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https://www.investopedia.com/should-i-get-a-student-credit-card-5192378

Should I Get a Student Credit Card?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you are enrolled in school, you may wonder if you should get a student credit card. Student credit cards are easier to get than other cards, and they can offer advantages like providing a convenient way to pay for purchases as you build credit. However they do have downsides to consider. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Learn about the advantages and disadvantages of getting a student credit card so you can determine if it's right for you. </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>You can use a student credit cards the same way you would use a regular credit card.</li><li>A student credit card can help you build a good credit history if you pay your bills on time.</li><li>Student credit cards tend to carry higher interest rates than traditional credit cards and may have lower credit limits.</li><li>Some student credit cards offer rewards.</li></ul><p><br/></p></div></div></div> <span class="heading-toc" id="toc-what-is-a-student-credit-card"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> What Is a Student Credit Card? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-student-credit-card-5191388">student credit card</a> works just like any other credit card, but it's designed for younger adults with little credit history. It provides the convenience of a credit card, making it handy for making purchases, especially with online shopping, while also helping you build a credit history and a good credit score. These cards usually carry a lower credit limit and higher interest rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> To obtain a student credit card, the applicant typically must: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Be at least 18 years old</li> <li>Be a U.S. citizen or have a Social Security Number</li> <li>Be enrolled either full-time or part-time at a qualifying school</li> <li>Have some form of income or have someone to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_sign.asp">co-sign</a> the application</li> <li>Not already have bad credit</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Student credit cards generally have lower credit lines and a cap on how much a student can spend on the card to minimize the risk to the lender. This smaller limit can make it easier for the student repay the balance or make the minimum monthly payments. </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>The credit limit is determined by the bank or card issuer and is based on your current credit score (if one exists), monthly income and expenses, and how much debt you have.</p></div></div></div> <span class="heading-toc" id="toc-the-upsides-of-student-credit-cards"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> The Upsides of Student Credit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> A student credit card can be beneficial in a number of ways, such as helping you build credit, providing emergency funds, and potentially offering rewards. </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"> Builds Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> When you use a student credit card, the issuer will report your account activity to the major <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp">credit bureaus</a>. The credit reports that the credit bureaus compile on you become the basis for determining your credit score. </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"> Lenders use your credit score to assess how financially responsible you are and how big of a risk you may be. Many of life's major milestones, like buying a car or getting a mortgage for a new home, become easier with a higher credit score. </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"> By paying your credit card bills on time and keeping your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a> relatively low, you can build and maintain a good score. But if you fail to make your payments on time and regularly run up charges on your account, your credit score will fall. Credit scores typically range from 300 to 850, with "good" credit scores starting at 670.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-subheading__text"> Emergency Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Ideally, an emergency fund would include three to six months' worth of expenses in cash. Younger adults who may not have built an emergency fund yet may need to rely on a credit card to cover unexpected expenses like a car repair. </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"> Potential Rewards </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Like many credit cards on the market today, student credit cards often come with additional benefits. While regular cards often offer rewards in the form of cash back or travel miles, student cards are more likely to offer perks like a free year of Amazon Prime or discounts at a major book retailer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-the-downsides-of-student-credit-cards"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> The Downsides of Student Credit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Student credit cards also have some potential downsides, such as their smaller credit limit and higher interest rate. You may face annual fees with these cards as well. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> Lower Credit Limits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The typical credit limit on a student credit card is much lower than on a traditional credit cards, often just a couple hundred dollars. While that can keep you from charging too much, it also limits the card's usefulness in a costly emergency. </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"> Regular expenses that students face, like books, groceries, and other necessities, can also add up quickly if they're charged to the card, and can quickly drive up your credit utilization ratio.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Higher Interest Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Student credit cards have variable interest rates that can be on the high side. Many charge in excess of 20%. That won't affect you if you pay your credit card bill in full each month, but it can be costly if you don't. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Additional Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> More often than not, student credit cards carry fees like an annual fee, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-transaction-fee.asp">foreign transaction fees</a>, and late payment fees, among others. By shopping around, however, you may find a card with few or relatively low fees.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Risks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Even though you can't run up a huge balance with a student credit card, it's still possible to damage your credit if you miss payments. So plan to pay at least the minimum due each month and ideally your entire balance. Also monitor your credit utilization ratio, so it doesn't get too high and drag down your score. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_51-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" 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_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 get free copies of your credit reports at the website <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.annualcreditreport.com/index.action">AnnualCreditReport.com</a>.</p></div></div></div> <span class="heading-toc" id="toc-shopping-for-a-student-credit-card"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Shopping for a Student Credit Card </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Student credit cards are widely available from the same banks that issue regular credit cards. To help you find one that's a good fit for your needs, Investopedia evaluates student credit cards and publishes a regularly updated list of the best student credit cards on the market. </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"> Note that if you don't qualify for a student credit card, another <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-vs-student-credit-cards-which-to-choose-5190814">option is a secured credit card</a>. With a secured credit card, you deposit a sum of money, which becomes your credit line. </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"> After you have used your secured card for a while—and made all your monthly payments on time—you may qualify for an unsecured credit card. Like student credit cards, secured cards will report your account activity to the major credit bureaus, allowing you to build a good credit history and respectable credit score. Investopedia also publishes a list of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">best secured credit cards</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-which-card-is-best-for-students"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Card is Best for Students?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The best card for students will be a card with a competitive interest rate and credit line. If you are shopping for a student credit card, look for a card with no annual fees. A good credit card for beginners will also consider you for extended credit after a set period of time.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_62-0"><span class="heading-toc" id="toc-can-a-student-qualify-for-a-credit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Student Qualify for a Credit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A student can qualify for a credit card, but they must meet other criteria as well. You need to be over 18 to get a credit card, and a lender will have requirements such as a minimum credit score.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-can-i-get-a-student-credit-card-if-im-not-a-student"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Get a Student Credit Card if I'm Not a Student?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You usually do need to be enrolled full-time or part-time in a school to qualify for a student credit card. However some credit card issuers may choose not to require proof of enrollment. For example, anyone can apply for the Journey Student Card by Chase, which is not just for students.<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_65-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Student credit cards can provide significant benefits to young adults who have little credit history. If used responsibly, they can help you build credit and provide a convenient payment method. If you're considering getting a student credit card, shop around and compare rates and terms.<br/> </p></div>

If you are enrolled in school, you may wonder if you should get a student credit card. Student credit cards are easier to get than other cards, and they can offer advantages like providing a convenient way to pay for purchases as you build credit. However they do have downsides to consider. Learn about the advantages and disadvantages of getting a student credit card so you can determine if it's right for you. ### Key Takeaways * You can use a student credit cards the same way you would use a regular credit card. * A student credit card can help you build a good credit history if you pay your bills on time. * Student credit cards tend to carry higher interest rates than traditional credit cards and may have lower credit limits. * Some student credit cards offer rewards. ## What Is a Student Credit Card? A [student credit card](https://www.investopedia.com/what-is-a-student-credit-card-5191388) works just like any other credit card, but it's designed for younger adults with little credit history. It provides the convenience of a credit card, making it handy for making purchases, especially with online shopping, while also helping you build a credit history and a good credit score. These cards usually carry a lower credit limit and higher interest rate. To obtain a student credit card, the applicant typically must: * Be at least 18 years old * Be a U.S. citizen or have a Social Security Number * Be enrolled either full-time or part-time at a qualifying school * Have some form of income or have someone to [co-sign](https://www.investopedia.com/terms/c/co_sign.asp) the application * Not already have bad credit Student credit cards generally have lower credit lines and a cap on how much a student can spend on the card to minimize the risk to the lender. This smaller limit can make it easier for the student repay the balance or make the minimum monthly payments. ### The credit limit is determined by the bank or card issuer and is based on your current credit score (if one exists), monthly income and expenses, and how much debt you have. ## The Upsides of Student Credit Cards A student credit card can be beneficial in a number of ways, such as helping you build credit, providing emergency funds, and potentially offering rewards. ### Builds Credit When you use a student credit card, the issuer will report your account activity to the major [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp). The credit reports that the credit bureaus compile on you become the basis for determining your credit score. Lenders use your credit score to assess how financially responsible you are and how big of a risk you may be. Many of life's major milestones, like buying a car or getting a mortgage for a new home, become easier with a higher credit score. By paying your credit card bills on time and keeping your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp) relatively low, you can build and maintain a good score. But if you fail to make your payments on time and regularly run up charges on your account, your credit score will fall. Credit scores typically range from 300 to 850, with "good" credit scores starting at 670. ### Emergency Funds Ideally, an emergency fund would include three to six months' worth of expenses in cash. Younger adults who may not have built an emergency fund yet may need to rely on a credit card to cover unexpected expenses like a car repair. ### Potential Rewards Like many credit cards on the market today, student credit cards often come with additional benefits. While regular cards often offer rewards in the form of cash back or travel miles, student cards are more likely to offer perks like a free year of Amazon Prime or discounts at a major book retailer. ## The Downsides of Student Credit Cards Student credit cards also have some potential downsides, such as their smaller credit limit and higher interest rate. You may face annual fees with these cards as well. ### Lower Credit Limits The typical credit limit on a student credit card is much lower than on a traditional credit cards, often just a couple hundred dollars. While that can keep you from charging too much, it also limits the card's usefulness in a costly emergency. Regular expenses that students face, like books, groceries, and other necessities, can also add up quickly if they're charged to the card, and can quickly drive up your credit utilization ratio. ### Higher Interest Rates Student credit cards have variable interest rates that can be on the high side. Many charge in excess of 20%. That won't affect you if you pay your credit card bill in full each month, but it can be costly if you don't. ### Additional Fees More often than not, student credit cards carry fees like an annual fee, [foreign transaction fees](https://www.investopedia.com/terms/f/foreign-transaction-fee.asp), and late payment fees, among others. By shopping around, however, you may find a card with few or relatively low fees. ### Risks Even though you can't run up a huge balance with a student credit card, it's still possible to damage your credit if you miss payments. So plan to pay at least the minimum due each month and ideally your entire balance. Also monitor your credit utilization ratio, so it doesn't get too high and drag down your score. ### You can get free copies of your credit reports at the website [AnnualCreditReport.com](https://www.annualcreditreport.com/index.action). ## Shopping for a Student Credit Card Student credit cards are widely available from the same banks that issue regular credit cards. To help you find one that's a good fit for your needs, Investopedia evaluates student credit cards and publishes a regularly updated list of the best student credit cards on the market. Note that if you don't qualify for a student credit card, another [option is a secured credit card](https://www.investopedia.com/secured-vs-student-credit-cards-which-to-choose-5190814). With a secured credit card, you deposit a sum of money, which becomes your credit line. After you have used your secured card for a while—and made all your monthly payments on time—you may qualify for an unsecured credit card. Like student credit cards, secured cards will report your account activity to the major credit bureaus, allowing you to build a good credit history and respectable credit score. Investopedia also publishes a list of the [best secured credit cards](https://www.investopedia.com/best-credit-cards-4801582). ## Which Card is Best for Students? The best card for students will be a card with a competitive interest rate and credit line. If you are shopping for a student credit card, look for a card with no annual fees. A good credit card for beginners will also consider you for extended credit after a set period of time. ## Can a Student Qualify for a Credit Card? A student can qualify for a credit card, but they must meet other criteria as well. You need to be over 18 to get a credit card, and a lender will have requirements such as a minimum credit score. ## Can I Get a Student Credit Card if I'm Not a Student? You usually do need to be enrolled full-time or part-time in a school to qualify for a student credit card. However some credit card issuers may choose not to require proof of enrollment. For example, anyone can apply for the Journey Student Card by Chase, which is not just for students. ## The Bottom Line Student credit cards can provide significant benefits to young adults who have little credit history. If used responsibly, they can help you build credit and provide a convenient payment method. If you're considering getting a student credit card, shop around and compare rates and terms.

If you are enrolled in school, you may wonder if you should get a student credit card. Student credit cards are easier to get than other cards, and they can offer advantages like providing a convenient way to pay for purchases as you build credit. However they do have downsides to consider. Learn about the advantages and disadvantages of getting a student credit card so you can determine if it's right for you. Key Takeaways You can use a student credit cards the same way you would use a regular credit card.A student credit card can help you build a good credit history if you pay your bills on time.Student credit cards tend to carry higher interest rates than traditional credit cards and may have lower credit limits.Some student credit cards offer rewards. What Is a Student Credit Card? A student credit card works just like any other credit card, but it's designed for younger adults with little credit history. It provides the convenience of a credit card, making it handy for making purchases, especially with online shopping, while also helping you build a credit history and a good credit score. These cards usually carry a lower credit limit and higher interest rate. To obtain a student credit card, the applicant typically must: Be at least 18 years old Be a U.S. citizen or have a Social Security Number Be enrolled either full-time or part-time at a qualifying school Have some form of income or have someone to co-sign the application Not already have bad credit Student credit cards generally have lower credit lines and a cap on how much a student can spend on the card to minimize the risk to the lender. This smaller limit can make it easier for the student repay the balance or make the minimum monthly payments. The credit limit is determined by the bank or card issuer and is based on your current credit score (if one exists), monthly income and expenses, and how much debt you have. The Upsides of Student Credit Cards A student credit card can be beneficial in a number of ways, such as helping you build credit, providing emergency funds, and potentially offering rewards. Builds Credit When you use a student credit card, the issuer will report your account activity to the major credit bureaus. The credit reports that the credit bureaus compile on you become the basis for determining your credit score. Lenders use your credit score to assess how financially responsible you are and how big of a risk you may be. Many of life's major milestones, like buying a car or getting a mortgage for a new home, become easier with a higher credit score. By paying your credit card bills on time and keeping your credit utilization ratio relatively low, you can build and maintain a good score. But if you fail to make your payments on time and regularly run up charges on your account, your credit score will fall. Credit scores typically range from 300 to 850, with "good" credit scores starting at 670. Emergency Funds Ideally, an emergency fund would include three to six months' worth of expenses in cash. Younger adults who may not have built an emergency fund yet may need to rely on a credit card to cover unexpected expenses like a car repair. Potential Rewards Like many credit cards on the market today, student credit cards often come with additional benefits. While regular cards often offer rewards in the form of cash back or travel miles, student cards are more likely to offer perks like a free year of Amazon Prime or discounts at a major book retailer. The Downsides of Student Credit Cards Student credit cards also have some potential downsides, such as their smaller credit limit and higher interest rate. You may face annual fees with these cards as well. Lower Credit Limits The typical credit limit on a student credit card is much lower than on a traditional credit cards, often just a couple hundred dollars. While that can keep you from charging too much, it also limits the card's usefulness in a costly emergency. Regular expenses that students face, like books, groceries, and other necessities, can also add up quickly if they're charged to the card, and can quickly drive up your credit utilization ratio. Higher Interest Rates Student credit cards have variable interest rates that can be on the high side. Many charge in excess of 20%. That won't affect you if you pay your credit card bill in full each month, but it can be costly if you don't. Additional Fees More often than not, student credit cards carry fees like an annual fee, foreign transaction fees, and late payment fees, among others. By shopping around, however, you may find a card with few or relatively low fees. Risks Even though you can't run up a huge balance with a student credit card, it's still possible to damage your credit if you miss payments. So plan to pay at least the minimum due each month and ideally your entire balance. Also monitor your credit utilization ratio, so it doesn't get too high and drag down your score. You can get free copies of your credit reports at the website AnnualCreditReport.com. Shopping for a Student Credit Card Student credit cards are widely available from the same banks that issue regular credit cards. To help you find one that's a good fit for your needs, Investopedia evaluates student credit cards and publishes a regularly updated list of the best student credit cards on the market. Note that if you don't qualify for a student credit card, another option is a secured credit card. With a secured credit card, you deposit a sum of money, which becomes your credit line. After you have used your secured card for a while—and made all your monthly payments on time—you may qualify for an unsecured credit card. Like student credit cards, secured cards will report your account activity to the major credit bureaus, allowing you to build a good credit history and respectable credit score. Investopedia also publishes a list of the best secured credit cards. Which Card is Best for Students? The best card for students will be a card with a competitive interest rate and credit line. If you are shopping for a student credit card, look for a card with no annual fees. A good credit card for beginners will also consider you for extended credit after a set period of time. Can a Student Qualify for a Credit Card? A student can qualify for a credit card, but they must meet other criteria as well. You need to be over 18 to get a credit card, and a lender will have requirements such as a minimum credit score. Can I Get a Student Credit Card if I'm Not a Student? You usually do need to be enrolled full-time or part-time in a school to qualify for a student credit card. However some credit card issuers may choose not to require proof of enrollment. For example, anyone can apply for the Journey Student Card by Chase, which is not just for students. The Bottom Line Student credit cards can provide significant benefits to young adults who have little credit history. If used responsibly, they can help you build credit and provide a convenient payment method. If you're considering getting a student credit card, shop around and compare rates and terms.

https://www.investopedia.com/citi-updates-double-cash-card-to-offer-thank-you-points-5216741

Citi Updates Double Cash Card to Offer ThankYou Points

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Citi has announced changes to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citi-double-cash-credit-card-review-4796331">Citi Double Cash Card</a>, converting it from a cash-back earning credit card to a ThankYou points earning credit card, though cash back will remain as a points redemption option. The new changes, which will take place in March, will open up more flexibility for redemptions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Citi Double Cash Card offers 2% cash back, half of which cardholders earn when they make a purchase, and the other half when they pay it off.</li><li>In March, the card will be transitioned to the ThankYou rewards program and earn points instead of cash back.</li><li>Cardholders can continue to redeem their rewards for cash back, but will also have other redemption options that are available in the ThankYou program.</li></ul></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-subheading__text"> The Citi Double Cash Card Gets an Upgrade </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The Citi Double Cash Card has been one of the top cash-back credit cards since it came onto the scene in 2014.<span class="ql-inline-citation" data-cite="1"></span> Cardholders earn 1% cash back when they make a purchase, then another 1% back as they pay it off. </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 March, however, cardholders will start earning ThankYou points with the card instead of straight cash back—that's 1 point per dollar spent and 1 point per dollar paid on those purchases. </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 switch to the ThankYou rewards program opens up more opportunities for redemption. Currently, cardholders have two options: get cash back in the form of a statement credit, direct deposit or check, or convert their rewards to ThankYou points.<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"> When the card gets updated in March, redemption options will include cash back, gift cards, online shopping and travel reservations. What's more, the card's $25 minimum on cash-back redemptions will be eliminated, meaning cardholders will be able to redeem as little as 1 point.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> That said, points earned with the Citi Double Cash Card are not eligible for transfers to all of Citi's travel partners unless you have a ThankYou points credit card that offers that option, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citi-premier-credit-card-review-4798749">Citi Premier Credit Card</a>. ThankYou points earned from the Double Cash Card will be eligible for transfer to JetBlue, Choice Privileges and Wyndham Rewards, however. </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"> Cardholders don't need to take any action to make the switch. If you want to continue to get your rewards in the form of cash back, you can do so. But if you want to consider other redemptions, that option will be available to you.<br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

Citi has announced changes to the [Citi Double Cash Card](https://www.investopedia.com/citi-double-cash-credit-card-review-4796331), converting it from a cash-back earning credit card to a ThankYou points earning credit card, though cash back will remain as a points redemption option. The new changes, which will take place in March, will open up more flexibility for redemptions. ### * The Citi Double Cash Card offers 2% cash back, half of which cardholders earn when they make a purchase, and the other half when they pay it off. * In March, the card will be transitioned to the ThankYou rewards program and earn points instead of cash back. * Cardholders can continue to redeem their rewards for cash back, but will also have other redemption options that are available in the ThankYou program. ### The Citi Double Cash Card Gets an Upgrade The Citi Double Cash Card has been one of the top cash-back credit cards since it came onto the scene in 2014. Cardholders earn 1% cash back when they make a purchase, then another 1% back as they pay it off. In March, however, cardholders will start earning ThankYou points with the card instead of straight cash back—that's 1 point per dollar spent and 1 point per dollar paid on those purchases. The switch to the ThankYou rewards program opens up more opportunities for redemption. Currently, cardholders have two options: get cash back in the form of a statement credit, direct deposit or check, or convert their rewards to ThankYou points. When the card gets updated in March, redemption options will include cash back, gift cards, online shopping and travel reservations. What's more, the card's $25 minimum on cash-back redemptions will be eliminated, meaning cardholders will be able to redeem as little as 1 point. That said, points earned with the Citi Double Cash Card are not eligible for transfers to all of Citi's travel partners unless you have a ThankYou points credit card that offers that option, such as the [Citi Premier Credit Card](https://www.investopedia.com/citi-premier-credit-card-review-4798749). ThankYou points earned from the Double Cash Card will be eligible for transfer to JetBlue, Choice Privileges and Wyndham Rewards, however. Cardholders don't need to take any action to make the switch. If you want to continue to get your rewards in the form of cash back, you can do so. But if you want to consider other redemptions, that option will be available to you. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Citi has announced changes to the Citi Double Cash Card, converting it from a cash-back earning credit card to a ThankYou points earning credit card, though cash back will remain as a points redemption option. The new changes, which will take place in March, will open up more flexibility for redemptions. The Citi Double Cash Card offers 2% cash back, half of which cardholders earn when they make a purchase, and the other half when they pay it off.In March, the card will be transitioned to the ThankYou rewards program and earn points instead of cash back.Cardholders can continue to redeem their rewards for cash back, but will also have other redemption options that are available in the ThankYou program. The Citi Double Cash Card Gets an Upgrade The Citi Double Cash Card has been one of the top cash-back credit cards since it came onto the scene in 2014. Cardholders earn 1% cash back when they make a purchase, then another 1% back as they pay it off. In March, however, cardholders will start earning ThankYou points with the card instead of straight cash back—that's 1 point per dollar spent and 1 point per dollar paid on those purchases. The switch to the ThankYou rewards program opens up more opportunities for redemption. Currently, cardholders have two options: get cash back in the form of a statement credit, direct deposit or check, or convert their rewards to ThankYou points. When the card gets updated in March, redemption options will include cash back, gift cards, online shopping and travel reservations. What's more, the card's $25 minimum on cash-back redemptions will be eliminated, meaning cardholders will be able to redeem as little as 1 point. That said, points earned with the Citi Double Cash Card are not eligible for transfers to all of Citi's travel partners unless you have a ThankYou points credit card that offers that option, such as the Citi Premier Credit Card. ThankYou points earned from the Double Cash Card will be eligible for transfer to JetBlue, Choice Privileges and Wyndham Rewards, however. Cardholders don't need to take any action to make the switch. If you want to continue to get your rewards in the form of cash back, you can do so. But if you want to consider other redemptions, that option will be available to you. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/education-department-sends-staff-to-help-colleges-fix-fafsa-mess-8559231

Education Department Sends Staff To Help Colleges Fix FAFSA Mess

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 is sending personnel to colleges to help process federal aid applications, hopefully speeding along a process that has been delayed by months.<br/></li><li>The department is rolling out a modernized FAFSA application, but it hasn't gone smoothly, and colleges aren't getting applications from the government until March, where normally they would start receiving them in October.<br/></li><li>The delays potentially impact students' ability to decide where to go to college and how much they need to borrow in student loans.<br/></li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The Department of Education is sending staffers to colleges to help process federal college aid applications that have been delayed by glitches in the department’s rollout of a new streamlined application process.<br/><br/>The department is sending federal personnel and $50 million in funding to colleges, prioritizing smaller, “under-resourced” schools including tribal colleges and historically Black institutions,  the department said Monday. The department is attempting to reduce delays caused by the deployment of a new, simplified Free Application for Federal Student Aid (FAFSA) form, which college-bound students must fill out to receive grants.<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"> This year, the department isn’t passing aid applications <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fafsa-student-aid-timeline-delayed-complicating-college-acceptance-process-8553400">along to colleges until March</a>, about five months after it normally does, potentially causing problems for students who face deadlines for deciding where to go to college.  </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 new form is the result of laws passed by Congress in 2019 and 2020 but the department has run into problems modernizing old systems.<br/><br/>“I understand delays have been frustrating for institutions,” education secretary Miguel Cardona said in a conference call with reporters Monday.  “They've been frustrating for me too. But let's keep in mind that we're completely overhauling a broken system, a system that's older than me, based on COBOL, a coding language many institutions stopped using decades ago.”<br/><br/>The extra personnel are intended to help colleges process applications in time for students to be approved for aid, and make informed decisions about where to go to college, as quickly as possible, department officials said.<br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 is sending personnel to colleges to help process federal aid applications, hopefully speeding along a process that has been delayed by months. * The department is rolling out a modernized FAFSA application, but it hasn't gone smoothly, and colleges aren't getting applications from the government until March, where normally they would start receiving them in October. * The delays potentially impact students' ability to decide where to go to college and how much they need to borrow in student loans. The Department of Education is sending staffers to colleges to help process federal college aid applications that have been delayed by glitches in the department’s rollout of a new streamlined application process. The department is sending federal personnel and $50 million in funding to colleges, prioritizing smaller, “under-resourced” schools including tribal colleges and historically Black institutions,  the department said Monday. The department is attempting to reduce delays caused by the deployment of a new, simplified Free Application for Federal Student Aid (FAFSA) form, which college-bound students must fill out to receive grants. This year, the department isn’t passing aid applications [along to colleges until March](https://www.investopedia.com/fafsa-student-aid-timeline-delayed-complicating-college-acceptance-process-8553400), about five months after it normally does, potentially causing problems for students who face deadlines for deciding where to go to college.  The new form is the result of laws passed by Congress in 2019 and 2020 but the department has run into problems modernizing old systems. “I understand delays have been frustrating for institutions,” education secretary Miguel Cardona said in a conference call with reporters Monday.  “They've been frustrating for me too. But let's keep in mind that we're completely overhauling a broken system, a system that's older than me, based on COBOL, a coding language many institutions stopped using decades ago.” The extra personnel are intended to help colleges process applications in time for students to be approved for aid, and make informed decisions about where to go to college, as quickly as possible, department officials said. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways The Department of Education is sending personnel to colleges to help process federal aid applications, hopefully speeding along a process that has been delayed by months.The department is rolling out a modernized FAFSA application, but it hasn't gone smoothly, and colleges aren't getting applications from the government until March, where normally they would start receiving them in October.The delays potentially impact students' ability to decide where to go to college and how much they need to borrow in student loans. The Department of Education is sending staffers to colleges to help process federal college aid applications that have been delayed by glitches in the department’s rollout of a new streamlined application process.The department is sending federal personnel and $50 million in funding to colleges, prioritizing smaller, “under-resourced” schools including tribal colleges and historically Black institutions,  the department said Monday. The department is attempting to reduce delays caused by the deployment of a new, simplified Free Application for Federal Student Aid (FAFSA) form, which college-bound students must fill out to receive grants. This year, the department isn’t passing aid applications along to colleges until March, about five months after it normally does, potentially causing problems for students who face deadlines for deciding where to go to college.  The new form is the result of laws passed by Congress in 2019 and 2020 but the department has run into problems modernizing old systems.“I understand delays have been frustrating for institutions,” education secretary Miguel Cardona said in a conference call with reporters Monday.  “They've been frustrating for me too. But let's keep in mind that we're completely overhauling a broken system, a system that's older than me, based on COBOL, a coding language many institutions stopped using decades ago.”The extra personnel are intended to help colleges process applications in time for students to be approved for aid, and make informed decisions about where to go to college, as quickly as possible, department officials said. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/ask/answers/09/stolen-credit-card.asp

Who Is Liable for Credit Card Fraud?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 notice charges on your credit card that aren't yours, call your bank immediately to report it and have the card canceled. Your credit card number could have been picked up by an employee at a company where you purchased goods. Often, the fraudulent purchases are made online, but this is not always the case as your card could have been cloned. </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 good news is that consumers are not typically responsible for the amounts lost in cases of credit card fraud. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fair-credit-billing-act-fcba.asp">Fair Credit Billing Act</a> limits the liability to $50, and oftentimes, there's no cost at all.<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_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Credit card fraud is when somebody makes unauthorized purchases using a stolen or misappropriated credit card (or card number).</li><li>In the U.S., millions of credit card numbers are stolen each year accounting for billions of dollars in illegal purchases.</li><li>Regulations state that an individual is limited to just $50 in the event of credit card fraud, but the theft must be reported and the correct steps undertaken.</li><li>Third-party identity theft protection services are available, but they can be expensive and often follow the same procedure that you can do on your own.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-scale-of-credit-card-fraud-in-the-us"></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 Scale of Credit Card Fraud in the U.S. </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In today's digital world, credit card fraud and ID theft continue to rise. In fact, according to the Federal Trade Commission, credit card fraud is the most common form of identity theft in the U.S. as of 2023.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Around 151 million Americans, or 65% of credit and credit-card holders, have been fraud victims during their lifetimes, according to Security.org’s 2023 Credit Card Fraud Report, up from 127 million the prior year.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Card fraud is expected to reach $35.79 billion worldwide in 2024, and increase to $43.47 billion by 2028, according to the Nilson Report.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Card-not-present fraud is a type of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit card</a> scam in which the fraudster does not physically present the card to the merchant during the transaction. Card-not-present fraud can occur with transactions that are conducted online or over the phone. It is theoretically harder to prevent than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cardpresent-fraud.asp">card-present fraud</a> because the merchant cannot personally examine the credit card for signs of possible fraud, such as a missing hologram or altered account number. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-what-to-do-if-credit-card-theft-happens-to-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"> What To Do If Credit Card Theft Happens to You </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In the event that your credit card is stolen in the United States, federal law limits the liability of cardholders to $50, regardless of the amount charged on the card by the unauthorized user. In today's world of electronic fraud, whether the physical card or just the credit card <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/account-number.asp">account number</a> is stolen and the theft is reported before any charges are made, federal law guarantees that the cardholder has a zero liability to the issuer.<span class="ql-inline-citation" data-cite="3"></span> The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/terms-and-conditions-credit-card.asp">terms and conditions</a> of your cardholder agreement often spell out the details. </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"> As a cardholder, you should notify the issuer immediately if you notice that your credit card is missing or stolen. This early notification will give the issuer time to help you with the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li>Verify if and where fraud has occurred.</li><li>Remove unauthorized charges from your credit card account.</li><li>Close down your account to prevent future fraudulent charges.</li><li>Issue you a new card and account number.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> You should also check with the three major <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-reporting-agency.asp">credit reporting agencies</a> and obtain a copy of your credit report to be sure that nothing else has been accessed fraudulently. </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"> According to the Fair Credit Billing Act, consumers have 60 days from the time they receive their credit card bill to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/credit-card-dispute.asp">dispute</a> a charge with a card issuer. Charges must be over $50 to be eligible for dispute. They may be unauthorized, display an incorrect date or amount, or contain calculation errors. If a good or service was not delivered, that charge can be disputed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The card issuer then has 30 days to acknowledge receipt of a complaint, and has two <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/billing-cycle.asp">billing cycles</a> to complete their investigation; during that time the issuer is not allowed to try to collect the payment, charge interest on it, or report it to credit bureaus as late. These limitations only apply to the disputed payment, not other charges made during the same billing cycle, which can still accrue interest and be reported as late if not paid.<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_28-0"></div> <span class="heading-toc" id="toc-be-wary-of-credit-card-protection-offers"></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"> Be Wary of Credit Card Protection Offers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> This type of insurance is unnecessary because of the federal limits in place. Oftentimes, your bank or credit card company will have identity protection or fraud protection services already in place just by being a customer. Third-party companies that offer credit and identity theft insurance can be expensive and often simply follow the same steps that you would in reporting unauthorized spending on your card.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> But beware: some scam artists try to sell $200-300 credit card insurance by falsely claiming that cardholders face significant financial risk if their cards are misused.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-vigorously-monitor-your-reports"></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"> Vigorously Monitor Your Reports </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> A great way to monitor activity on your accounts is to order your credit reports for each credit card reporting company. In fact, federal law states you are allowed one free credit report per year, but if your card has ever been stolen, you may be able to get your reports for free more frequently.<span class="ql-inline-citation" data-cite="11"></span> Some experts recommend ordering one report every four months, in essence staggering requests via each of the main companies.<span class="ql-inline-citation" data-cite="12"></span> This is a great way to keep a lookout for fraud. A weekly or monthly check-in of credit activity via your card's main website can also provide insight into any potential fraudulent activity. </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"> Remember, if someone steals your card and rings up hundreds of dollars in charges, you are not on the hook if you report the missing card promptly, although it can take time to sort out the charges and get reimbursed. Make sure to contact your credit card company as soon as the fraudulent charges are discovered, and make sure to monitor your credit report and other cards to ensure nothing else, like another card, has been stolen too. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> If you are lucky and have never been a victim, take immediate steps to make yourself less susceptible to credit card thieves. Order your annual credit card reports, monitor your bills and charges, and always take the time to call your credit card company if anything suspicious shows up. For those especially worried about credit card fraud, one of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-monitoring-services-4846982">best credit monitoring services</a> could provide some needed peace of mind. </p></div>

If you notice charges on your credit card that aren't yours, call your bank immediately to report it and have the card canceled. Your credit card number could have been picked up by an employee at a company where you purchased goods. Often, the fraudulent purchases are made online, but this is not always the case as your card could have been cloned. The good news is that consumers are not typically responsible for the amounts lost in cases of credit card fraud. The [Fair Credit Billing Act](https://www.investopedia.com/terms/f/fair-credit-billing-act-fcba.asp) limits the liability to $50, and oftentimes, there's no cost at all. ### Key Takeaways * Credit card fraud is when somebody makes unauthorized purchases using a stolen or misappropriated credit card (or card number). * In the U.S., millions of credit card numbers are stolen each year accounting for billions of dollars in illegal purchases. * Regulations state that an individual is limited to just $50 in the event of credit card fraud, but the theft must be reported and the correct steps undertaken. * Third-party identity theft protection services are available, but they can be expensive and often follow the same procedure that you can do on your own. ## The Scale of Credit Card Fraud in the U.S. In today's digital world, credit card fraud and ID theft continue to rise. In fact, according to the Federal Trade Commission, credit card fraud is the most common form of identity theft in the U.S. as of 2023. Around 151 million Americans, or 65% of credit and credit-card holders, have been fraud victims during their lifetimes, according to Security.org’s 2023 Credit Card Fraud Report, up from 127 million the prior year. Card fraud is expected to reach $35.79 billion worldwide in 2024, and increase to $43.47 billion by 2028, according to the Nilson Report. Card-not-present fraud is a type of [credit card](https://www.investopedia.com/terms/c/creditcard.asp) scam in which the fraudster does not physically present the card to the merchant during the transaction. Card-not-present fraud can occur with transactions that are conducted online or over the phone. It is theoretically harder to prevent than [card-present fraud](https://www.investopedia.com/terms/c/cardpresent-fraud.asp) because the merchant cannot personally examine the credit card for signs of possible fraud, such as a missing hologram or altered account number. ## What To Do If Credit Card Theft Happens to You In the event that your credit card is stolen in the United States, federal law limits the liability of cardholders to $50, regardless of the amount charged on the card by the unauthorized user. In today's world of electronic fraud, whether the physical card or just the credit card [account number](https://www.investopedia.com/terms/a/account-number.asp) is stolen and the theft is reported before any charges are made, federal law guarantees that the cardholder has a zero liability to the issuer. The [terms and conditions](https://www.investopedia.com/terms/t/terms-and-conditions-credit-card.asp) of your cardholder agreement often spell out the details. As a cardholder, you should notify the issuer immediately if you notice that your credit card is missing or stolen. This early notification will give the issuer time to help you with the following: 1. Verify if and where fraud has occurred. 2. Remove unauthorized charges from your credit card account. 3. Close down your account to prevent future fraudulent charges. 4. Issue you a new card and account number. You should also check with the three major [credit reporting agencies](https://www.investopedia.com/terms/c/credit-reporting-agency.asp) and obtain a copy of your credit report to be sure that nothing else has been accessed fraudulently. According to the Fair Credit Billing Act, consumers have 60 days from the time they receive their credit card bill to [dispute](https://www.investopedia.com/articles/pf/07/credit-card-dispute.asp) a charge with a card issuer. Charges must be over $50 to be eligible for dispute. They may be unauthorized, display an incorrect date or amount, or contain calculation errors. If a good or service was not delivered, that charge can be disputed. The card issuer then has 30 days to acknowledge receipt of a complaint, and has two [billing cycles](https://www.investopedia.com/terms/b/billing-cycle.asp) to complete their investigation; during that time the issuer is not allowed to try to collect the payment, charge interest on it, or report it to credit bureaus as late. These limitations only apply to the disputed payment, not other charges made during the same billing cycle, which can still accrue interest and be reported as late if not paid. ## Be Wary of Credit Card Protection Offers This type of insurance is unnecessary because of the federal limits in place. Oftentimes, your bank or credit card company will have identity protection or fraud protection services already in place just by being a customer. Third-party companies that offer credit and identity theft insurance can be expensive and often simply follow the same steps that you would in reporting unauthorized spending on your card. But beware: some scam artists try to sell $200-300 credit card insurance by falsely claiming that cardholders face significant financial risk if their cards are misused. ## Vigorously Monitor Your Reports A great way to monitor activity on your accounts is to order your credit reports for each credit card reporting company. In fact, federal law states you are allowed one free credit report per year, but if your card has ever been stolen, you may be able to get your reports for free more frequently. Some experts recommend ordering one report every four months, in essence staggering requests via each of the main companies. This is a great way to keep a lookout for fraud. A weekly or monthly check-in of credit activity via your card's main website can also provide insight into any potential fraudulent activity. ## The Bottom Line Remember, if someone steals your card and rings up hundreds of dollars in charges, you are not on the hook if you report the missing card promptly, although it can take time to sort out the charges and get reimbursed. Make sure to contact your credit card company as soon as the fraudulent charges are discovered, and make sure to monitor your credit report and other cards to ensure nothing else, like another card, has been stolen too. If you are lucky and have never been a victim, take immediate steps to make yourself less susceptible to credit card thieves. Order your annual credit card reports, monitor your bills and charges, and always take the time to call your credit card company if anything suspicious shows up. For those especially worried about credit card fraud, one of the [best credit monitoring services](https://www.investopedia.com/best-credit-monitoring-services-4846982) could provide some needed peace of mind.

If you notice charges on your credit card that aren't yours, call your bank immediately to report it and have the card canceled. Your credit card number could have been picked up by an employee at a company where you purchased goods. Often, the fraudulent purchases are made online, but this is not always the case as your card could have been cloned. The good news is that consumers are not typically responsible for the amounts lost in cases of credit card fraud. The Fair Credit Billing Act limits the liability to $50, and oftentimes, there's no cost at all. Key Takeaways Credit card fraud is when somebody makes unauthorized purchases using a stolen or misappropriated credit card (or card number).In the U.S., millions of credit card numbers are stolen each year accounting for billions of dollars in illegal purchases.Regulations state that an individual is limited to just $50 in the event of credit card fraud, but the theft must be reported and the correct steps undertaken.Third-party identity theft protection services are available, but they can be expensive and often follow the same procedure that you can do on your own. The Scale of Credit Card Fraud in the U.S. In today's digital world, credit card fraud and ID theft continue to rise. In fact, according to the Federal Trade Commission, credit card fraud is the most common form of identity theft in the U.S. as of 2023. Around 151 million Americans, or 65% of credit and credit-card holders, have been fraud victims during their lifetimes, according to Security.org’s 2023 Credit Card Fraud Report, up from 127 million the prior year. Card fraud is expected to reach $35.79 billion worldwide in 2024, and increase to $43.47 billion by 2028, according to the Nilson Report. Card-not-present fraud is a type of credit card scam in which the fraudster does not physically present the card to the merchant during the transaction. Card-not-present fraud can occur with transactions that are conducted online or over the phone. It is theoretically harder to prevent than card-present fraud because the merchant cannot personally examine the credit card for signs of possible fraud, such as a missing hologram or altered account number. What To Do If Credit Card Theft Happens to You In the event that your credit card is stolen in the United States, federal law limits the liability of cardholders to $50, regardless of the amount charged on the card by the unauthorized user. In today's world of electronic fraud, whether the physical card or just the credit card account number is stolen and the theft is reported before any charges are made, federal law guarantees that the cardholder has a zero liability to the issuer. The terms and conditions of your cardholder agreement often spell out the details. As a cardholder, you should notify the issuer immediately if you notice that your credit card is missing or stolen. This early notification will give the issuer time to help you with the following: Verify if and where fraud has occurred.Remove unauthorized charges from your credit card account.Close down your account to prevent future fraudulent charges.Issue you a new card and account number. You should also check with the three major credit reporting agencies and obtain a copy of your credit report to be sure that nothing else has been accessed fraudulently. According to the Fair Credit Billing Act, consumers have 60 days from the time they receive their credit card bill to dispute a charge with a card issuer. Charges must be over $50 to be eligible for dispute. They may be unauthorized, display an incorrect date or amount, or contain calculation errors. If a good or service was not delivered, that charge can be disputed. The card issuer then has 30 days to acknowledge receipt of a complaint, and has two billing cycles to complete their investigation; during that time the issuer is not allowed to try to collect the payment, charge interest on it, or report it to credit bureaus as late. These limitations only apply to the disputed payment, not other charges made during the same billing cycle, which can still accrue interest and be reported as late if not paid. Be Wary of Credit Card Protection Offers This type of insurance is unnecessary because of the federal limits in place. Oftentimes, your bank or credit card company will have identity protection or fraud protection services already in place just by being a customer. Third-party companies that offer credit and identity theft insurance can be expensive and often simply follow the same steps that you would in reporting unauthorized spending on your card. But beware: some scam artists try to sell $200-300 credit card insurance by falsely claiming that cardholders face significant financial risk if their cards are misused. Vigorously Monitor Your Reports A great way to monitor activity on your accounts is to order your credit reports for each credit card reporting company. In fact, federal law states you are allowed one free credit report per year, but if your card has ever been stolen, you may be able to get your reports for free more frequently. Some experts recommend ordering one report every four months, in essence staggering requests via each of the main companies. This is a great way to keep a lookout for fraud. A weekly or monthly check-in of credit activity via your card's main website can also provide insight into any potential fraudulent activity. The Bottom Line Remember, if someone steals your card and rings up hundreds of dollars in charges, you are not on the hook if you report the missing card promptly, although it can take time to sort out the charges and get reimbursed. Make sure to contact your credit card company as soon as the fraudulent charges are discovered, and make sure to monitor your credit report and other cards to ensure nothing else, like another card, has been stolen too. If you are lucky and have never been a victim, take immediate steps to make yourself less susceptible to credit card thieves. Order your annual credit card reports, monitor your bills and charges, and always take the time to call your credit card company if anything suspicious shows up. For those especially worried about credit card fraud, one of the best credit monitoring services could provide some needed peace of mind.

https://www.investopedia.com/articles/tax/09/calculate-property-tax.asp

How Property Taxes Are Calculated

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Property taxes are levied by cities, counties, and school districts on the properties within their boundaries and they're used by these organizations to provide services. All these levies are added together to calculate property taxes and work out the total tax rate, known as a mill rate, for a region. This rate is then multiplied by the assessed value of a property so people with more valuable properties pay more. Millions of homeowners pay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/propertytax.asp">property taxes</a> every year. </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>Cities, counties, and school districts in a region have the power to levy taxes against the properties within their boundaries. </li><li>Property tax rates for each jurisdiction are calculated separately then all the levies are added together to determine the total tax rate, called a mill rate, for an entire region.</li><li>Property taxes are calculated by taking the mill rate and multiplying it by the assessed value of your property. </li><li>The market value of your property is assessed by using one or a combination of three methods: performing a sales evaluation, the cost method, and the income method.</li><li>The market value is then multiplied by an assessment rate to arrive at the assessed value.</li></ul></div></div></div> <span class="heading-toc" id="toc-assessing-property-tax"></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"> Assessing Property Tax </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Different property types have various types of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/land-value-tax.asp">taxes assessed on the land</a> and its structures. Vacant land will have a significantly lower assessed value than a comparable piece of property that's improved. It will have lower property taxes as a result. The land assessment might be higher if there is access to public services, such as sewer, water, and gas. It could lead to a higher assessment and more taxes for the owner if the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assessor.asp">assessor</a> feels that the land has the potential to be developed. </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-note" 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 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 amount that a property is taxed comes from a percentage of the assessed value of the property.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money must be allocated to provide the various services required by the local community. These services include education, transportation, emergency, parks, recreation, and libraries and are funded by property taxes.  </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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/">Tax Cuts and Jobs Act</a> (TCJA) placed a cap of $10,000 per year (or $5,000 for those married and filing separately) on the federal tax deduction for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/salt-5180146">state and local taxes (SALT)</a> paid beginning in the 2018 tax year. This figure includes all real estate, income, and sales taxes on property. The TCJA provision is set to expire after 2025 but the federal American Families and Jobs Act that was introduced in 2023 aims to repeal or adjust this limit before that time.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-calculating-property-taxes"></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"> Calculating Property Taxes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Property taxes are calculated based on the value of the property. This includes both the land and the buildings on it. Tax assessors will typically value the property every one to five years and charge the owner of record the appropriate rate according to the standards set by the taxing authority. Assessors calculate that value using the mill levy, also called the millage tax, and the assessed property value. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-subheading__text"> Example of a Property Tax Calculation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The tax rate for a property is determined by how many city and school districts a property lies within and adding together the rates applied by each. This aggregate rate is referred to as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mill-levy.asp">mill levy</a>. Each entity calculates its required mill levy and they are then tallied together to calculate the total mill levy. </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>Every city, county, and school district generally has the power to levy taxes against the properties within its boundaries.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The mill levy is the total <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxrate.asp">tax rate</a> levied on your property value. One mill represents one-tenth of one cent. One mill would be equal to $1 for each $1,000 of assessed property value.<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_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Suppose the total assessed property value in a county is $100 million and the county decides it needs $1 million in tax revenues to run its necessary operations. The mill levy would be $1 million divided by $100 million, which equals 1%. The total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills if the city and the school district calculated a mill levy of 0.5% and 3%, respectively. </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"> Two further steps are required to calculate a tax bill. First, a property’s value must be assessed via one of three methods. Then the value is multiplied by the assessment rate, which varies by jurisdiction and represents the percentage of a property on which taxes are due. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% that we calculated previously, the tax due would be $1,800 ($40,000 × 4.5%).<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-3-ways-to-assess-property-value"></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"> 3 Ways to Assess Property Value </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assessedvalue.asp">assessed value</a> estimates the reasonable <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a> for your home. It's based upon prevailing local real estate market conditions. The assessor will review all relevant information surrounding your property to estimate its overall value. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> To give you the most accurate assessment, the assessor must look at what comparable properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you're making from the property, and how much interest would be charged to purchase or construct a property comparable to yours. </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 assessor can estimate the market value of the property by using three methods and they have the option of choosing a single one or any combination of the three. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> 1. Performing a Sales Evaluation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The assessor values the property using comparable sales in the area. Criteria include location, the condition of the property, any improvements, and overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <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"> 2. Cost Method </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The assessor determines your property value based on how much it would cost to replace it. Assessors determine the amount of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/depreciation.asp">depreciation</a> that has taken place and how much the property would be worth if it were empty if the property is older. For newer properties, the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-subheading__text"> 3. Income Method </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> This method is based on how much income you could make from the property if it were rented. Using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income-approach.asp">income method</a> approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that you could reasonably anticipate from the property.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-assessed-value"></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"> Assessed Value </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> After determining the market value of the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage and varies by tax jurisdiction. It could be any percentage below 100%. The assessed value is multiplied by the mill levy to determine your property taxes due.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The assessor works in two stages when they have the value: First, they send the assessed value of the property to the owner then they follow it up with a tax bill. </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"> Other Considerations on How Your Property Value Is Assessed </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Most property tax assessments are performed either annually or every five years depending on the community where the property is located. A property tax bill is mailed separately after the owner has received their assessment with its property valuation. </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 information that the assessor has is considered to be part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. They may sometimes be charged a small fee for accessing this material. </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"> Another option is to go to the assessor’s office in the county courthouse. You can look up the information there and print out a copy for a nominal fee. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_58-0"><span class="heading-toc" id="toc-why-is-my-property-tax-higher-than-my-neighbors"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is My Property Tax Higher Than My Neighbor’s?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>This will typically be due to the assessed value of your home being higher. Your home may have a higher value if you have a larger plot of land, if your residence is larger, or if your home has desirable features. In some rare cases, however, you may live in a different jurisdiction from your neighbor.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-what-state-has-the-highest-property-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">What State Has the Highest Property Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The mean effective property tax rate (total real estate taxes paid divided by total home value) across the United States was 1.08% as assessed from data from the Tax Foundation, a tax policy research organization, in 2022. New Jersey had the highest rate in the country at that time at 2.21%. Hawaii had the lowest rate, at just 0.31%, followed closely by Alabama at 0.39% and Louisiana at 0.54%.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="3"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_62-0"><span class="heading-toc" id="toc-what-states-have-no-property-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">What States Have No Property Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>All 50 states and the District of Columbia have property taxes. But some people may qualify for a property tax exemption. Certain states have homestead exemptions or exemptions for older homeowners, people with disabilities, military veterans, and homeowners who install renewable energy systems like solar panels.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="5"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Paying the right amount of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102015/7-best-states-property-taxes-and-why.asp">property taxes</a> requires understanding how the tax is calculated, where you can get this information, and when tax bills are sent out and due. Some cities allow their residents to view and/or pay their property tax bills online. Property owners should do their part to remain educated by knowing how their taxes are calculated, when the billing cycle is, and where they can locate this information.  </p></div>

Property taxes are levied by cities, counties, and school districts on the properties within their boundaries and they're used by these organizations to provide services. All these levies are added together to calculate property taxes and work out the total tax rate, known as a mill rate, for a region. This rate is then multiplied by the assessed value of a property so people with more valuable properties pay more. Millions of homeowners pay [property taxes](https://www.investopedia.com/terms/p/propertytax.asp) every year. ### Key Takeaways * Cities, counties, and school districts in a region have the power to levy taxes against the properties within their boundaries. * Property tax rates for each jurisdiction are calculated separately then all the levies are added together to determine the total tax rate, called a mill rate, for an entire region. * Property taxes are calculated by taking the mill rate and multiplying it by the assessed value of your property. * The market value of your property is assessed by using one or a combination of three methods: performing a sales evaluation, the cost method, and the income method. * The market value is then multiplied by an assessment rate to arrive at the assessed value. ## Assessing Property Tax Different property types have various types of [taxes assessed on the land](https://www.investopedia.com/terms/l/land-value-tax.asp) and its structures. Vacant land will have a significantly lower assessed value than a comparable piece of property that's improved. It will have lower property taxes as a result. The land assessment might be higher if there is access to public services, such as sewer, water, and gas. It could lead to a higher assessment and more taxes for the owner if the [assessor](https://www.investopedia.com/terms/a/assessor.asp) feels that the land has the potential to be developed. ### The amount that a property is taxed comes from a percentage of the assessed value of the property. Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money must be allocated to provide the various services required by the local community. These services include education, transportation, emergency, parks, recreation, and libraries and are funded by property taxes.  The [Tax Cuts and Jobs Act](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) (TCJA) placed a cap of $10,000 per year (or $5,000 for those married and filing separately) on the federal tax deduction for [state and local taxes (SALT)](https://www.investopedia.com/salt-5180146) paid beginning in the 2018 tax year. This figure includes all real estate, income, and sales taxes on property. The TCJA provision is set to expire after 2025 but the federal American Families and Jobs Act that was introduced in 2023 aims to repeal or adjust this limit before that time. ## Calculating Property Taxes Property taxes are calculated based on the value of the property. This includes both the land and the buildings on it. Tax assessors will typically value the property every one to five years and charge the owner of record the appropriate rate according to the standards set by the taxing authority. Assessors calculate that value using the mill levy, also called the millage tax, and the assessed property value. ### Example of a Property Tax Calculation The tax rate for a property is determined by how many city and school districts a property lies within and adding together the rates applied by each. This aggregate rate is referred to as the [mill levy](https://www.investopedia.com/terms/m/mill-levy.asp). Each entity calculates its required mill levy and they are then tallied together to calculate the total mill levy. ### Every city, county, and school district generally has the power to levy taxes against the properties within its boundaries. The mill levy is the total [tax rate](https://www.investopedia.com/terms/t/taxrate.asp) levied on your property value. One mill represents one-tenth of one cent. One mill would be equal to $1 for each $1,000 of assessed property value. Suppose the total assessed property value in a county is $100 million and the county decides it needs $1 million in tax revenues to run its necessary operations. The mill levy would be $1 million divided by $100 million, which equals 1%. The total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills if the city and the school district calculated a mill levy of 0.5% and 3%, respectively. Two further steps are required to calculate a tax bill. First, a property’s value must be assessed via one of three methods. Then the value is multiplied by the assessment rate, which varies by jurisdiction and represents the percentage of a property on which taxes are due. Suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% that we calculated previously, the tax due would be $1,800 ($40,000 × 4.5%). ## 3 Ways to Assess Property Value Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The [assessed value](https://www.investopedia.com/terms/a/assessedvalue.asp) estimates the reasonable [market value](https://www.investopedia.com/terms/m/marketvalue.asp) for your home. It's based upon prevailing local real estate market conditions. The assessor will review all relevant information surrounding your property to estimate its overall value. To give you the most accurate assessment, the assessor must look at what comparable properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you're making from the property, and how much interest would be charged to purchase or construct a property comparable to yours. The assessor can estimate the market value of the property by using three methods and they have the option of choosing a single one or any combination of the three. ### 1. Performing a Sales Evaluation The assessor values the property using comparable sales in the area. Criteria include location, the condition of the property, any improvements, and overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations. ### 2. Cost Method The assessor determines your property value based on how much it would cost to replace it. Assessors determine the amount of [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) that has taken place and how much the property would be worth if it were empty if the property is older. For newer properties, the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property. ### 3. Income Method This method is based on how much income you could make from the property if it were rented. Using the [income method](https://www.investopedia.com/terms/i/income-approach.asp) approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that you could reasonably anticipate from the property. ## Assessed Value After determining the market value of the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage and varies by tax jurisdiction. It could be any percentage below 100%. The assessed value is multiplied by the mill levy to determine your property taxes due. The assessor works in two stages when they have the value: First, they send the assessed value of the property to the owner then they follow it up with a tax bill. ### Other Considerations on How Your Property Value Is Assessed Most property tax assessments are performed either annually or every five years depending on the community where the property is located. A property tax bill is mailed separately after the owner has received their assessment with its property valuation. The information that the assessor has is considered to be part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. They may sometimes be charged a small fee for accessing this material. Another option is to go to the assessor’s office in the county courthouse. You can look up the information there and print out a copy for a nominal fee. ## Why Is My Property Tax Higher Than My Neighbor’s? This will typically be due to the assessed value of your home being higher. Your home may have a higher value if you have a larger plot of land, if your residence is larger, or if your home has desirable features. In some rare cases, however, you may live in a different jurisdiction from your neighbor. ## What State Has the Highest Property Taxes? The mean effective property tax rate (total real estate taxes paid divided by total home value) across the United States was 1.08% as assessed from data from the Tax Foundation, a tax policy research organization, in 2022. New Jersey had the highest rate in the country at that time at 2.21%. Hawaii had the lowest rate, at just 0.31%, followed closely by Alabama at 0.39% and Louisiana at 0.54%. ## What States Have No Property Taxes? All 50 states and the District of Columbia have property taxes. But some people may qualify for a property tax exemption. Certain states have homestead exemptions or exemptions for older homeowners, people with disabilities, military veterans, and homeowners who install renewable energy systems like solar panels. ## The Bottom Line Paying the right amount of [property taxes](https://www.investopedia.com/articles/personal-finance/102015/7-best-states-property-taxes-and-why.asp) requires understanding how the tax is calculated, where you can get this information, and when tax bills are sent out and due. Some cities allow their residents to view and/or pay their property tax bills online. Property owners should do their part to remain educated by knowing how their taxes are calculated, when the billing cycle is, and where they can locate this information. 

Property taxes are levied by cities, counties, and school districts on the properties within their boundaries and they're used by these organizations to provide services. All these levies are added together to calculate property taxes and work out the total tax rate, known as a mill rate, for a region. This rate is then multiplied by the assessed value of a property so people with more valuable properties pay more. Millions of homeowners pay property taxes every year. Key Takeaways Cities, counties, and school districts in a region have the power to levy taxes against the properties within their boundaries. Property tax rates for each jurisdiction are calculated separately then all the levies are added together to determine the total tax rate, called a mill rate, for an entire region.Property taxes are calculated by taking the mill rate and multiplying it by the assessed value of your property. The market value of your property is assessed by using one or a combination of three methods: performing a sales evaluation, the cost method, and the income method.The market value is then multiplied by an assessment rate to arrive at the assessed value. Assessing Property Tax Different property types have various types of taxes assessed on the land and its structures. Vacant land will have a significantly lower assessed value than a comparable piece of property that's improved. It will have lower property taxes as a result. The land assessment might be higher if there is access to public services, such as sewer, water, and gas. It could lead to a higher assessment and more taxes for the owner if the assessor feels that the land has the potential to be developed. The amount that a property is taxed comes from a percentage of the assessed value of the property. Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money must be allocated to provide the various services required by the local community. These services include education, transportation, emergency, parks, recreation, and libraries and are funded by property taxes.  The Tax Cuts and Jobs Act (TCJA) placed a cap of $10,000 per year (or $5,000 for those married and filing separately) on the federal tax deduction for state and local taxes (SALT) paid beginning in the 2018 tax year. This figure includes all real estate, income, and sales taxes on property. The TCJA provision is set to expire after 2025 but the federal American Families and Jobs Act that was introduced in 2023 aims to repeal or adjust this limit before that time. Calculating Property Taxes Property taxes are calculated based on the value of the property. This includes both the land and the buildings on it. Tax assessors will typically value the property every one to five years and charge the owner of record the appropriate rate according to the standards set by the taxing authority. Assessors calculate that value using the mill levy, also called the millage tax, and the assessed property value. Example of a Property Tax Calculation The tax rate for a property is determined by how many city and school districts a property lies within and adding together the rates applied by each. This aggregate rate is referred to as the mill levy. Each entity calculates its required mill levy and they are then tallied together to calculate the total mill levy. Every city, county, and school district generally has the power to levy taxes against the properties within its boundaries. The mill levy is the total tax rate levied on your property value. One mill represents one-tenth of one cent. One mill would be equal to $1 for each $1,000 of assessed property value. Suppose the total assessed property value in a county is $100 million and the county decides it needs $1 million in tax revenues to run its necessary operations. The mill levy would be $1 million divided by $100 million, which equals 1%. The total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills if the city and the school district calculated a mill levy of 0.5% and 3%, respectively. Two further steps are required to calculate a tax bill. First, a property’s value must be assessed via one of three methods. Then the value is multiplied by the assessment rate, which varies by jurisdiction and represents the percentage of a property on which taxes are due. Suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% that we calculated previously, the tax due would be $1,800 ($40,000 × 4.5%). 3 Ways to Assess Property Value Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The assessed value estimates the reasonable market value for your home. It's based upon prevailing local real estate market conditions. The assessor will review all relevant information surrounding your property to estimate its overall value. To give you the most accurate assessment, the assessor must look at what comparable properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you're making from the property, and how much interest would be charged to purchase or construct a property comparable to yours. The assessor can estimate the market value of the property by using three methods and they have the option of choosing a single one or any combination of the three. 1. Performing a Sales Evaluation The assessor values the property using comparable sales in the area. Criteria include location, the condition of the property, any improvements, and overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations. 2. Cost Method The assessor determines your property value based on how much it would cost to replace it. Assessors determine the amount of depreciation that has taken place and how much the property would be worth if it were empty if the property is older. For newer properties, the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property. 3. Income Method This method is based on how much income you could make from the property if it were rented. Using the income method approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that you could reasonably anticipate from the property. Assessed Value After determining the market value of the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage and varies by tax jurisdiction. It could be any percentage below 100%. The assessed value is multiplied by the mill levy to determine your property taxes due. The assessor works in two stages when they have the value: First, they send the assessed value of the property to the owner then they follow it up with a tax bill. Other Considerations on How Your Property Value Is Assessed Most property tax assessments are performed either annually or every five years depending on the community where the property is located. A property tax bill is mailed separately after the owner has received their assessment with its property valuation. The information that the assessor has is considered to be part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. They may sometimes be charged a small fee for accessing this material. Another option is to go to the assessor’s office in the county courthouse. You can look up the information there and print out a copy for a nominal fee. Why Is My Property Tax Higher Than My Neighbor’s? This will typically be due to the assessed value of your home being higher. Your home may have a higher value if you have a larger plot of land, if your residence is larger, or if your home has desirable features. In some rare cases, however, you may live in a different jurisdiction from your neighbor. What State Has the Highest Property Taxes? The mean effective property tax rate (total real estate taxes paid divided by total home value) across the United States was 1.08% as assessed from data from the Tax Foundation, a tax policy research organization, in 2022. New Jersey had the highest rate in the country at that time at 2.21%. Hawaii had the lowest rate, at just 0.31%, followed closely by Alabama at 0.39% and Louisiana at 0.54%. What States Have No Property Taxes? All 50 states and the District of Columbia have property taxes. But some people may qualify for a property tax exemption. Certain states have homestead exemptions or exemptions for older homeowners, people with disabilities, military veterans, and homeowners who install renewable energy systems like solar panels. The Bottom Line Paying the right amount of property taxes requires understanding how the tax is calculated, where you can get this information, and when tax bills are sent out and due. Some cities allow their residents to view and/or pay their property tax bills online. Property owners should do their part to remain educated by knowing how their taxes are calculated, when the billing cycle is, and where they can locate this information. 

https://www.investopedia.com/what-happens-when-your-student-loans-are-forgiven-7152753

What Happens When Your Student Loans Are Forgiven?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 qualify for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/education-loan.asp">student loan</a> forgiveness or discharge in full, and have applied if necessary in your case, you will get a notification and will no longer need to make payments. In some cases, you may even get a refund, depending on the program you applied under. If only some of your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">debt</a> is canceled or discharged, you’ll still be responsible for repaying the rest of what you owe. There may be consequences for your taxes, your credit score, and your overall financial health as well. </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>When your student loan debt is forgiven, you’ll be sent notice of how much is canceled and whether you still owe anything more.</li><li>If your loan is discharged because of fraud or deception on the part of the school, you may get a refund of some payments.</li><li>The Supreme Court ruled the Biden administration's plan to forgive loan debt to be unconstitutional, but Biden announced an alternative plan to pursue forgiveness.</li><li>If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won’t be subject to federal income taxes, it may still be taxed at the state level.</li></ul></div></div></div> <span class="heading-toc" id="toc-student-loan-forgiveness-programs"></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"> Student Loan Forgiveness Programs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Your federal student loans may be canceled or discharged under a number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp">existing specialized programs</a> or under more widespread income-based forgiveness programs being pursued by President Biden. Here’s how <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">student loan forgiveness</a> has evolved in the last year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-subheading__text"> Biden’s Proposed Student Loan Forgiveness </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The Supreme Court ruled on June 30, 2023, that the Higher Education Relief Opportunities for Students (HEROES) Act of 2003 did not give the Biden administration the authority to forgive student loan debt.<span class="ql-inline-citation" data-cite="26"></span> Biden responded by providing a new plan for debt relief that reduces minimum payments for some borrowers and also reduces the number of years before loans are forgiven. At the same time, he announced that the Department of Education would pursue an alternative plan to provide student debt forgiveness.<span class="ql-inline-citation" data-cite="28"></span><span class="ql-inline-citation" data-cite="27"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Under Biden's original plan, you would have been eligible for this one-time loan forgiveness if you have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp">federal student loans</a> (private student loans are not eligible) and make less than $125,000 annually for individual borrowers or less than $250,000 annually for families. </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 eligible, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/find-student-loan-servicer-5322700">your loan servicer</a> would have applied your debt relief directly to your account and then notified you if your debt had been paid in full or if there was any outstanding balance. In the latter scenario, the company also would have informed you of your new monthly payment. </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 plan would have provided up to $20,000 in debt relief if you were a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pell-grant.asp">Pell Grant</a> recipient and met the income requirements, while all other eligible borrowers who met the income requirements would have received up to $10,000 in debt relief.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A pause on student loan payments and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> began back in March 2020 and was extended multiple times throughout the pandemic. This pause ended on September 1, 2023, when interest began accruing again, and payments resumed in October 2023.<span class="ql-inline-citation" data-cite="41"></span><span class="ql-inline-citation" data-cite="29"></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"> After the one-time debt relief plan was struck down, the Biden-Harris administration announced another path to potential forgiveness—the Saving for a Valuable Education (SAVE) plan. Under the SAVE plan, monthly payments would be reduced based on income, with some borrowers eligible for $0 monthly payments, and most borrowers eligible for up to $1,000 of yearly savings. Sign-ups for the SAVE plan opened in August of 2023. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> After ten years of payments, borrowers with initial balances of less than $12,000 are eligible for forgiveness. For those that have higher balances, the amount of time before forgiveness goes up proportionately, capping at 20 years for undergraduate loans and 25 for graduate loans. Past payments will count toward the total payment time.<span class="ql-inline-citation" data-cite="35"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Public Service Loan Forgiveness (PSLF) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Employees of a U.S. federal, state, local, or tribal government or a not-for-profit organization may be eligible for a permanent program called Public Service Loan Forgiveness (PSLF). The PSLF program forgives any outstanding balance on an eligible borrower’s direct loans after they’ve made 120 qualifying monthly payments as part of a qualifying repayment plan, while also working full time for a qualifying employer. Due to the number and frequency of payments required, it can take at least 10 years before a borrower can qualify for PSLF. </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"> Borrowers who wish to apply for PSLF should complete the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/public-service-loan-forgiveness-application">Public Service Loan Forgiveness (PSLF) &amp; Temporary Expanded PSLF (TEPSLF) Certification &amp; Application</a>. After submitting the PSLF form, a PSLF servicer will review it to ensure that it’s complete and to determine whether your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loans</a> and employment qualify for the PSLF program.<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_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Only direct loans made by the federal government (currently known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-direct-student-loan-program.asp">William D. Ford Federal Direct Loan Program</a>) are eligible for student loan forgiveness under PSLF. If you instead borrowed through either of two now-defunct programs—the Federal Family Education Loan (FFEL) Program or the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/perkins-loan.asp">Perkins Loan Program</a>—you are allowed to consolidate those debts into a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/direct-consolidation-loan.asp">direct consolidation loan</a>. The new consolidated loan is then eligible for PSLF.<span class="ql-inline-citation" data-cite="12"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> When your PSLF form is approved, you will be notified that the remaining balance of your eligible direct loans will be forgiven. Any payments made after your 120th qualifying payment will be treated as overpayments and refunded to you.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-repayment-options-what-s-the-best-way-to-pay-4772402">repayment plans</a> that qualify for PSLF are the four income-driven repayment (IDR) plans: Saving on a Valuable Education (SAVE), Pay as You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).<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_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Payments made under the 10-year Standard Repayment Plan can also be qualifying payments for PSLF. Keep in mind that payments may be higher under the 10-year Standard Repayment Plan versus an income-driven plan, depending on your income and the amount of student loan debt you have.<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_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Income-driven repayment plans are also an option for some student loan forgiveness as remaining balances are forgiven at the end of the plan's timeframe. For borrowers unable to pay off their federal student loan debt within the typical 10-year time frame, income-driven repayment plans set a new monthly payment at an amount that is intended to be more affordable based on your income and family size. Biden's SAVE plan is the newest iteration of these plans. </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 tradeoff is that income-driven repayment plans have much longer repayment periods of either 20 or 25 years (depending on the plan), but any remaining loan balance will be forgiven by the end of those periods.<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_39-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Teacher Loan Forgiveness </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Some teachers with federal student loans can take advantage of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-forgiveness-for-teachers-4772528">Teacher Loan Forgiveness Program</a>. A highly qualified teacher holding a bachelor’s degree and full state certification as a teacher is eligible for this program if they have subsidized/unsubsidized direct loans and/or subsidized/unsubsidized Stafford loans as well as teach full time for five consecutive and complete academic years at an institution serving low-income students. </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 maximum forgiveness amount available is $17,500 for secondary school mathematics and science teachers as well as highly qualified special education teachers or $5,000 for highly qualified full-time elementary or secondary education teachers.<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_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_45-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_46-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You may be able to get your loan discharged if the school you went to misled you or engaged in misconduct of certain loan discharge through a program known as “borrower defense to loan repayment” forgiveness. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-borrower-defense-5214746">Borrower defense</a> now applies mainly to private, for-profit schools. To apply, you’ll need to submit an application on the Department of Education’s website with evidence that the school broke the law, significantly misled you, or misrepresented itself. If your application is approved, you would get a discharge, meaning you no longer owe the loan. You could possibly get a refund of some or all of your student loan payments as well.<span class="ql-inline-citation" data-cite="42"></span></p></div></div></div> <span class="heading-toc" id="toc-what-happens-to-your-credit"></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"> What Happens to Your Credit? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> It feels good to have your debt load lightened, but for a brief period of time, that assistance can work against you, as you might see your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a> drop slightly. This occurs because student loans are a type of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/072316/how-installment-loans-work.asp">installment loan</a>—like an auto loan. When this loan is erased from your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>, it reduces the diversity of your credit lines. As a result, it may decrease your credit score—but again, only for a short period of time.<span class="ql-inline-citation" data-cite="40"></span> And because <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-mix.asp">credit mix</a> only makes up 10% of your credit score, the dip shouldn’t be too dramatic.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> However, there is good news, even if you fell behind on your payments before the pause began and your credit score took a hit. Once the loan forgiveness plan kicks in, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp">credit bureaus</a> may delete any <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/delinquent.asp">delinquent</a> payments from your report. As a result, you could actually see a bump in your credit score. It’s important to keep an eye on your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a> once you receive confirmation that you were approved for <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/settle-student-loan-debt-guide-8547140">student debt relief</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> With certain types of student loan discharges, even if your student loan was in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a>, you may regain eligibility for federal student aid if you have not defaulted on other loans.<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_53-0"></div> <span class="heading-toc" id="toc-how-does-student-loan-forgiveness-affect-your-taxes"></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"> How Does Student Loan Forgiveness Affect Your Taxes? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Most student loan forgiveness is not taxed. Any loans that are canceled because you worked for a certain period of time in a certain profession are not taxable if forgiven. One exception is that debt forgiven through income-driven repayment forgiveness is usually considered taxable income.<span class="ql-inline-citation" data-cite="39"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> However, thanks to a provision of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/american-rescue-plan-definition-5095694">American Rescue Plan</a>, all student loan debt relief won’t be treated as taxable income for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal_income_tax.asp">federal income tax purposes</a> from 2021 through 2025.<span class="ql-inline-citation" data-cite="43"></span> However, some states will tax forgiven balances at the regular <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060515/what-difference-between-state-income-tax-and-federal-income-tax.asp">state income tax</a> rate.<span class="ql-inline-citation" data-cite="40"></span> And if the tax treatment is not extended after 2025, income-driven repayment forgiveness will once again become taxable at the federal level. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <span class="heading-toc" id="toc-what-happens-to-your-finances"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_59-0"> <span class="mntl-sc-block-heading__text"> What Happens to Your Finances? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> If you received a refund from your student loan payments, or even if you have just been benefiting from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forbearance.asp">forbearance</a> period, consider this an opportunity to get ahead of your finances. For example, you can use your refund to pay down other higher-interest debt, such as car payments or credit cards, or use it to create an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a> for peace of mind. </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"> If you have already been paying your student loan every month, move that payment over to a credit card, medical bill, or car payment, or designate it to go into your savings every month instead.<br/> </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-how-will-i-find-out-if-im-approved-for-student-loan-forgiveness"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Will I Find Out if I’m Approved for Student Loan Forgiveness?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you have applied for forgiveness under a program like the PSLF or Teacher Loan Forgiveness program, your student loan servicer will notify you regarding your loan being forgiven totally, or partially with a remaining balance, depending on the program. Things would work similarly if you have paid for the required number of years under an income-driven plan and are having the rest forgiven.</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-will-student-loan-forgiveness-help-or-hurt-my-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">Will Student Loan Forgiveness Help or Hurt My Credit Score?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A student loan being erased from your credit report may temporarily bring your score down a bit because it is part of your credit mix. On the plus side, the credit bureaus may also delete any delinquent loan payments from your credit report, which will help to raise your score. Eventually, your credit score may go up as your debt-to-income ratio will be lower.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="37"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-will-i-have-to-pay-tax-on-the-forgiven-amount-of-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">Will I Have to Pay Tax on the Forgiven Amount of Student Loan Debt?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Your student debt relief won’t be taxed on the federal level through the end of 2025, and forever for occupation based programs.<span class="ql-inline-citation" data-cite="43"></span><span class="ql-inline-citation" data-cite="39"></span> However, it may be considered taxable income at the state level, depending on where you live.<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_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"> Student loan forgiveness plans are intended to provide relief for borrowers who are saddled with too much debt. Some are targeted at people who work in particular public service jobs for a certain length of time. After completing the required number of payments, and service in a profession if required, you will be notified if you are approved and provided further information on the forgiveness of your loan and any balance remaining, depending on the program. </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"> If you still have an outstanding balance after forgiveness, you can work out a new repayment plan that suits your needs. You won’t be taxed federally on the forgiven amount for forgiveness occurring through the end of 2025 for income-driven payment plan forgiveness, and occupational based forgiveness is always federally tax-free. While your credit score could dip slightly, it won’t be too much or for too long.<br/> </p></div>

If you qualify for [student loan](https://www.investopedia.com/terms/e/education-loan.asp) forgiveness or discharge in full, and have applied if necessary in your case, you will get a notification and will no longer need to make payments. In some cases, you may even get a refund, depending on the program you applied under. If only some of your [debt](https://www.investopedia.com/terms/d/debt.asp) is canceled or discharged, you’ll still be responsible for repaying the rest of what you owe. There may be consequences for your taxes, your credit score, and your overall financial health as well. ### Key Takeaways * When your student loan debt is forgiven, you’ll be sent notice of how much is canceled and whether you still owe anything more. * If your loan is discharged because of fraud or deception on the part of the school, you may get a refund of some payments. * The Supreme Court ruled the Biden administration's plan to forgive loan debt to be unconstitutional, but Biden announced an alternative plan to pursue forgiveness. * If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won’t be subject to federal income taxes, it may still be taxed at the state level. ## Student Loan Forgiveness Programs Your federal student loans may be canceled or discharged under a number of [existing specialized programs](https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp) or under more widespread income-based forgiveness programs being pursued by President Biden. Here’s how [student loan forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) has evolved in the last year. ### Biden’s Proposed Student Loan Forgiveness The Supreme Court ruled on June 30, 2023, that the Higher Education Relief Opportunities for Students (HEROES) Act of 2003 did not give the Biden administration the authority to forgive student loan debt. Biden responded by providing a new plan for debt relief that reduces minimum payments for some borrowers and also reduces the number of years before loans are forgiven. At the same time, he announced that the Department of Education would pursue an alternative plan to provide student debt forgiveness. Under Biden's original plan, you would have been eligible for this one-time loan forgiveness if you have [federal student loans](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) (private student loans are not eligible) and make less than $125,000 annually for individual borrowers or less than $250,000 annually for families. If eligible, [your loan servicer](https://www.investopedia.com/find-student-loan-servicer-5322700) would have applied your debt relief directly to your account and then notified you if your debt had been paid in full or if there was any outstanding balance. In the latter scenario, the company also would have informed you of your new monthly payment. The plan would have provided up to $20,000 in debt relief if you were a [Pell Grant](https://www.investopedia.com/terms/p/pell-grant.asp) recipient and met the income requirements, while all other eligible borrowers who met the income requirements would have received up to $10,000 in debt relief. A pause on student loan payments and [interest](https://www.investopedia.com/terms/i/interest.asp) began back in March 2020 and was extended multiple times throughout the pandemic. This pause ended on September 1, 2023, when interest began accruing again, and payments resumed in October 2023. After the one-time debt relief plan was struck down, the Biden-Harris administration announced another path to potential forgiveness—the Saving for a Valuable Education (SAVE) plan. Under the SAVE plan, monthly payments would be reduced based on income, with some borrowers eligible for $0 monthly payments, and most borrowers eligible for up to $1,000 of yearly savings. Sign-ups for the SAVE plan opened in August of 2023. After ten years of payments, borrowers with initial balances of less than $12,000 are eligible for forgiveness. For those that have higher balances, the amount of time before forgiveness goes up proportionately, capping at 20 years for undergraduate loans and 25 for graduate loans. Past payments will count toward the total payment time. ### Public Service Loan Forgiveness (PSLF) Employees of a U.S. federal, state, local, or tribal government or a not-for-profit organization may be eligible for a permanent program called Public Service Loan Forgiveness (PSLF). The PSLF program forgives any outstanding balance on an eligible borrower’s direct loans after they’ve made 120 qualifying monthly payments as part of a qualifying repayment plan, while also working full time for a qualifying employer. Due to the number and frequency of payments required, it can take at least 10 years before a borrower can qualify for PSLF. Borrowers who wish to apply for PSLF should complete the [Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application](https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/public-service-loan-forgiveness-application). After submitting the PSLF form, a PSLF servicer will review it to ensure that it’s complete and to determine whether your [loans](https://www.investopedia.com/terms/l/loan.asp) and employment qualify for the PSLF program. ### Only direct loans made by the federal government (currently known as the [William D. Ford Federal Direct Loan Program](https://www.investopedia.com/terms/f/federal-direct-student-loan-program.asp)) are eligible for student loan forgiveness under PSLF. If you instead borrowed through either of two now-defunct programs—the Federal Family Education Loan (FFEL) Program or the [Perkins Loan Program](https://www.investopedia.com/terms/p/perkins-loan.asp)—you are allowed to consolidate those debts into a [direct consolidation loan](https://www.investopedia.com/terms/d/direct-consolidation-loan.asp). The new consolidated loan is then eligible for PSLF. When your PSLF form is approved, you will be notified that the remaining balance of your eligible direct loans will be forgiven. Any payments made after your 120th qualifying payment will be treated as overpayments and refunded to you. The [repayment plans](https://www.investopedia.com/student-loan-repayment-options-what-s-the-best-way-to-pay-4772402) that qualify for PSLF are the four income-driven repayment (IDR) plans: Saving on a Valuable Education (SAVE), Pay as You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Payments made under the 10-year Standard Repayment Plan can also be qualifying payments for PSLF. Keep in mind that payments may be higher under the 10-year Standard Repayment Plan versus an income-driven plan, depending on your income and the amount of student loan debt you have. Income-driven repayment plans are also an option for some student loan forgiveness as remaining balances are forgiven at the end of the plan's timeframe. For borrowers unable to pay off their federal student loan debt within the typical 10-year time frame, income-driven repayment plans set a new monthly payment at an amount that is intended to be more affordable based on your income and family size. Biden's SAVE plan is the newest iteration of these plans. The tradeoff is that income-driven repayment plans have much longer repayment periods of either 20 or 25 years (depending on the plan), but any remaining loan balance will be forgiven by the end of those periods. ### Teacher Loan Forgiveness Some teachers with federal student loans can take advantage of the [Teacher Loan Forgiveness Program](https://www.investopedia.com/student-loan-forgiveness-for-teachers-4772528). A highly qualified teacher holding a bachelor’s degree and full state certification as a teacher is eligible for this program if they have subsidized/unsubsidized direct loans and/or subsidized/unsubsidized Stafford loans as well as teach full time for five consecutive and complete academic years at an institution serving low-income students. The maximum forgiveness amount available is $17,500 for secondary school mathematics and science teachers as well as highly qualified special education teachers or $5,000 for highly qualified full-time elementary or secondary education teachers. ### You may be able to get your loan discharged if the school you went to misled you or engaged in misconduct of certain loan discharge through a program known as “borrower defense to loan repayment” forgiveness. [Borrower defense](https://www.investopedia.com/what-is-borrower-defense-5214746) now applies mainly to private, for-profit schools. To apply, you’ll need to submit an application on the Department of Education’s website with evidence that the school broke the law, significantly misled you, or misrepresented itself. If your application is approved, you would get a discharge, meaning you no longer owe the loan. You could possibly get a refund of some or all of your student loan payments as well. ## What Happens to Your Credit? It feels good to have your debt load lightened, but for a brief period of time, that assistance can work against you, as you might see your [credit scores](https://www.investopedia.com/terms/c/credit_score.asp) drop slightly. This occurs because student loans are a type of [installment loan](https://www.investopedia.com/articles/personal-finance/072316/how-installment-loans-work.asp)—like an auto loan. When this loan is erased from your [credit history](https://www.investopedia.com/terms/c/credit-history.asp), it reduces the diversity of your credit lines. As a result, it may decrease your credit score—but again, only for a short period of time. And because [credit mix](https://www.investopedia.com/terms/c/credit-mix.asp) only makes up 10% of your credit score, the dip shouldn’t be too dramatic. However, there is good news, even if you fell behind on your payments before the pause began and your credit score took a hit. Once the loan forgiveness plan kicks in, the [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp) may delete any [delinquent](https://www.investopedia.com/terms/d/delinquent.asp) payments from your report. As a result, you could actually see a bump in your credit score. It’s important to keep an eye on your [credit report](https://www.investopedia.com/terms/c/creditreport.asp) once you receive confirmation that you were approved for [student debt relief](https://www.investopedia.com/settle-student-loan-debt-guide-8547140). With certain types of student loan discharges, even if your student loan was in [default](https://www.investopedia.com/terms/d/default2.asp), you may regain eligibility for federal student aid if you have not defaulted on other loans. ## How Does Student Loan Forgiveness Affect Your Taxes? Most student loan forgiveness is not taxed. Any loans that are canceled because you worked for a certain period of time in a certain profession are not taxable if forgiven. One exception is that debt forgiven through income-driven repayment forgiveness is usually considered taxable income. However, thanks to a provision of the [American Rescue Plan](https://www.investopedia.com/american-rescue-plan-definition-5095694), all student loan debt relief won’t be treated as taxable income for [federal income tax purposes](https://www.investopedia.com/terms/f/federal_income_tax.asp) from 2021 through 2025. However, some states will tax forgiven balances at the regular [state income tax](https://www.investopedia.com/ask/answers/060515/what-difference-between-state-income-tax-and-federal-income-tax.asp) rate. And if the tax treatment is not extended after 2025, income-driven repayment forgiveness will once again become taxable at the federal level. ## What Happens to Your Finances? If you received a refund from your student loan payments, or even if you have just been benefiting from the [forbearance](https://www.investopedia.com/terms/f/forbearance.asp) period, consider this an opportunity to get ahead of your finances. For example, you can use your refund to pay down other higher-interest debt, such as car payments or credit cards, or use it to create an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) for peace of mind. If you have already been paying your student loan every month, move that payment over to a credit card, medical bill, or car payment, or designate it to go into your savings every month instead. ## How Will I Find Out if I’m Approved for Student Loan Forgiveness? If you have applied for forgiveness under a program like the PSLF or Teacher Loan Forgiveness program, your student loan servicer will notify you regarding your loan being forgiven totally, or partially with a remaining balance, depending on the program. Things would work similarly if you have paid for the required number of years under an income-driven plan and are having the rest forgiven. ## Will Student Loan Forgiveness Help or Hurt My Credit Score? A student loan being erased from your credit report may temporarily bring your score down a bit because it is part of your credit mix. On the plus side, the credit bureaus may also delete any delinquent loan payments from your credit report, which will help to raise your score. Eventually, your credit score may go up as your debt-to-income ratio will be lower. ## Will I Have to Pay Tax on the Forgiven Amount of Student Loan Debt? Your student debt relief won’t be taxed on the federal level through the end of 2025, and forever for occupation based programs. However, it may be considered taxable income at the state level, depending on where you live. ## The Bottom Line Student loan forgiveness plans are intended to provide relief for borrowers who are saddled with too much debt. Some are targeted at people who work in particular public service jobs for a certain length of time. After completing the required number of payments, and service in a profession if required, you will be notified if you are approved and provided further information on the forgiveness of your loan and any balance remaining, depending on the program. If you still have an outstanding balance after forgiveness, you can work out a new repayment plan that suits your needs. You won’t be taxed federally on the forgiven amount for forgiveness occurring through the end of 2025 for income-driven payment plan forgiveness, and occupational based forgiveness is always federally tax-free. While your credit score could dip slightly, it won’t be too much or for too long.

If you qualify for student loan forgiveness or discharge in full, and have applied if necessary in your case, you will get a notification and will no longer need to make payments. In some cases, you may even get a refund, depending on the program you applied under. If only some of your debt is canceled or discharged, you’ll still be responsible for repaying the rest of what you owe. There may be consequences for your taxes, your credit score, and your overall financial health as well. Key Takeaways When your student loan debt is forgiven, you’ll be sent notice of how much is canceled and whether you still owe anything more.If your loan is discharged because of fraud or deception on the part of the school, you may get a refund of some payments.The Supreme Court ruled the Biden administration's plan to forgive loan debt to be unconstitutional, but Biden announced an alternative plan to pursue forgiveness.If your student loan debt is completely forgiven, your credit score may take a small, temporary hit. Additionally, while your debt relief won’t be subject to federal income taxes, it may still be taxed at the state level. Student Loan Forgiveness Programs Your federal student loans may be canceled or discharged under a number of existing specialized programs or under more widespread income-based forgiveness programs being pursued by President Biden. Here’s how student loan forgiveness has evolved in the last year. Biden’s Proposed Student Loan Forgiveness The Supreme Court ruled on June 30, 2023, that the Higher Education Relief Opportunities for Students (HEROES) Act of 2003 did not give the Biden administration the authority to forgive student loan debt. Biden responded by providing a new plan for debt relief that reduces minimum payments for some borrowers and also reduces the number of years before loans are forgiven. At the same time, he announced that the Department of Education would pursue an alternative plan to provide student debt forgiveness. Under Biden's original plan, you would have been eligible for this one-time loan forgiveness if you have federal student loans (private student loans are not eligible) and make less than $125,000 annually for individual borrowers or less than $250,000 annually for families. If eligible, your loan servicer would have applied your debt relief directly to your account and then notified you if your debt had been paid in full or if there was any outstanding balance. In the latter scenario, the company also would have informed you of your new monthly payment. The plan would have provided up to $20,000 in debt relief if you were a Pell Grant recipient and met the income requirements, while all other eligible borrowers who met the income requirements would have received up to $10,000 in debt relief. A pause on student loan payments and interest began back in March 2020 and was extended multiple times throughout the pandemic. This pause ended on September 1, 2023, when interest began accruing again, and payments resumed in October 2023. After the one-time debt relief plan was struck down, the Biden-Harris administration announced another path to potential forgiveness—the Saving for a Valuable Education (SAVE) plan. Under the SAVE plan, monthly payments would be reduced based on income, with some borrowers eligible for $0 monthly payments, and most borrowers eligible for up to $1,000 of yearly savings. Sign-ups for the SAVE plan opened in August of 2023. After ten years of payments, borrowers with initial balances of less than $12,000 are eligible for forgiveness. For those that have higher balances, the amount of time before forgiveness goes up proportionately, capping at 20 years for undergraduate loans and 25 for graduate loans. Past payments will count toward the total payment time. Public Service Loan Forgiveness (PSLF) Employees of a U.S. federal, state, local, or tribal government or a not-for-profit organization may be eligible for a permanent program called Public Service Loan Forgiveness (PSLF). The PSLF program forgives any outstanding balance on an eligible borrower’s direct loans after they’ve made 120 qualifying monthly payments as part of a qualifying repayment plan, while also working full time for a qualifying employer. Due to the number and frequency of payments required, it can take at least 10 years before a borrower can qualify for PSLF. Borrowers who wish to apply for PSLF should complete the Public Service Loan Forgiveness (PSLF) & Temporary Expanded PSLF (TEPSLF) Certification & Application. After submitting the PSLF form, a PSLF servicer will review it to ensure that it’s complete and to determine whether your loans and employment qualify for the PSLF program. Only direct loans made by the federal government (currently known as the William D. Ford Federal Direct Loan Program) are eligible for student loan forgiveness under PSLF. If you instead borrowed through either of two now-defunct programs—the Federal Family Education Loan (FFEL) Program or the Perkins Loan Program—you are allowed to consolidate those debts into a direct consolidation loan. The new consolidated loan is then eligible for PSLF. When your PSLF form is approved, you will be notified that the remaining balance of your eligible direct loans will be forgiven. Any payments made after your 120th qualifying payment will be treated as overpayments and refunded to you. The repayment plans that qualify for PSLF are the four income-driven repayment (IDR) plans: Saving on a Valuable Education (SAVE), Pay as You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Payments made under the 10-year Standard Repayment Plan can also be qualifying payments for PSLF. Keep in mind that payments may be higher under the 10-year Standard Repayment Plan versus an income-driven plan, depending on your income and the amount of student loan debt you have. Income-driven repayment plans are also an option for some student loan forgiveness as remaining balances are forgiven at the end of the plan's timeframe. For borrowers unable to pay off their federal student loan debt within the typical 10-year time frame, income-driven repayment plans set a new monthly payment at an amount that is intended to be more affordable based on your income and family size. Biden's SAVE plan is the newest iteration of these plans. The tradeoff is that income-driven repayment plans have much longer repayment periods of either 20 or 25 years (depending on the plan), but any remaining loan balance will be forgiven by the end of those periods. Teacher Loan Forgiveness Some teachers with federal student loans can take advantage of the Teacher Loan Forgiveness Program. A highly qualified teacher holding a bachelor’s degree and full state certification as a teacher is eligible for this program if they have subsidized/unsubsidized direct loans and/or subsidized/unsubsidized Stafford loans as well as teach full time for five consecutive and complete academic years at an institution serving low-income students. The maximum forgiveness amount available is $17,500 for secondary school mathematics and science teachers as well as highly qualified special education teachers or $5,000 for highly qualified full-time elementary or secondary education teachers. You may be able to get your loan discharged if the school you went to misled you or engaged in misconduct of certain loan discharge through a program known as “borrower defense to loan repayment” forgiveness. Borrower defense now applies mainly to private, for-profit schools. To apply, you’ll need to submit an application on the Department of Education’s website with evidence that the school broke the law, significantly misled you, or misrepresented itself. If your application is approved, you would get a discharge, meaning you no longer owe the loan. You could possibly get a refund of some or all of your student loan payments as well. What Happens to Your Credit? It feels good to have your debt load lightened, but for a brief period of time, that assistance can work against you, as you might see your credit scores drop slightly. This occurs because student loans are a type of installment loan—like an auto loan. When this loan is erased from your credit history, it reduces the diversity of your credit lines. As a result, it may decrease your credit score—but again, only for a short period of time. And because credit mix only makes up 10% of your credit score, the dip shouldn’t be too dramatic. However, there is good news, even if you fell behind on your payments before the pause began and your credit score took a hit. Once the loan forgiveness plan kicks in, the credit bureaus may delete any delinquent payments from your report. As a result, you could actually see a bump in your credit score. It’s important to keep an eye on your credit report once you receive confirmation that you were approved for student debt relief. With certain types of student loan discharges, even if your student loan was in default, you may regain eligibility for federal student aid if you have not defaulted on other loans. How Does Student Loan Forgiveness Affect Your Taxes? Most student loan forgiveness is not taxed. Any loans that are canceled because you worked for a certain period of time in a certain profession are not taxable if forgiven. One exception is that debt forgiven through income-driven repayment forgiveness is usually considered taxable income. However, thanks to a provision of the American Rescue Plan, all student loan debt relief won’t be treated as taxable income for federal income tax purposes from 2021 through 2025. However, some states will tax forgiven balances at the regular state income tax rate. And if the tax treatment is not extended after 2025, income-driven repayment forgiveness will once again become taxable at the federal level. What Happens to Your Finances? If you received a refund from your student loan payments, or even if you have just been benefiting from the forbearance period, consider this an opportunity to get ahead of your finances. For example, you can use your refund to pay down other higher-interest debt, such as car payments or credit cards, or use it to create an emergency fund for peace of mind. If you have already been paying your student loan every month, move that payment over to a credit card, medical bill, or car payment, or designate it to go into your savings every month instead. How Will I Find Out if I’m Approved for Student Loan Forgiveness? If you have applied for forgiveness under a program like the PSLF or Teacher Loan Forgiveness program, your student loan servicer will notify you regarding your loan being forgiven totally, or partially with a remaining balance, depending on the program. Things would work similarly if you have paid for the required number of years under an income-driven plan and are having the rest forgiven. Will Student Loan Forgiveness Help or Hurt My Credit Score? A student loan being erased from your credit report may temporarily bring your score down a bit because it is part of your credit mix. On the plus side, the credit bureaus may also delete any delinquent loan payments from your credit report, which will help to raise your score. Eventually, your credit score may go up as your debt-to-income ratio will be lower. Will I Have to Pay Tax on the Forgiven Amount of Student Loan Debt? Your student debt relief won’t be taxed on the federal level through the end of 2025, and forever for occupation based programs. However, it may be considered taxable income at the state level, depending on where you live. The Bottom Line Student loan forgiveness plans are intended to provide relief for borrowers who are saddled with too much debt. Some are targeted at people who work in particular public service jobs for a certain length of time. After completing the required number of payments, and service in a profession if required, you will be notified if you are approved and provided further information on the forgiveness of your loan and any balance remaining, depending on the program. If you still have an outstanding balance after forgiveness, you can work out a new repayment plan that suits your needs. You won’t be taxed federally on the forgiven amount for forgiveness occurring through the end of 2025 for income-driven payment plan forgiveness, and occupational based forgiveness is always federally tax-free. While your credit score could dip slightly, it won’t be too much or for too long.

https://www.investopedia.com/terms/m/money-market-yield.asp

Money Market Yield: Definition, Calculation, and Example

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-money-market-yield"></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 Money Market Yield? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncd.asp">negotiable certificates of deposit</a>, U.S. Treasury bills, and municipal notes. Money market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It can also be calculated using a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-discount-rate.asp">bank discount yield</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The money market yield is closely related to the CD-equivalent yield and the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bey.asp">bond equivalent yield</a> (BEY). </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 money market yield is what money market instruments are expected to return to investors.</li><li>The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper.</li><li>An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-money-market-yield"></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 Money Market Yield </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money market</a> is the part of the broader financial markets that deals with highly liquid and short-term financial securities. The market links borrowers and lenders who are looking to transact in short-term instruments overnight or for some days, weeks, or months, but always less than a year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Active participants in this market include banks, <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 funds</a>, brokers, and dealers. Examples of money market securities include <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> (CD), <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury bills</a> (T-bills), commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repurchaseagreement.asp">repurchase agreements</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"> To earn a money market yield, it is thus necessary to have a <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</a>. Banks, for example, offer money market accounts because they need to borrow funds on a short-term basis to meet <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredreserves.asp">reserve requirements</a> and to participate in interbank lending. </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"> Money market investors receive compensation for lending funds to entities that need to fulfill their short-term debt obligations. This compensation is typically in the form of variable interest rates determined by the current interest rate in the economy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Since money market securities are considered to have low <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>, the money market yield will be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/11/4-money-market-yields.asp">lower than the yield on stocks and bonds</a> but higher than the interest rates on standard savings accounts. </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-calculating-the-money-market-yield"></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"> Calculating the Money Market Yield </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Although interest rates are quoted annually, the quoted interest may actually be compounded semi-annually, quarterly, monthly, or even daily. The money market yield is calculated using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bey.asp">bond equivalent yield</a> (BEY) based on a 360-day year, which helps an investor compare the return of a bond that pays a coupon on an annual basis with a bond that pays semi-annual, quarterly, or any other coupons. </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 formula for the money market yield is: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Money market yield = <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp">Holding period yield</a> x (360/Time to maturity) </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Money market yield = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity) </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> For example, a T-bill with a $100,000 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/facevalue.asp">face value</a> is issued for $98,000 and is due to mature in 180 days. The money market yield is: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li>= ($100,000 - $98,000/$98,000) x 360/180</li><li>= 0.0204 x 2</li><li>= 0.0408, or 4.08%</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The money market yield differs slightly from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankdiscountbasis.asp">bank discount</a> yield, which is computed on the face value, not the purchase price; however, the money market yield can also be calculated using the bank discount yield as seen in this formula: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Money market yield = Bank discount yield x (Face value/Purchase price) </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Money market yield = Bank discount yield / [1 – (Face value – Purchase price/Face value)] </blockquote> <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"> Where bank discount yield = (Face value – Purchase price)/Face value x (360/Time to maturity) </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-what-is-a-typical-money-market-yield"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Typical Money Market Yield?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Money market accounts and instruments typically yield between 0.01% and 4%. This depends on the amount of money deposited, as some institutions require a higher deposit to earn the higher interest rate.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-is-the-7-day-yield-on-the-money-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the 7-Day Yield on the Money Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The 7-day yield on the money market is a method of estimating the return of money market instruments on an annual basis. It takes the difference between the price today and the price seven days ago and multiplies that by the annualization factor.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-are-the-disadvantages-of-a-money-market-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Disadvantages of a Money Market Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Some disadvantages of a money market account include a lower yield than some other investment accounts, possible limits on the number of transactions allowed in a certain period, and minimum account balances.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Investing in money market instruments can be a good way to utilize short-term funds to generate interest income, which is a better use than leaving your cash in a non-interest-bearing or low-interest-bearing vehicle. </p></div>

## What Is the Money Market Yield? The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year, such as [negotiable certificates of deposit](https://www.investopedia.com/terms/n/ncd.asp), U.S. Treasury bills, and municipal notes. Money market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It can also be calculated using a [bank discount yield](https://www.investopedia.com/terms/b/bank-discount-rate.asp). The money market yield is closely related to the CD-equivalent yield and the [bond equivalent yield](https://www.investopedia.com/terms/b/bey.asp) (BEY). ### Key Takeaways * The money market yield is what money market instruments are expected to return to investors. * The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. * An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. ## Understanding the Money Market Yield The [money market](https://www.investopedia.com/terms/m/moneymarket.asp) is the part of the broader financial markets that deals with highly liquid and short-term financial securities. The market links borrowers and lenders who are looking to transact in short-term instruments overnight or for some days, weeks, or months, but always less than a year. Active participants in this market include banks, [money market funds](https://www.investopedia.com/terms/m/money-marketfund.asp), brokers, and dealers. Examples of money market securities include [Certificates of Deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CD), [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp) (T-bills), commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and [repurchase agreements](https://www.investopedia.com/terms/r/repurchaseagreement.asp). To earn a money market yield, it is thus necessary to have a [money market account](https://www.investopedia.com/terms/m/moneymarketaccount.asp). Banks, for example, offer money market accounts because they need to borrow funds on a short-term basis to meet [reserve requirements](https://www.investopedia.com/terms/r/requiredreserves.asp) and to participate in interbank lending. Money market investors receive compensation for lending funds to entities that need to fulfill their short-term debt obligations. This compensation is typically in the form of variable interest rates determined by the current interest rate in the economy. Since money market securities are considered to have low [default risk](https://www.investopedia.com/terms/d/defaultrisk.asp), the money market yield will be [lower than the yield on stocks and bonds](https://www.investopedia.com/articles/financial-theory/11/4-money-market-yields.asp) but higher than the interest rates on standard savings accounts. ## Calculating the Money Market Yield Although interest rates are quoted annually, the quoted interest may actually be compounded semi-annually, quarterly, monthly, or even daily. The money market yield is calculated using the [bond equivalent yield](https://www.investopedia.com/terms/b/bey.asp) (BEY) based on a 360-day year, which helps an investor compare the return of a bond that pays a coupon on an annual basis with a bond that pays semi-annual, quarterly, or any other coupons. The formula for the money market yield is: > Money market yield = [Holding period yield](https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp) x (360/Time to maturity) > Money market yield = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity) For example, a T-bill with a $100,000 [face value](https://www.investopedia.com/terms/f/facevalue.asp) is issued for $98,000 and is due to mature in 180 days. The money market yield is: * = ($100,000 - $98,000/$98,000) x 360/180 * = 0.0204 x 2 * = 0.0408, or 4.08% The money market yield differs slightly from the [bank discount](https://www.investopedia.com/terms/b/bankdiscountbasis.asp) yield, which is computed on the face value, not the purchase price; however, the money market yield can also be calculated using the bank discount yield as seen in this formula: > Money market yield = Bank discount yield x (Face value/Purchase price) > Money market yield = Bank discount yield / [1 – (Face value – Purchase price/Face value)] Where bank discount yield = (Face value – Purchase price)/Face value x (360/Time to maturity) ## What Is a Typical Money Market Yield? Money market accounts and instruments typically yield between 0.01% and 4%. This depends on the amount of money deposited, as some institutions require a higher deposit to earn the higher interest rate. ## What Is the 7-Day Yield on the Money Market? The 7-day yield on the money market is a method of estimating the return of money market instruments on an annual basis. It takes the difference between the price today and the price seven days ago and multiplies that by the annualization factor. ## What Are the Disadvantages of a Money Market Account? Some disadvantages of a money market account include a lower yield than some other investment accounts, possible limits on the number of transactions allowed in a certain period, and minimum account balances. ## The Bottom Line Investing in money market instruments can be a good way to utilize short-term funds to generate interest income, which is a better use than leaving your cash in a non-interest-bearing or low-interest-bearing vehicle.

What Is the Money Market Yield? The money market yield is the interest rate earned by investing in securities with high liquidity and maturities of less than one year, such as negotiable certificates of deposit, U.S. Treasury bills, and municipal notes. Money market yield is calculated by taking the holding period yield and multiplying it by a 360-day bank year divided by days to maturity. It can also be calculated using a bank discount yield. The money market yield is closely related to the CD-equivalent yield and the bond equivalent yield (BEY). Key Takeaways The money market yield is what money market instruments are expected to return to investors.The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper.An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. Understanding the Money Market Yield The money market is the part of the broader financial markets that deals with highly liquid and short-term financial securities. The market links borrowers and lenders who are looking to transact in short-term instruments overnight or for some days, weeks, or months, but always less than a year. Active participants in this market include banks, money market funds, brokers, and dealers. Examples of money market securities include Certificates of Deposit (CD), Treasury bills (T-bills), commercial paper, municipal notes, short-term asset-backed securities, Eurodollar deposits, and repurchase agreements. To earn a money market yield, it is thus necessary to have a money market account. Banks, for example, offer money market accounts because they need to borrow funds on a short-term basis to meet reserve requirements and to participate in interbank lending. Money market investors receive compensation for lending funds to entities that need to fulfill their short-term debt obligations. This compensation is typically in the form of variable interest rates determined by the current interest rate in the economy. Since money market securities are considered to have low default risk, the money market yield will be lower than the yield on stocks and bonds but higher than the interest rates on standard savings accounts. Calculating the Money Market Yield Although interest rates are quoted annually, the quoted interest may actually be compounded semi-annually, quarterly, monthly, or even daily. The money market yield is calculated using the bond equivalent yield (BEY) based on a 360-day year, which helps an investor compare the return of a bond that pays a coupon on an annual basis with a bond that pays semi-annual, quarterly, or any other coupons. The formula for the money market yield is: Money market yield = Holding period yield x (360/Time to maturity) Money market yield = [(Face value – Purchase price)/Purchase price] x (360/Time to maturity) For example, a T-bill with a $100,000 face value is issued for $98,000 and is due to mature in 180 days. The money market yield is: = ($100,000 - $98,000/$98,000) x 360/180= 0.0204 x 2= 0.0408, or 4.08% The money market yield differs slightly from the bank discount yield, which is computed on the face value, not the purchase price; however, the money market yield can also be calculated using the bank discount yield as seen in this formula: Money market yield = Bank discount yield x (Face value/Purchase price) Money market yield = Bank discount yield / [1 – (Face value – Purchase price/Face value)] Where bank discount yield = (Face value – Purchase price)/Face value x (360/Time to maturity) What Is a Typical Money Market Yield? Money market accounts and instruments typically yield between 0.01% and 4%. This depends on the amount of money deposited, as some institutions require a higher deposit to earn the higher interest rate. What Is the 7-Day Yield on the Money Market? The 7-day yield on the money market is a method of estimating the return of money market instruments on an annual basis. It takes the difference between the price today and the price seven days ago and multiplies that by the annualization factor. What Are the Disadvantages of a Money Market Account? Some disadvantages of a money market account include a lower yield than some other investment accounts, possible limits on the number of transactions allowed in a certain period, and minimum account balances. The Bottom Line Investing in money market instruments can be a good way to utilize short-term funds to generate interest income, which is a better use than leaving your cash in a non-interest-bearing or low-interest-bearing vehicle.

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

Collateralization: Definition, How It Works, 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-collateralization"></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 Collateralization? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Collateralization is the use of a valuable asset as collateral to secure a loan. If the borrower defaults on the loan, the lender may seize and sell the asset to offset their loss. </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"> For lenders, the collateralization of assets provides a level of reassurance 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>. For borrowers with poor credit histories, it can help them obtain loans. Collateralized loans are considered <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-loans-5076025">secured loans</a>, so they generally have substantially lower interest rates than <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredloan.asp">unsecured loans</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>Collateralization provides a lender with security against default on a loan.</li><li>Because it greatly reduces the lender's risk, the interest rates on collateralized loans are substantially lower.</li><li>Businesses typically use collateralized loans to fund expansion and improvement projects.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-collateralization"></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 Collateralization </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A home mortgage and a car loan are two common examples of collateralization. The house or the car may be seized by the lender if the borrower defaults on the payments. </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"> Collateralization is also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/borrowing-base.asp">common for business loans</a>. A business owner may put up equipment, property, stock, or bonds as a security for a loan to expand or improve the business. </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 a collateralized loan, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>—the original sum of money borrowed—is typically based on the appraised <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/collateral-value.asp">collateral value</a> of the property. Most secured lenders will lend about 70% to 90% of the value—known as the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/advancerate.asp">advance rate</a>—of the collateral. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For a lender, collateralized loans are inherently safer than non-collateralized loans, so they generally have lower interest rates. Non-collateralized, or unsecured, loans include credit cards and personal loans, which generally have much higher rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-subheading__text"> Interest Rates for Collateralized vs. Unsecured Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> For example, as of August 2023, here are sample interest rates for collateralized vs. unsecured loans: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <li><strong>Collateralized</strong>: An 36-month auto loan for a new car could be obtained at an average interest rate of 7.91% by an applicant with a good credit rating.<span class="ql-inline-citation" data-cite="4"></span></li> <li><strong>Collateralized</strong>:<strong> </strong>A 30-year fixed-rate mortgage could be obtained for an average interest rate of 7.23%.<span class="ql-inline-citation" data-cite="5"></span></li> <li><strong>Unsecured</strong>: On the other hand, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-card-interest-rate-5076674">median rate of interest</a> across all credit cards in the Investopedia card database was 23.99%.</li> <li><strong>Unsecured or secured</strong>: Interest rates for personal loans, which can be either collateralized or unsecured, ranged from 4.6% all the way up to 36%.<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_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"> Collateralized Business Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> When companies need loans to finance projects and operations, they can use equipment and property as collateral to secure <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a> that are issued to investors as <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-incomesecurity.asp">fixed-income securities</a>. Fixed income provides investors with fixed interest payments as well as the return of principal at maturity, so bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). </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>Buying on margin is a type of collateralized lending used by <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activeinvesting.asp">active investors</a>. The collateral consists of assets in the investor's account.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> With bond offerings, the equipment and property is pledged as collateral for the repayment of the bond. In the event of the company's default, the underwriters of the deal can seize the collateral, sell it, and use the proceeds to repay investors. </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 increased level of security offered to a bondholder (the lender) typically helps to lower the interest rate offered on the bond, which also decreases the cost of financing for the issuer (the borrower). </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"> Collateralized Investing: Buying on a Margin </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In the investment industry, using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> as collateral is common. For example, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buying-on-margin.asp">buying on a margin</a>, which means buying (in part) with borrowed money, is based on the use of other securities in the investor's account as collateral on the loan. If the investor has sufficient assets in the account to use as collateral, a brokerage firm will allow that investor to buy securities with borrowed money. </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 investment is successful, the loan will be repaid from the profits. If the investment loses money, the broker issues a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margincall.asp">margin call</a>, (i.e., a demand for the investor to either deposit additional money or securities or sell some of the assets to bring the account up to the minimum value).<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Typically, margin calls are for a percentage of the total amount borrowed. If an investor borrows $1,000, the brokerage would require that 25% of the loan ($250) be available as collateral. Thus, it's essential that investments bought on a margin increase in value for a positive return. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-are-examples-of-collateralization"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Examples of Collateralization?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The most common types of collateralization are home mortgages and car loans. The house or the car is used as collateral that can be seized by the lender if the borrower defaults on the loan.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-how-is-the-collateral-value-of-my-house-determined"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is the Collateral Value of My House Determined?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>On a collateralized loan, most secured lenders will base the principal (the amount of money they lend) on the appraised value of the property as collateral—and then lend about 70% to 90% of that value.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-are-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Bonds?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). With bond offerings, the company's equipment and property is often pledged as collateral for the repayment of the bond to the investors.<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-is-buying-on-a-margin"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Buying on a Margin?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Buying on a margin means that an investor buys an asset primarily with borrowed money—for example, 10% down and 90% financed. Margin investing is a form of collateralized lending, as the loan is secured by the other securities in the investor's account.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Secured loans use collateralization to protect the lenders in the event of a default. If you have something of value and you're confident of your ability to repay your loan, you can leverage your collateral to get a much lower interest rate than you could on an unsecured loan. Just borrow wisely—if you can't repay a loan that is secured by your house or car, you may find yourself without shelter or transport.<br/> </p></div>

## What Is Collateralization? Collateralization is the use of a valuable asset as collateral to secure a loan. If the borrower defaults on the loan, the lender may seize and sell the asset to offset their loss. For lenders, the collateralization of assets provides a level of reassurance against [default risk](https://www.investopedia.com/terms/d/defaultrisk.asp). For borrowers with poor credit histories, it can help them obtain loans. Collateralized loans are considered [secured loans](https://www.investopedia.com/secured-loans-5076025), so they generally have substantially lower interest rates than [unsecured loans](https://www.investopedia.com/terms/u/unsecuredloan.asp). ### Key Takeaways * Collateralization provides a lender with security against default on a loan. * Because it greatly reduces the lender's risk, the interest rates on collateralized loans are substantially lower. * Businesses typically use collateralized loans to fund expansion and improvement projects. ## Understanding Collateralization A home mortgage and a car loan are two common examples of collateralization. The house or the car may be seized by the lender if the borrower defaults on the payments. Collateralization is also [common for business loans](https://www.investopedia.com/terms/b/borrowing-base.asp). A business owner may put up equipment, property, stock, or bonds as a security for a loan to expand or improve the business. On a collateralized loan, the [principal](https://www.investopedia.com/terms/p/principal.asp)—the original sum of money borrowed—is typically based on the appraised [collateral value](https://www.investopedia.com/terms/collateral-value.asp) of the property. Most secured lenders will lend about 70% to 90% of the value—known as the [advance rate](https://www.investopedia.com/terms/a/advancerate.asp)—of the collateral. For a lender, collateralized loans are inherently safer than non-collateralized loans, so they generally have lower interest rates. Non-collateralized, or unsecured, loans include credit cards and personal loans, which generally have much higher rates. ### Interest Rates for Collateralized vs. Unsecured Loans For example, as of August 2023, here are sample interest rates for collateralized vs. unsecured loans: * **Collateralized**: An 36-month auto loan for a new car could be obtained at an average interest rate of 7.91% by an applicant with a good credit rating. * **Collateralized**:A 30-year fixed-rate mortgage could be obtained for an average interest rate of 7.23%. * **Unsecured**: On the other hand, the [median rate of interest](https://www.investopedia.com/average-credit-card-interest-rate-5076674) across all credit cards in the Investopedia card database was 23.99%. * **Unsecured or secured**: Interest rates for personal loans, which can be either collateralized or unsecured, ranged from 4.6% all the way up to 36%. ### Collateralized Business Loans When companies need loans to finance projects and operations, they can use equipment and property as collateral to secure [bonds](https://www.investopedia.com/terms/b/bond.asp) that are issued to investors as [fixed-income securities](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp). Fixed income provides investors with fixed interest payments as well as the return of principal at maturity, so bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). ### Buying on margin is a type of collateralized lending used by [active investors](https://www.investopedia.com/terms/a/activeinvesting.asp). The collateral consists of assets in the investor's account. With bond offerings, the equipment and property is pledged as collateral for the repayment of the bond. In the event of the company's default, the underwriters of the deal can seize the collateral, sell it, and use the proceeds to repay investors. The increased level of security offered to a bondholder (the lender) typically helps to lower the interest rate offered on the bond, which also decreases the cost of financing for the issuer (the borrower). ### Collateralized Investing: Buying on a Margin In the investment industry, using [securities](https://www.investopedia.com/terms/s/security.asp) as collateral is common. For example, [buying on a margin](https://www.investopedia.com/terms/b/buying-on-margin.asp), which means buying (in part) with borrowed money, is based on the use of other securities in the investor's account as collateral on the loan. If the investor has sufficient assets in the account to use as collateral, a brokerage firm will allow that investor to buy securities with borrowed money. If the investment is successful, the loan will be repaid from the profits. If the investment loses money, the broker issues a [margin call](https://www.investopedia.com/terms/m/margincall.asp), (i.e., a demand for the investor to either deposit additional money or securities or sell some of the assets to bring the account up to the minimum value). Typically, margin calls are for a percentage of the total amount borrowed. If an investor borrows $1,000, the brokerage would require that 25% of the loan ($250) be available as collateral. Thus, it's essential that investments bought on a margin increase in value for a positive return. ## What Are Examples of Collateralization? The most common types of collateralization are home mortgages and car loans. The house or the car is used as collateral that can be seized by the lender if the borrower defaults on the loan. ## How Is the Collateral Value of My House Determined? On a collateralized loan, most secured lenders will base the principal (the amount of money they lend) on the appraised value of the property as collateral—and then lend about 70% to 90% of that value. ## What Are Bonds? Bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). With bond offerings, the company's equipment and property is often pledged as collateral for the repayment of the bond to the investors. ## What Is Buying on a Margin? Buying on a margin means that an investor buys an asset primarily with borrowed money—for example, 10% down and 90% financed. Margin investing is a form of collateralized lending, as the loan is secured by the other securities in the investor's account. ## The Bottom Line Secured loans use collateralization to protect the lenders in the event of a default. If you have something of value and you're confident of your ability to repay your loan, you can leverage your collateral to get a much lower interest rate than you could on an unsecured loan. Just borrow wisely—if you can't repay a loan that is secured by your house or car, you may find yourself without shelter or transport.

What Is Collateralization? Collateralization is the use of a valuable asset as collateral to secure a loan. If the borrower defaults on the loan, the lender may seize and sell the asset to offset their loss. For lenders, the collateralization of assets provides a level of reassurance against default risk. For borrowers with poor credit histories, it can help them obtain loans. Collateralized loans are considered secured loans, so they generally have substantially lower interest rates than unsecured loans. Key Takeaways Collateralization provides a lender with security against default on a loan.Because it greatly reduces the lender's risk, the interest rates on collateralized loans are substantially lower.Businesses typically use collateralized loans to fund expansion and improvement projects. Understanding Collateralization A home mortgage and a car loan are two common examples of collateralization. The house or the car may be seized by the lender if the borrower defaults on the payments. Collateralization is also common for business loans. A business owner may put up equipment, property, stock, or bonds as a security for a loan to expand or improve the business. On a collateralized loan, the principal—the original sum of money borrowed—is typically based on the appraised collateral value of the property. Most secured lenders will lend about 70% to 90% of the value—known as the advance rate—of the collateral. For a lender, collateralized loans are inherently safer than non-collateralized loans, so they generally have lower interest rates. Non-collateralized, or unsecured, loans include credit cards and personal loans, which generally have much higher rates. Interest Rates for Collateralized vs. Unsecured Loans For example, as of August 2023, here are sample interest rates for collateralized vs. unsecured loans: Collateralized: An 36-month auto loan for a new car could be obtained at an average interest rate of 7.91% by an applicant with a good credit rating. Collateralized: A 30-year fixed-rate mortgage could be obtained for an average interest rate of 7.23%. Unsecured: On the other hand, the median rate of interest across all credit cards in the Investopedia card database was 23.99%. Unsecured or secured: Interest rates for personal loans, which can be either collateralized or unsecured, ranged from 4.6% all the way up to 36%. Collateralized Business Loans When companies need loans to finance projects and operations, they can use equipment and property as collateral to secure bonds that are issued to investors as fixed-income securities. Fixed income provides investors with fixed interest payments as well as the return of principal at maturity, so bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). Buying on margin is a type of collateralized lending used by active investors. The collateral consists of assets in the investor's account. With bond offerings, the equipment and property is pledged as collateral for the repayment of the bond. In the event of the company's default, the underwriters of the deal can seize the collateral, sell it, and use the proceeds to repay investors. The increased level of security offered to a bondholder (the lender) typically helps to lower the interest rate offered on the bond, which also decreases the cost of financing for the issuer (the borrower). Collateralized Investing: Buying on a Margin In the investment industry, using securities as collateral is common. For example, buying on a margin, which means buying (in part) with borrowed money, is based on the use of other securities in the investor's account as collateral on the loan. If the investor has sufficient assets in the account to use as collateral, a brokerage firm will allow that investor to buy securities with borrowed money. If the investment is successful, the loan will be repaid from the profits. If the investment loses money, the broker issues a margin call, (i.e., a demand for the investor to either deposit additional money or securities or sell some of the assets to bring the account up to the minimum value). Typically, margin calls are for a percentage of the total amount borrowed. If an investor borrows $1,000, the brokerage would require that 25% of the loan ($250) be available as collateral. Thus, it's essential that investments bought on a margin increase in value for a positive return. What Are Examples of Collateralization? The most common types of collateralization are home mortgages and car loans. The house or the car is used as collateral that can be seized by the lender if the borrower defaults on the loan. How Is the Collateral Value of My House Determined? On a collateralized loan, most secured lenders will base the principal (the amount of money they lend) on the appraised value of the property as collateral—and then lend about 70% to 90% of that value. What Are Bonds? Bonds are a type of collateralized loan (corporate debt) between the company (the borrower) and the investor (the lender). With bond offerings, the company's equipment and property is often pledged as collateral for the repayment of the bond to the investors. What Is Buying on a Margin? Buying on a margin means that an investor buys an asset primarily with borrowed money—for example, 10% down and 90% financed. Margin investing is a form of collateralized lending, as the loan is secured by the other securities in the investor's account. The Bottom Line Secured loans use collateralization to protect the lenders in the event of a default. If you have something of value and you're confident of your ability to repay your loan, you can leverage your collateral to get a much lower interest rate than you could on an unsecured loan. Just borrow wisely—if you can't repay a loan that is secured by your house or car, you may find yourself without shelter or transport.

https://www.investopedia.com/citibank-savings-account-interest-rates-7553927

Citibank 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-citibank-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"> Citibank 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"> If you’re shopping for a new savings account, Citibank offers several options tailored for different consumers. Each of its savings accounts comes with a relatively generous APY (compared to the national average), though fees and features vary depending on the account you choose. In addition to traditional savings accounts, Citi also offers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citibank-cd-rates-7482684">certificate of deposit (CD) accounts</a> with generous rates, as well as bank IRAs.  </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"> Here’s what to know about Citibank savings account rates, options, and features. Take note that Citi’s terms can vary widely depending on where you live. The terms below use Texas ZIP code 73301. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th><b>Account Name</b></th> <th><b>Balance for Highest APY</b></th> <th><b>APY Range</b></th> <th><b>Monthly Fee</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Citigold Private Client</b></td> <td>$1,000,000</td> <td>4.35%</td> <td>$0</td> </tr> <tr> <td><b>Citigold Account Package</b></td> <td>$200,000</td> <td>4.35%</td> <td>$0<span data-cite="1"></span></td> </tr> <tr> <td><b>Citi Priority Account Package</b></td> <td>$0</td> <td>4.35%</td> <td>$30<span data-cite="2"></span></td> </tr> <tr> <td><b>The Citibank Account Package</b></td> <td>$0</td> <td>4.35%</td> <td>$25<span data-cite="3"></span></td> </tr> <tr> <td><b>Basic Account Package</b></td> <td>$0</td> <td>4.35%</td> <td>$12<span data-cite="4"></span></td> </tr> <tr> <td><b>Access Account Package</b></td> <td>$0</td> <td>4.35%<span data-cite="5"></span></td> <td>$10<span data-cite="6"></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-citibank-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"> Citibank Savings Accounts: Key Features </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Citigold Private Client Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>$1,000,000</td> </tr> <tr> <th><b>Eligibility</b></th> <td>Reserved for account holders with balances of $1,000,000 or more</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$5,000 per business day</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$0<span data-cite="1"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> If you’ve got plenty to put away, a Citigold Private Client account could be a good option—though this account must be opened with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-checking-accounts-5070332">checking account</a>. To be eligible you’ll need a combined account balance of $1,000,000 or more across your Citi deposit, retirement, and investment accounts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> This account offers access to a dedicated relationship manager, a wealth manager, and Citigold’s concierge service, as well as other perks like a generous APY, waived monthly service fees, and ATM fee reimbursement.<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_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>Citi’s banking options include its Citi Accelerate Savings Account, which provides the APYs shown on this page. Different banking options have different features and requirements. Some may require you to open a checking account in addition to your savings account, others may not. </p></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_19-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Citigold Account Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>$200,000</td> </tr> <tr> <th><b>Eligibility</b></th> <td>Reserved for account holders with balances of $200,000 or more</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$2,000 per business day for accounts with average balances below $400,000 for the month that is two months prior to the transaction $5,000 per business day for accounts with average balances of $400,000 or more for the month that is two months prior to the transaction</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$0<span data-cite="1"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The Citigold Account offers similar benefits to the Private Client Package, including a dedicated relationship manager, concierge access, investment guidance, and waived fees. To be eligible for a Citigold Account, you’ll need a combined balance of $200,000 or more across your deposit, investment, and retirement accounts. You’ll also need to open a checking account with this package option.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_23-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Citi Priority Account Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>$0</td> </tr> <tr> <th><b>Minimum Deposit</b></th> <td>$0</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$2,000 per card, per business day</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$30<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_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> While it doesn’t come with a minimum deposit or balance requirement, the Citi Priority Account is designed for customers who have combined eligible account balances of $30,000 or more—this will waive the $30 monthly fee. You won’t get a dedicated relationship manager as you would with a Citigold account, but you will get investment guidance and a generous savings APY.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_27-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">The Citibank Account Package Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>None</td> </tr> <tr> <th><b>Minimum Deposit</b></th> <td>None</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$1,500 per card, per business day</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$25<span data-cite="3"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The Citibank Account Package comes with a generous APY and no minimum deposit or balance requirement. You’ll need to maintain a $10,000 average monthly balance in eligible linked deposit, investment, and retirement accounts to avoid the $25 monthly service fee. Account holders who maintain this balance also benefit from no ATM fees and potential discounts on Citi products and services.<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_30-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_31-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Basic Account Package Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>None</td> </tr> <tr> <th><b>Minimum Deposit</b></th> <td>None</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$1,500 per card, per business day</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$12 for checking and linked savings account $4.50 for savings accounts not linked to checking<span data-cite="4"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> With a Basic Account Package from Citi, you’ll get a relatively high APY, no minimum deposit requirement, and unlimited check writing when you open checking and savings accounts.  </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 linked checking and savings accounts, the $12 monthly service fee is waived if you do one of the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <li>Make one eligible direct deposit per statement period</li><li>Pay a qualifying monthly bill per statement period</li><li>Maintain a monthly average balance of $1,500 or more in eligible linked accounts</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"> For savings accounts not linked to checking, the $4.50 fee is waived if you maintain an average monthly balance of $500 or more in the savings account.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <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"> <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">Access Account Package Key Features</th> </tr> </thead> <tbody data-check="-1"> <tr> <th><b>APY Range</b></th> <td>4.35%<span data-cite="5"></span></td> </tr> <tr> <th><b>Minimum Balance to Earn Highest APY</b></th> <td>None</td> </tr> <tr> <th><b>Minimum Deposit</b></th> <td>None</td> </tr> <tr> <th><b>Withdrawal Limit</b></th> <td>$1,500 per card, per business day</td> </tr> <tr> <th><b>Monthly Service Fee</b></th> <td>$10 for checking and linked savings account $4.50 for savings accounts not linked to checking<span data-cite="6"></span></td> </tr> </tbody> </table> </div></figure> <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 Access Account Package is similar to the Basic Account Package, though you won’t get unlimited check writing when you open a checking account with your savings account.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> This package has a slightly lower monthly service fee of $10 for linked accounts, which can be waived if you do one of the following: </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>Make one eligible direct deposit per statement period</li><li>Pay a qualifying bill per statement period</li><li>Maintain a $1,500 average monthly balance in eligible linked accounts</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"> The $4.50 fee for savings accounts alone can be waived by maintaining an average monthly balance of $500 in the savings account. </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-about-citibank-other-savings-options"></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"> About Citibank: Other Savings Options </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Citigroup, which owns <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citibank-review-4801736">Citibank</a>, is the third-largest bank in the United States by assets.<span class="ql-inline-citation" data-cite="9"></span> It has over 65,000 ATMs and hundreds of bank branches nationwide.<span class="ql-inline-citation" data-cite="10"></span> Citi offers an impressive range of accounts designed for different types of customers, and all of its savings accounts come with generous rates.  </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 addition to savings accounts, Citi also offers checking accounts, CDs, and bank IRAs. Those seeking a more long-term savings option may <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citibank-cd-rates-7482684">benefit from a Citi CD</a>, and those interested in diversifying their investments with low-risk options may find a bank IRA is a good choice.  </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"> Overall, Citi offers some decent savings options with generous rates, although you can typically 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">better rates for savings accounts</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">better rates for CDs</a> elsewhere. Several of Citi's savings accounts come included in account packages, though, so if you don’t plan to do all of your banking with Citi, another institution may offer more flexibility.   </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <span class="heading-toc" id="toc-compare-savings-account-rates"></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"> Compare Savings Account Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Citi’s account packages and savings accounts may be worth exploring, especially for high-net-worth individuals, but they won’t be right for everyone—and their rates aren’t the highest.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--ma-rate-table--finance-mma" id="mntl-sc-block_61-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div class="comp ma-rate-table--finance-mma mntl-block" id="ma-rate-table--finance-mma_1-0"></div><!-- end: comp ma-rate-table--finance-mma mntl-block --> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_63-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_64-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">In the News</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><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="17"></span><span class="ql-inline-citation" data-cite="16"></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.</p></div></div></div> <span class="heading-toc" id="toc-pros-and-cons-of-citibank-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> Pros and Cons of Citibank Savings Accounts </span> </h2> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_66-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_67-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>No minimum balance to earn highest APY</p></li> <li><p>Competitive APYs</p></li> <li><p>Large ATM and branch network</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>Different rates in different areas of the country<br/></p></li> <li><p>Monthly fees may apply<br/></p></li> <li><p>Rates may not be higher for high-tier accounts</p></li> <li><p>Rates may vary depending on where you live</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <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"> Pros Explained </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <li><strong>No minimum balance to earn highest APY:</strong> Unlike some competitors which require you to maintain a high minimum balance to earn the highest possible APY, Citibank often does not. Some account types do require a minimum balance to open, however; the Citigold account, for example, requires a combined balance of at least $200,000 across eligible accounts.</li><li><strong>Competitive APYs:</strong> Citibank offers competitive APYs on its savings account packages, typically with rates well above 4% for some areas of the U.S.</li><li><strong>Large ATM and branch network:</strong> Citibank is one of the largest banks in the United States, and it has a large network of over 65,000 ATMs and branches nationwide. </li> </ul> <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"> Cons Explained </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> <li><strong>Different rates in different areas of the country:</strong> Citibank’s rates vary widely across the U.S.; some areas have fairly competitive rates, while others are below the national average for savings accounts (which itself is quite low already).<span class="ql-inline-citation" data-cite="13"></span></li><li><strong>Monthly fees may apply:</strong> Monthly fees of up to $30 apply with certain Citibank account packages, although there are some free accounts as well. The monthly fee can be waived by meeting certain criteria, like keeping a certain balance across Citi deposit, investing, and retirement accounts. </li><li><strong>Rates may not be higher for high-tier accounts:</strong> Citi’s savings account rates are often the same across all of its accounts, regardless of the relationship tier. That means having more money in Citi accounts doesn’t usually get you a higher interest rate.</li><li><strong>Rates may vary depending on where you live:</strong> You could get a higher or lower savings rate depending on where you live. Citibank requires you to enter your ZIP code to view rates, and it indicates rates may vary.<span class="ql-inline-citation" data-cite="14"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <span class="heading-toc" id="toc-alternatives-to-citibank-savings-accounts"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_75-0"> <span class="mntl-sc-block-heading__text"> Alternatives to Citibank Savings Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> If Citibank doesn’t offer the account options you need, several alternatives exist with other financial institutions. Consider looking into the following, </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-subheading__text"> High-Yield Savings Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> It’s worth shopping around for high-yield savings accounts with other banking institutions. These accounts offer generous rates and are widely available, typically from online banks but also from credit unions and some traditional banks. See our picks for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a>, and compare rates, fees, and features before making a decision. </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-callout mntl-block" id="mntl-sc-block_81-0"><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_82-0"><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>Online banks typically have lower overhead costs than brick-and-mortar institutions. As a result, they can often afford to offer higher savings rates for account holders. </p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Money Market Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Money market accounts (MMAs) offer similar rates to high-yield savings accounts, though they may come with additional features, like debit cards and checkbooks. These accounts are also widely available at many banking institutions. As with high-yield savings accounts, you’ll want to compare account rates and features and read the fine print before opening a new MMA. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Browse the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">top money market account rates</a> to see what you could earn. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-subheading__text"> Certificates of Deposit (CDs) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> If you can afford to invest some of your savings for some period of time, a short or long-duration CD may be a good choice. Many CDs offer great rates, though not always as high as you’d get with an MMA or high-yield savings account. Still, they could be a good option if you don’t mind separating some of your savings. Be aware that CDs often come with early withdrawal penalties.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Check the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates currently available</a> for a variety of term lengths, from 3 months to 10 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_93-0"><span class="heading-toc" id="toc-how-often-does-citibank-pay-interest-on-savings-accounts"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Often Does Citibank Pay Interest on Savings Accounts?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Citibank <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compounds interest</a> on its savings accounts daily, and total interest earnings are paid out monthly.<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_94-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_95-0"><span class="heading-toc" id="toc-is-there-a-minimum-balance-for-a-citibank-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is There a Minimum Balance for a Citibank Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are minimum combined balance requirements for certain Citibank account packages (which include savings accounts), but not others. For instance, you’ll need to maintain an average monthly balance of $200,000 across your deposit, retirement, and investment accounts to qualify for a Citigold Account, or $1,000,000 for a Citigold Private Client Account.<span class="ql-inline-citation" data-cite="1"></span></p><p>But other account packages, like the Citibank Account Package, the Basic Account Package, and the Access Account Package, do not come with minimum balance requirements.<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_96-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_97-0"><span class="heading-toc" id="toc-can-you-open-a-savings-account-at-citibank-without-a-checking-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Open a Savings Account at Citibank Without a Checking Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, it’s possible to open a savings account at Citibank without opening a checking account—but some account packages require you to open a checking account to qualify. The Citibank Account, Basic Banking, and Access Account Packages don’t require you to open a checking account.<span class="ql-inline-citation" data-cite="8"></span> The Citigold, Citigold Private Client, and Citi Priority Accounts do require you to open a checking account.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_99-0"><span class="heading-toc" id="toc-does-citibank-have-a-high-yield-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Citibank Have a High-Yield Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, Citibank offers a savings account with a higher-than-average APY. If you’re looking to earn a higher rate than you’d get with a traditional savings account, 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> with Citi could be a decent option. But Citi doesn’t offer the highest rates available—see the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a> to find the best home for your money.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_101-0"><span class="heading-toc" id="toc-how-much-does-citi-charge-for-a-high-yield-savings-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does Citi Charge for a High-Yield Savings Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Citibank offers accounts with no monthly fees along with accounts with monthly fees as high as $30; the fee structure depends on the account or account package you choose. It’s possible to have your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/bank_fees.asp">monthly maintenance fees</a> waived if you meet certain criteria, such as maintaining a specific minimum balance across eligible Citi accounts or making a qualifying direct deposit or bill payment.<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_102-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_103-0"><span class="heading-toc" id="toc-is-citi-good-for-savings"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Citi Good for Savings?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Citibank offers generous rates in some areas of the U.S., and may be good for savings depending on your individual situation and needs. If you’re looking for an all-in-one banking solution and can meet the criteria to waive the monthly maintenance fees, an account package from Citi may be a decent choice. But you can likely find higher APYs elsewhere for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">savings accounts</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">CDs</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">MMAs</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <span class="heading-toc" id="toc-your-guide-to-savings-accounts"></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"> 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_106-0"> <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>

## Citibank Savings Account Rates If you’re shopping for a new savings account, Citibank offers several options tailored for different consumers. Each of its savings accounts comes with a relatively generous APY (compared to the national average), though fees and features vary depending on the account you choose. In addition to traditional savings accounts, Citi also offers [certificate of deposit (CD) accounts](https://www.investopedia.com/citibank-cd-rates-7482684) with generous rates, as well as bank IRAs.  Here’s what to know about Citibank savings account rates, options, and features. Take note that Citi’s terms can vary widely depending on where you live. The terms below use Texas ZIP code 73301. | **Account Name** | **Balance for Highest APY** | **APY Range** | **Monthly Fee** | | --- | --- | --- | --- | | **Citigold Private Client** | $1,000,000 | 4.35% | $0 | | **Citigold Account Package** | $200,000 | 4.35% | $0 | | **Citi Priority Account Package** | $0 | 4.35% | $30 | | **The Citibank Account Package** | $0 | 4.35% | $25 | | **Basic Account Package** | $0 | 4.35% | $12 | | **Access Account Package** | $0 | 4.35% | $10 | ### 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. ## Citibank Savings Accounts: Key Features | Citigold Private Client Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | $1,000,000 | | **Eligibility** | Reserved for account holders with balances of $1,000,000 or more | | **Withdrawal Limit** | $5,000 per business day | | **Monthly Service Fee** | $0 | If you’ve got plenty to put away, a Citigold Private Client account could be a good option—though this account must be opened with a [checking account](https://www.investopedia.com/best-high-yield-checking-accounts-5070332). To be eligible you’ll need a combined account balance of $1,000,000 or more across your Citi deposit, retirement, and investment accounts.  This account offers access to a dedicated relationship manager, a wealth manager, and Citigold’s concierge service, as well as other perks like a generous APY, waived monthly service fees, and ATM fee reimbursement. ### Citi’s banking options include its Citi Accelerate Savings Account, which provides the APYs shown on this page. Different banking options have different features and requirements. Some may require you to open a checking account in addition to your savings account, others may not.  | Citigold Account Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | $200,000 | | **Eligibility** | Reserved for account holders with balances of $200,000 or more | | **Withdrawal Limit** | $2,000 per business day for accounts with average balances below $400,000 for the month that is two months prior to the transaction $5,000 per business day for accounts with average balances of $400,000 or more for the month that is two months prior to the transaction | | **Monthly Service Fee** | $0 | The Citigold Account offers similar benefits to the Private Client Package, including a dedicated relationship manager, concierge access, investment guidance, and waived fees. To be eligible for a Citigold Account, you’ll need a combined balance of $200,000 or more across your deposit, investment, and retirement accounts. You’ll also need to open a checking account with this package option. | Citi Priority Account Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | $0 | | **Minimum Deposit** | $0 | | **Withdrawal Limit** | $2,000 per card, per business day | | **Monthly Service Fee** | $30 | While it doesn’t come with a minimum deposit or balance requirement, the Citi Priority Account is designed for customers who have combined eligible account balances of $30,000 or more—this will waive the $30 monthly fee. You won’t get a dedicated relationship manager as you would with a Citigold account, but you will get investment guidance and a generous savings APY.  | The Citibank Account Package Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | None | | **Minimum Deposit** | None | | **Withdrawal Limit** | $1,500 per card, per business day | | **Monthly Service Fee** | $25 | The Citibank Account Package comes with a generous APY and no minimum deposit or balance requirement. You’ll need to maintain a $10,000 average monthly balance in eligible linked deposit, investment, and retirement accounts to avoid the $25 monthly service fee. Account holders who maintain this balance also benefit from no ATM fees and potential discounts on Citi products and services. | Basic Account Package Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | None | | **Minimum Deposit** | None | | **Withdrawal Limit** | $1,500 per card, per business day | | **Monthly Service Fee** | $12 for checking and linked savings account $4.50 for savings accounts not linked to checking | With a Basic Account Package from Citi, you’ll get a relatively high APY, no minimum deposit requirement, and unlimited check writing when you open checking and savings accounts.  For linked checking and savings accounts, the $12 monthly service fee is waived if you do one of the following: * Make one eligible direct deposit per statement period * Pay a qualifying monthly bill per statement period * Maintain a monthly average balance of $1,500 or more in eligible linked accounts For savings accounts not linked to checking, the $4.50 fee is waived if you maintain an average monthly balance of $500 or more in the savings account. | Access Account Package Key Features | | | --- | --- | | **APY Range** | 4.35% | | **Minimum Balance to Earn Highest APY** | None | | **Minimum Deposit** | None | | **Withdrawal Limit** | $1,500 per card, per business day | | **Monthly Service Fee** | $10 for checking and linked savings account $4.50 for savings accounts not linked to checking | The Access Account Package is similar to the Basic Account Package, though you won’t get unlimited check writing when you open a checking account with your savings account.  This package has a slightly lower monthly service fee of $10 for linked accounts, which can be waived if you do one of the following: * Make one eligible direct deposit per statement period * Pay a qualifying bill per statement period * Maintain a $1,500 average monthly balance in eligible linked accounts The $4.50 fee for savings accounts alone can be waived by maintaining an average monthly balance of $500 in the savings account. ## About Citibank: Other Savings Options Citigroup, which owns [Citibank](https://www.investopedia.com/citibank-review-4801736), is the third-largest bank in the United States by assets. It has over 65,000 ATMs and hundreds of bank branches nationwide. Citi offers an impressive range of accounts designed for different types of customers, and all of its savings accounts come with generous rates.  In addition to savings accounts, Citi also offers checking accounts, CDs, and bank IRAs. Those seeking a more long-term savings option may [benefit from a Citi CD](https://www.investopedia.com/citibank-cd-rates-7482684), and those interested in diversifying their investments with low-risk options may find a bank IRA is a good choice.  Overall, Citi offers some decent savings options with generous rates, although you can typically find [better rates for savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) and [better rates for CDs](https://www.investopedia.com/best-cd-rates-4770214) elsewhere. Several of Citi's savings accounts come included in account packages, though, so if you don’t plan to do all of your banking with Citi, another institution may offer more flexibility.   ## Compare Savings Account Rates Citi’s account packages and savings accounts may be worth exploring, especially for high-net-worth individuals, but they won’t be right for everyone—and their rates aren’t the highest.  ### In the News **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. ## Pros and Cons of Citibank Savings Accounts Pros * No minimum balance to earn highest APY * Competitive APYs * Large ATM and branch network Cons * Different rates in different areas of the country * Monthly fees may apply * Rates may not be higher for high-tier accounts * Rates may vary depending on where you live ### Pros Explained * **No minimum balance to earn highest APY:** Unlike some competitors which require you to maintain a high minimum balance to earn the highest possible APY, Citibank often does not. Some account types do require a minimum balance to open, however; the Citigold account, for example, requires a combined balance of at least $200,000 across eligible accounts. * **Competitive APYs:** Citibank offers competitive APYs on its savings account packages, typically with rates well above 4% for some areas of the U.S. * **Large ATM and branch network:** Citibank is one of the largest banks in the United States, and it has a large network of over 65,000 ATMs and branches nationwide. ### Cons Explained * **Different rates in different areas of the country:** Citibank’s rates vary widely across the U.S.; some areas have fairly competitive rates, while others are below the national average for savings accounts (which itself is quite low already). * **Monthly fees may apply:** Monthly fees of up to $30 apply with certain Citibank account packages, although there are some free accounts as well. The monthly fee can be waived by meeting certain criteria, like keeping a certain balance across Citi deposit, investing, and retirement accounts. * **Rates may not be higher for high-tier accounts:** Citi’s savings account rates are often the same across all of its accounts, regardless of the relationship tier. That means having more money in Citi accounts doesn’t usually get you a higher interest rate. * **Rates may vary depending on where you live:** You could get a higher or lower savings rate depending on where you live. Citibank requires you to enter your ZIP code to view rates, and it indicates rates may vary. ## Alternatives to Citibank Savings Accounts If Citibank doesn’t offer the account options you need, several alternatives exist with other financial institutions. Consider looking into the following, ### High-Yield Savings Accounts It’s worth shopping around for high-yield savings accounts with other banking institutions. These accounts offer generous rates and are widely available, typically from online banks but also from credit unions and some traditional banks. See our picks for the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633), and compare rates, fees, and features before making a decision. ### Online banks typically have lower overhead costs than brick-and-mortar institutions. As a result, they can often afford to offer higher savings rates for account holders.  ### Money Market Accounts Money market accounts (MMAs) offer similar rates to high-yield savings accounts, though they may come with additional features, like debit cards and checkbooks. These accounts are also widely available at many banking institutions. As with high-yield savings accounts, you’ll want to compare account rates and features and read the fine print before opening a new MMA. Browse the [top money market account rates](https://www.investopedia.com/best-money-market-accounts-5096917) to see what you could earn. ### Certificates of Deposit (CDs) If you can afford to invest some of your savings for some period of time, a short or long-duration CD may be a good choice. Many CDs offer great rates, though not always as high as you’d get with an MMA or high-yield savings account. Still, they could be a good option if you don’t mind separating some of your savings. Be aware that CDs often come with early withdrawal penalties.  Check the [best CD rates currently available](https://www.investopedia.com/best-cd-rates-4770214) for a variety of term lengths, from 3 months to 10 years. ## How Often Does Citibank Pay Interest on Savings Accounts? Citibank [compounds interest](https://www.investopedia.com/terms/c/compoundinterest.asp) on its savings accounts daily, and total interest earnings are paid out monthly. ## Is There a Minimum Balance for a Citibank Savings Account? There are minimum combined balance requirements for certain Citibank account packages (which include savings accounts), but not others. For instance, you’ll need to maintain an average monthly balance of $200,000 across your deposit, retirement, and investment accounts to qualify for a Citigold Account, or $1,000,000 for a Citigold Private Client Account. But other account packages, like the Citibank Account Package, the Basic Account Package, and the Access Account Package, do not come with minimum balance requirements. ## Can You Open a Savings Account at Citibank Without a Checking Account? Yes, it’s possible to open a savings account at Citibank without opening a checking account—but some account packages require you to open a checking account to qualify. The Citibank Account, Basic Banking, and Access Account Packages don’t require you to open a checking account. The Citigold, Citigold Private Client, and Citi Priority Accounts do require you to open a checking account. ## Does Citibank Have a High-Yield Savings Account? Yes, Citibank offers a savings account with a higher-than-average APY. If you’re looking to earn a higher rate than you’d get with a traditional savings account, a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) with Citi could be a decent option. But Citi doesn’t offer the highest rates available—see the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) to find the best home for your money. ## How Much Does Citi Charge for a High-Yield Savings Account? Citibank offers accounts with no monthly fees along with accounts with monthly fees as high as $30; the fee structure depends on the account or account package you choose. It’s possible to have your [monthly maintenance fees](https://www.investopedia.com/articles/pf/07/bank_fees.asp) waived if you meet certain criteria, such as maintaining a specific minimum balance across eligible Citi accounts or making a qualifying direct deposit or bill payment. ## Is Citi Good for Savings? Citibank offers generous rates in some areas of the U.S., and may be good for savings depending on your individual situation and needs. If you’re looking for an all-in-one banking solution and can meet the criteria to waive the monthly maintenance fees, an account package from Citi may be a decent choice. But you can likely find higher APYs elsewhere for [savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633), [CDs](https://www.investopedia.com/best-cd-rates-4770214), and [MMAs](https://www.investopedia.com/best-money-market-accounts-5096917). ## 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)

Citibank Savings Account Rates If you’re shopping for a new savings account, Citibank offers several options tailored for different consumers. Each of its savings accounts comes with a relatively generous APY (compared to the national average), though fees and features vary depending on the account you choose. In addition to traditional savings accounts, Citi also offers certificate of deposit (CD) accounts with generous rates, as well as bank IRAs.  Here’s what to know about Citibank savings account rates, options, and features. Take note that Citi’s terms can vary widely depending on where you live. The terms below use Texas ZIP code 73301. Account Name Balance for Highest APY APY Range Monthly Fee Citigold Private Client $1,000,000 4.35% $0 Citigold Account Package $200,000 4.35% $0 Citi Priority Account Package $0 4.35% $30 The Citibank Account Package $0 4.35% $25 Basic Account Package $0 4.35% $12 Access Account Package $0 4.35% $10 See the best high-yield savings account rates today before choosing the savings account that is best for you. Citibank Savings Accounts: Key Features Citigold Private Client Key Features APY Range 4.35% Minimum Balance to Earn Highest APY $1,000,000 Eligibility Reserved for account holders with balances of $1,000,000 or more Withdrawal Limit $5,000 per business day Monthly Service Fee $0 If you’ve got plenty to put away, a Citigold Private Client account could be a good option—though this account must be opened with a checking account. To be eligible you’ll need a combined account balance of $1,000,000 or more across your Citi deposit, retirement, and investment accounts.  This account offers access to a dedicated relationship manager, a wealth manager, and Citigold’s concierge service, as well as other perks like a generous APY, waived monthly service fees, and ATM fee reimbursement. Citi’s banking options include its Citi Accelerate Savings Account, which provides the APYs shown on this page. Different banking options have different features and requirements. Some may require you to open a checking account in addition to your savings account, others may not.  Citigold Account Key Features APY Range 4.35% Minimum Balance to Earn Highest APY $200,000 Eligibility Reserved for account holders with balances of $200,000 or more Withdrawal Limit $2,000 per business day for accounts with average balances below $400,000 for the month that is two months prior to the transaction $5,000 per business day for accounts with average balances of $400,000 or more for the month that is two months prior to the transaction Monthly Service Fee $0 The Citigold Account offers similar benefits to the Private Client Package, including a dedicated relationship manager, concierge access, investment guidance, and waived fees. To be eligible for a Citigold Account, you’ll need a combined balance of $200,000 or more across your deposit, investment, and retirement accounts. You’ll also need to open a checking account with this package option. Citi Priority Account Key Features APY Range 4.35% Minimum Balance to Earn Highest APY $0 Minimum Deposit $0 Withdrawal Limit $2,000 per card, per business day Monthly Service Fee $30 While it doesn’t come with a minimum deposit or balance requirement, the Citi Priority Account is designed for customers who have combined eligible account balances of $30,000 or more—this will waive the $30 monthly fee. You won’t get a dedicated relationship manager as you would with a Citigold account, but you will get investment guidance and a generous savings APY.  The Citibank Account Package Key Features APY Range 4.35% Minimum Balance to Earn Highest APY None Minimum Deposit None Withdrawal Limit $1,500 per card, per business day Monthly Service Fee $25 The Citibank Account Package comes with a generous APY and no minimum deposit or balance requirement. You’ll need to maintain a $10,000 average monthly balance in eligible linked deposit, investment, and retirement accounts to avoid the $25 monthly service fee. Account holders who maintain this balance also benefit from no ATM fees and potential discounts on Citi products and services. Basic Account Package Key Features APY Range 4.35% Minimum Balance to Earn Highest APY None Minimum Deposit None Withdrawal Limit $1,500 per card, per business day Monthly Service Fee $12 for checking and linked savings account $4.50 for savings accounts not linked to checking With a Basic Account Package from Citi, you’ll get a relatively high APY, no minimum deposit requirement, and unlimited check writing when you open checking and savings accounts.  For linked checking and savings accounts, the $12 monthly service fee is waived if you do one of the following: Make one eligible direct deposit per statement periodPay a qualifying monthly bill per statement periodMaintain a monthly average balance of $1,500 or more in eligible linked accounts For savings accounts not linked to checking, the $4.50 fee is waived if you maintain an average monthly balance of $500 or more in the savings account. Access Account Package Key Features APY Range 4.35% Minimum Balance to Earn Highest APY None Minimum Deposit None Withdrawal Limit $1,500 per card, per business day Monthly Service Fee $10 for checking and linked savings account $4.50 for savings accounts not linked to checking The Access Account Package is similar to the Basic Account Package, though you won’t get unlimited check writing when you open a checking account with your savings account.  This package has a slightly lower monthly service fee of $10 for linked accounts, which can be waived if you do one of the following: Make one eligible direct deposit per statement periodPay a qualifying bill per statement periodMaintain a $1,500 average monthly balance in eligible linked accounts The $4.50 fee for savings accounts alone can be waived by maintaining an average monthly balance of $500 in the savings account. About Citibank: Other Savings Options Citigroup, which owns Citibank, is the third-largest bank in the United States by assets. It has over 65,000 ATMs and hundreds of bank branches nationwide. Citi offers an impressive range of accounts designed for different types of customers, and all of its savings accounts come with generous rates.  In addition to savings accounts, Citi also offers checking accounts, CDs, and bank IRAs. Those seeking a more long-term savings option may benefit from a Citi CD, and those interested in diversifying their investments with low-risk options may find a bank IRA is a good choice.  Overall, Citi offers some decent savings options with generous rates, although you can typically find better rates for savings accounts and better rates for CDs elsewhere. Several of Citi's savings accounts come included in account packages, though, so if you don’t plan to do all of your banking with Citi, another institution may offer more flexibility.   Compare Savings Account Rates Citi’s account packages and savings accounts may be worth exploring, especially for high-net-worth individuals, but they won’t be right for everyone—and their rates aren’t the highest.  In the News 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. Pros and Cons of Citibank Savings Accounts Pros No minimum balance to earn highest APY Competitive APYs Large ATM and branch network Cons Different rates in different areas of the country Monthly fees may apply Rates may not be higher for high-tier accounts Rates may vary depending on where you live Pros Explained No minimum balance to earn highest APY: Unlike some competitors which require you to maintain a high minimum balance to earn the highest possible APY, Citibank often does not. Some account types do require a minimum balance to open, however; the Citigold account, for example, requires a combined balance of at least $200,000 across eligible accounts.Competitive APYs: Citibank offers competitive APYs on its savings account packages, typically with rates well above 4% for some areas of the U.S.Large ATM and branch network: Citibank is one of the largest banks in the United States, and it has a large network of over 65,000 ATMs and branches nationwide.  Cons Explained Different rates in different areas of the country: Citibank’s rates vary widely across the U.S.; some areas have fairly competitive rates, while others are below the national average for savings accounts (which itself is quite low already).Monthly fees may apply: Monthly fees of up to $30 apply with certain Citibank account packages, although there are some free accounts as well. The monthly fee can be waived by meeting certain criteria, like keeping a certain balance across Citi deposit, investing, and retirement accounts. Rates may not be higher for high-tier accounts: Citi’s savings account rates are often the same across all of its accounts, regardless of the relationship tier. That means having more money in Citi accounts doesn’t usually get you a higher interest rate.Rates may vary depending on where you live: You could get a higher or lower savings rate depending on where you live. Citibank requires you to enter your ZIP code to view rates, and it indicates rates may vary. Alternatives to Citibank Savings Accounts If Citibank doesn’t offer the account options you need, several alternatives exist with other financial institutions. Consider looking into the following, High-Yield Savings Accounts It’s worth shopping around for high-yield savings accounts with other banking institutions. These accounts offer generous rates and are widely available, typically from online banks but also from credit unions and some traditional banks. See our picks for the best high-yield savings accounts, and compare rates, fees, and features before making a decision. Online banks typically have lower overhead costs than brick-and-mortar institutions. As a result, they can often afford to offer higher savings rates for account holders.  Money Market Accounts Money market accounts (MMAs) offer similar rates to high-yield savings accounts, though they may come with additional features, like debit cards and checkbooks. These accounts are also widely available at many banking institutions. As with high-yield savings accounts, you’ll want to compare account rates and features and read the fine print before opening a new MMA. Browse the top money market account rates to see what you could earn. Certificates of Deposit (CDs) If you can afford to invest some of your savings for some period of time, a short or long-duration CD may be a good choice. Many CDs offer great rates, though not always as high as you’d get with an MMA or high-yield savings account. Still, they could be a good option if you don’t mind separating some of your savings. Be aware that CDs often come with early withdrawal penalties.  Check the best CD rates currently available for a variety of term lengths, from 3 months to 10 years. How Often Does Citibank Pay Interest on Savings Accounts? Citibank compounds interest on its savings accounts daily, and total interest earnings are paid out monthly. Is There a Minimum Balance for a Citibank Savings Account? There are minimum combined balance requirements for certain Citibank account packages (which include savings accounts), but not others. For instance, you’ll need to maintain an average monthly balance of $200,000 across your deposit, retirement, and investment accounts to qualify for a Citigold Account, or $1,000,000 for a Citigold Private Client Account.But other account packages, like the Citibank Account Package, the Basic Account Package, and the Access Account Package, do not come with minimum balance requirements. Can You Open a Savings Account at Citibank Without a Checking Account? Yes, it’s possible to open a savings account at Citibank without opening a checking account—but some account packages require you to open a checking account to qualify. The Citibank Account, Basic Banking, and Access Account Packages don’t require you to open a checking account. The Citigold, Citigold Private Client, and Citi Priority Accounts do require you to open a checking account. Does Citibank Have a High-Yield Savings Account? Yes, Citibank offers a savings account with a higher-than-average APY. If you’re looking to earn a higher rate than you’d get with a traditional savings account, a high-yield savings account with Citi could be a decent option. But Citi doesn’t offer the highest rates available—see the best high-yield savings accounts to find the best home for your money. How Much Does Citi Charge for a High-Yield Savings Account? Citibank offers accounts with no monthly fees along with accounts with monthly fees as high as $30; the fee structure depends on the account or account package you choose. It’s possible to have your monthly maintenance fees waived if you meet certain criteria, such as maintaining a specific minimum balance across eligible Citi accounts or making a qualifying direct deposit or bill payment. Is Citi Good for Savings? Citibank offers generous rates in some areas of the U.S., and may be good for savings depending on your individual situation and needs. If you’re looking for an all-in-one banking solution and can meet the criteria to waive the monthly maintenance fees, an account package from Citi may be a decent choice. But you can likely find higher APYs elsewhere for savings accounts, CDs, and MMAs. Your Guide to Savings Accounts What Is a Savings Account and How Does It Work? What Is a High-Yield Savings Account? How to Open a High-Yield Savings Account How to Close a Savings Account Besides a Savings Account, Where Is the Safest Place to Keep My Money? How Many Savings Accounts Should I Have? How Savings Account Interest Rates Are Determined How Interest Works on Savings Accounts How Is a Savings Account Taxed? Money Market Fund vs. MMA vs. Savings Account: What’s the Difference? Certificates of Deposit (CDs) vs. Savings Accounts: Which Is Better for You? 4 Savings Accounts for Investors Best High-Yield Savings Accounts Best Free Savings Accounts Best Savings Accounts for Kids and Teens

https://www.investopedia.com/cannabis-etfs-and-stocks-may-be-next-shoe-to-drop-after-failed-ipos-4772520

Cannabis ETFs and Stocks May Be Next Shoe to Drop After Failed IPOs

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Much like investors who have pulled back from the highly anticipated IPOs of 2019, many buyers of cannabis stocks and ETFs may want to think again before they hold out for better times and suffer a series of additional downdrafts. Despite the industry’s long-term prospects, some analysts have been cutting forecasts for cannabis sales and cash flow, expecting the underperformance to continue into next year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <span class="heading-toc" id="toc-headwinds-into-2020"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> Headwinds Into 2020 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> BMO Capital Markets was the latest this week to write a downbeat forecast on Canadian industry giants such as Canopy Growth Corp. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=cgc">CGC</a>), Tilray Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=tlry">TLRY</a>), and Aurora Cannabis Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=acb">ACB</a>), expecting them to suffer negative cash flow into 2020 as they combat headwinds such as a shortage in retail stores and weaker than expected growth of new products like vapes and edibles, as outlined in a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.barrons.com/articles/marijuana-stocks-face-headwinds-including-sales-slump-says-analyst-51570456370?mod=hp_DAY_4">Barron’s</a> report.  </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"> “Our industry forecast does not anticipate an acceleration in growth until Q2 2020,” wrote BMO Capital Markets analyst Tamy Chen in a note published this week. Chen rates Canopy, Aurora, Tilray and Aphria (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=apha">APHA</a>) at market perform even as she has an outperform rating on lesser known, smaller players including OrganiGram Holdings (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ogi">OGI</a>) and Sundial Growers (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=sndl">SNDL</a>).  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Cannabis ETFs also could see more downdrafts. The ETFMG Alternative Harvest ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=mj">MJ</a>), a proxy for the cannabis market, has declined by 48% since March 19. The ETF and its component stocks aren’t extremely liquid, Barron's notes, which makes them vulnerable should big investors decide to unload their shares. </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-whats-next"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> What’s Next  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The short term outlook is not good. Chen is forecasting a 20% sequential decrease in revenue for the quarter ended September, citing her study of sales volumes recorded by Canada’s federal health agency. She adds that elevated inventories could lead to lower wholesale prices, likely to present another blow to cannabis producers in the first quarter of 2020. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

Much like investors who have pulled back from the highly anticipated IPOs of 2019, many buyers of cannabis stocks and ETFs may want to think again before they hold out for better times and suffer a series of additional downdrafts. Despite the industry’s long-term prospects, some analysts have been cutting forecasts for cannabis sales and cash flow, expecting the underperformance to continue into next year. ## Headwinds Into 2020 BMO Capital Markets was the latest this week to write a downbeat forecast on Canadian industry giants such as Canopy Growth Corp. ([CGC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cgc)), Tilray Inc. ([TLRY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tlry)), and Aurora Cannabis Inc. ([ACB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=acb)), expecting them to suffer negative cash flow into 2020 as they combat headwinds such as a shortage in retail stores and weaker than expected growth of new products like vapes and edibles, as outlined in a [Barron’s](https://www.barrons.com/articles/marijuana-stocks-face-headwinds-including-sales-slump-says-analyst-51570456370?mod=hp_DAY_4) report.  “Our industry forecast does not anticipate an acceleration in growth until Q2 2020,” wrote BMO Capital Markets analyst Tamy Chen in a note published this week. Chen rates Canopy, Aurora, Tilray and Aphria ([APHA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=apha)) at market perform even as she has an outperform rating on lesser known, smaller players including OrganiGram Holdings ([OGI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ogi)) and Sundial Growers ([SNDL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sndl)).  Cannabis ETFs also could see more downdrafts. The ETFMG Alternative Harvest ETF ([MJ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mj)), a proxy for the cannabis market, has declined by 48% since March 19. The ETF and its component stocks aren’t extremely liquid, Barron's notes, which makes them vulnerable should big investors decide to unload their shares. ## What’s Next The short term outlook is not good. Chen is forecasting a 20% sequential decrease in revenue for the quarter ended September, citing her study of sales volumes recorded by Canada’s federal health agency. She adds that elevated inventories could lead to lower wholesale prices, likely to present another blow to cannabis producers in the first quarter of 2020. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Much like investors who have pulled back from the highly anticipated IPOs of 2019, many buyers of cannabis stocks and ETFs may want to think again before they hold out for better times and suffer a series of additional downdrafts. Despite the industry’s long-term prospects, some analysts have been cutting forecasts for cannabis sales and cash flow, expecting the underperformance to continue into next year. Headwinds Into 2020 BMO Capital Markets was the latest this week to write a downbeat forecast on Canadian industry giants such as Canopy Growth Corp. (CGC), Tilray Inc. (TLRY), and Aurora Cannabis Inc. (ACB), expecting them to suffer negative cash flow into 2020 as they combat headwinds such as a shortage in retail stores and weaker than expected growth of new products like vapes and edibles, as outlined in a Barron’s report.  “Our industry forecast does not anticipate an acceleration in growth until Q2 2020,” wrote BMO Capital Markets analyst Tamy Chen in a note published this week. Chen rates Canopy, Aurora, Tilray and Aphria (APHA) at market perform even as she has an outperform rating on lesser known, smaller players including OrganiGram Holdings (OGI) and Sundial Growers (SNDL).  Cannabis ETFs also could see more downdrafts. The ETFMG Alternative Harvest ETF (MJ), a proxy for the cannabis market, has declined by 48% since March 19. The ETF and its component stocks aren’t extremely liquid, Barron's notes, which makes them vulnerable should big investors decide to unload their shares. What’s Next  The short term outlook is not good. Chen is forecasting a 20% sequential decrease in revenue for the quarter ended September, citing her study of sales volumes recorded by Canada’s federal health agency. She adds that elevated inventories could lead to lower wholesale prices, likely to present another blow to cannabis producers in the first quarter of 2020. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/astrazeneca-rises-to-record-high-after-announcing-plans-for-new-era-of-growth-8651886

AstraZeneca Rises to Record High After Announcing Plans for 'New Era of 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>AstraZeneca announced plans Tuesday for a “new era of growth" with 75% revenue growth and 20 new drug launches by 2030.</li><li>The pharmaceutical company said it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion in 2023.</li><li>AstraZeneca ADRs rose to a record high Tuesday following the announcement. </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"> AstraZeneca's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AZN">AZN</a>) <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adr.asp">American depositary receipts (ADRs)</a> rose over 2% to a record high Tuesday after the Anglo-Swedish drug maker announced what it called its “bold ambition” for future growth. </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 said that it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion last year. It said that would be accomplished by “significant growth in its existing oncology, biopharmaceuticals, and rare disease portfolio,” as well as by launching 20 new medicines over the next six years.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In addition, the company said it aims for core <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operatingmargin.asp">operating margin</a> in the mid-30-percentage range by 2026, and will seek at least that level in the years that follow. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> CEO Pascal Soriot called it a “new era of growth” for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/astrazeneca-gets-a-boost-from-sales-of-its-cancer-drugs-8638845">AstraZeneca</a>. The press release about the company's expansion agenda came ahead of AstraZeneca's investor day event on Tuesday, at which Soriot said that of the 20 new medicines AstraZeneca expects to have before the end of the decade, 12 could have peak-year revenue of more than $5 billion.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The company said Monday that it plans to build a $1.5 billion facility in Singapore to produce antibody drug conjugates.<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"> AstraZeneca ADRs gained 2.7% to close at a record high of $79.18 Tuesday, and have gained more than 17% since the start of the year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_15-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:70.6%;"> <img alt="AZN" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/6wnMj0JmfDsIxM8cL1s9WcNqrTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/6wnMj0JmfDsIxM8cL1s9WcNqrTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png" data-srcset="https://www.investopedia.com/thmb/_0wViYdG3dP7wpS-xsbsq3eDt24=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png 750w" data-tracking-container="true" height="1094" id="mntl-sc-block-image_1-0" width="1548"/> <noscript> <img alt="AZN" class="img--noscript universal-image__image" height="1094" sizes="750px" src="https://www.investopedia.com/thmb/6wnMj0JmfDsIxM8cL1s9WcNqrTY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png" srcset="https://www.investopedia.com/thmb/_0wViYdG3dP7wpS-xsbsq3eDt24=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png 750w" width="1548"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>TradingView</p></span> </figcaption></figure> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

### Key Takeaways * AstraZeneca announced plans Tuesday for a “new era of growth" with 75% revenue growth and 20 new drug launches by 2030. * The pharmaceutical company said it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion in 2023. * AstraZeneca ADRs rose to a record high Tuesday following the announcement. AstraZeneca's ([AZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AZN)) [American depositary receipts (ADRs)](https://www.investopedia.com/terms/a/adr.asp) rose over 2% to a record high Tuesday after the Anglo-Swedish drug maker announced what it called its “bold ambition” for future growth. The company said that it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion last year. It said that would be accomplished by “significant growth in its existing oncology, biopharmaceuticals, and rare disease portfolio,” as well as by launching 20 new medicines over the next six years. In addition, the company said it aims for core [operating margin](https://www.investopedia.com/terms/o/operatingmargin.asp) in the mid-30-percentage range by 2026, and will seek at least that level in the years that follow. CEO Pascal Soriot called it a “new era of growth” for [AstraZeneca](https://www.investopedia.com/astrazeneca-gets-a-boost-from-sales-of-its-cancer-drugs-8638845). The press release about the company's expansion agenda came ahead of AstraZeneca's investor day event on Tuesday, at which Soriot said that of the 20 new medicines AstraZeneca expects to have before the end of the decade, 12 could have peak-year revenue of more than $5 billion. The company said Monday that it plans to build a $1.5 billion facility in Singapore to produce antibody drug conjugates. AstraZeneca ADRs gained 2.7% to close at a record high of $79.18 Tuesday, and have gained more than 17% since the start of the year. ![AZN]() :max_bytes(150000):strip_icc()/AZN_2024-05-21_17-37-01-f1e9ed5989f64d4c8b7927390c721aed.png) TradingView Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways AstraZeneca announced plans Tuesday for a “new era of growth" with 75% revenue growth and 20 new drug launches by 2030.The pharmaceutical company said it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion in 2023.AstraZeneca ADRs rose to a record high Tuesday following the announcement. AstraZeneca's (AZN) American depositary receipts (ADRs) rose over 2% to a record high Tuesday after the Anglo-Swedish drug maker announced what it called its “bold ambition” for future growth. The company said that it is targeting $80 billion in total annual revenue by 2030, up from $45.8 billion last year. It said that would be accomplished by “significant growth in its existing oncology, biopharmaceuticals, and rare disease portfolio,” as well as by launching 20 new medicines over the next six years. In addition, the company said it aims for core operating margin in the mid-30-percentage range by 2026, and will seek at least that level in the years that follow. CEO Pascal Soriot called it a “new era of growth” for AstraZeneca. The press release about the company's expansion agenda came ahead of AstraZeneca's investor day event on Tuesday, at which Soriot said that of the 20 new medicines AstraZeneca expects to have before the end of the decade, 12 could have peak-year revenue of more than $5 billion. The company said Monday that it plans to build a $1.5 billion facility in Singapore to produce antibody drug conjugates. AstraZeneca ADRs gained 2.7% to close at a record high of $79.18 Tuesday, and have gained more than 17% since the start of the year. TradingView Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/biden-levies-sweeping-tariffs-on-chinese-chips-solar-cells-evs-8648008

Biden Levies Sweeping Tariffs on Chinese Chips, Solar Cells, EVs

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>President Biden has significantly escalated tariffs on a wide range of Chinese imports, from semiconductors and solar cells to electric vehicles.</li><li>These tariffs represent a substantial increase from previous levels, with those on EVs rising to 100% from 25% this year.</li><li>The changes are projected to affect around $18 billion in current annual imports from China, the White House said.</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"> President Joe Biden imposed sweeping tariffs on a large swath of Chinese imports from steel to semiconductors and electric vehicles on Tuesday, turning up the heat on trade tensions between the two countries as U.S. officials accuse China of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/yellen-says-china-s-overcapacity-poses-risks-to-world-economy-8625275">overcapacity in manufacturing</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_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The changes, the culmination of a review of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/what-are-tariffs-and-how-do-they-affect-you/">Section 301 tariffs</a> under former President Donald Trump starting in 2018, are projected to affect around $18 billion in current annual imports, according to the White House. </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"> "Today’s actions to counter China’s unfair trade practices are carefully targeted at strategic sectors," the White House said in its statement. </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-tariffs-jump-on-steel-semiconductors-evs"></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"> Tariffs Jump on Steel, Semiconductors, EVs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The administration said that the tariff rate on certain steel and aluminum products under Section 301 will increase to 25% in 2024 from 0%–7.5%; the rate on semiconductors will increase to 50% by 2025 from 25%; and the rate on electric vehicles will rise to 100% this year from 25%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Also this year, there will be an increase to 25% from 7.5% on the tariff rate for lithium-ion EV batteries and battery parts, and increase to 50% on solar cells from 25%. </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"> Trade Representative Katherine Tai separately said the report also includes a recommendation for allocating additional funds to U.S. Customs and Border Protection for greater enforcement of the tariffs.<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> <span class="heading-toc" id="toc-us-efforts-to-promote-domestic-manufacturing-in-critical-industries"></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"> U.S. Efforts to Promote Domestic Manufacturing in Critical Industries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The Biden administration has been spending billions of dollars to promote domestic manufacturing in critical industries in recent months as it seeks to counter what it sees as China's increasing dominance in many fields. </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/chips-and-science-act-6500333">CHIPS and Science Act</a> of 2022 has <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tmsc-gets-usd6-6-billion-in-chips-act-funding-stock-rises-8628158">earmarked over $50 billion </a>for investment in semiconductor research and manufacturing facilities to be built in the U.S. after the industry mostly has moved overseas in recent years. </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 * President Biden has significantly escalated tariffs on a wide range of Chinese imports, from semiconductors and solar cells to electric vehicles. * These tariffs represent a substantial increase from previous levels, with those on EVs rising to 100% from 25% this year. * The changes are projected to affect around $18 billion in current annual imports from China, the White House said. President Joe Biden imposed sweeping tariffs on a large swath of Chinese imports from steel to semiconductors and electric vehicles on Tuesday, turning up the heat on trade tensions between the two countries as U.S. officials accuse China of [overcapacity in manufacturing](https://www.investopedia.com/yellen-says-china-s-overcapacity-poses-risks-to-world-economy-8625275). The changes, the culmination of a review of the [Section 301 tariffs](https://www.investopedia.com/news/what-are-tariffs-and-how-do-they-affect-you/) under former President Donald Trump starting in 2018, are projected to affect around $18 billion in current annual imports, according to the White House. "Today’s actions to counter China’s unfair trade practices are carefully targeted at strategic sectors," the White House said in its statement. ## Tariffs Jump on Steel, Semiconductors, EVs The administration said that the tariff rate on certain steel and aluminum products under Section 301 will increase to 25% in 2024 from 0%–7.5%; the rate on semiconductors will increase to 50% by 2025 from 25%; and the rate on electric vehicles will rise to 100% this year from 25%. Also this year, there will be an increase to 25% from 7.5% on the tariff rate for lithium-ion EV batteries and battery parts, and increase to 50% on solar cells from 25%. Trade Representative Katherine Tai separately said the report also includes a recommendation for allocating additional funds to U.S. Customs and Border Protection for greater enforcement of the tariffs. ## U.S. Efforts to Promote Domestic Manufacturing in Critical Industries The Biden administration has been spending billions of dollars to promote domestic manufacturing in critical industries in recent months as it seeks to counter what it sees as China's increasing dominance in many fields. The [CHIPS and Science Act](https://www.investopedia.com/chips-and-science-act-6500333) of 2022 has [earmarked over $50 billion](https://www.investopedia.com/tmsc-gets-usd6-6-billion-in-chips-act-funding-stock-rises-8628158) for investment in semiconductor research and manufacturing facilities to be built in the U.S. after the industry mostly has moved overseas in recent years. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

KEY TAKEAWAYS President Biden has significantly escalated tariffs on a wide range of Chinese imports, from semiconductors and solar cells to electric vehicles.These tariffs represent a substantial increase from previous levels, with those on EVs rising to 100% from 25% this year.The changes are projected to affect around $18 billion in current annual imports from China, the White House said. President Joe Biden imposed sweeping tariffs on a large swath of Chinese imports from steel to semiconductors and electric vehicles on Tuesday, turning up the heat on trade tensions between the two countries as U.S. officials accuse China of overcapacity in manufacturing. The changes, the culmination of a review of the Section 301 tariffs under former President Donald Trump starting in 2018, are projected to affect around $18 billion in current annual imports, according to the White House. "Today’s actions to counter China’s unfair trade practices are carefully targeted at strategic sectors," the White House said in its statement. Tariffs Jump on Steel, Semiconductors, EVs The administration said that the tariff rate on certain steel and aluminum products under Section 301 will increase to 25% in 2024 from 0%–7.5%; the rate on semiconductors will increase to 50% by 2025 from 25%; and the rate on electric vehicles will rise to 100% this year from 25%. Also this year, there will be an increase to 25% from 7.5% on the tariff rate for lithium-ion EV batteries and battery parts, and increase to 50% on solar cells from 25%. Trade Representative Katherine Tai separately said the report also includes a recommendation for allocating additional funds to U.S. Customs and Border Protection for greater enforcement of the tariffs. U.S. Efforts to Promote Domestic Manufacturing in Critical Industries The Biden administration has been spending billions of dollars to promote domestic manufacturing in critical industries in recent months as it seeks to counter what it sees as China's increasing dominance in many fields. The CHIPS and Science Act of 2022 has earmarked over $50 billion for investment in semiconductor research and manufacturing facilities to be built in the U.S. after the industry mostly has moved overseas in recent years. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/ask/answers/09/calculating-premium.asp

How to Calculate Insurance Premiums

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and your car, home, life, and other valuables. The amount that you pay is based on your age, the type of coverage that you want, the amount of coverage that you need, your personal information, your ZIP code, and other factors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>An insurance premium is the amount of money that you pay for an insurance policy.</li><li>You pay insurance premiums for policies that cover your health, car, home, life, and others.</li><li>Insurance premiums vary depending on your age, the type of coverage, the amount of coverage, your insurance history, and other factors.</li><li>Premiums can increase each time you renew an insurance policy.</li></ul></div></div></div> <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_5-0"> <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_6-0"> When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-health-insurance-companies-4775920">health insurance policy</a>, you might pay the premium each month or on a semiannual basis. In some cases, you might be required to pay the full amount up front, before coverage starts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank_draft.asp">bank drafts</a>. You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <span class="heading-toc" id="toc-how-much-is-an-insurance-premium"></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 Much Is an Insurance Premium? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> There’s no set cost for insurance premiums. You could have the same car as your neighbor and pay more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies. There are insurers who offer a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-flow-plans.asp">cash flow payment plan</a> where your annual premium is broken into smaller payment units. </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"> You’ll pay more for broader coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same. </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"> Still, that doesn’t mean you should automatically go for the cheapest policy just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-how-to-calculate-insurance-premiums"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> How to Calculate Insurance Premiums </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Insurance companies consider several factors when calculating an individual's insurance premiums. Group insurance providers will also look at these factors when they <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/member-month.asp">calculate the premium for a group</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></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_20-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Factors That Influence Insurance Premiums" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/qNPB9TMJQO0c5dGYLxIQRhpupJg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/qNPB9TMJQO0c5dGYLxIQRhpupJg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png" data-srcset="https://www.investopedia.com/thmb/imzTX209RjkWaxvSHxgzI2AwsbY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Factors That Influence Insurance Premiums" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/qNPB9TMJQO0c5dGYLxIQRhpupJg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png" srcset="https://www.investopedia.com/thmb/imzTX209RjkWaxvSHxgzI2AwsbY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Ellen Lindner</p></span> </figcaption></figure> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li><strong>Your age</strong>: Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/">a higher chance of needing more medical services</a>. And teenage drivers are still working on building experience, so their auto insurance is more expensive. Likewise, older drivers—who tend to have slower reflexes—will also pay more.</li> <li><strong>The type of coverage</strong>: In general, you have several options when you buy an insurance policy. The more comprehensive the coverage that you get, the more expensive it will be. For example, if you have an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance/how-to-find-car-insurance/">auto insurance policy</a> that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage.</li> <li><strong>The amount of coverage</strong>: The less coverage, the cheaper the premiums—no matter what you’re insuring. For example, if you buy health insurance, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and a higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Personal information</strong>:<strong> </strong>Depending on the type of insurance for which you’re shopping, the insurance company may take a close look at things like your claims history, driving record, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>, gender, marital status, lifestyle, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102914/7-factors-affect-your-life-insurance-quote.asp#6-family-medical-history">family medical history</a>, health, smoking status, hobbies, job, and where you live.</li> <li><strong>Actuarial tables</strong>: Most insurance companies employ <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/professionals/090513/day-life-actuary.asp">actuaries</a>—business professionals who assess the risk of financial loss, using mathematics and statistics to predict the likelihood of an insurance claim, based on much of the aforementioned criteria. They typically produce something called an actuarial table that is provided to an insurance company’s <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriting.asp">underwriting</a> department, which uses the input to set policy premiums.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">95%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The percentage of car insurance companies that consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrating.asp">credit ratings</a> when calculating insurance premiums.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-how-to-lower-your-premiums"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> How to Lower Your Premiums </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> One way is to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/insurance/09/bundle-insurance.asp">bundle your insurance</a>. For example, if you have your auto, home, and life insurance policies with one company, then you’ll probably qualify for a discount. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Of course, you can save money if you reduce your coverage (e.g., increase your deductible). However, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions. </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 other ways to save on your premiums, but they take more of a commitment. For instance, most states charge smokers up to 50% more than nonsmokers for health insurance policies. As an example, if you’re a smoker paying $600 a month for health insurance, you might be able to reduce your premium to, say, $400 if you quit smoking. </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 example: You may qualify for lower auto insurance rates if you improve your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a>. That’s because people with lower credit scores are, statistically speaking, more likely to file a claim.<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_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-are-insurance-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Are Insurance Premiums?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Insurance premiums vary based on the coverage and the person taking out the policy. Many <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">variables factor into the amount that you’ll pay</a>, but the main considerations are the level of coverage that you’ll receive and personal information such as age and personal information. For car insurance, that could mean age and driving record. For health insurance, it could be based on personal habits such as smoking or on preexisting conditions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-does-a-higher-insurance-premium-mean-better-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does a Higher Insurance Premium Mean Better Insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Not necessarily. Because so many variables go into determining your premium, your premium may be higher than someone else’s for the exact same coverage. Typically, you’ll pay a higher premium for more extensive coverage, such as a lower deductible, or for more added services, such as roadside assistance or rental car coverage.</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-can-i-lower-my-insurance-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Lower My Insurance Premiums?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The most foolproof way to lower your premiums is by choosing a lower level of coverage. If you like the coverage that you have, consider bundling—combining several different types of insurance—to qualify for multi-policy discounts. For health insurance, some companies offer incentives to build healthy habits, such as getting a yearly health assessment or trying to quit smoking. Some car insurance companies will also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-cut-car-insurance-costs-5188163">lower your premiums</a> based on a good driving record or credit score.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Several metrics factor into the price of an insurance premium, including age, state and county of residence, and amount of coverage. You cannot change your age, obviously, but you can take advantage of incentives to lower the cost by, for example, quitting smoking or improving your credit score. Whether or not you bundle your insurance, change a health habit, or improve financial picture, it always pays to shop around. That way, you can find the best insurance policy at a price that you can afford.  </p></div>

If you have an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and your car, home, life, and other valuables. The amount that you pay is based on your age, the type of coverage that you want, the amount of coverage that you need, your personal information, your ZIP code, and other factors. ### Key Takeaways * An insurance premium is the amount of money that you pay for an insurance policy. * You pay insurance premiums for policies that cover your health, car, home, life, and others. * Insurance premiums vary depending on your age, the type of coverage, the amount of coverage, your insurance history, and other factors. * Premiums can increase each time you renew an insurance policy. ## What Is an Insurance Premium? When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the [health insurance policy](https://www.investopedia.com/best-health-insurance-companies-4775920), you might pay the premium each month or on a semiannual basis. In some cases, you might be required to pay the full amount up front, before coverage starts. Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and [bank drafts](https://www.investopedia.com/terms/b/bank_draft.asp). You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments. ## How Much Is an Insurance Premium? There’s no set cost for insurance premiums. You could have the same car as your neighbor and pay more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies. There are insurers who offer a [cash flow payment plan](https://www.investopedia.com/terms/c/cash-flow-plans.asp) where your annual premium is broken into smaller payment units. You’ll pay more for broader coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same. Still, that doesn’t mean you should automatically go for the cheapest policy just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you. ## How to Calculate Insurance Premiums Insurance companies consider several factors when calculating an individual's insurance premiums. Group insurance providers will also look at these factors when they [calculate the premium for a group](https://www.investopedia.com/terms/m/member-month.asp). ![Factors That Influence Insurance Premiums]() :max_bytes(150000):strip_icc()/calculating-premium.asp_sketch_revised-5eb88ace64ae40cfa39d93ba9a23f19c.png) Investopedia / Ellen Lindner * **Your age**: Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have [a higher chance of needing more medical services](https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/). And teenage drivers are still working on building experience, so their auto insurance is more expensive. Likewise, older drivers—who tend to have slower reflexes—will also pay more. * **The type of coverage**: In general, you have several options when you buy an insurance policy. The more comprehensive the coverage that you get, the more expensive it will be. For example, if you have an [auto insurance policy](https://www.investopedia.com/insurance/how-to-find-car-insurance/) that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage. * **The amount of coverage**: The less coverage, the cheaper the premiums—no matter what you’re insuring. For example, if you buy health insurance, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and a higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home. * **Personal information**:Depending on the type of insurance for which you’re shopping, the insurance company may take a close look at things like your claims history, driving record, [credit history](https://www.investopedia.com/terms/c/credit-history.asp), gender, marital status, lifestyle, [family medical history](https://www.investopedia.com/articles/investing/102914/7-factors-affect-your-life-insurance-quote.asp#6-family-medical-history), health, smoking status, hobbies, job, and where you live. * **Actuarial tables**: Most insurance companies employ [actuaries](https://www.investopedia.com/articles/professionals/090513/day-life-actuary.asp)—business professionals who assess the risk of financial loss, using mathematics and statistics to predict the likelihood of an insurance claim, based on much of the aforementioned criteria. They typically produce something called an actuarial table that is provided to an insurance company’s [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) department, which uses the input to set policy premiums. ### 95% The percentage of car insurance companies that consider [credit ratings](https://www.investopedia.com/terms/c/creditrating.asp) when calculating insurance premiums. ## How to Lower Your Premiums Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums. One way is to [bundle your insurance](https://www.investopedia.com/articles/insurance/09/bundle-insurance.asp). For example, if you have your auto, home, and life insurance policies with one company, then you’ll probably qualify for a discount. Of course, you can save money if you reduce your coverage (e.g., increase your deductible). However, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions. There are other ways to save on your premiums, but they take more of a commitment. For instance, most states charge smokers up to 50% more than nonsmokers for health insurance policies. As an example, if you’re a smoker paying $600 a month for health insurance, you might be able to reduce your premium to, say, $400 if you quit smoking. Another example: You may qualify for lower auto insurance rates if you improve your [credit score](https://www.investopedia.com/terms/c/credit_score.asp). That’s because people with lower credit scores are, statistically speaking, more likely to file a claim. ## How Much Are Insurance Premiums? Insurance premiums vary based on the coverage and the person taking out the policy. Many [variables factor into the amount that you’ll pay](https://www.investopedia.com/car-insurance-for-transgender-and-nonbinary-people-7548334), but the main considerations are the level of coverage that you’ll receive and personal information such as age and personal information. For car insurance, that could mean age and driving record. For health insurance, it could be based on personal habits such as smoking or on preexisting conditions. ## Does a Higher Insurance Premium Mean Better Insurance? Not necessarily. Because so many variables go into determining your premium, your premium may be higher than someone else’s for the exact same coverage. Typically, you’ll pay a higher premium for more extensive coverage, such as a lower deductible, or for more added services, such as roadside assistance or rental car coverage. ## How Can I Lower My Insurance Premiums? The most foolproof way to lower your premiums is by choosing a lower level of coverage. If you like the coverage that you have, consider bundling—combining several different types of insurance—to qualify for multi-policy discounts. For health insurance, some companies offer incentives to build healthy habits, such as getting a yearly health assessment or trying to quit smoking. Some car insurance companies will also [lower your premiums](https://www.investopedia.com/how-to-cut-car-insurance-costs-5188163) based on a good driving record or credit score. ## The Bottom Line Several metrics factor into the price of an insurance premium, including age, state and county of residence, and amount of coverage. You cannot change your age, obviously, but you can take advantage of incentives to lower the cost by, for example, quitting smoking or improving your credit score. Whether or not you bundle your insurance, change a health habit, or improve financial picture, it always pays to shop around. That way, you can find the best insurance policy at a price that you can afford. 

If you have an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and your car, home, life, and other valuables. The amount that you pay is based on your age, the type of coverage that you want, the amount of coverage that you need, your personal information, your ZIP code, and other factors. Key Takeaways An insurance premium is the amount of money that you pay for an insurance policy.You pay insurance premiums for policies that cover your health, car, home, life, and others.Insurance premiums vary depending on your age, the type of coverage, the amount of coverage, your insurance history, and other factors.Premiums can increase each time you renew an insurance policy. What Is an Insurance Premium? When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the health insurance policy, you might pay the premium each month or on a semiannual basis. In some cases, you might be required to pay the full amount up front, before coverage starts. Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank drafts. You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments. How Much Is an Insurance Premium? There’s no set cost for insurance premiums. You could have the same car as your neighbor and pay more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies. There are insurers who offer a cash flow payment plan where your annual premium is broken into smaller payment units. You’ll pay more for broader coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same. Still, that doesn’t mean you should automatically go for the cheapest policy just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you. How to Calculate Insurance Premiums Insurance companies consider several factors when calculating an individual's insurance premiums. Group insurance providers will also look at these factors when they calculate the premium for a group. Investopedia / Ellen Lindner Your age: Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have a higher chance of needing more medical services. And teenage drivers are still working on building experience, so their auto insurance is more expensive. Likewise, older drivers—who tend to have slower reflexes—will also pay more. The type of coverage: In general, you have several options when you buy an insurance policy. The more comprehensive the coverage that you get, the more expensive it will be. For example, if you have an auto insurance policy that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage. The amount of coverage: The less coverage, the cheaper the premiums—no matter what you’re insuring. For example, if you buy health insurance, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and a higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home. Personal information: Depending on the type of insurance for which you’re shopping, the insurance company may take a close look at things like your claims history, driving record, credit history, gender, marital status, lifestyle, family medical history, health, smoking status, hobbies, job, and where you live. Actuarial tables: Most insurance companies employ actuaries—business professionals who assess the risk of financial loss, using mathematics and statistics to predict the likelihood of an insurance claim, based on much of the aforementioned criteria. They typically produce something called an actuarial table that is provided to an insurance company’s underwriting department, which uses the input to set policy premiums. 95% The percentage of car insurance companies that consider credit ratings when calculating insurance premiums. How to Lower Your Premiums Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums. One way is to bundle your insurance. For example, if you have your auto, home, and life insurance policies with one company, then you’ll probably qualify for a discount. Of course, you can save money if you reduce your coverage (e.g., increase your deductible). However, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions. There are other ways to save on your premiums, but they take more of a commitment. For instance, most states charge smokers up to 50% more than nonsmokers for health insurance policies. As an example, if you’re a smoker paying $600 a month for health insurance, you might be able to reduce your premium to, say, $400 if you quit smoking. Another example: You may qualify for lower auto insurance rates if you improve your credit score. That’s because people with lower credit scores are, statistically speaking, more likely to file a claim. How Much Are Insurance Premiums? Insurance premiums vary based on the coverage and the person taking out the policy. Many variables factor into the amount that you’ll pay, but the main considerations are the level of coverage that you’ll receive and personal information such as age and personal information. For car insurance, that could mean age and driving record. For health insurance, it could be based on personal habits such as smoking or on preexisting conditions. Does a Higher Insurance Premium Mean Better Insurance? Not necessarily. Because so many variables go into determining your premium, your premium may be higher than someone else’s for the exact same coverage. Typically, you’ll pay a higher premium for more extensive coverage, such as a lower deductible, or for more added services, such as roadside assistance or rental car coverage. How Can I Lower My Insurance Premiums? The most foolproof way to lower your premiums is by choosing a lower level of coverage. If you like the coverage that you have, consider bundling—combining several different types of insurance—to qualify for multi-policy discounts. For health insurance, some companies offer incentives to build healthy habits, such as getting a yearly health assessment or trying to quit smoking. Some car insurance companies will also lower your premiums based on a good driving record or credit score. The Bottom Line Several metrics factor into the price of an insurance premium, including age, state and county of residence, and amount of coverage. You cannot change your age, obviously, but you can take advantage of incentives to lower the cost by, for example, quitting smoking or improving your credit score. Whether or not you bundle your insurance, change a health habit, or improve financial picture, it always pays to shop around. That way, you can find the best insurance policy at a price that you can afford. 

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

What Is Asset-Based Lending? How Loans Work, Example 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-asset-based-lending"></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 Asset-Based Lending? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetbasedfinance.asp">asset-based loan</a> or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. </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 asset-based lending industry serves business, not consumers. It is also known as asset-based financing. </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>Asset-based lending involves loaning money using the borrower's assets as collateral.</li><li>Liquid collateral is preferred as opposed to illiquid or physical assets such as equipment.</li><li>Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow demands.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-asset-based-lending-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 Asset-Based Lending Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Many businesses need to take out loans or obtain lines of credit to meet routine <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> demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/borrowing-base.asp">physical assets as collateral</a>. For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral. Lenders might require a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negativepledgeclause.asp">negative pledge clause or covenant</a> as part of the loan. This clause will limit the borrower from reusing the pledged asset for another loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The terms and conditions of an asset-based loan depend on the type and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset-based-approach.asp">value of the assets offered</a> as security. Lenders prefer highly liquid collateral, such as securities, that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant's credit history, cash flow, and length of time doing business. </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>Interest rates on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetfinancing.asp">asset-based lending</a> are lower than rates on unsecured loans since the lender can recoup most or all of its losses in the event that the borrower defaults.</p></div></div></div> <span class="heading-toc" id="toc-example"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> For example, say a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketablesecurities.asp">marketable securities</a> on its balance sheet as collateral, the lender may grant a loan equalling 85% of the face value of the securities. If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000. </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 both cases, the discount represents the costs of converting the collateral to cash and its potential loss in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a>. </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"> Small and mid-sized companies that are stable and that have physical assets of value are the most common asset-based borrowers. </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, even large corporations may occasionally seek asset-based loans to cover short-term needs. The cost and long lead time of issuing additional shares or bonds in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalmarkets.asp">capital markets</a> may be too high. The cash demand may be extremely time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase. </p></div>

## What Is Asset-Based Lending? Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An [asset-based loan](https://www.investopedia.com/terms/a/assetbasedfinance.asp) or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. The asset-based lending industry serves business, not consumers. It is also known as asset-based financing. ### Key Takeaways * Asset-based lending involves loaning money using the borrower's assets as collateral. * Liquid collateral is preferred as opposed to illiquid or physical assets such as equipment. * Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow demands. ## How Asset-Based Lending Works Many businesses need to take out loans or obtain lines of credit to meet routine [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive. If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its [physical assets as collateral](https://www.investopedia.com/terms/b/borrowing-base.asp). For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral. Lenders might require a [negative pledge clause or covenant](https://www.investopedia.com/terms/n/negativepledgeclause.asp) as part of the loan. This clause will limit the borrower from reusing the pledged asset for another loan. The terms and conditions of an asset-based loan depend on the type and [value of the assets offered](https://www.investopedia.com/terms/a/asset-based-approach.asp) as security. Lenders prefer highly liquid collateral, such as securities, that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant's credit history, cash flow, and length of time doing business. ### Interest rates on [asset-based lending](https://www.investopedia.com/terms/a/assetfinancing.asp) are lower than rates on unsecured loans since the lender can recoup most or all of its losses in the event that the borrower defaults. ## Example For example, say a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid [marketable securities](https://www.investopedia.com/terms/m/marketablesecurities.asp) on its balance sheet as collateral, the lender may grant a loan equalling 85% of the face value of the securities. If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000. In both cases, the discount represents the costs of converting the collateral to cash and its potential loss in [market value](https://www.investopedia.com/terms/m/marketvalue.asp). ## Special Considerations Small and mid-sized companies that are stable and that have physical assets of value are the most common asset-based borrowers. However, even large corporations may occasionally seek asset-based loans to cover short-term needs. The cost and long lead time of issuing additional shares or bonds in the [capital markets](https://www.investopedia.com/terms/c/capitalmarkets.asp) may be too high. The cash demand may be extremely time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase.

What Is Asset-Based Lending? Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. The asset-based lending industry serves business, not consumers. It is also known as asset-based financing. Key Takeaways Asset-based lending involves loaning money using the borrower's assets as collateral.Liquid collateral is preferred as opposed to illiquid or physical assets such as equipment.Asset-based lending is often used by small to mid-sized businesses in order to cover short-term cash flow demands. How Asset-Based Lending Works Many businesses need to take out loans or obtain lines of credit to meet routine cash flow demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive. If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral. Lenders might require a negative pledge clause or covenant as part of the loan. This clause will limit the borrower from reusing the pledged asset for another loan. The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security. Lenders prefer highly liquid collateral, such as securities, that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant's credit history, cash flow, and length of time doing business. Interest rates on asset-based lending are lower than rates on unsecured loans since the lender can recoup most or all of its losses in the event that the borrower defaults. Example For example, say a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid marketable securities on its balance sheet as collateral, the lender may grant a loan equalling 85% of the face value of the securities. If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000. In both cases, the discount represents the costs of converting the collateral to cash and its potential loss in market value. Special Considerations Small and mid-sized companies that are stable and that have physical assets of value are the most common asset-based borrowers. However, even large corporations may occasionally seek asset-based loans to cover short-term needs. The cost and long lead time of issuing additional shares or bonds in the capital markets may be too high. The cash demand may be extremely time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase.

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

What Is Market Risk Premium? Explanation and Use in Investing

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-market-risk-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 Market Risk Premium? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The market risk premium (MRP) is the difference between the expected return on a market portfolio and the risk-free 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"> The market risk premium is equal to the slope of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sml.asp">security market line</a> (SML), a graphical representation of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM). CAPM measures the required rate of return on equity investments, and it is an important element of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp">modern portfolio theory</a> (MPT) and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dcf.asp">discounted cash flows</a> (DCF) valuation. </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 market risk premium is the difference between the expected return on a market portfolio and the risk-free rate.</li><li>It provides a quantitative measure of the extra return demanded by market participants for the increased risk.</li><li>The market risk premium is measured as the slope of the security market line (SML) associated with the CAPM model.</li><li>The market risk premium is broader and more diversified than the equity risk premium, which only considers the stock market. As a result, the equity risk premium is often higher.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-market-risk-premium"></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 Market Risk Premium </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Market risk premium describes the relationship between returns from an asset portfolio and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">treasury bond</a> yields. The risk premium reflects the required returns, historical returns, and expected returns. The historical market risk premium will be the same for all investors. The required and expected market premiums, however, will differ from investor to investor based on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstyle.asp">investing styles</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"> Investors require compensation for risk and opportunity costs. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freerate.asp">risk-free rate</a> is a theoretical interest rate that is paid by an investment with zero risks. Long-term yields on U.S. Treasuries have traditionally been used as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040915/how-riskfree-rate-determined-when-calculating-market-risk-premium.asp">proxy for the risk-free rate</a> because of the low default risk and have had relatively low yields as a result of this assumed reliability. </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"> Equity market returns are based on expected returns on a broad benchmark index such as the Standard &amp; Poor's 500 index of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average</a> (DJIA). Real equity returns fluctuate with the operational performance of the underlying business. </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"> Historical return rates have fluctuated as the economy matures and endures cycles, but conventional knowledge has generally estimated a long-term potential of approximately 8% annually. </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-calculation-and-application"></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"> Calculation and Application </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The market risk premium can be calculated by subtracting the risk-free rate from the expected equity market return, providing a quantitative measure of the extra return demanded by market participants for the increased risk. </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"> Once calculated, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/061815/what-difference-between-market-risk-premium-and-equity-risk-premium.asp">equity risk premium</a> can be used in important calculations such as CAPM. Between 1926 and 2014, the S&amp;P 500 exhibited a 10.5% compounded annual rate of return, while the 30-day Treasury bill compounded at 5.1%. This indicates a market risk premium of 5.4%, based on these parameters. </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 required rate of return for an individual asset can be calculated by multiplying the asset's beta coefficient by the market coefficient, then adding back the risk-free rate. This is often used as the discount rate in discounted cash flow, a popular valuation model. </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-difference-between-the-market-risk-premium-and-equity-risk-premium"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between the Market Risk Premium and Equity Risk Premium?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The market risk premium (MRP) broadly describes the additional returns above the risk-free rate that investors require when putting a portfolio of assets at risk in the market. This would include the universe of investable assets, including stocks, bonds, real estate, and so on.</p><p>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityriskpremium.asp">equity risk premium</a> (ERP) looks more narrowly only at the excess returns of stocks over the risk-free rate. Because the market risk premium is broader and more diversified, the equity risk premium by itself tends to be larger.</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-what-is-the-historical-market-risk-premium"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Historical Market Risk Premium?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In the U.S., the market risk premium has hovered around 5.5% over the past decade.<span class="ql-inline-citation" data-cite="1"></span> Historical risk premiums used in practice have been estimated to be as high as 12% and as low as 3%.<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_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-what-is-used-for-the-risk-free-rate-when-measuring-the-market-risk-premium"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Used for the Risk-Free Rate When Measuring the Market Risk Premium?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In the United States, the yield on government bonds such as 2-year Treasuries are the most oft-used risk-free rate of return.</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 market risk premium—<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041315/how-do-i-interpret-security-market-line-sml-graph.asp">measured as the slope of the security market line (SML)</a>—is the difference between the expected return on a market portfolio and the risk-free rate. It provides a quantitative measure of the extra return demanded by market participants for an increased risk.<br/> </p></div>

## What Is Market Risk Premium? The market risk premium (MRP) is the difference between the expected return on a market portfolio and the risk-free rate. The market risk premium is equal to the slope of the [security market line](https://www.investopedia.com/terms/s/sml.asp) (SML), a graphical representation of the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM). CAPM measures the required rate of return on equity investments, and it is an important element of [modern portfolio theory](https://www.investopedia.com/terms/m/modernportfoliotheory.asp) (MPT) and [discounted cash flows](https://www.investopedia.com/terms/d/dcf.asp) (DCF) valuation. ### Key Takeaways * The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. * It provides a quantitative measure of the extra return demanded by market participants for the increased risk. * The market risk premium is measured as the slope of the security market line (SML) associated with the CAPM model. * The market risk premium is broader and more diversified than the equity risk premium, which only considers the stock market. As a result, the equity risk premium is often higher. ## Understanding the Market Risk Premium Market risk premium describes the relationship between returns from an asset portfolio and [treasury bond](https://www.investopedia.com/terms/t/treasurybond.asp) yields. The risk premium reflects the required returns, historical returns, and expected returns. The historical market risk premium will be the same for all investors. The required and expected market premiums, however, will differ from investor to investor based on [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and [investing styles](https://www.investopedia.com/terms/i/investmentstyle.asp). Investors require compensation for risk and opportunity costs. The [risk-free rate](https://www.investopedia.com/terms/r/risk-freerate.asp) is a theoretical interest rate that is paid by an investment with zero risks. Long-term yields on U.S. Treasuries have traditionally been used as a [proxy for the risk-free rate](https://www.investopedia.com/ask/answers/040915/how-riskfree-rate-determined-when-calculating-market-risk-premium.asp) because of the low default risk and have had relatively low yields as a result of this assumed reliability. Equity market returns are based on expected returns on a broad benchmark index such as the Standard & Poor's 500 index of the [Dow Jones Industrial Average](https://www.investopedia.com/terms/d/djia.asp) (DJIA). Real equity returns fluctuate with the operational performance of the underlying business. Historical return rates have fluctuated as the economy matures and endures cycles, but conventional knowledge has generally estimated a long-term potential of approximately 8% annually. ## Calculation and Application The market risk premium can be calculated by subtracting the risk-free rate from the expected equity market return, providing a quantitative measure of the extra return demanded by market participants for the increased risk. Once calculated, the [equity risk premium](https://www.investopedia.com/ask/answers/061815/what-difference-between-market-risk-premium-and-equity-risk-premium.asp) can be used in important calculations such as CAPM. Between 1926 and 2014, the S&P 500 exhibited a 10.5% compounded annual rate of return, while the 30-day Treasury bill compounded at 5.1%. This indicates a market risk premium of 5.4%, based on these parameters. The required rate of return for an individual asset can be calculated by multiplying the asset's beta coefficient by the market coefficient, then adding back the risk-free rate. This is often used as the discount rate in discounted cash flow, a popular valuation model. ## What Is the Difference Between the Market Risk Premium and Equity Risk Premium? The market risk premium (MRP) broadly describes the additional returns above the risk-free rate that investors require when putting a portfolio of assets at risk in the market. This would include the universe of investable assets, including stocks, bonds, real estate, and so on. The [equity risk premium](https://www.investopedia.com/terms/e/equityriskpremium.asp) (ERP) looks more narrowly only at the excess returns of stocks over the risk-free rate. Because the market risk premium is broader and more diversified, the equity risk premium by itself tends to be larger. ## What Is the Historical Market Risk Premium? In the U.S., the market risk premium has hovered around 5.5% over the past decade. Historical risk premiums used in practice have been estimated to be as high as 12% and as low as 3%. ## What Is Used for the Risk-Free Rate When Measuring the Market Risk Premium? In the United States, the yield on government bonds such as 2-year Treasuries are the most oft-used risk-free rate of return. ## The Bottom Line The market risk premium—[measured as the slope of the security market line (SML)](https://www.investopedia.com/ask/answers/041315/how-do-i-interpret-security-market-line-sml-graph.asp)—is the difference between the expected return on a market portfolio and the risk-free rate. It provides a quantitative measure of the extra return demanded by market participants for an increased risk.

What Is Market Risk Premium? The market risk premium (MRP) is the difference between the expected return on a market portfolio and the risk-free rate. The market risk premium is equal to the slope of the security market line (SML), a graphical representation of the capital asset pricing model (CAPM). CAPM measures the required rate of return on equity investments, and it is an important element of modern portfolio theory (MPT) and discounted cash flows (DCF) valuation. Key Takeaways The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate.It provides a quantitative measure of the extra return demanded by market participants for the increased risk.The market risk premium is measured as the slope of the security market line (SML) associated with the CAPM model.The market risk premium is broader and more diversified than the equity risk premium, which only considers the stock market. As a result, the equity risk premium is often higher. Understanding the Market Risk Premium Market risk premium describes the relationship between returns from an asset portfolio and treasury bond yields. The risk premium reflects the required returns, historical returns, and expected returns. The historical market risk premium will be the same for all investors. The required and expected market premiums, however, will differ from investor to investor based on risk tolerance and investing styles. Investors require compensation for risk and opportunity costs. The risk-free rate is a theoretical interest rate that is paid by an investment with zero risks. Long-term yields on U.S. Treasuries have traditionally been used as a proxy for the risk-free rate because of the low default risk and have had relatively low yields as a result of this assumed reliability. Equity market returns are based on expected returns on a broad benchmark index such as the Standard & Poor's 500 index of the Dow Jones Industrial Average (DJIA). Real equity returns fluctuate with the operational performance of the underlying business. Historical return rates have fluctuated as the economy matures and endures cycles, but conventional knowledge has generally estimated a long-term potential of approximately 8% annually. Calculation and Application The market risk premium can be calculated by subtracting the risk-free rate from the expected equity market return, providing a quantitative measure of the extra return demanded by market participants for the increased risk. Once calculated, the equity risk premium can be used in important calculations such as CAPM. Between 1926 and 2014, the S&P 500 exhibited a 10.5% compounded annual rate of return, while the 30-day Treasury bill compounded at 5.1%. This indicates a market risk premium of 5.4%, based on these parameters. The required rate of return for an individual asset can be calculated by multiplying the asset's beta coefficient by the market coefficient, then adding back the risk-free rate. This is often used as the discount rate in discounted cash flow, a popular valuation model. What Is the Difference Between the Market Risk Premium and Equity Risk Premium? The market risk premium (MRP) broadly describes the additional returns above the risk-free rate that investors require when putting a portfolio of assets at risk in the market. This would include the universe of investable assets, including stocks, bonds, real estate, and so on.The equity risk premium (ERP) looks more narrowly only at the excess returns of stocks over the risk-free rate. Because the market risk premium is broader and more diversified, the equity risk premium by itself tends to be larger. What Is the Historical Market Risk Premium? In the U.S., the market risk premium has hovered around 5.5% over the past decade. Historical risk premiums used in practice have been estimated to be as high as 12% and as low as 3%. What Is Used for the Risk-Free Rate When Measuring the Market Risk Premium? In the United States, the yield on government bonds such as 2-year Treasuries are the most oft-used risk-free rate of return. The Bottom Line The market risk premium—measured as the slope of the security market line (SML)—is the difference between the expected return on a market portfolio and the risk-free rate. It provides a quantitative measure of the extra return demanded by market participants for an increased risk.

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Chase Auto Loans Review 2024

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star-rating__star-4 star-rating_star-icon" style="fill: url(#linear-star-rating_1-0);"> <svg viewbox="0 0 12.5 12.1" xmlns="http://www.w3.org/2000/svg"><path d="M6.2 0 8.2 4 12.5 4.6 9.4 7.7 10.1 12.1 6.2 10 2.4 12.1 3.1 7.7 0 4.6 4.3 4z"></path></svg> </div> </div> <div class="star-rating__wrapper"> <div class="star-rating__empty-star star-rating__icon star-rating__star-5 star-rating_star-icon" style="fill: #d5d5d5;"> <svg class="icon star-icon"> <use xlink:href="#star-icon" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> </div> </div></div><!-- end: comp star-rating --> </div><!-- end: comp product-card__rating card-rating--finance product-rating --> <div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0"> <a class="commerce-button mntl-text-link" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&amp;pub_param_2=${REQUEST_ID}" data-tracking-container="false" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&amp;p=chase&amp;ts=investopedia&amp;bwid_id=6385e804ca097c71ee1e23c1" id="commerce-button_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> <strong>Our Take</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-1"> If you’re looking for an easy, modern way to combine your car shopping and auto loan experience, Chase offers a good alternative to other online car-buying websites. Chase may be a particularly good fit for affluent shoppers already banking with Chase and seeking a high-value car. But we’d recommend taking a few extra steps along the way to find the right loan for you.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review"> <ul class="tabbed-sc-block__tabs"> <li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros and Cons</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Key Takeaways</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="3"><span class="tabbed-sc-block__title">Company Overview</span></li> </ul> <div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1"> <span class="tabbed-sc-block__text">Pros and Cons</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1"> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-3"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>No down payment required</p></li> <li><p>Offers auto loan pre-qualification</p></li> <li><p>High lending limits</p></li> <li><p>Discounts for Chase Private Clients</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons </span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Doesn’t offer refinancing</p></li> <li><p>Not all cars qualify </p></li> <li><p>No RV or motorcycle loans</p></li> <li><p>Only available at partner dealerships</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2"> <span class="tabbed-sc-block__text">Key Takeaways</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2"> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-5"> <li>Chase is a division of the famous JPMorgan Chase &amp; Co., and offers an array of banking, investment, and financing options. </li><li>You can only finance new or used cars from Chase’s network of partner dealerships.</li><li>Chase may be a good option to finance luxury car purchases since qualified borrowers can acquire up to $1 million for a new car loan.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="3"> <span class="tabbed-sc-block__text">Company Overview</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="3"> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-7"> Chase is a branch of the storied mega-bank <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/companies-owned-by-jpmorgan-chase-and-co-5092490">JPMorgan Chase &amp; Co.</a> It’s been around for almost as long as the country has, after being founded in part in 1799 by none other than famed rivals Alexander Hamilton and Aaron Burr. Today JPMorgan Chase is the largest bank in the country, offering most types of financial services, including bank accounts, investing, and financing for individuals and businesses.<span class="ql-inline-citation" data-cite="1"></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_1-0-8"> Currently, Chase is the fourth-largest bank auto lender based on the total dollar amount of its outstanding loans.<span class="ql-inline-citation" data-cite="2"></span> The company scores well on independent analyses of customer satisfaction for its auto loans.<span class="ql-inline-citation" data-cite="3"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-9"> <div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0"> <ul class="definition-list__container"> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Loan Types Offered</span> <span class="definition-list__item-content definition-list__item-content-0"> New, used, lease buyout </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">States Available</span> <span class="definition-list__item-content definition-list__item-content-1"> All states and D.C. </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">New APR Range</span> <span class="definition-list__item-content definition-list__item-content-2"> Not disclosed </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Used APR Range</span> <span class="definition-list__item-content definition-list__item-content-3"> Not disclosed </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Refinance APR Range</span> <span class="definition-list__item-content definition-list__item-content-4"> N/A </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Min. Time to Receive Loan</span> <span class="definition-list__item-content definition-list__item-content-5"> 1 day </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Recommended Min. Credit Score</span> <span class="definition-list__item-content definition-list__item-content-6"> Not disclosed </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Max. Accepted Mileage</span> <span class="definition-list__item-content definition-list__item-content-7"> 120,000 </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Max. Accepted Age</span> <span class="definition-list__item-content definition-list__item-content-8"> 10 years </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Max. Accepted Loan-to-Value Ratio</span> <span class="definition-list__item-content definition-list__item-content-9"> 140% </span> </span> </li> </ul> </div><!-- end: comp product-spec-tool definition-list --> </div><!-- end: comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block --> </div> </div> </div> </div><!-- end: comp product-card --> </div><!-- end: comp js-toc-appear article-container article-intro mntl-block --> <div class="loc body-content article-container"> <div class="comp article-body article-content mntl-block" id="article-content_1-0"> <div class="comp left-nav js-sticky-container product-review__left-nav mntl-block" id="product-review__left-nav_1-0"> <div class="comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block" data-desktop-bp="54em" data-tracking-container="true" id="product-review__toc_1-0"> <div class="comp sticky-toc-widget__product-container mntl-block" id="sticky-toc-widget__product-container_1-0"> <figure class="comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image" id="sticky-toc-widget__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Chase logo" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/U3dQ6st4Ym7lX7pgCaMs268fVK0=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDgAFAPEAACEeHhF6yv///yEeHiwAAAAADgAFAEEIIgAFCBxIsKDBgwIBABi4cGEAAQEULhTQkKJDixUpWoQoICAAOw==')" width="1500"/> <noscript> <img alt="Chase logo" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/U3dQ6st4Ym7lX7pgCaMs268fVK0=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp sticky-toc-widget__rating product-rating" id="sticky-toc-widget__rating_1-0"> <span class="product-rating__rating-label noskim"> overall rating </span> <div alt="3.8 out of 5 stars" class="comp star-rating" id="star-rating_1-0-1"> <span class="star-rating__label">3.8</span> <div class="star-rating__stars" data-rating-caption=""> <div class="star-rating__wrapper"> <div class="star-rating__full-star star-rating__icon star-rating__star-1 star-rating_star-icon" style="fill: #d17000;"> <svg class="icon star-icon"> <use xlink:href="#star-icon" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> </div> <div class="star-rating__wrapper"> <div class="star-rating__full-star star-rating__icon star-rating__star-2 star-rating_star-icon" style="fill: #d17000;"> <svg class="icon star-icon"> <use xlink:href="#star-icon" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> </div> <div class="star-rating__wrapper"> <div class="star-rating__full-star star-rating__icon star-rating__star-3 star-rating_star-icon" style="fill: #d17000;"> <svg class="icon star-icon"> <use xlink:href="#star-icon" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> </div> <div class="star-rating__wrapper"> <svg height="0" style="position: absolute;" width="0"> <defs> <lineargradient id="linear-star-rating_1-0-1" x1="0%" x2="100%" y1="0%" y2="0%"> <stop offset="70%" stop-color="#d17000"></stop> <stop offset="70%" stop-color="#d5d5d5"></stop> </lineargradient> </defs> </svg> <div class="star-rating__quarter-empty star-rating__icon star-rating__star-4 star-rating_star-icon" style="fill: url(#linear-star-rating_1-0-1);"> <svg viewbox="0 0 12.5 12.1" xmlns="http://www.w3.org/2000/svg"><path d="M6.2 0 8.2 4 12.5 4.6 9.4 7.7 10.1 12.1 6.2 10 2.4 12.1 3.1 7.7 0 4.6 4.3 4z"></path></svg> </div> </div> <div class="star-rating__wrapper"> <div class="star-rating__empty-star star-rating__icon star-rating__star-5 star-rating_star-icon" style="fill: #d5d5d5;"> <svg class="icon star-icon"> <use xlink:href="#star-icon" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> </div> </div></div><!-- end: comp star-rating --> </div><!-- end: comp sticky-toc-widget__rating product-rating --> <div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0"> <a class="commerce-button mntl-text-link" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&amp;pub_param_2=${REQUEST_ID}" data-tracking-container="false" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&amp;p=chase&amp;ts=investopedia&amp;bwid_id=6385e804ca097c71ee1e23c1" id="commerce-button_2-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block --> </div><!-- end: comp sticky-toc-widget__product-container mntl-block --> <div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0"> Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0"> View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Chase Auto Loans Review 2024" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0"> Chase Auto Loans Review 2024</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0"> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Types of Auto Loans" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-types-of-auto-loans-offered-by-chase" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Types of Auto Loans</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Time to Receive Funds" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-time-to-receive-funds" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Time to Receive Funds</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Borrower Requirements" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-borrower-requirements" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Borrower Requirements</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Vehicle Requirements" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-vehicle-requirements" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">Vehicle Requirements</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Chase Auto Loan Features" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-chase-auto-loan-features" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">Chase Auto Loan Features</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-7"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-7"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-customer-service" id="mntl-toc__list-item-link_3-0-7" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-8"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-8"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Satisfaction" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-customer-satisfaction" id="mntl-toc__list-item-link_3-0-8" rel="nocaes"><span class="link__wrapper">Customer Satisfaction</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-9"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-9"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Apply" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-apply-for-a-chase-auto-loan" id="mntl-toc__list-item-link_3-0-9" rel="nocaes"><span class="link__wrapper">How to Apply</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-10"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-10"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Alternatives" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-alternatives-to-chase" id="mntl-toc__list-item-link_3-0-10" rel="nocaes"><span class="link__wrapper">Alternatives</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-11"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-11"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Final Verdict" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-final-verdict" id="mntl-toc__list-item-link_3-0-11" rel="nocaes"><span class="link__wrapper">Final Verdict</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-12"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-12"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-12" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block --> </div><!-- end: comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block --> </div><!-- end: comp left-nav js-sticky-container product-review__left-nav mntl-block --> <div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0"> <div class="comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"> <p>See our picks for the best auto loans in a variety of categories:</p> <ul> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">Best Auto Loan Rates</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-used-car-loans-7373705">Best Used Car Loans</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">Best Auto Refinance Loans</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-bad-credit-7372351">Best Car Loans for Bad Credit</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579">Best Car Loans for Fair Credit</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461">Best Car Loans for First Time Buyers</a></li> </ul></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-1"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-2"> <li><strong>No down payment required:</strong> Making a down payment is always useful to reduce the amount you’re financing (and your monthly payment). But if you don’t have one, that’s not necessarily a barrier to buying a car through Chase. </li> <li><strong>Offers auto loan pre-qualification:</strong> Pre-qualification gives you an idea of whether or not you’ll qualify for financing, and only requires a soft credit check, which doesn’t lower your credit score. It’s useful, but you’ll have to formally apply to find out your actual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rate (APR)</a> and gain final approval.</li> <li><strong>High lending limits:</strong> Chase’s highest stated potential loan amount for qualified borrowers is $1 million, the highest available among lenders we surveyed. </li> <li><strong>Discounts for Chase Private Clients:</strong> If you’re a Chase Private Client customer, you’ll get a 0.25% discount off standard rates on your auto loan.<span class="ql-inline-citation" data-cite="4"></span> </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-3"> <span class="mntl-sc-block-heading__text"> Cons Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-4"> <li><strong>Doesn’t offer refinancing:</strong> Unlike many other lenders, Chase doesn’t offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-refinance-a-car-loan-7368491">car loan refinancing</a>. Chase only offers loans for purchasing a new or used car. </li> <li><strong>Not all cars qualify:</strong> Chase sets limits on the types of used autos you can borrow for—and will say no to vehicles more than 10 years old, vehicles with more than 120,000 miles, certain exotic makes, and vehicles you plan to use for rideshares, among others.</li> <li><strong>No RV or motorcycle loans:</strong> While some competitors lend for RVs and motorcycles, Chase does not. </li> <li><strong>Only available at partner dealerships:</strong> Your Chase auto loan application can only be used at the specific dealerships partnering with the bank, and many of the dealerships are franchised rather than independent. If you apply for a loan and decide later to buy a car from another dealership, you’ll need to apply for a new auto loan. </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-types-of-auto-loans-offered-by-chase"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-5"> <span class="mntl-sc-block-heading__text"> Types of Auto Loans Offered by Chase </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6"> Chase only offers two types of vehicle loans: new and used. You’ll have to look elsewhere for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">auto loan refinancing options</a>. </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_2-0-7"> <span class="mntl-sc-block-subheading__text"> New Auto Loans </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-8"> <li><strong>APR:</strong> Not disclosed</li><li><strong>Loan amounts:</strong> $4,000–$1,000,000</li><li><strong>Loan terms:</strong> 12–84 months</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-9"> Chase only offers loans for new cars purchased at partner dealerships.  </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_2-0-10"> <span class="mntl-sc-block-subheading__text"> Used Auto Loans </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11"> <li><strong>APR:</strong> Not disclosed</li><li><strong>Loan amounts:</strong> Starting from $4,000</li><li><strong>Loan terms:</strong> 12–84 months</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-12"> Chase auto loans can only be used to buy a used car at a dealership in its network. Chase may be able to offer financing for lease buyout loans for cars leased from partner dealerships as well.<span class="ql-inline-citation" data-cite="5"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-13"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-1"> <p>Automatic withdrawals into a savings account can help you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-save-for-a-car-5184740">save up for a car down payment</a>. A larger down payment means a reduced loan amount and a lower interest rate, and those two factors combine to make a smaller monthly payment for you. </p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-time-to-receive-funds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-14"> <span class="mntl-sc-block-heading__text"> Time to Receive Funds </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_2-0-15"> It typically takes about one day to complete financing on your new car, but it may be as short as two to three hours. Since Chase already has existing business relationships with dealerships, Chase will work with the dealership itself to hand off the money.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-borrower-requirements"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-16"> <span class="mntl-sc-block-heading__text"> Borrower Requirements </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_2-0-17"> Chase is pretty tight-lipped about what kind of borrowers it offers financing for. Other lenders are more up-front about credit, income, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-a-car-loan-7368513">residency requirements</a> you’ll need to meet, but not Chase. It is, however, widely available across the country: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18"> <li><strong>Minimum recommended credit score: </strong>Not disclosed</li><li><strong>State availability:</strong> All 50 states and Washington, D.C.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-vehicle-requirements"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-19"> <span class="mntl-sc-block-heading__text"> Vehicle Requirements </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_2-0-20"> Chase provides a bit more information about what types of vehicles qualify for financing: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-21"> <li><strong>Maximum age:</strong> 10 years</li><li><strong>Maximum accepted mileage:</strong> 120,000</li><li><strong>Maximum loan-to-value ratio:</strong> 140%</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-chase-auto-loan-features"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-22"> <span class="mntl-sc-block-heading__text"> Chase Auto Loan Features </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_2-0-23"> A few other extra details you should be aware of with Chase auto loans:<br/> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-24"> <li><strong>Origination fee:</strong> $0 in all states except Indiana, where the origination fee is $195</li> <li><strong>Prepayment fee:</strong> $0</li> <li><strong>Discounts:</strong> You’ll get a 0.25% rate discount if you’re a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/managing-wealth/050716/10-checking-accounts-ultra-rich-use.asp">Chase Private Client</a> customer (available for those with $150,000 or more across all their Chase deposit and investment accounts).</li> <li><strong>Can change due date:</strong> Chase allows you to adjust your monthly payment due date up to two times over the life of your loan.</li> <li><strong>Partner dealerships:</strong> Chase offers an online portal where you can easily browse cars available for financing with local partner lenders. </li> <li><strong>First-time car buyer program:</strong> Available for Chase Relationship customers and select dealer partnerships. </li> <li><strong>Mobile app:</strong> You can use the general Chase banking app to manage your auto loan along with any other accounts you may have with the bank. It’s available for iPhone and Android.</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_2-0-25"> <span class="mntl-sc-block-subheading__text"> Co-Signers and Co-Applicants </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_2-0-26"> You can apply for an auto loan through Chase with another person as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_borrowers.asp">co-applicant</a>. This means they’ll be listed on the car’s title as well, unlike a co-signer who doesn’t have any ownership rights to your car and only serves to guarantee your loan in case you don’t repay it.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-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_2-0-27"> <span class="mntl-sc-block-heading__text"> 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_2-0-28"> Chase offers a few different ways to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chase.com/personal/auto-loans/contact-us" rel="sponsored nofollow">get in touch</a> if you have questions or run into problems. You can get help over the phone, by snail mail, or by sending a secure message through your online account.  </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_2-0-29"> <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>Method</b></th> <th><b>Contact</b></th> <th><b>Availability</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Telephone (Loans)</b></td> <td>(800) 336-6675</td> <td>Not disclosed</td> </tr> <tr> <td><b>Telephone (Leases)</b></td> <td>(800) 227-5151</td> <td>Not disclosed</td> </tr> <tr> <td><b>Secure email</b></td> <td>Via online account</td> <td>Not disclosed</td> </tr> <tr> <td><b>Mail</b></td> <td>Chase Auto P.O. Box 901076 Fort Worth, TX 76101-2076</td> <td>N/A</td> </tr> </tbody> </table> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <span class="heading-toc" id="toc-customer-satisfaction"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-30"> <span class="mntl-sc-block-heading__text"> Customer Satisfaction </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_2-0-31"> Chase has a bit of a mixed reputation when it comes to its auto loans. Over 1,484 people have filed official complaints against Chase’s auto loans department with the Consumer Financial Protection Bureau since 2017. Most complaints concerned managing the loan or lease, and problems at the end of the loan or lease.<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_2-0-32"> However, the CFPB’s complaint database isn’t necessarily representative of most consumers’ experiences, and this number of complaints isn’t all that unusual, considering this is the fourth-largest auto lender in the nation.<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_2-0-33"> If you look at more comprehensive reviews, J.D. Power rated Chase quite well in its annual survey of overall customer satisfaction. The company got above-average rankings among luxury car owners and mass-market car owners alike, although it still didn’t make it into the top three lenders for each category.<span class="ql-inline-citation" data-cite="3"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-how-to-apply-for-a-chase-auto-loan"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-34"> <span class="mntl-sc-block-heading__text"> How to Apply for a Chase Auto Loan </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_2-0-35"> A major advantage of going with Chase for your auto loan is how easy it is to apply. However, before you go down the Chase road, we recommend <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">checking your rate with other lenders</a> so you have a baseline for whether Chase’s offer is good or not. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-36"> If you decide to apply, this is how a Chase auto loan works.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ol class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-37"> <li><strong>Get pre-qualified: </strong>Chase offers a simple form on its website where you can get pre-qualified to see if you’re likely to be approved for financing before you head to the dealership. Note that this initial step won’t tell you your estimated rate and term. For that, you’ll need to go to the next step. </li><li><strong>Choose a vehicle and apply: </strong>If you’re ready to buy a car, you can browse available options for financing on Chase’s website. If you find a vehicle you’re interested in, you’ll fill out a full auto loan application. This doesn’t mean you’re obligated to buy the car; you’ll just be approved for financing to buy this specific vehicle within the next 30 days. </li><li><strong>Test-drive the car:</strong> After your application is approved, Chase will forward your contact information to the dealership to help arrange a test drive. You can also test-drive other cars while at the dealership to swap over the financing if you like another vehicle better. You can also apply for the loan directly from the dealership prior to approval. </li><li><strong>Sign the loan agreement: </strong>If you like the car and you’re happy with Chase’s financing offer, all you have to do is sign on the dotted line while you’re at the dealership and the two companies will handle the rest. If you like the car but you got a better offer from another lender, you’re free to ignore Chase’s offer and instead arrange another financing option. </li> </ol><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-alternatives-to-chase"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-38"> <span class="mntl-sc-block-heading__text"> Alternatives to Chase </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-39"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th></th> <th><b><a class="null" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&amp;pub_param_2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&amp;p=chase&amp;ts=investopedia&amp;bwid_id=6385e804ca097c71ee1e23c1" rel="nofollow">Chase</a></b></th> <th><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.penfed.org/auto/rates?s_cid=NA-1017425" rel="sponsored nofollow">PenFed</a></b></th> <th><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0" rel="sponsored nofollow">AUTOPAY</a></b></th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Loan Types Offered</b></td> <td>New, used, lease buyout</td> <td>New, used, refinance, cash-out refinance, lease buyout</td> <td>New, used, refinance, cash-out refinance, lease buyout, motorcycle</td> </tr> <tr> <td><b>States Available</b></td> <td>All states and D.C.</td> <td>All states, D.C., Puerto Rico</td> <td>All states and D.C.</td> </tr> <tr> <td><b>New APR Range</b></td> <td>Not disclosed</td> <td>4.74%–17.99%</td> <td>Starting from 5.69%</td> </tr> <tr> <td><b>Used APR Range</b></td> <td>Not disclosed</td> <td>6.19%–17.99%</td> <td>Starting from 5.69%</td> </tr> <tr> <td><b>Refinance APR Range</b></td> <td>N/A</td> <td>4.74% and up</td> <td>Starting from 4.67%</td> </tr> <tr> <td><b>Min. Time to Receive Loan</b></td> <td>1 day</td> <td>5 days</td> <td>Not disclosed</td> </tr> <tr> <td><b>Recommended Min. Credit Score</b></td> <td>Not disclosed</td> <td>Not disclosed</td> <td>500</td> </tr> <tr> <td><b>Max. Accepted Mileage</b></td> <td>120,000 miles</td> <td>125,000 miles</td> <td>150,000 miles</td> </tr> <tr> <td><b>Max. Accepted Age</b></td> <td>10 years</td> <td>None</td> <td>10 years</td> </tr> <tr> <td><b>Max. Accepted Loan-to-Value Ratio</b></td> <td>140%</td> <td>125%</td> <td>Not disclosed</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-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-40"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0-2"> <p>Chase might make it easy to buy a new or used car, but its partner network doesn’t cover every dealership and car seller. Browse our top picks to check your rates with a few different lenders.</p> <ul> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">Best Auto Loan Rates</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-used-car-loans-7373705">Best Used Car Loans</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">Best Auto Refinance Loans</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-bad-credit-7372351">Best Car Loans for Bad Credit</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579">Best Car Loans for Fair Credit</a></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461">Best Car Loans for First Time Buyers</a></li> </ul></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-tip mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <span class="heading-toc" id="toc-final-verdict"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-41"> <span class="mntl-sc-block-heading__text"> Final Verdict </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-42"> Most auto lenders offer loans for cars you’ve already decided to purchase, but Chase works the other way around. You’ll start the car shopping process with Chase, line up your financing, and then be referred to a partner dealership to seal the deal. It’s a good choice if you’re looking for an easy way to finance a car—particularly if you’re already a customer with Chase Private Banking and are hoping to take out a big loan—but make sure to check your rates with other lenders first, so you get the best rates and terms available to you. </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_2-0-43"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-affiliate-link-rewriter="pub_param_1=${DOC_ID}&amp;pub_param_2=${REQUEST_ID}" data-retailer-type="other" data-tracking-container="true" href="https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&amp;p=chase&amp;ts=investopedia&amp;bwid_id=6385e804ca097c71ee1e23c1" id="button_1-0" rel="noskim noopener nofollow nocaes" target="_blank"><span class="link__wrapper">Apply Now</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp 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 --> <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_2-0-44"> <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_2-0-45"> Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process. See our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/auto-loan-review-methodology-7552736">full auto loan review methodology</a> for more information. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div><!-- end: comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block --> </div><!-- end: comp article-body article-content mntl-block --> </div> </div><!-- end: comp product-review-content product-review-content--finance product-review--base --> </span> </div><div class="loc content-bottom"><div class="comp prm-article-sources article-sources mntl-article-sources mntl-expandable-block" data-scroll-offset="100" id="prm-article-sources_1-0"><div class="loc toggle-content"><div class="comp mntl-article-sources__wrapper mntl-block article-sources__wrapper" data-click-tracked="true" id="mntl-article-sources__wrapper_1-0"><div class="comp mntl-article-sources__heading mntl-text-block article-sources__heading" id="mntl-article-sources__heading_1-0">Article Sources</div> <div class="comp mntl-article-sources__icon-wrapper mntl-block article-sources__icon-wrapper" id="mntl-article-sources__icon-wrapper_1-0"><div class="comp article-sources__show-icon mntl-block" id="article-sources__show-icon_1-0"></div> <div class="comp article-sources__hide-icon mntl-block" id="article-sources__hide-icon_1-0"></div></div></div> </div><div class="loc expandable-content"> <div class="comp article-sources__disclaimer mntl-block" id="article-sources__disclaimer_1-0">Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our <a class="article-sources__disclaimer-text-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/legal-4768893#EditorialPolicy" id="article-sources__disclaimer-text-link_1-0" rel="nocaes"><span class="link__wrapper">editorial policy.</span></a></div> <div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content"> <li class="mntl-sources__source" id="citation-1"><p>Federal Reserve. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/releases/lbr/current/">Large Commercial Banks</a>."</p></li> <li class="mntl-sources__source" id="citation-2"><p>PR Web. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.prweb.com/releases/2023/5/prweb19326950.htm">New Data Shows Auto Loan and Lease Total Outstandings Top $1.3 Trillion for Second Straight Year</a>."</p></li> <li class="mntl-sources__source" id="citation-3"><p>J.D. Power. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.jdpower.com/business/press-releases/2022-us-consumer-financing-satisfaction-study">2022 U.S. Consumer Financing Satisfaction Study</a>."</p></li> <li class="mntl-sources__source" id="citation-4"><p>Chase. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chase.com/personal/checking/private-client" rel="nofollow sponsored">Chase Private Client Checking</a>."</p></li> <li class="mntl-sources__source" id="citation-5"><p>Chase. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chase.com/personal/auto-loans/servicing/lease-end/know-your-lease-end-options" rel="nofollow sponsored">Know Your Lease-End Options</a>.”</p></li> <li class="mntl-sources__source" id="citation-6"><p>Consumer Financial Protection Bureau. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.consumerfinance.gov/data-research/consumer-complaints/search/?chartType=line&amp;company=JPMORGAN%20CHASE%20%26%20CO.&amp;dateInterval=Month&amp;dateRange=All&amp;date_received_max=2023-09-09&amp;date_received_min=2011-12-01&amp;lens=Product&amp;product=Vehicle%20loan%20or%20lease&amp;searchField=all&amp;subLens=sub_product&amp;tab=Trends">Consumer Complaint Database</a>."</p></li> </ol> </div> </div></div> <div class="comp prm-recirc related-recirc-section--articles mntl-block" data-tracking-container="true" id="prm-recirc_1-0"><section class="comp related-articles" data-tracking-container="true" id="related-articles_1-0"> <span class="related-articles__header type--camel"> Related Articles </span> <div class="loc recirc-content"><div class="comp related-articles__card-list-1 card-list--related-articles mntl-document-card-list mntl-card-list mntl-block" data-chunk="36" id="related-articles__card-list-1_1-0"><a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="8599916" data-ordinal="1" data-tax-levels="" href="https://www.investopedia.com/what-is-a-private-party-auto-loan-financing-your-car-purchase-from-individuals-8599916" id="mntl-card-list-items_1-0"> <div class="card__media" data-tag="Car Loans"> <img alt="Private party auto sale" class="lazyload card__img" data-dim-ratio="1.615" data-src="https://www.investopedia.com/thmb/AUotVccJSSYIFvqNE6vP0t8hZtg=/400x300/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1321856816-84ec23c02e21414aa8d82d81bc233970.jpg" height="300" width="400"/> <noscript> <img alt="Private party auto sale" class="img--noscript card__img" height="300" src="https://www.investopedia.com/thmb/AUotVccJSSYIFvqNE6vP0t8hZtg=/400x300/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-1321856816-84ec23c02e21414aa8d82d81bc233970.jpg" width="400"/> </noscript> </div> <div class="card__content" data-tag="Car Loans"> <div class="card__header"></div> <span class="card__title"><span class="card__title-text">Private Party Auto Loan: What It Is, How It Works, How to Get One</span></span> <div class="card__byline mntl-card__byline" data-byline="By Sarah Li Cain"></div> </div> </a> <a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="8357871" data-ordinal="2" data-tax-levels="" href="https://www.investopedia.com/consumers-credit-union-auto-loan-review-8357871" id="mntl-card-list-items_2-0"> <div class="card__media" data-tag="Car Loans"> <img alt="Consumers-Credit-Union-logo" class="lazyload card__img" data-dim-ratio="2.507" data-src="https://www.investopedia.com/thmb/CbF6st_2k8oHr6Qg2BPXHi_yqpY=/400x300/filters:no_upscale():max_bytes(150000):strip_icc()/consumers-credit-union-logo-ffb7633baac644dd984bb8b66cb3a13f.jpeg" height="300" width="400"/> <noscript> <img alt="Consumers-Credit-Union-logo" class="img--noscript card__img" height="300" src="https://www.investopedia.com/thmb/CbF6st_2k8oHr6Qg2BPXHi_yqpY=/400x300/filters:no_upscale():max_bytes(150000):strip_icc()/consumers-credit-union-logo-ffb7633baac644dd984bb8b66cb3a13f.jpeg" width="400"/> </noscript> </div> <div class="card__content" data-tag="Car Loans"> <div class="card__header"></div> <span class="card__title"><span class="card__title-text">Consumers Credit Union Auto Loan Review 2024</span></span> <div class="card__byline mntl-card__byline" data-byline="By Jessica Ullrich"></div> </div> </a> <a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="4846394" data-ordinal="3" data-tax-levels="" href="https://www.investopedia.com/best-auto-loan-rates-4846394" id="mntl-card-list-items_3-0"> <div class="card__media" data-tag="Car Loans"> <img alt="Compare Best Auto Loan Rates, Lenders, &amp; 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:fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png) :fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png) Investopedia’s Rating 3.8 [Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=chase&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1) **Our Take** If you’re looking for an easy, modern way to combine your car shopping and auto loan experience, Chase offers a good alternative to other online car-buying websites. Chase may be a particularly good fit for affluent shoppers already banking with Chase and seeking a high-value car. But we’d recommend taking a few extra steps along the way to find the right loan for you.  * Pros and Cons * Key Takeaways * Company Overview Pros and Cons Pros * No down payment required * Offers auto loan pre-qualification * High lending limits * Discounts for Chase Private Clients Cons * Doesn’t offer refinancing * Not all cars qualify * No RV or motorcycle loans * Only available at partner dealerships Key Takeaways * Chase is a division of the famous JPMorgan Chase & Co., and offers an array of banking, investment, and financing options. * You can only finance new or used cars from Chase’s network of partner dealerships. * Chase may be a good option to finance luxury car purchases since qualified borrowers can acquire up to $1 million for a new car loan. Company Overview Chase is a branch of the storied mega-bank [JPMorgan Chase & Co.](https://www.investopedia.com/companies-owned-by-jpmorgan-chase-and-co-5092490) It’s been around for almost as long as the country has, after being founded in part in 1799 by none other than famed rivals Alexander Hamilton and Aaron Burr. Today JPMorgan Chase is the largest bank in the country, offering most types of financial services, including bank accounts, investing, and financing for individuals and businesses.  Currently, Chase is the fourth-largest bank auto lender based on the total dollar amount of its outstanding loans. The company scores well on independent analyses of customer satisfaction for its auto loans. * Loan Types Offered New, used, lease buyout * States Available All states and D.C. * New APR Range Not disclosed * Used APR Range Not disclosed * Refinance APR Range N/A * Min. Time to Receive Loan 1 day * Recommended Min. Credit Score Not disclosed * Max. Accepted Mileage 120,000 * Max. Accepted Age 10 years * Max. Accepted Loan-to-Value Ratio 140% :fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png) :fill(white):max_bytes(150000):strip_icc()/chase_LOGO-861a88632e8f45e898470c67c6e5ddaa.png) overall rating 3.8 [Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=chase&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1) Table of Contents View All Chase Auto Loans Review 2024 * [Pros Explained](#toc-pros-explained) * [Cons Explained](#toc-cons-explained) * [Types of Auto Loans](#toc-types-of-auto-loans-offered-by-chase) * [Time to Receive Funds](#toc-time-to-receive-funds) * [Borrower Requirements](#toc-borrower-requirements) * [Vehicle Requirements](#toc-vehicle-requirements) * [Chase Auto Loan Features](#toc-chase-auto-loan-features) * [Customer Service](#toc-customer-service) * [Customer Satisfaction](#toc-customer-satisfaction) * [How to Apply](#toc-how-to-apply-for-a-chase-auto-loan) * [Alternatives](#toc-alternatives-to-chase) * [Final Verdict](#toc-final-verdict) * [Methodology](#toc-methodology) See our picks for the best auto loans in a variety of categories: * [Best Auto Loan Rates](https://www.investopedia.com/best-auto-loan-rates-4846394) * [Best Used Car Loans](https://www.investopedia.com/best-used-car-loans-7373705) * [Best Auto Refinance Loans](https://www.investopedia.com/best-auto-refinance-loans-5069118) * [Best Car Loans for Bad Credit](https://www.investopedia.com/best-car-loans-for-bad-credit-7372351) * [Best Car Loans for Fair Credit](https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579) * [Best Car Loans for First Time Buyers](https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461) ## Pros Explained * **No down payment required:** Making a down payment is always useful to reduce the amount you’re financing (and your monthly payment). But if you don’t have one, that’s not necessarily a barrier to buying a car through Chase. * **Offers auto loan pre-qualification:** Pre-qualification gives you an idea of whether or not you’ll qualify for financing, and only requires a soft credit check, which doesn’t lower your credit score. It’s useful, but you’ll have to formally apply to find out your actual [annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp) and gain final approval. * **High lending limits:** Chase’s highest stated potential loan amount for qualified borrowers is $1 million, the highest available among lenders we surveyed. * **Discounts for Chase Private Clients:** If you’re a Chase Private Client customer, you’ll get a 0.25% discount off standard rates on your auto loan. ## Cons Explained * **Doesn’t offer refinancing:** Unlike many other lenders, Chase doesn’t offer [car loan refinancing](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491). Chase only offers loans for purchasing a new or used car. * **Not all cars qualify:** Chase sets limits on the types of used autos you can borrow for—and will say no to vehicles more than 10 years old, vehicles with more than 120,000 miles, certain exotic makes, and vehicles you plan to use for rideshares, among others. * **No RV or motorcycle loans:** While some competitors lend for RVs and motorcycles, Chase does not. * **Only available at partner dealerships:** Your Chase auto loan application can only be used at the specific dealerships partnering with the bank, and many of the dealerships are franchised rather than independent. If you apply for a loan and decide later to buy a car from another dealership, you’ll need to apply for a new auto loan. ## Types of Auto Loans Offered by Chase Chase only offers two types of vehicle loans: new and used. You’ll have to look elsewhere for [auto loan refinancing options](https://www.investopedia.com/best-auto-refinance-loans-5069118). ### New Auto Loans * **APR:** Not disclosed * **Loan amounts:** $4,000–$1,000,000 * **Loan terms:** 12–84 months Chase only offers loans for new cars purchased at partner dealerships.  ### Used Auto Loans * **APR:** Not disclosed * **Loan amounts:** Starting from $4,000 * **Loan terms:** 12–84 months Chase auto loans can only be used to buy a used car at a dealership in its network. Chase may be able to offer financing for lease buyout loans for cars leased from partner dealerships as well. Automatic withdrawals into a savings account can help you [save up for a car down payment](https://www.investopedia.com/how-to-save-for-a-car-5184740). A larger down payment means a reduced loan amount and a lower interest rate, and those two factors combine to make a smaller monthly payment for you.  ## Time to Receive Funds It typically takes about one day to complete financing on your new car, but it may be as short as two to three hours. Since Chase already has existing business relationships with dealerships, Chase will work with the dealership itself to hand off the money.  ## Borrower Requirements Chase is pretty tight-lipped about what kind of borrowers it offers financing for. Other lenders are more up-front about credit, income, and [residency requirements](https://www.investopedia.com/how-to-get-a-car-loan-7368513) you’ll need to meet, but not Chase. It is, however, widely available across the country: * **Minimum recommended credit score:** Not disclosed * **State availability:** All 50 states and Washington, D.C. ## Vehicle Requirements Chase provides a bit more information about what types of vehicles qualify for financing: * **Maximum age:** 10 years * **Maximum accepted mileage:** 120,000 * **Maximum loan-to-value ratio:** 140% ## Chase Auto Loan Features A few other extra details you should be aware of with Chase auto loans: * **Origination fee:** $0 in all states except Indiana, where the origination fee is $195 * **Prepayment fee:** $0 * **Discounts:** You’ll get a 0.25% rate discount if you’re a [Chase Private Client](https://www.investopedia.com/articles/managing-wealth/050716/10-checking-accounts-ultra-rich-use.asp) customer (available for those with $150,000 or more across all their Chase deposit and investment accounts). * **Can change due date:** Chase allows you to adjust your monthly payment due date up to two times over the life of your loan. * **Partner dealerships:** Chase offers an online portal where you can easily browse cars available for financing with local partner lenders. * **First-time car buyer program:** Available for Chase Relationship customers and select dealer partnerships. * **Mobile app:** You can use the general Chase banking app to manage your auto loan along with any other accounts you may have with the bank. It’s available for iPhone and Android. ### Co-Signers and Co-Applicants You can apply for an auto loan through Chase with another person as a [co-applicant](https://www.investopedia.com/terms/c/co_borrowers.asp). This means they’ll be listed on the car’s title as well, unlike a co-signer who doesn’t have any ownership rights to your car and only serves to guarantee your loan in case you don’t repay it.  ## Customer Service Chase offers a few different ways to [get in touch](https://www.chase.com/personal/auto-loans/contact-us) if you have questions or run into problems. You can get help over the phone, by snail mail, or by sending a secure message through your online account.  | **Method** | **Contact** | **Availability** | | --- | --- | --- | | **Telephone (Loans)** | (800) 336-6675 | Not disclosed | | **Telephone (Leases)** | (800) 227-5151 | Not disclosed | | **Secure email** | Via online account | Not disclosed | | **Mail** | Chase Auto P.O. Box 901076 Fort Worth, TX 76101-2076 | N/A | ## Customer Satisfaction Chase has a bit of a mixed reputation when it comes to its auto loans. Over 1,484 people have filed official complaints against Chase’s auto loans department with the Consumer Financial Protection Bureau since 2017. Most complaints concerned managing the loan or lease, and problems at the end of the loan or lease.  However, the CFPB’s complaint database isn’t necessarily representative of most consumers’ experiences, and this number of complaints isn’t all that unusual, considering this is the fourth-largest auto lender in the nation. If you look at more comprehensive reviews, J.D. Power rated Chase quite well in its annual survey of overall customer satisfaction. The company got above-average rankings among luxury car owners and mass-market car owners alike, although it still didn’t make it into the top three lenders for each category. ## How to Apply for a Chase Auto Loan A major advantage of going with Chase for your auto loan is how easy it is to apply. However, before you go down the Chase road, we recommend [checking your rate with other lenders](https://www.investopedia.com/best-auto-loan-rates-4846394) so you have a baseline for whether Chase’s offer is good or not. If you decide to apply, this is how a Chase auto loan works.  1. **Get pre-qualified:** Chase offers a simple form on its website where you can get pre-qualified to see if you’re likely to be approved for financing before you head to the dealership. Note that this initial step won’t tell you your estimated rate and term. For that, you’ll need to go to the next step. 2. **Choose a vehicle and apply:** If you’re ready to buy a car, you can browse available options for financing on Chase’s website. If you find a vehicle you’re interested in, you’ll fill out a full auto loan application. This doesn’t mean you’re obligated to buy the car; you’ll just be approved for financing to buy this specific vehicle within the next 30 days. 3. **Test-drive the car:** After your application is approved, Chase will forward your contact information to the dealership to help arrange a test drive. You can also test-drive other cars while at the dealership to swap over the financing if you like another vehicle better. You can also apply for the loan directly from the dealership prior to approval. 4. **Sign the loan agreement:** If you like the car and you’re happy with Chase’s financing offer, all you have to do is sign on the dotted line while you’re at the dealership and the two companies will handle the rest. If you like the car but you got a better offer from another lender, you’re free to ignore Chase’s offer and instead arrange another financing option. ## Alternatives to Chase | | **[Chase](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=chase&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1)** | **[PenFed](https://www.penfed.org/auto/rates?s_cid=NA-1017425)** | **[AUTOPAY](https://og.services.apex.prod.autopay.com/api/2.0/lead/inbound/organization/DOTDASH/channel/DOTDASH_A/event/LEAD_REFERRED_FOR_REDIRECT/version/1.0.0)** | | --- | --- | --- | --- | | **Loan Types Offered** | New, used, lease buyout | New, used, refinance, cash-out refinance, lease buyout | New, used, refinance, cash-out refinance, lease buyout, motorcycle | | **States Available** | All states and D.C. | All states, D.C., Puerto Rico | All states and D.C. | | **New APR Range** | Not disclosed | 4.74%–17.99% | Starting from 5.69% | | **Used APR Range** | Not disclosed | 6.19%–17.99% | Starting from 5.69% | | **Refinance APR Range** | N/A | 4.74% and up | Starting from 4.67% | | **Min. Time to Receive Loan** | 1 day | 5 days | Not disclosed | | **Recommended Min. Credit Score** | Not disclosed | Not disclosed | 500 | | **Max. Accepted Mileage** | 120,000 miles | 125,000 miles | 150,000 miles | | **Max. Accepted Age** | 10 years | None | 10 years | | **Max. Accepted Loan-to-Value Ratio** | 140% | 125% | Not disclosed | Chase might make it easy to buy a new or used car, but its partner network doesn’t cover every dealership and car seller. Browse our top picks to check your rates with a few different lenders. * [Best Auto Loan Rates](https://www.investopedia.com/best-auto-loan-rates-4846394) * [Best Used Car Loans](https://www.investopedia.com/best-used-car-loans-7373705) * [Best Auto Refinance Loans](https://www.investopedia.com/best-auto-refinance-loans-5069118) * [Best Car Loans for Bad Credit](https://www.investopedia.com/best-car-loans-for-bad-credit-7372351) * [Best Car Loans for Fair Credit](https://www.investopedia.com/best-auto-loans-for-fair-credit-7486579) * [Best Car Loans for First Time Buyers](https://www.investopedia.com/best-car-loans-for-first-time-buyers-7373461) ## Final Verdict Most auto lenders offer loans for cars you’ve already decided to purchase, but Chase works the other way around. You’ll start the car shopping process with Chase, line up your financing, and then be referred to a partner dealership to seal the deal. It’s a good choice if you’re looking for an easy way to finance a car—particularly if you’re already a customer with Chase Private Banking and are hoping to take out a big loan—but make sure to check your rates with other lenders first, so you get the best rates and terms available to you. [Apply Now](https://www.bestmoney.com/car-loans/investopedia?utm_source=investopedia&p=chase&ts=investopedia&bwid_id=6385e804ca097c71ee1e23c1) ## Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process. See our [full auto loan review methodology](https://www.investopedia.com/auto-loan-review-methodology-7552736) for more information. Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. Federal Reserve. "[Large Commercial Banks](https://www.federalreserve.gov/releases/lbr/current/)." 2. PR Web. "[New Data Shows Auto Loan and Lease Total Outstandings Top $1.3 Trillion for Second Straight Year](https://www.prweb.com/releases/2023/5/prweb19326950.htm)." 3. J.D. Power. "[2022 U.S. Consumer Financing Satisfaction Study](https://www.jdpower.com/business/press-releases/2022-us-consumer-financing-satisfaction-study)." 4. Chase. "[Chase Private Client Checking](https://www.chase.com/personal/checking/private-client)." 5. Chase. “[Know Your Lease-End Options](https://www.chase.com/personal/auto-loans/servicing/lease-end/know-your-lease-end-options).” 6. Consumer Financial Protection Bureau. "[Consumer Complaint Database](https://www.consumerfinance.gov/data-research/consumer-complaints/search/?chartType=line&company=JPMORGAN%20CHASE%20%26%20CO.&dateInterval=Month&dateRange=All&date_received_max=2023-09-09&date_received_min=2011-12-01&lens=Product&product=Vehicle%20loan%20or%20lease&searchField=all&subLens=sub_product&tab=Trends)." 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Investopedia’s Rating 3.8 Apply Now Our Take If you’re looking for an easy, modern way to combine your car shopping and auto loan experience, Chase offers a good alternative to other online car-buying websites. Chase may be a particularly good fit for affluent shoppers already banking with Chase and seeking a high-value car. But we’d recommend taking a few extra steps along the way to find the right loan for you.  Pros and Cons Key Takeaways Company Overview Pros and Cons Pros No down payment required Offers auto loan pre-qualification High lending limits Discounts for Chase Private Clients Cons Doesn’t offer refinancing Not all cars qualify  No RV or motorcycle loans Only available at partner dealerships Key Takeaways Chase is a division of the famous JPMorgan Chase & Co., and offers an array of banking, investment, and financing options. You can only finance new or used cars from Chase’s network of partner dealerships.Chase may be a good option to finance luxury car purchases since qualified borrowers can acquire up to $1 million for a new car loan. Company Overview Chase is a branch of the storied mega-bank JPMorgan Chase & Co. It’s been around for almost as long as the country has, after being founded in part in 1799 by none other than famed rivals Alexander Hamilton and Aaron Burr. Today JPMorgan Chase is the largest bank in the country, offering most types of financial services, including bank accounts, investing, and financing for individuals and businesses.  Currently, Chase is the fourth-largest bank auto lender based on the total dollar amount of its outstanding loans. The company scores well on independent analyses of customer satisfaction for its auto loans. Loan Types Offered New, used, lease buyout States Available All states and D.C. New APR Range Not disclosed Used APR Range Not disclosed Refinance APR Range N/A Min. Time to Receive Loan 1 day Recommended Min. Credit Score Not disclosed Max. Accepted Mileage 120,000 Max. Accepted Age 10 years Max. Accepted Loan-to-Value Ratio 140% overall rating 3.8 Apply Now Table of Contents View All Chase Auto Loans Review 2024 Pros Explained Cons Explained Types of Auto Loans Time to Receive Funds Borrower Requirements Vehicle Requirements Chase Auto Loan Features Customer Service Customer Satisfaction How to Apply Alternatives Final Verdict Methodology See our picks for the best auto loans in a variety of categories: Best Auto Loan Rates Best Used Car Loans Best Auto Refinance Loans Best Car Loans for Bad Credit Best Car Loans for Fair Credit Best Car Loans for First Time Buyers Pros Explained No down payment required: Making a down payment is always useful to reduce the amount you’re financing (and your monthly payment). But if you don’t have one, that’s not necessarily a barrier to buying a car through Chase.  Offers auto loan pre-qualification: Pre-qualification gives you an idea of whether or not you’ll qualify for financing, and only requires a soft credit check, which doesn’t lower your credit score. It’s useful, but you’ll have to formally apply to find out your actual annual percentage rate (APR) and gain final approval. High lending limits: Chase’s highest stated potential loan amount for qualified borrowers is $1 million, the highest available among lenders we surveyed.  Discounts for Chase Private Clients: If you’re a Chase Private Client customer, you’ll get a 0.25% discount off standard rates on your auto loan.  Cons Explained Doesn’t offer refinancing: Unlike many other lenders, Chase doesn’t offer car loan refinancing. Chase only offers loans for purchasing a new or used car.  Not all cars qualify: Chase sets limits on the types of used autos you can borrow for—and will say no to vehicles more than 10 years old, vehicles with more than 120,000 miles, certain exotic makes, and vehicles you plan to use for rideshares, among others. No RV or motorcycle loans: While some competitors lend for RVs and motorcycles, Chase does not.  Only available at partner dealerships: Your Chase auto loan application can only be used at the specific dealerships partnering with the bank, and many of the dealerships are franchised rather than independent. If you apply for a loan and decide later to buy a car from another dealership, you’ll need to apply for a new auto loan.  Types of Auto Loans Offered by Chase Chase only offers two types of vehicle loans: new and used. You’ll have to look elsewhere for auto loan refinancing options. New Auto Loans APR: Not disclosedLoan amounts: $4,000–$1,000,000Loan terms: 12–84 months Chase only offers loans for new cars purchased at partner dealerships.  Used Auto Loans APR: Not disclosedLoan amounts: Starting from $4,000Loan terms: 12–84 months Chase auto loans can only be used to buy a used car at a dealership in its network. Chase may be able to offer financing for lease buyout loans for cars leased from partner dealerships as well. Automatic withdrawals into a savings account can help you save up for a car down payment. A larger down payment means a reduced loan amount and a lower interest rate, and those two factors combine to make a smaller monthly payment for you.  Time to Receive Funds It typically takes about one day to complete financing on your new car, but it may be as short as two to three hours. Since Chase already has existing business relationships with dealerships, Chase will work with the dealership itself to hand off the money.  Borrower Requirements Chase is pretty tight-lipped about what kind of borrowers it offers financing for. Other lenders are more up-front about credit, income, and residency requirements you’ll need to meet, but not Chase. It is, however, widely available across the country: Minimum recommended credit score: Not disclosedState availability: All 50 states and Washington, D.C. Vehicle Requirements Chase provides a bit more information about what types of vehicles qualify for financing: Maximum age: 10 yearsMaximum accepted mileage: 120,000Maximum loan-to-value ratio: 140% Chase Auto Loan Features A few other extra details you should be aware of with Chase auto loans: Origination fee: $0 in all states except Indiana, where the origination fee is $195 Prepayment fee: $0 Discounts: You’ll get a 0.25% rate discount if you’re a Chase Private Client customer (available for those with $150,000 or more across all their Chase deposit and investment accounts). Can change due date: Chase allows you to adjust your monthly payment due date up to two times over the life of your loan. Partner dealerships: Chase offers an online portal where you can easily browse cars available for financing with local partner lenders.  First-time car buyer program: Available for Chase Relationship customers and select dealer partnerships.  Mobile app: You can use the general Chase banking app to manage your auto loan along with any other accounts you may have with the bank. It’s available for iPhone and Android. Co-Signers and Co-Applicants You can apply for an auto loan through Chase with another person as a co-applicant. This means they’ll be listed on the car’s title as well, unlike a co-signer who doesn’t have any ownership rights to your car and only serves to guarantee your loan in case you don’t repay it.  Customer Service Chase offers a few different ways to get in touch if you have questions or run into problems. You can get help over the phone, by snail mail, or by sending a secure message through your online account.  Method Contact Availability Telephone (Loans) (800) 336-6675 Not disclosed Telephone (Leases) (800) 227-5151 Not disclosed Secure email Via online account Not disclosed Mail Chase Auto P.O. Box 901076 Fort Worth, TX 76101-2076 N/A Customer Satisfaction Chase has a bit of a mixed reputation when it comes to its auto loans. Over 1,484 people have filed official complaints against Chase’s auto loans department with the Consumer Financial Protection Bureau since 2017. Most complaints concerned managing the loan or lease, and problems at the end of the loan or lease.  However, the CFPB’s complaint database isn’t necessarily representative of most consumers’ experiences, and this number of complaints isn’t all that unusual, considering this is the fourth-largest auto lender in the nation. If you look at more comprehensive reviews, J.D. Power rated Chase quite well in its annual survey of overall customer satisfaction. The company got above-average rankings among luxury car owners and mass-market car owners alike, although it still didn’t make it into the top three lenders for each category. How to Apply for a Chase Auto Loan A major advantage of going with Chase for your auto loan is how easy it is to apply. However, before you go down the Chase road, we recommend checking your rate with other lenders so you have a baseline for whether Chase’s offer is good or not. If you decide to apply, this is how a Chase auto loan works.  Get pre-qualified: Chase offers a simple form on its website where you can get pre-qualified to see if you’re likely to be approved for financing before you head to the dealership. Note that this initial step won’t tell you your estimated rate and term. For that, you’ll need to go to the next step. Choose a vehicle and apply: If you’re ready to buy a car, you can browse available options for financing on Chase’s website. If you find a vehicle you’re interested in, you’ll fill out a full auto loan application. This doesn’t mean you’re obligated to buy the car; you’ll just be approved for financing to buy this specific vehicle within the next 30 days. Test-drive the car: After your application is approved, Chase will forward your contact information to the dealership to help arrange a test drive. You can also test-drive other cars while at the dealership to swap over the financing if you like another vehicle better. You can also apply for the loan directly from the dealership prior to approval. Sign the loan agreement: If you like the car and you’re happy with Chase’s financing offer, all you have to do is sign on the dotted line while you’re at the dealership and the two companies will handle the rest. If you like the car but you got a better offer from another lender, you’re free to ignore Chase’s offer and instead arrange another financing option.  Alternatives to Chase Chase PenFed AUTOPAY Loan Types Offered New, used, lease buyout New, used, refinance, cash-out refinance, lease buyout New, used, refinance, cash-out refinance, lease buyout, motorcycle States Available All states and D.C. All states, D.C., Puerto Rico All states and D.C. New APR Range Not disclosed 4.74%–17.99% Starting from 5.69% Used APR Range Not disclosed 6.19%–17.99% Starting from 5.69% Refinance APR Range N/A 4.74% and up Starting from 4.67% Min. Time to Receive Loan 1 day 5 days Not disclosed Recommended Min. Credit Score Not disclosed Not disclosed 500 Max. Accepted Mileage 120,000 miles 125,000 miles 150,000 miles Max. Accepted Age 10 years None 10 years Max. Accepted Loan-to-Value Ratio 140% 125% Not disclosed Chase might make it easy to buy a new or used car, but its partner network doesn’t cover every dealership and car seller. Browse our top picks to check your rates with a few different lenders. Best Auto Loan Rates Best Used Car Loans Best Auto Refinance Loans Best Car Loans for Bad Credit Best Car Loans for Fair Credit Best Car Loans for First Time Buyers Final Verdict Most auto lenders offer loans for cars you’ve already decided to purchase, but Chase works the other way around. You’ll start the car shopping process with Chase, line up your financing, and then be referred to a partner dealership to seal the deal. It’s a good choice if you’re looking for an easy way to finance a car—particularly if you’re already a customer with Chase Private Banking and are hoping to take out a big loan—but make sure to check your rates with other lenders first, so you get the best rates and terms available to you. Apply Now Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of auto loan lenders. To rate providers, we collected hundreds of data points across more than 20 auto loan lenders, including interest rates, fees, loan amounts, borrower requirements, and vehicle requirements, to ensure that our reviews help users make informed decisions for their borrowing needs. We also conducted a survey of 1,016 auto loan borrowers for attitudes and opinions about lenders and the loan approval and disbursement process. See our full auto loan review methodology for more information. Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Federal Reserve. "Large Commercial Banks." PR Web. "New Data Shows Auto Loan and Lease Total Outstandings Top $1.3 Trillion for Second Straight Year." J.D. Power. "2022 U.S. Consumer Financing Satisfaction Study." Chase. "Chase Private Client Checking." Chase. “Know Your Lease-End Options.” Consumer Financial Protection Bureau. "Consumer Complaint Database." Related Articles Private Party Auto Loan: What It Is, How It Works, How to Get One Consumers Credit Union Auto Loan Review 2024 Compare Best Auto Loan Rates, Lenders, & Financing for May 2024 - Rates From 1.99% Capital One Auto Loans Review 2024 What Is a Business Auto Loan? How to Finance Company Vehicles LightStream Auto Loans Review

https://www.investopedia.com/tesla-being-investigated-over-concerns-about-autopilot-recall-fix-8639509

Tesla Being Investigated Over Concerns About Autopilot Recall Fix

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Federal transportation regulators have opened an investigation into Tesla's moves to resolve concerns about the electric vehicle (EV) maker's Autopilot system.</li><li>Tesla agreed to a recall of some 2 million vehicles in December after the National Highway Traffic Safety Administration (NHTSA) cited several accidents they said were directly related to use of the self-driving feature.</li><li>The carmaker said it had fixed the issue with a software update, but NHTSA argued post-remedy events and tests suggested problems remain.</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"> Federal transportation regulators have opened an investigation into Tesla's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>) moves to resolve concerns about the electric vehicle (EV) maker's Autopilot self-driving system.  </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 National Highway Traffic Safety Administration (NHTSA) announced its Office of Defects Investigation (ODI) was launching a “Recall Query” because of concerns about “post-remedy crash events and results from preliminary NHTSA tests of remedied vehicles.”<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Tesla agreed to the recall of some 2 million EVs in December following a series of 13 accidents, causing at least one fatality. Officials said “foreseeable driver misuse of the system played an apparent role” in those incidents. </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"> Tesla had explained that an over-the-air software fix resolved the issues. However, NHTSA pointed out that the carmaker “has stated that a portion of the remedy both requires the owner to opt in and allows a driver to readily reverse it,” and that Tesla provided “non-remedy” updates. Officials noted the probe was initiated "to further evaluate the adequacy of the remedy for recall."  </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"> Last week, Tesla ordered a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-soap-likely-made-tesla-recall-almost-4000-cybertrucks-8635951">voluntary recall</a> of almost 4,000 Cybertrucks because of an issue with the accelerator pedal. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Shares of Tesla were little changed as of 11:30 a.m. ET Friday but have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/is-the-ride-of-the-magnificent-seven-over-8608006">tumbled this year</a> as falling demand for EVs hurt sales. The stock price earlier this week fell to its lowest level in more than a year, but rallied somewhat after <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/ceo.asp">Chief Executive Officer (CEO</a>) <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/061015/how-elon-musk-became-elon-musk.asp">Elon Musk</a> announced plans for the company to build a lower-priced car. However, shares remain down about 30% so far in 2024.<br/> </p></div>

### Key Takeaways * Federal transportation regulators have opened an investigation into Tesla's moves to resolve concerns about the electric vehicle (EV) maker's Autopilot system. * Tesla agreed to a recall of some 2 million vehicles in December after the National Highway Traffic Safety Administration (NHTSA) cited several accidents they said were directly related to use of the self-driving feature. * The carmaker said it had fixed the issue with a software update, but NHTSA argued post-remedy events and tests suggested problems remain. Federal transportation regulators have opened an investigation into Tesla's ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) moves to resolve concerns about the electric vehicle (EV) maker's Autopilot self-driving system.  The National Highway Traffic Safety Administration (NHTSA) announced its Office of Defects Investigation (ODI) was launching a “Recall Query” because of concerns about “post-remedy crash events and results from preliminary NHTSA tests of remedied vehicles.” Tesla agreed to the recall of some 2 million EVs in December following a series of 13 accidents, causing at least one fatality. Officials said “foreseeable driver misuse of the system played an apparent role” in those incidents. Tesla had explained that an over-the-air software fix resolved the issues. However, NHTSA pointed out that the carmaker “has stated that a portion of the remedy both requires the owner to opt in and allows a driver to readily reverse it,” and that Tesla provided “non-remedy” updates. Officials noted the probe was initiated "to further evaluate the adequacy of the remedy for recall."  Last week, Tesla ordered a [voluntary recall](https://www.investopedia.com/how-soap-likely-made-tesla-recall-almost-4000-cybertrucks-8635951) of almost 4,000 Cybertrucks because of an issue with the accelerator pedal. Shares of Tesla were little changed as of 11:30 a.m. ET Friday but have [tumbled this year](https://www.investopedia.com/is-the-ride-of-the-magnificent-seven-over-8608006) as falling demand for EVs hurt sales. The stock price earlier this week fell to its lowest level in more than a year, but rallied somewhat after [Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) [Elon Musk](https://www.investopedia.com/articles/personal-finance/061015/how-elon-musk-became-elon-musk.asp) announced plans for the company to build a lower-priced car. However, shares remain down about 30% so far in 2024.

Key Takeaways Federal transportation regulators have opened an investigation into Tesla's moves to resolve concerns about the electric vehicle (EV) maker's Autopilot system.Tesla agreed to a recall of some 2 million vehicles in December after the National Highway Traffic Safety Administration (NHTSA) cited several accidents they said were directly related to use of the self-driving feature.The carmaker said it had fixed the issue with a software update, but NHTSA argued post-remedy events and tests suggested problems remain. Federal transportation regulators have opened an investigation into Tesla's (TSLA) moves to resolve concerns about the electric vehicle (EV) maker's Autopilot self-driving system.  The National Highway Traffic Safety Administration (NHTSA) announced its Office of Defects Investigation (ODI) was launching a “Recall Query” because of concerns about “post-remedy crash events and results from preliminary NHTSA tests of remedied vehicles.” Tesla agreed to the recall of some 2 million EVs in December following a series of 13 accidents, causing at least one fatality. Officials said “foreseeable driver misuse of the system played an apparent role” in those incidents. Tesla had explained that an over-the-air software fix resolved the issues. However, NHTSA pointed out that the carmaker “has stated that a portion of the remedy both requires the owner to opt in and allows a driver to readily reverse it,” and that Tesla provided “non-remedy” updates. Officials noted the probe was initiated "to further evaluate the adequacy of the remedy for recall."  Last week, Tesla ordered a voluntary recall of almost 4,000 Cybertrucks because of an issue with the accelerator pedal. Shares of Tesla were little changed as of 11:30 a.m. ET Friday but have tumbled this year as falling demand for EVs hurt sales. The stock price earlier this week fell to its lowest level in more than a year, but rallied somewhat after Chief Executive Officer (CEO) Elon Musk announced plans for the company to build a lower-priced car. However, shares remain down about 30% so far in 2024.

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

Understanding and Investing in Sovereign 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"><span class="heading-toc" id="toc-what-is-a-sovereign-bond"></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 Sovereign Bond? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A sovereign bond is a debt security issued by a national government to raise money for its operations, pay down old debt, pay interest on current debt, and for any other government spending needs. Sovereign bonds may be denominated in a foreign currency or the government’s domestic currency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Sovereign bonds are a major source of government financing, alongside tax revenue. They are a safe investment or a risky one depending on the financial health of the nation that issued them. </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>Sovereign bonds are debt securities issued by a government to raise capital.</li><li>Riskier sovereign borrowers—nations with a developing economy or higher political risk—tend to denominate their sovereign bonds in the currencies of more stable economies.</li><li>Exchange-traded funds (ETFs) focusing on foreign government bonds offer a simple way to invest in this type of bond.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-sovereign-bond"></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 Sovereign Bond </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Like any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bond</a>, sovereign debt entitles owners to periodic interest payments from the issuer—in this case the government—with repayment of the bond's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/facevalue.asp">face value</a> when its term <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">matures</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"> As with other bonds, the interest rate paid, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond-yield.asp">yield</a>, depends on the risk profile of the issuer. The yield will be higher for countries that are seen to be at a higher risk of default. </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"> Rating agencies grade sovereign bonds based on the economic profile of the country, its <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>, its outstanding debts, and its political stability to estimate the likelihood that it could <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0911/7-things-you-didnt-know-about-sovereign-debt-defaults.aspx">default on its sovereign debt</a> obligations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond-rating-agencies.asp">Rating agencies</a> including Standard &amp; Poor's, Moody's, and Fitch Ratings provide sovereign credit ratings for investors seeking to evaluate the risks involved in investing in a specific country. The same agencies provide credit ratings on corporations and the bonds they issue. </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-sovereign-bond-denominations"></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"> Sovereign Bond Denominations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Some developing countries can't attract foreign investment in bonds denominated in their domestic currency because foreign investors are unwilling to assume the additional risk of a fluctuating currency. Their currency markets may not be sufficiently liquid, or investors may be wary that the currency will lose value, eroding their <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>. </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"> Countries borrowing in a foreign currency face similar currency exchange risk and higher borrowing costs if the domestic currency loses value against the one in which the sovereign bond is denominated. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> For example, say the Indonesian government issues bonds denominated in the Japanese yen to raise capital. It agrees to a nominal annual <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> of 5%. During the bonds’ term, the Indonesian rupiah depreciates by 10% annually versus the yen. As a result, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realinterestrate.asp">real interest rate</a> on the yen-denominated debt to the Indonesian government will be 15% in rupiah terms. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>In August 2023, Fitch Ratings downgraded the long-term ratings of the United States to AA+ from AAA due to the anticipated fiscal deterioration over the next three years, an increasing government debt burden, and the erosion of governance in comparison to its peers over the previous two decades. The agency cited the repeated debt limit standoffs and their 11th-hour resolutions by Congress.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-investing-in-sovereign-bonds"></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"> Investing in Sovereign Bonds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Investing in U.S. sovereign bonds is a straightforward process and can be done on the U.S. Treasury Department site, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://treasurydirect.gov/" rel="sponsored nofollow">TreasuryDirect.gov</a>. </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"> Buying foreign bonds is a bit trickier and is usually done via a broker through an account set up for foreign trading. The broker would buy the bond at the prevailing market price. This route can be limiting, depending on what bonds are available, and the transaction costs can be high. </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 simpler alternative is to buy U.S. <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> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds</a> (ETFs) that hold foreign sovereign bonds. These funds also provide <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</a> with exposure to a variety of foreign bond issues, which reduces risk. </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"> Popular foreign sovereign bond ETFs include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> <li>iShares International Treasury Bond ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=igov">IGOV</a>)</li> <li>SPDR Bloomberg International Treasury Bond ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BWX">BWX</a>)</li> <li>SPDR Bloomberg Capital Short Term International Treasury Bond ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bwz">BWZ</a>)</li> <li>Franklin Liberty International Aggregate Bond ETF (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=flia">FLIA</a>)</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-what-are-sovereign-bond-yields"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Sovereign Bond Yields?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Sovereign bond yields are the interest rate a government pays to buyers of its sovereign bonds. These are debt securities issued by a national government to raise capital. As with corporate bonds, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sovereign-bond-yield.asp">sovereign bond yields</a> are higher than average for risky issuers and lower than average for highly-rated issuers.</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-are-sovereign-bonds-denominated"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Sovereign Bonds Denominated?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Sovereign bonds, which are debt securities issued by national governments to raise money, can be denominated in either the local currency or in a global currency such as the U.S. dollar or the euro.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-are-sovereign-bonds-risky"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Sovereign Bonds Risky?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>As with any bond, the risk is judged by the likelihood that the issuer will default. Sovereign bonds are rated by the same agencies that rate corporate bonds to indicate their relative risk.</p><p>Sovereign bonds issued by countries with low ratings are experiencing economic troubles, political instability, or both. That makes them more likely to default on their debts.</p><p>Sovereign bonds issued by countries with high ratings are more stable and have a low risk of default.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> A sovereign bond may be issued by a national government to finance infrastructure programs, social programs, a war, or any other spending. As with corporate debt, the riskiness of sovereign debt depends on the likelihood of the underlying issuer defaulting. For countries with higher political and economic risk, the likelihood of default may be high. But for stable countries, the risk is low. </p></div>

## What Is a Sovereign Bond? A sovereign bond is a debt security issued by a national government to raise money for its operations, pay down old debt, pay interest on current debt, and for any other government spending needs. Sovereign bonds may be denominated in a foreign currency or the government’s domestic currency. Sovereign bonds are a major source of government financing, alongside tax revenue. They are a safe investment or a risky one depending on the financial health of the nation that issued them. ### Key Takeaways * Sovereign bonds are debt securities issued by a government to raise capital. * Riskier sovereign borrowers—nations with a developing economy or higher political risk—tend to denominate their sovereign bonds in the currencies of more stable economies. * Exchange-traded funds (ETFs) focusing on foreign government bonds offer a simple way to invest in this type of bond. ## Understanding a Sovereign Bond Like any [bond](https://www.investopedia.com/terms/b/bond.asp), sovereign debt entitles owners to periodic interest payments from the issuer—in this case the government—with repayment of the bond's [face value](https://www.investopedia.com/terms/f/facevalue.asp) when its term [matures](https://www.investopedia.com/terms/m/maturity.asp). As with other bonds, the interest rate paid, or [yield](https://www.investopedia.com/terms/b/bond-yield.asp), depends on the risk profile of the issuer. The yield will be higher for countries that are seen to be at a higher risk of default. Rating agencies grade sovereign bonds based on the economic profile of the country, its [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp), its outstanding debts, and its political stability to estimate the likelihood that it could [default on its sovereign debt](https://www.investopedia.com/financial-edge/0911/7-things-you-didnt-know-about-sovereign-debt-defaults.aspx) obligations. [Rating agencies](https://www.investopedia.com/terms/b/bond-rating-agencies.asp) including Standard & Poor's, Moody's, and Fitch Ratings provide sovereign credit ratings for investors seeking to evaluate the risks involved in investing in a specific country. The same agencies provide credit ratings on corporations and the bonds they issue. ## Sovereign Bond Denominations Some developing countries can't attract foreign investment in bonds denominated in their domestic currency because foreign investors are unwilling to assume the additional risk of a fluctuating currency. Their currency markets may not be sufficiently liquid, or investors may be wary that the currency will lose value, eroding their [rate of return](https://www.investopedia.com/terms/r/rateofreturn.asp). Countries borrowing in a foreign currency face similar currency exchange risk and higher borrowing costs if the domestic currency loses value against the one in which the sovereign bond is denominated. For example, say the Indonesian government issues bonds denominated in the Japanese yen to raise capital. It agrees to a nominal annual [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) of 5%. During the bonds’ term, the Indonesian rupiah depreciates by 10% annually versus the yen. As a result, the [real interest rate](https://www.investopedia.com/terms/r/realinterestrate.asp) on the yen-denominated debt to the Indonesian government will be 15% in rupiah terms. ### Important In August 2023, Fitch Ratings downgraded the long-term ratings of the United States to AA+ from AAA due to the anticipated fiscal deterioration over the next three years, an increasing government debt burden, and the erosion of governance in comparison to its peers over the previous two decades. The agency cited the repeated debt limit standoffs and their 11th-hour resolutions by Congress. ## Investing in Sovereign Bonds Investing in U.S. sovereign bonds is a straightforward process and can be done on the U.S. Treasury Department site, [TreasuryDirect.gov](https://treasurydirect.gov/). Buying foreign bonds is a bit trickier and is usually done via a broker through an account set up for foreign trading. The broker would buy the bond at the prevailing market price. This route can be limiting, depending on what bonds are available, and the transaction costs can be high. A simpler alternative is to buy U.S. [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) or [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) that hold foreign sovereign bonds. These funds also provide [diversification](https://www.investopedia.com/terms/d/diversification.asp) with exposure to a variety of foreign bond issues, which reduces risk. Popular foreign sovereign bond ETFs include: * iShares International Treasury Bond ETF ([IGOV](https://www.investopedia.com/markets/quote?tvwidgetsymbol=igov)) * SPDR Bloomberg International Treasury Bond ETF ([BWX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BWX)) * SPDR Bloomberg Capital Short Term International Treasury Bond ETF ([BWZ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bwz)) * Franklin Liberty International Aggregate Bond ETF ([FLIA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=flia)) ## What Are Sovereign Bond Yields? Sovereign bond yields are the interest rate a government pays to buyers of its sovereign bonds. These are debt securities issued by a national government to raise capital. As with corporate bonds, [sovereign bond yields](https://www.investopedia.com/terms/s/sovereign-bond-yield.asp) are higher than average for risky issuers and lower than average for highly-rated issuers. ## How Are Sovereign Bonds Denominated? Sovereign bonds, which are debt securities issued by national governments to raise money, can be denominated in either the local currency or in a global currency such as the U.S. dollar or the euro. ## Are Sovereign Bonds Risky? As with any bond, the risk is judged by the likelihood that the issuer will default. Sovereign bonds are rated by the same agencies that rate corporate bonds to indicate their relative risk. Sovereign bonds issued by countries with low ratings are experiencing economic troubles, political instability, or both. That makes them more likely to default on their debts. Sovereign bonds issued by countries with high ratings are more stable and have a low risk of default. ## The Bottom Line A sovereign bond may be issued by a national government to finance infrastructure programs, social programs, a war, or any other spending. As with corporate debt, the riskiness of sovereign debt depends on the likelihood of the underlying issuer defaulting. For countries with higher political and economic risk, the likelihood of default may be high. But for stable countries, the risk is low.

What Is a Sovereign Bond? A sovereign bond is a debt security issued by a national government to raise money for its operations, pay down old debt, pay interest on current debt, and for any other government spending needs. Sovereign bonds may be denominated in a foreign currency or the government’s domestic currency. Sovereign bonds are a major source of government financing, alongside tax revenue. They are a safe investment or a risky one depending on the financial health of the nation that issued them. Key Takeaways Sovereign bonds are debt securities issued by a government to raise capital.Riskier sovereign borrowers—nations with a developing economy or higher political risk—tend to denominate their sovereign bonds in the currencies of more stable economies.Exchange-traded funds (ETFs) focusing on foreign government bonds offer a simple way to invest in this type of bond. Understanding a Sovereign Bond Like any bond, sovereign debt entitles owners to periodic interest payments from the issuer—in this case the government—with repayment of the bond's face value when its term matures. As with other bonds, the interest rate paid, or yield, depends on the risk profile of the issuer. The yield will be higher for countries that are seen to be at a higher risk of default. Rating agencies grade sovereign bonds based on the economic profile of the country, its exchange rate, its outstanding debts, and its political stability to estimate the likelihood that it could default on its sovereign debt obligations. Rating agencies including Standard & Poor's, Moody's, and Fitch Ratings provide sovereign credit ratings for investors seeking to evaluate the risks involved in investing in a specific country. The same agencies provide credit ratings on corporations and the bonds they issue. Sovereign Bond Denominations Some developing countries can't attract foreign investment in bonds denominated in their domestic currency because foreign investors are unwilling to assume the additional risk of a fluctuating currency. Their currency markets may not be sufficiently liquid, or investors may be wary that the currency will lose value, eroding their rate of return. Countries borrowing in a foreign currency face similar currency exchange risk and higher borrowing costs if the domestic currency loses value against the one in which the sovereign bond is denominated. For example, say the Indonesian government issues bonds denominated in the Japanese yen to raise capital. It agrees to a nominal annual interest rate of 5%. During the bonds’ term, the Indonesian rupiah depreciates by 10% annually versus the yen. As a result, the real interest rate on the yen-denominated debt to the Indonesian government will be 15% in rupiah terms. Important In August 2023, Fitch Ratings downgraded the long-term ratings of the United States to AA+ from AAA due to the anticipated fiscal deterioration over the next three years, an increasing government debt burden, and the erosion of governance in comparison to its peers over the previous two decades. The agency cited the repeated debt limit standoffs and their 11th-hour resolutions by Congress. Investing in Sovereign Bonds Investing in U.S. sovereign bonds is a straightforward process and can be done on the U.S. Treasury Department site, TreasuryDirect.gov. Buying foreign bonds is a bit trickier and is usually done via a broker through an account set up for foreign trading. The broker would buy the bond at the prevailing market price. This route can be limiting, depending on what bonds are available, and the transaction costs can be high. A simpler alternative is to buy U.S. mutual funds or exchange-traded funds (ETFs) that hold foreign sovereign bonds. These funds also provide diversification with exposure to a variety of foreign bond issues, which reduces risk. Popular foreign sovereign bond ETFs include: iShares International Treasury Bond ETF (IGOV) SPDR Bloomberg International Treasury Bond ETF (BWX) SPDR Bloomberg Capital Short Term International Treasury Bond ETF (BWZ) Franklin Liberty International Aggregate Bond ETF (FLIA) What Are Sovereign Bond Yields? Sovereign bond yields are the interest rate a government pays to buyers of its sovereign bonds. These are debt securities issued by a national government to raise capital. As with corporate bonds, sovereign bond yields are higher than average for risky issuers and lower than average for highly-rated issuers. How Are Sovereign Bonds Denominated? Sovereign bonds, which are debt securities issued by national governments to raise money, can be denominated in either the local currency or in a global currency such as the U.S. dollar or the euro. Are Sovereign Bonds Risky? As with any bond, the risk is judged by the likelihood that the issuer will default. Sovereign bonds are rated by the same agencies that rate corporate bonds to indicate their relative risk.Sovereign bonds issued by countries with low ratings are experiencing economic troubles, political instability, or both. That makes them more likely to default on their debts.Sovereign bonds issued by countries with high ratings are more stable and have a low risk of default. The Bottom Line A sovereign bond may be issued by a national government to finance infrastructure programs, social programs, a war, or any other spending. As with corporate debt, the riskiness of sovereign debt depends on the likelihood of the underlying issuer defaulting. For countries with higher political and economic risk, the likelihood of default may be high. But for stable countries, the risk is low.

https://www.investopedia.com/live-oak-bank-review-5069912

Live Oak Bank Review

<div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body"> <span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="comp product-review-content product-review-content--finance product-review--base" id="product-review-content--finance_1-0"> <div class="comp js-toc-appear article-container article-intro mntl-block" id="article-intro_1-0"> <div class="comp product-card" data-tracking-container="true" data-tracking-id="product-card" id="product-card_1-0" style="--imgWidth: 0px"> <div class="product-card__content"> <div class="product-card__intro expert-content"> <figure class="comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image" id="product-card__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="LOB" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/RXMdVyT1yHTuvmRvG32ysAKAyKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEQAEAPAAAAAAAJkAMyH5BAEAAAAALAAAAAARAAQAQAgbAAEECACgoMGDBwcSFJiwYcGFCxkiNBhxIsKAADs=')" width="1500"/> <noscript> <img alt="LOB" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/RXMdVyT1yHTuvmRvG32ysAKAyKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.liveoakbank.com/" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.liveoakbank.com/" rel="sponsored nofollow">Live Oak Bank</a> was founded in 2008 and has its roots in lending to small businesses in specialized industries. It’s since expanded to include personal deposit accounts. An online bank, Live Oak is headquartered in Wilmington, N.C.<span class="ql-inline-citation" data-cite="5"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review"> <ul class="tabbed-sc-block__tabs"> <li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros &amp; Cons</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li> </ul> <div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1"> <span class="tabbed-sc-block__text">Pros &amp; Cons</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1"> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-2"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Decent interest rates </p></li> <li><p>No monthly maintenance fees</p></li> <li><p>No minimum amount to open a savings account and no minimum balance </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 bells or whistles</p></li> <li><p>No debit card</p></li> <li><p>No ATM access</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2"> <span class="tabbed-sc-block__text">Company Overview</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2"> <div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-4"> <div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0"> <ul class="definition-list__container"> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Year Founded</span> <span class="definition-list__item-content definition-list__item-content-0"> 2008 </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.liveoakbank.com </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Banking Products Offered</span> <span class="definition-list__item-content definition-list__item-content-2"> Savings, CDs </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Customer Service</span> <span class="definition-list__item-content definition-list__item-content-3"> Phone line: 1-866-518-0286, Monday–Friday, 8 a.m. to 8 p.m. EST </span> </span> </li> </ul> </div><!-- end: comp product-spec-tool definition-list --> </div><!-- end: comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block --> </div> </div> </div> </div><!-- end: comp product-card --> </div><!-- end: comp js-toc-appear article-container article-intro mntl-block --> <div class="loc body-content article-container"> <div class="comp article-body article-content mntl-block" id="article-content_1-0"> <div class="comp left-nav js-sticky-container product-review__left-nav mntl-block" id="product-review__left-nav_1-0"> <div class="comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block" data-desktop-bp="54em" data-tracking-container="true" id="product-review__toc_1-0"> <div class="comp sticky-toc-widget__product-container mntl-block" id="sticky-toc-widget__product-container_1-0"> <figure class="comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image" id="sticky-toc-widget__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="LOB" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/RXMdVyT1yHTuvmRvG32ysAKAyKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEQAEAPAAAAAAAJkAMyH5BAEAAAAALAAAAAARAAQAQAgbAAEECACgoMGDBwcSFJiwYcGFCxkiNBhxIsKAADs=')" width="1500"/> <noscript> <img alt="LOB" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/RXMdVyT1yHTuvmRvG32ysAKAyKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.liveoakbank.com/" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block --> </div><!-- end: comp sticky-toc-widget__product-container mntl-block --> <div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0"> Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0"> View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Live Oak Bank Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0"> Live Oak Bank Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0"> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best For" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-who-is-live-oak-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best For</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-live-oak-bank-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Other Products" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-other-financial-products-offered-by-live-oak-bank" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Other Products</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-live-oak-bank-customer-service" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-with-live-oak-bank" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-7"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-7"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-7" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block --> </div><!-- end: comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block --> </div><!-- end: comp left-nav js-sticky-container product-review__left-nav mntl-block --> <div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0"> <span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0"> <span class="mntl-sc-block-heading__text"> Pros Explained<strong> </strong> </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>Decent interest rates</strong> – As of April 4, 2024, Live Oak Bank features a 4.40% annual percentage yield (APY) on its savings accounts, which is considerably higher than the 0.47% national average rate for deposit accounts as of March 18, 2024.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="6"></span> However, this rate is a bit lower than some of the most popular online banks out there.</li><li><strong>No monthly maintenance fees </strong>–<strong> </strong>There are no monthly account fees. However, if you keep a balance that falls below $10.01 and your account is inactive for 24 months straight, you’ll be charged a dormant account fee. This fee will be either $10 or whatever remains in the account—whichever is less.</li><li><strong>No minimum amount to open an account and no minimum balance</strong> – You don’t need to put money into this account to have it. However, do remember the time limit of 24 months of inactivity that could trigger a dormant account fee and reset your balance to zero.<span class="ql-inline-citation" data-cite="3"></span></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <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>No bells or whistles </strong>–<strong> </strong>This could potentially be seen as a positive. For those who want to bank with a financial institution with robust products and services, Live Oak Bank probably seems a bit lacking. However, for those who want a straightforward and simple option, it could fill the bill nicely.</li><li><strong>No debit card </strong>–<strong> </strong>As Live Oak Bank is primarily for those who are looking for a deposit account, you won’t be able to make purchases with a debit card.</li><li><strong>No ATM access </strong>– As an online-only institution, Live Oak doesn’t have brick-and-mortar locations where you can access your funds.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-who-is-live-oak-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 Live Oak 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"> Live Oak Bank should appeal to consumers who are looking for a digital bank in which to stash their cash and earn some interest. It’s particularly fitting for those who: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6"> <li>Want to do without monthly maintenance fees </li> <li>Don’t want to worry about minimum balance requirements </li> <li>Want a safe option to grow their money in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp" rel="noopener noreferrer">liquid</a> account </li> <li>Are looking for a bank in which to park their money </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-what-does-live-oak-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 Live Oak 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"> Live Oak Bank offers one thing and one thing only: Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts. </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>Savings Account</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp" rel="noopener noreferrer">Certificates of Deposit (CDs)</a> </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"> High-Yield Online Savings </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11"> Live Oak Bank’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings account</a> has a more than acceptable 4.40% APY. Account holders don’t have to worry about paying a monthly maintenance fee, nor are there any minimum balance requirements.<span class="ql-inline-citation" data-cite="2"></span> However, fee-free banking ends there. If you go over the six transactions per monthly statement cycle, you’ll get dinged with $10 per transaction. Returned items cost $10. Should there be a stop payment, you’re looking at coughing up $25.<span class="ql-inline-citation" data-cite="3"></span>  </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_2-0-12"> <span class="mntl-sc-block-subheading__text"> High-Yield 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_2-0-13"> CDs provide a means to save your money for a given period of time. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">They typically have higher interest rates than savings accounts</a>, meaning your money can grow faster. Live Oak Bank’s CDs don’t have any monthly account fees. The terms are anywhere from six months to five years. However, the amount you need to open a CD is $2,500, and the maximum balance is $250,000. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14"> There is a fee if you need to pull money before the CD matures. The early withdrawal penalty is a portion of the interest earned, and it depends on the length of the CD. For CDs with a term that’s less than 24 months, the early withdrawal penalty is 90 days of simple interest. For CDs with a term that’s over 24 months, you’ll be charged 180 days of simple interest. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15"> What happens once the term of the CD ends and the CD matures? It will automatically renew for the same term at the current interest rate. You do have the option to withdraw your money from your CD, and you have 10 calendar days after the maturity date to do so.<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_2-0-16"> The Live Oak Bank terms and rates for CDs are: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-17"> <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">Live Oak Bank’s High-Yield CD Rates</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>Term</b></td> <td><b>Rates</b></td> </tr> <tr> <td>3 Months</td> <td>3.00% APY</td> </tr> <tr> <td>6 Months</td> <td>4.80% APY</td> </tr> <tr> <td>9 Months</td> <td>4.90% APY</td> </tr> <tr> <td>12 Months</td> <td>5.00% APY</td> </tr> <tr> <td>18 Months</td> <td>4.75% APY</td> </tr> <tr> <td>24 Months</td> <td>2.00% APY</td> </tr> <tr> <td>36 Months</td> <td>2.00% APY</td> </tr> <tr> <td>48 Months</td> <td>2.00% APY</td> </tr> <tr> <td>60 Months</td> <td>2.00% APY</td> </tr> </tbody> </table> <figcaption>(As of April 4, 2023)</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 --> <span class="heading-toc" id="toc-other-financial-products-offered-by-live-oak-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-18"> <span class="mntl-sc-block-heading__text"> Other Financial Products Offered by Live Oak 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_2-0-19"> As for personal accounts, Live Oak Bank only offers savings and CDs.  </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-live-oak-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_2-0-20"> <span class="mntl-sc-block-heading__text"> Live Oak 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_2-0-21"> Live Oak Bank’s customer support team is available by phone during weekdays from 8 a.m. to 8 p.m. ET at 1-866-518-0286. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-how-to-bank-with-live-oak-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-22"> <span class="mntl-sc-block-heading__text"> How To Bank With Live Oak 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_2-0-23"> Accounts can only be opened online, and you’ll need the standard information, such as your contact information, Social Security number, and additional documentation to verify your identity. You’ll also need to provide the info for an external bank to transfer your money to your new account. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp theme-finalverdict mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-24"> <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>Live Oak Bank is a simple, no-nonsense option for those who want an FDIC-protected deposit account that earns a higher-than-average interest rate. It’s also a strong choice for those <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">who are comfortable with online banking</a>—using the app or logging onto their computer for everything from opening an account to transferring money between accounts. The lack of monthly maintenance fees is also an attractive feature. However, if you’re looking for a CD with low minimum requirements, Live Oak Bank’s $2,500 can be an impediment for those who don’t have that much to stash away for a longer stretch.</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_2-0-25"> <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_2-0-26"> Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block" data-click-tracked="false" data-link-closest-header="false" data-tracking-container="true" data-use-child-url=".mntl-sc-block-commerce__button" data-use-external-image="false" id="mntl-sc-block_2-0-27"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://www.liveoakbank.com/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div><!-- end: comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block --> </div><!-- end: comp article-body article-content mntl-block --> </div> </div><!-- end: comp product-review-content product-review-content--finance product-review--base --> </span> </div><div class="loc content-bottom"><div class="comp prm-article-sources article-sources mntl-article-sources mntl-expandable-block" data-scroll-offset="100" id="prm-article-sources_1-0"><div class="loc toggle-content"><div class="comp mntl-article-sources__wrapper mntl-block article-sources__wrapper" data-click-tracked="true" id="mntl-article-sources__wrapper_1-0"><div class="comp mntl-article-sources__heading mntl-text-block article-sources__heading" id="mntl-article-sources__heading_1-0">Article Sources</div> <div class="comp mntl-article-sources__icon-wrapper mntl-block article-sources__icon-wrapper" id="mntl-article-sources__icon-wrapper_1-0"><div class="comp article-sources__show-icon mntl-block" id="article-sources__show-icon_1-0"></div> <div class="comp article-sources__hide-icon mntl-block" id="article-sources__hide-icon_1-0"></div></div></div> </div><div class="loc expandable-content"> <div class="comp article-sources__disclaimer mntl-block" id="article-sources__disclaimer_1-0">Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our <a class="article-sources__disclaimer-text-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/legal-4768893#EditorialPolicy" id="article-sources__disclaimer-text-link_1-0" rel="nocaes"><span class="link__wrapper">editorial policy.</span></a></div> <div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content"> <li class="mntl-sources__source" id="citation-1"><p>Federal Deposit Insurance Corporation. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fdic.gov/regulations/resources/rates/">Weekly National Rates and Rate Caps - Weekly Update</a>."</p></li> <li class="mntl-sources__source" id="citation-6"><p>Live Oak Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.liveoakbank.com/personal-banking/" rel="nofollow sponsored">Personal Banking</a>."</p></li> <li class="mntl-sources__source" id="citation-3"><p>Live Oak Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.liveoakbank.com/personal-banking/personal-savings/savings-faqs/" rel="nofollow sponsored">Savings Account FAQS</a>."</p></li> <li class="mntl-sources__source" id="citation-2"><p>Live Oak Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.liveoakbank.com/personal-banking/" rel="nofollow sponsored">Live Oak Personal Banking</a>."</p></li> <li class="mntl-sources__source" id="citation-4"><p>Live Oak Bank. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.liveoakbank.com/personal-banking/personal-cd/" rel="nofollow sponsored">Live Oak Personal CD Accounts</a>."</p></li> </ol> </div> </div></div> <div class="comp prm-recirc related-recirc-section--articles mntl-block" data-tracking-container="true" id="prm-recirc_1-0"><section class="comp related-articles" data-tracking-container="true" id="related-articles_1-0"> <span class="related-articles__header type--camel"> Related Articles </span> <div class="loc recirc-content"><div class="comp related-articles__card-list-1 card-list--related-articles mntl-document-card-list mntl-card-list mntl-block" data-chunk="36" id="related-articles__card-list-1_1-0"><a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="8644041" data-ordinal="1" data-tax-levels="" 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:fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png) :fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png) [Open Account](https://www.liveoakbank.com/) [Live Oak Bank](https://www.liveoakbank.com/) was founded in 2008 and has its roots in lending to small businesses in specialized industries. It’s since expanded to include personal deposit accounts. An online bank, Live Oak is headquartered in Wilmington, N.C. * Pros & Cons * Company Overview Pros & Cons Pros * Decent interest rates * No monthly maintenance fees * No minimum amount to open a savings account and no minimum balance Cons * No bells or whistles * No debit card * No ATM access Company Overview * Year Founded 2008 * Official Website www.liveoakbank.com * Banking Products Offered Savings, CDs * Customer Service Phone line: 1-866-518-0286, Monday–Friday, 8 a.m. to 8 p.m. EST :fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png) :fill(white):max_bytes(150000):strip_icc()/live-oak-bank-logo-5a95cb00c8134e2e9db994b22f01f06d.png) [Open Account](https://www.liveoakbank.com/) Table of Contents View All Live Oak Bank Review * [Pros Explained](#toc-pros-explained) * [Cons Explained](#toc-cons-explained) * [Best For](#toc-who-is-live-oak-best-for) * [Bank Offerings](#toc-what-does-live-oak-bank-offer) * [Other Products](#toc-other-financial-products-offered-by-live-oak-bank) * [Customer Service](#toc-live-oak-bank-customer-service) * [How to Bank](#toc-how-to-bank-with-live-oak-bank) * [Methodology](#toc-methodology) ## Pros Explained * **Decent interest rates** – As of April 4, 2024, Live Oak Bank features a 4.40% annual percentage yield (APY) on its savings accounts, which is considerably higher than the 0.47% national average rate for deposit accounts as of March 18, 2024. However, this rate is a bit lower than some of the most popular online banks out there. * **No monthly maintenance fees** –There are no monthly account fees. However, if you keep a balance that falls below $10.01 and your account is inactive for 24 months straight, you’ll be charged a dormant account fee. This fee will be either $10 or whatever remains in the account—whichever is less. * **No minimum amount to open an account and no minimum balance** – You don’t need to put money into this account to have it. However, do remember the time limit of 24 months of inactivity that could trigger a dormant account fee and reset your balance to zero. ## Cons Explained * **No bells or whistles** –This could potentially be seen as a positive. For those who want to bank with a financial institution with robust products and services, Live Oak Bank probably seems a bit lacking. However, for those who want a straightforward and simple option, it could fill the bill nicely. * **No debit card** –As Live Oak Bank is primarily for those who are looking for a deposit account, you won’t be able to make purchases with a debit card. * **No ATM access** – As an online-only institution, Live Oak doesn’t have brick-and-mortar locations where you can access your funds. ## Who Is Live Oak Best For? Live Oak Bank should appeal to consumers who are looking for a digital bank in which to stash their cash and earn some interest. It’s particularly fitting for those who: * Want to do without monthly maintenance fees * Don’t want to worry about minimum balance requirements * Want a safe option to grow their money in a [liquid](https://www.investopedia.com/terms/l/liquidity.asp) account * Are looking for a bank in which to park their money ## What Does Live Oak Bank Offer? Live Oak Bank offers one thing and one thing only: Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts. * Savings Account * [Certificates of Deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) ### High-Yield Online Savings Live Oak Bank’s [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) has a more than acceptable 4.40% APY. Account holders don’t have to worry about paying a monthly maintenance fee, nor are there any minimum balance requirements. However, fee-free banking ends there. If you go over the six transactions per monthly statement cycle, you’ll get dinged with $10 per transaction. Returned items cost $10. Should there be a stop payment, you’re looking at coughing up $25.  ### High-Yield CDs CDs provide a means to save your money for a given period of time. [They typically have higher interest rates than savings accounts](https://www.investopedia.com/best-cd-rates-4770214), meaning your money can grow faster. Live Oak Bank’s CDs don’t have any monthly account fees. The terms are anywhere from six months to five years. However, the amount you need to open a CD is $2,500, and the maximum balance is $250,000. There is a fee if you need to pull money before the CD matures. The early withdrawal penalty is a portion of the interest earned, and it depends on the length of the CD. For CDs with a term that’s less than 24 months, the early withdrawal penalty is 90 days of simple interest. For CDs with a term that’s over 24 months, you’ll be charged 180 days of simple interest. What happens once the term of the CD ends and the CD matures? It will automatically renew for the same term at the current interest rate. You do have the option to withdraw your money from your CD, and you have 10 calendar days after the maturity date to do so. The Live Oak Bank terms and rates for CDs are: | Live Oak Bank’s High-Yield CD Rates | | | --- | --- | | **Term** | **Rates** | | 3 Months | 3.00% APY | | 6 Months | 4.80% APY | | 9 Months | 4.90% APY | | 12 Months | 5.00% APY | | 18 Months | 4.75% APY | | 24 Months | 2.00% APY | | 36 Months | 2.00% APY | | 48 Months | 2.00% APY | | 60 Months | 2.00% APY | (As of April 4, 2023) ## Other Financial Products Offered by Live Oak Bank As for personal accounts, Live Oak Bank only offers savings and CDs.  ## Live Oak Bank Customer Service Live Oak Bank’s customer support team is available by phone during weekdays from 8 a.m. to 8 p.m. ET at 1-866-518-0286. ## How To Bank With Live Oak Bank Accounts can only be opened online, and you’ll need the standard information, such as your contact information, Social Security number, and additional documentation to verify your identity. You’ll also need to provide the info for an external bank to transfer your money to your new account. Verdict Live Oak Bank is a simple, no-nonsense option for those who want an FDIC-protected deposit account that earns a higher-than-average interest rate. It’s also a strong choice for those [who are comfortable with online banking](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp)—using the app or logging onto their computer for everything from opening an account to transferring money between accounts. The lack of monthly maintenance fees is also an attractive feature. However, if you’re looking for a CD with low minimum requirements, Live Oak Bank’s $2,500 can be an impediment for those who don’t have that much to stash away for a longer stretch. ## Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. [Open Account](https://www.liveoakbank.com/) Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. Federal Deposit Insurance Corporation. "[Weekly National Rates and Rate Caps - Weekly Update](https://www.fdic.gov/regulations/resources/rates/)." 2. Live Oak Bank. "[Personal Banking](https://www.liveoakbank.com/personal-banking/)." 3. Live Oak Bank. "[Savings Account FAQS](https://www.liveoakbank.com/personal-banking/personal-savings/savings-faqs/)." 4. Live Oak Bank. "[Live Oak Personal Banking](https://www.liveoakbank.com/personal-banking/)." 5. Live Oak Bank. "[Live Oak Personal CD Accounts](https://www.liveoakbank.com/personal-banking/personal-cd/)." 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Open Account Live Oak Bank was founded in 2008 and has its roots in lending to small businesses in specialized industries. It’s since expanded to include personal deposit accounts. An online bank, Live Oak is headquartered in Wilmington, N.C. Pros & Cons Company Overview Pros & Cons Pros Decent interest rates  No monthly maintenance fees No minimum amount to open a savings account and no minimum balance  Cons No bells or whistles No debit card No ATM access Company Overview Year Founded 2008 Official Website www.liveoakbank.com Banking Products Offered Savings, CDs Customer Service Phone line: 1-866-518-0286, Monday–Friday, 8 a.m. to 8 p.m. EST Open Account Table of Contents View All Live Oak Bank Review Pros Explained Cons Explained Best For Bank Offerings Other Products Customer Service How to Bank Methodology Pros Explained Decent interest rates – As of April 4, 2024, Live Oak Bank features a 4.40% annual percentage yield (APY) on its savings accounts, which is considerably higher than the 0.47% national average rate for deposit accounts as of March 18, 2024. However, this rate is a bit lower than some of the most popular online banks out there.No monthly maintenance fees – There are no monthly account fees. However, if you keep a balance that falls below $10.01 and your account is inactive for 24 months straight, you’ll be charged a dormant account fee. This fee will be either $10 or whatever remains in the account—whichever is less.No minimum amount to open an account and no minimum balance – You don’t need to put money into this account to have it. However, do remember the time limit of 24 months of inactivity that could trigger a dormant account fee and reset your balance to zero. Cons Explained No bells or whistles – This could potentially be seen as a positive. For those who want to bank with a financial institution with robust products and services, Live Oak Bank probably seems a bit lacking. However, for those who want a straightforward and simple option, it could fill the bill nicely.No debit card – As Live Oak Bank is primarily for those who are looking for a deposit account, you won’t be able to make purchases with a debit card.No ATM access – As an online-only institution, Live Oak doesn’t have brick-and-mortar locations where you can access your funds. Who Is Live Oak Best For? Live Oak Bank should appeal to consumers who are looking for a digital bank in which to stash their cash and earn some interest. It’s particularly fitting for those who: Want to do without monthly maintenance fees  Don’t want to worry about minimum balance requirements  Want a safe option to grow their money in a liquid account  Are looking for a bank in which to park their money  What Does Live Oak Bank Offer? Live Oak Bank offers one thing and one thing only: Federal Deposit Insurance Corporation (FDIC)-backed deposit accounts. Savings Account Certificates of Deposit (CDs)  High-Yield Online Savings Live Oak Bank’s high-yield savings account has a more than acceptable 4.40% APY. Account holders don’t have to worry about paying a monthly maintenance fee, nor are there any minimum balance requirements. However, fee-free banking ends there. If you go over the six transactions per monthly statement cycle, you’ll get dinged with $10 per transaction. Returned items cost $10. Should there be a stop payment, you’re looking at coughing up $25.  High-Yield CDs CDs provide a means to save your money for a given period of time. They typically have higher interest rates than savings accounts, meaning your money can grow faster. Live Oak Bank’s CDs don’t have any monthly account fees. The terms are anywhere from six months to five years. However, the amount you need to open a CD is $2,500, and the maximum balance is $250,000. There is a fee if you need to pull money before the CD matures. The early withdrawal penalty is a portion of the interest earned, and it depends on the length of the CD. For CDs with a term that’s less than 24 months, the early withdrawal penalty is 90 days of simple interest. For CDs with a term that’s over 24 months, you’ll be charged 180 days of simple interest. What happens once the term of the CD ends and the CD matures? It will automatically renew for the same term at the current interest rate. You do have the option to withdraw your money from your CD, and you have 10 calendar days after the maturity date to do so. The Live Oak Bank terms and rates for CDs are: Live Oak Bank’s High-Yield CD Rates Term Rates 3 Months 3.00% APY 6 Months 4.80% APY 9 Months 4.90% APY 12 Months 5.00% APY 18 Months 4.75% APY 24 Months 2.00% APY 36 Months 2.00% APY 48 Months 2.00% APY 60 Months 2.00% APY (As of April 4, 2023) Other Financial Products Offered by Live Oak Bank  As for personal accounts, Live Oak Bank only offers savings and CDs.  Live Oak Bank Customer Service  Live Oak Bank’s customer support team is available by phone during weekdays from 8 a.m. to 8 p.m. ET at 1-866-518-0286. How To Bank With Live Oak Bank  Accounts can only be opened online, and you’ll need the standard information, such as your contact information, Social Security number, and additional documentation to verify your identity. You’ll also need to provide the info for an external bank to transfer your money to your new account. Verdict Live Oak Bank is a simple, no-nonsense option for those who want an FDIC-protected deposit account that earns a higher-than-average interest rate. It’s also a strong choice for those who are comfortable with online banking—using the app or logging onto their computer for everything from opening an account to transferring money between accounts. The lack of monthly maintenance fees is also an attractive feature. However, if you’re looking for a CD with low minimum requirements, Live Oak Bank’s $2,500 can be an impediment for those who don’t have that much to stash away for a longer stretch. Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected more than 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. Open Account Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Federal Deposit Insurance Corporation. "Weekly National Rates and Rate Caps - Weekly Update." Live Oak Bank. "Personal Banking." Live Oak Bank. "Savings Account FAQS." Live Oak Bank. "Live Oak Personal Banking." Live Oak Bank. "Live Oak Personal CD Accounts." Related Articles Regions Bank Review 2024 Vio Bank Review Best High-Yield Business Savings Accounts for May 2024 KeyBank Review 2024 M&T Bank Review 2024 U.S. Bank Review

https://www.investopedia.com/articles/investing/060315/stocks-trade-volume-important.asp

Is a Stock's Trade Volume Important?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 ever look at 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> leaders for the trading day, you will almost always find major stocks like Bank of America Corporation (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac">BAC</a>). On Aug. 19, 2021, the trading volume for BAC totaled 46.5 million.<span class="ql-inline-citation" data-cite="3"></span> Advanced Micro Devices, Inc (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD">AMD</a>) was even higher at 59.2 million.<span class="ql-inline-citation" data-cite="4"></span> Those are big numbers, but where do they come from, and what do they mean? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The first part of the question can be answered with ease: market exchanges. The second part requires a little more detail. While volume is only one tool of many, it adds value to your investment decision. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <span class="heading-toc" id="toc-how-it-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> How It Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Calculating volume is simply the total amount of shares traded for the day, which includes both buy and sell orders. You can determine the daily trading volume on your own—all transactions are publicly available—by calculating the total amount of shares traded. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> However, it’s much easier to look at the daily trading volume on any stock chart. Time is money, after all, and it would be wise to save time. Daily trading volume shouldn’t be confused with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dollar-volume-liquidity.asp">dollar volume</a>, which is a stock’s share price times its daily volume. </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-why-it-matters"></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"> Why It Matters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> If you see a stock that’s appreciating on high volume, it's more likely to be a sustainable move. If you see a stock that’s appreciating on low volume, it could be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deadcatbounce.asp">dead cat bounce</a>. Logically, when more money is moving a stock price, it means there is more demand for that stock. </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 small amount of money is moving the stock price, the odds of that move being sustainable are lower. Also, be careful of low-volume (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">illiquid</a>) stocks, where you could end up trapped in a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pumpanddump.asp">pump and dump</a> scheme. Even if you were trying to play the artificial move, you might not be able to find a seller if the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/051415/risks-trading-lowvolume-stocks.asp">volume is low</a> and you'd be locked into a losing trade. </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-low-trade-volume-stocks"></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"> Low-Trade Volume Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There is one exception for buying low-volume stocks, which is when you have done your due diligence and concluded that you have found a good company that has yet to be discovered. In this scenario, you would have gotten in ahead of the curve. When volume increases, you will have the potential for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenbagger.asp">multi-bagger</a>, which is every investor’s dream scenario. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Another reason to steer clear of most low-volume stocks 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>. With illiquid stocks, the bid-ask spread is going to be wide, which can be costly. A high-volume stock, such as the aforementioned BAC, often has a tight bid-ask spread of a penny, which should do you minimal to no harm. </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"> When you look at daily trading volume, don’t just look at the trading volume for that particular day. This could be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small-cap</a> stock that popped or dropped on the news. In most cases, this won’t be sustainable. Instead, look at the three-month <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/averagedailytradingvolume.asp">average daily trading volume</a>, which will give you a much better idea of whether the stock offers <a data-component="link" data-ordinal="3" 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_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> If you’re on the hunt for high-volume stocks, then you might want to begin with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange</a> (NYSE) or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a>. These exchanges have stricter requirements than other exchanges, which is positive because it keeps the riff-raff out of play. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Calculating volume is easy. Understanding what volume means is more important. While this should never be the only factor when weighing an investment or trading decision, it should always play a role, as it can impact your investments and trading strategy. </p></div>

If you ever look at the [volume](https://www.investopedia.com/terms/v/volume.asp) leaders for the trading day, you will almost always find major stocks like Bank of America Corporation ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac)). On Aug. 19, 2021, the trading volume for BAC totaled 46.5 million. Advanced Micro Devices, Inc ([AMD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMD)) was even higher at 59.2 million. Those are big numbers, but where do they come from, and what do they mean? The first part of the question can be answered with ease: market exchanges. The second part requires a little more detail. While volume is only one tool of many, it adds value to your investment decision. ## How It Works Calculating volume is simply the total amount of shares traded for the day, which includes both buy and sell orders. You can determine the daily trading volume on your own—all transactions are publicly available—by calculating the total amount of shares traded. However, it’s much easier to look at the daily trading volume on any stock chart. Time is money, after all, and it would be wise to save time. Daily trading volume shouldn’t be confused with [dollar volume](https://www.investopedia.com/terms/d/dollar-volume-liquidity.asp), which is a stock’s share price times its daily volume. ## Why It Matters If you see a stock that’s appreciating on high volume, it's more likely to be a sustainable move. If you see a stock that’s appreciating on low volume, it could be a [dead cat bounce](https://www.investopedia.com/terms/d/deadcatbounce.asp). Logically, when more money is moving a stock price, it means there is more demand for that stock. If a small amount of money is moving the stock price, the odds of that move being sustainable are lower. Also, be careful of low-volume ([illiquid](https://www.investopedia.com/terms/i/illiquid.asp)) stocks, where you could end up trapped in a [pump and dump](https://www.investopedia.com/terms/p/pumpanddump.asp) scheme. Even if you were trying to play the artificial move, you might not be able to find a seller if the [volume is low](https://www.investopedia.com/articles/active-trading/051415/risks-trading-lowvolume-stocks.asp) and you'd be locked into a losing trade. ## Low-Trade Volume Stocks There is one exception for buying low-volume stocks, which is when you have done your due diligence and concluded that you have found a good company that has yet to be discovered. In this scenario, you would have gotten in ahead of the curve. When volume increases, you will have the potential for a [multi-bagger](https://www.investopedia.com/terms/t/tenbagger.asp), which is every investor’s dream scenario. Another reason to steer clear of most low-volume stocks is the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp). With illiquid stocks, the bid-ask spread is going to be wide, which can be costly. A high-volume stock, such as the aforementioned BAC, often has a tight bid-ask spread of a penny, which should do you minimal to no harm. When you look at daily trading volume, don’t just look at the trading volume for that particular day. This could be a [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) stock that popped or dropped on the news. In most cases, this won’t be sustainable. Instead, look at the three-month [average daily trading volume](https://www.investopedia.com/terms/a/averagedailytradingvolume.asp), which will give you a much better idea of whether the stock offers [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). If you’re on the hunt for high-volume stocks, then you might want to begin with the [New York Stock Exchange](https://www.investopedia.com/terms/n/nyse.asp) (NYSE) or [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp). These exchanges have stricter requirements than other exchanges, which is positive because it keeps the riff-raff out of play. ## The Bottom Line Calculating volume is easy. Understanding what volume means is more important. While this should never be the only factor when weighing an investment or trading decision, it should always play a role, as it can impact your investments and trading strategy.

If you ever look at the volume leaders for the trading day, you will almost always find major stocks like Bank of America Corporation (BAC). On Aug. 19, 2021, the trading volume for BAC totaled 46.5 million. Advanced Micro Devices, Inc (AMD) was even higher at 59.2 million. Those are big numbers, but where do they come from, and what do they mean? The first part of the question can be answered with ease: market exchanges. The second part requires a little more detail. While volume is only one tool of many, it adds value to your investment decision. How It Works Calculating volume is simply the total amount of shares traded for the day, which includes both buy and sell orders. You can determine the daily trading volume on your own—all transactions are publicly available—by calculating the total amount of shares traded. However, it’s much easier to look at the daily trading volume on any stock chart. Time is money, after all, and it would be wise to save time. Daily trading volume shouldn’t be confused with dollar volume, which is a stock’s share price times its daily volume. Why It Matters If you see a stock that’s appreciating on high volume, it's more likely to be a sustainable move. If you see a stock that’s appreciating on low volume, it could be a dead cat bounce. Logically, when more money is moving a stock price, it means there is more demand for that stock. If a small amount of money is moving the stock price, the odds of that move being sustainable are lower. Also, be careful of low-volume (illiquid) stocks, where you could end up trapped in a pump and dump scheme. Even if you were trying to play the artificial move, you might not be able to find a seller if the volume is low and you'd be locked into a losing trade. Low-Trade Volume Stocks There is one exception for buying low-volume stocks, which is when you have done your due diligence and concluded that you have found a good company that has yet to be discovered. In this scenario, you would have gotten in ahead of the curve. When volume increases, you will have the potential for a multi-bagger, which is every investor’s dream scenario. Another reason to steer clear of most low-volume stocks is the bid-ask spread. With illiquid stocks, the bid-ask spread is going to be wide, which can be costly. A high-volume stock, such as the aforementioned BAC, often has a tight bid-ask spread of a penny, which should do you minimal to no harm. When you look at daily trading volume, don’t just look at the trading volume for that particular day. This could be a small-cap stock that popped or dropped on the news. In most cases, this won’t be sustainable. Instead, look at the three-month average daily trading volume, which will give you a much better idea of whether the stock offers liquidity. If you’re on the hunt for high-volume stocks, then you might want to begin with the New York Stock Exchange (NYSE) or Nasdaq. These exchanges have stricter requirements than other exchanges, which is positive because it keeps the riff-raff out of play. The Bottom Line Calculating volume is easy. Understanding what volume means is more important. While this should never be the only factor when weighing an investment or trading decision, it should always play a role, as it can impact your investments and trading strategy.

https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp

How Tax-Loss Harvesting Works for Average Investors

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Tax-loss harvesting is a stock investing strategy that attempts to lower the taxes an investor will pay to the U.S. federal government during a current taxable year. Investors using tax-loss harvesting may choose to sell some securities at a loss, then use those losses to offset capital gains or other taxable income. This lowers the tax bill the investor pays in that year, allowing them to reinvest the money they earned back into their portfolio. </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"> Tax-loss harvesting is not appropriate for all investors or all situations. However, advances in financial technology have made it more accessible for average investors with smaller, personal investment portfolios. </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>Tax-loss harvesting involves using the losses from the sale of one investment to offset gains made from the sale of another investment, lowering the federal tax owed that year.</li><li>Tax-loss harvesting only defers tax payments, it does not cancel them.</li><li>If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. There is no expiration date.</li><li>Tax-loss harvesting is not appropriate for all investors, but it can be used effectively even by average investors with only personal investment porfolios.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-tax-loss-harvesting"></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 Tax-Loss Harvesting? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Tax-loss harvesting is a strategy that uses the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalloss.asp">capital losses</a> from one investment to offset taxes owed on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">capital gains</a> (profit) from another investment. It is permitted under Internal Revenue Service (IRS) rules, though certain conditions must be met. The investment can be any tradable <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> (stocks, bonds, shares in an exchange-traded fund) or even cryptocurrencies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> To use this strategy, investors must sell an asset at a loss. This loss can then be used to offset taxes owed on other income, whether from a capital gain or even personal income. This lowers the tax bill the investor owes for that year, allowing them to take the total profit they made from both sales and reinvest it in a similar asset to maintain a balanced investment portfolio. Tax-loss harvesting is relevant only for taxable investment accounts. The benefit is <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxdeferred.asp">tax deferral</a>, not tax cancellation.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The rationale for the tax postponement is that a dollar today is worth more than a dollar in the future—especially if the money saved on taxes this year is wisely reinvested and builds more wealth than the amount of any future tax bill at liquidation. When tax-loss harvesting works as planned, the reinvested tax savings can drive the growth of a portfolio, even if the taxpayer makes no further contributions to the account.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Tax-loss harvesting can be executed by anyone with a taxable investment account and taxable income over the limits set by the tax code, as long as they have a fairly long <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment_horizon.asp">investment horizon</a>. However, this doesn't mean it is appropriate for all taxpayers in all circumstances. Tax-loss harvesting can be used as a hedge against market downturns, but using it correctly requires expertise that average investors may not have. To avoid tax pitfalls, all taxpayers should consult an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp">investment tax</a> professional before attempting tax-loss harvesting. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-how-tax-loss-harvesting-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> How Tax Loss Harvesting Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Tax-loss harvesting uses the balance of capital losses and capital gains to minimize an investor's tax burden. </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 capital gain is the profit that an investor makes when selling an asset. It is the difference between the cost basis—what a taxpayer paid for an investment—and the sale price. If the cost basis was higher than the sale price, the investor experiences a capital loss, rather than a capital gain. </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, as soon as an investor sells stock with a <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> of $25,000 for $27,000, they have realized a capital gain of $2,000—and that gain is taxable in the year they sold the stock and took the profit. If the investor sells the same stock for $23,000, then they instead have a capital loss of $2,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> This is where the IRS-approved strategy of tax-loss harvesting comes into play. The investor who realized a capital gain of $2,000 can deliberately sell one of their other investments at a loss to offset the gain on their tax return. For example, if the same investor had another stock that they bought for $30,000 and then sold for $25,000 when the price dropped, they can “harvest” that price difference of $5,000 as a capital loss.<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_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>For tax purposes, a capital loss is not considered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/amount-realized.asp#:~:text=Understanding%20Amount%20Realized,a%20result%20of%20the%20transaction.">realized</a> until the investment has been sold for a price lower than the cost basis.<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_27-0"> Not only can capital losses offset capital gains, but if losses exceed gains that year, the investor could also use the remaining capital-loss balance to offset personal income (up to a limited amount). It may even be possible for the investor to carry the loss over to future years to offset future gains.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Although tax-loss harvesting can be done throughout the year, the most common time is year-end, when annual income taxes are looming. December 31 is the deadline to take the capital losses that will be used to offset capital gains for that year, so that adds to the urgency. However, according to advocates, the danger of waiting until year-end for all tax-loss harvesting trades is that a capital loss that was available to be harvested in June may no longer be available in December.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-who-should-use-tax-loss-harvesting"></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"> Who Should Use Tax-Loss Harvesting? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Tax-loss harvesting is not appropriate for every taxpayer and every scenario. As a strategy, it assumes ideal conditions for factors that can be highly unpredictable in the real world. </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"> For example, postponing tax payments works only if tax rates (for both capital gains and the individual taxpayer) remain at the same level (or drop). But in the real world, tax rates can never be predicted, especially over the lifetime of most investment portfolios. When tax-loss harvesting backfires, the taxpayer could wind up with a future tax bill that is far higher than any profits from reinvested tax savings. </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"> Average investors also may not have the large, frequent capital gains that make tax-loss harvesting profitable for large investors, so capital losses might just accumulate indefinitely without lowering taxes. A study originally published in the Financial Analysts Journal found that 40% of what determines how profitable tax-loss harvesting is to small investors is driven by uncontrollable factors in the return environment and the remaining 60% of the variation is driven by differences in individual investor profiles (income, tax rates, cash contributions/liquidations, percentage of income offset with losses).<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_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> For this reason, the analysts on this study advocated a case-by-case approach to tax-loss harvesting, especially for average investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Transaction Fees and Administrative Costs </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Other developments in financial technology have made tax-loss harvesting more accessible and appropriate for average investors. </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"> Whenever trades are executed—including tax-loss harvesting trades—costs hit the account: both transaction costs (for commissions and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp#:~:text=our%20editorial%20policies-,What%20Is%20a%20Bid%2DAsk%20Spread%3F,seller%20is%20willing%20to%20accept.">bid-ask spreads</a>) and administrative costs (for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/022801.asp">trade execution</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental-analysis/08/sec-forms.asp#:~:text=SEC%20Filings%20are%20regulatory%20documents,investors%2C%20analysts%2C%20and%20regulators.">regulatory filings</a>). This traditionally made tax-loss harvest more appropriate for larger accounts (both <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp#:~:text=Key%20Takeaways-,An%20institutional%20investor%20is%20a%20company%20or%20organization%20that%20invests,subject%20to%20less%20regulatory%20oversight.">institutional</a> and individual), where these costs are a smaller percentage of the total portfolio. </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"> However, a 2020 study conducted by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://lfe.mit.edu/">MIT Laboratory for Financial Engineering</a> looked at the impact of recent advances in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fintech.asp">financial technology</a> (fintech). These new technologies, and the overall decline in computing costs, have lowered or even eliminated the transaction and administrative costs that used to wipe out the benefits of tax-loss harvesting for small investors. </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"> Now that fintech (especially <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp">robo-advisors</a>) has removed the cost barrier, the MIT analysts argued that tax-loss harvesting has become practical for small accounts as well as large investors. The study's analysts also argued that fintech has the potential to make tax-loss harvesting a common strategy for average investors, the same way it stimulated the growth of index funds and the options market.<span class="ql-inline-citation" data-cite="14"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_49-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_50-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Tax-loss harvesting should be tailored to individual tax and income profiles—exactly as investment advisors do when they match <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-profile.asp">risk profile</a> to each investor’s investment objectives and time horizons.</p></div></div></div> <span class="heading-toc" id="toc-important-considerations-for-tax-loss-harvesting"></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"> Important Considerations for Tax-Loss Harvesting </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Tax-loss harvesting is a legal strategy that even average investors can use to decrease their tax bill, if they are strategic with their investments. However, there are important considerations to keep in mind that impact how you manage your capital gains and losses. </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"> Short-Term vs. Long-Term Tax Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Whenever a capital gain or a capital loss is realized, it is classified by the IRS as either short-term (on assets held for less than a year) or long-term (on assets held for more than a year). From a tax-loss harvesting perspective, the most important <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp">short-term/long-term</a> considerations are: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <li>All decisions about tax-loss harvesting must take into consideration that tax rates are much higher on short-term capital gains than on long-term capital gains.</li> <li>Short-term capital gains are taxed as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/ordinaryincome.asp">ordinary income</a> at the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaltaxrate.asp">marginal tax rate</a>, which can be up to 37%, depending on income bracket.</li> <li>For most individuals, long-term capital gains are taxed at a rate of 15% to 20%, depending on income.</li> <li>For investors with income tax rates higher than their long-term capital gains tax rates, it might make sense to use capital losses to offset income rather than capital gains.</li> <li>For investors with income below certain levels—$40,400 for single filers or $80,800 for married couples filing jointly—capital gains are taxed at 0%.<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_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"> Delayed Tax Obligation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Tax-loss harvesting is relevant only for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/brokerage-account-vs-ira-5213909">taxable investment</a> accounts, and it doesn't cancel the investor's tax obligation. Instead, the benefit is the same one offered by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/brokerage-account-vs-ira-5213909">tax-deferred</a> accounts: the tax obligation is postponed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> The rationale behind tax-loss harvesting is that deferring current tax payments allows investors to use the savings to fuel portfolio growth in the present. The assumption is that the dollar amount generated over the years will be significantly more than the eventual tax bill when it comes due. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_64-0"> <span class="mntl-sc-block-subheading__text"> The Lower the Cost Basis, the Higher the Tax Bill </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Another important consideration for investors is that although tax-loss harvesting can reduce the tax bill due this year, the process automatically lowers the cost basis of the investment. This could result in a higher tax bill on future capital gains. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> As explained above, a capital gain (or a capital loss) is the difference between what a taxpayer paid for an investment (the cost basis) and what they later earn when the investment is sold (the sale price). When the cost basis goes down, capital gains go up, and so does the future tax bill. </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"> For example, an investor might harvest a capital loss by selling an investment with a cost basis of $30,000 when the price drops to $25,000. Their capital loss is: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> $30,000 - $25,000 = $5,000 </blockquote> <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"> If this was a long-term capital gain (meaning it was held for more than one year) and their income qualifies them for a 15% tax on capital gains, then the investor could lower this year's tax bill by: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> $5,000 x 15% = $750 </blockquote> <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"> In this example, tax-loss harvesting has worked this year, but that tax savings of $750 is not necessarily permanent over the long term. If the investor uses the $25,000 from the asset they sold to reinvest in a new security, then the new lower cost basis is $25,000, down from $30,000. If the value of the new investment increases to $30,000 by the time the portfolio is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidate.asp#:~:text=To%20liquidate%20means%20to%20sell,investment%2C%20or%20consolidating%20portfolio%20holdings.">liquidated</a> (sold for cash), the investor will have incurred a capital gain of: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> $30,000 - $25,000 = $5,000 </blockquote> <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"> If their tax rate stays the same, the tax savings of $750 this year will be wiped out on a future tax bill. </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"> However, if the value of the new investment increases above $30,000 to $35,000, then the investor will have lost money, despite the increase in value of the investment. The reason is that the capital gains bill at liquidation will be calculated by subtracting the sale price of $35,000 from the lower cost basis: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> $35,000 - $25,000 = $10,000 </blockquote> <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"> If their tax rate is still 15%, then their tax bill will be: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> $10,000 x 15% = $1,500 </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> <br>This ends up being double the loss they harvested this year. Of course, if the new investment drops even further (instead of increasing), there are additional opportunities for tax-loss harvesting, but buying losing investments should never be the objective. </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> The caution for investors is that, from the time the capital loss is harvested until the tax bill comes due at portfolio liquidation, tax rates can change, personal income can go up or down, and the market can fluctuate. Taxes on capital gains, however, will always be calculated on the cost basis of the investment. The fact that tax-loss harvesting automatically lowers the cost basis could make the strategy deliver no benefit—or even create a loss—as in the examples above. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <span class="heading-toc" id="toc-allowances-and-restrictions-on-tax-loss-harvesting"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_95-0"> <span class="mntl-sc-block-heading__text"> Allowances and Restrictions on Tax-Loss Harvesting </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> There are a few important allowances and restrictions on tax-loss harvesting. Investors will need to keep these in mind in order to take advantage of this tax strategy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_98-0"><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_99-0"><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>Consult a tax and investment professional before using a tax-loss harvesting strategy. They may spot pitfalls or concerns that you miss, which can save you time, money, and possibly an IRS audit.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-subheading__text"> Annual Tax Deduction Limit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> There is an annual limit of $3,000 on tax-loss harvesting for income tax deductions. A taxpayer may only deduct up to $3,000 ($1,500 if you are married and file a separate return) or your total net loss shown on Line 16 of your Form 1040, Schedule D. Any total net loss on line 16 that is not used in the current tax year may be carried forward.<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_102-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_103-0"> <span class="mntl-sc-block-subheading__text"> No Expiration Date on Capital Losses </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> In the example above, the investor can use their capital loss of $5,000 dollar for dollar to offset their entire capital gain of $2,000 this year—and the remaining capital-loss balance of $3,000 can be carried over to offset future capital gains (or income) until it is used up—there is no expiration date. In fact, even if the investor had no gains to offset that year, any capital losses they decided to harvest would carry over to future years until they are needed.<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_105-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_106-0"> <span class="mntl-sc-block-subheading__text"> Losses Must First Offset Gains of Same Type </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_107-0"> Another important consideration is that losses of one type must be used first to offset gains of the same type. Short-term capital losses must be used first to offset short-term capital gains; long-term capital losses must be used first to offset long-term capital gains. Fortunately, if losses in one category exceed gains in the same category, then the remaining losses can be applied to gains in the other category. Of course, due to the large difference in tax rates, the most profitable way for most investors to apply tax-loss harvesting is to use short-term losses to offset short-term gains.<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_108-0"></div> <span class="heading-toc" id="toc-the-wash-sale-rule"></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"> The Wash-Sale Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_110-0"> Of all the restrictions on tax-loss harvesting, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/washsalerule.asp">wash-sale rule</a> requires the most planning. This is how it works. </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"> Most investors who use tax-loss harvesting to lower their taxes want to maintain their level of exposure to the sector in which they took capital losses. Although reinvesting after realizing capital losses is allowed, investors must be careful not to violate the wash-sale rule—or the IRS will disallow the offset of capital gains. </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-note" 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 no-title" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>The wash-sale rule is cited by critics as a reason that many investors should think twice before attempting tax-loss harvesting. Markets can move a lot in 60 days, and if an investor hasn’t found an IRS-compliant replacement security, the profits they miss by sitting on the sidelines with insufficient investment in a hot sector could be greater than their tax savings from tax-loss harvesting.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> Here are the most important considerations for investors who want to stay both invested and compliant with the IRS wash-sale rule. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_118-0"> <span class="mntl-sc-block-subheading__text"> 60-Day Waiting Period </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> To prevent investors from gaming the system to get a tax break, the tax code prohibits investors from deducting capital losses on what the IRS calls "wash sales," i.e., using a capital loss for tax-loss harvesting and then repurchasing the identical security (or a “substantially identical” security) within 60 days of the sale that generated the capital loss. This means that investors must refrain from purchasing an identical or “substantially identical” security—or even an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/052505.asp">option</a> to buy such securities—for 30 days before and 30 days after the capital loss is realized.<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_120-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_121-0"> <span class="mntl-sc-block-subheading__text"> Stock Bonuses and ESPPs </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> In addition to options, investors need to be aware that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vesting.asp">vesting</a> dates of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockcompensation.asp">stock bonuses</a> or the purchase dates in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/espp.asp">employee stock purchase plans</a> (ESPPs) could possibly trigger violations of the wash-sale rule.<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_123-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_124-0"> <span class="mntl-sc-block-subheading__text"> Applies to All Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_125-0"> It is also important to remember that the wash-sale rule applies to all trades under the investor's or the couple's social security number(s)—which means that it applies to all their tax-deferred accounts, too. This means that an investor will trigger a wash-sale violation if they sell a stock in their <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> and buy the same stock in their IRA account within the 60-day waiting period. For married couples filing jointly, spouses are not allowed to use each other's accounts to get around the wash-sale rule.<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_126-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_127-0"><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_128-0"><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 IRS wash-sale rule does not clearly define what would make a replacement security “substantially identical” to the one sold to harvest a capital loss. With limited guidance from the IRS, investors trying to avoid wash-sale violations always have to consider the degree of overlap with the original investment. To maintain exposure to the industry of the security sold at a loss without violating the wash-sale rule, one option is investing in an exchange-traded fund (ETF) or a mutual fund that targets the same sector.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_129-0"> <span class="mntl-sc-block-subheading__text"> Cryptocurrency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_130-0"> Although cryptocurrency trades must be reported on tax returns as capital losses or capital gains, the IRS still considers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> a digital asset rather than a security.<span class="ql-inline-citation" data-cite="20"></span> Because the wash-sale rule applied to securities, it doesn't apply to cryptocurrency.<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_131-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_132-0"> In the crypto market, an investor could do exactly what the wash-sale rule disallows for securities—sell cryptocurrency at a loss, buy back the same cryptocurrency without observing the 60-day waiting period, and then use the capital loss to offset capital gains. However, as the U.S. Congress considers options to regulate the crypto market, the classification of cryptocurrency as a property may be subject to change in the future.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_133-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_134-0"><span class="heading-toc" id="toc-does-tax-loss-harvesting-cancel-your-tax-obligation"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Tax-Loss Harvesting Cancel Your Tax Obligation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Tax-loss harvesting does not permanently cancel your tax obligation on capital gains. Instead, this strategy postpones the taxes you owe. Once the taxable account has been liquidated, taxes are due on any capital gains.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_135-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_136-0"><span class="heading-toc" id="toc-what-is-the-point-of-tax-loss-harvesting"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Point of Tax-Loss Harvesting?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If executed correctly, tax-loss harvesting allows investors to lower their current tax bill, rebalance their portfolios, and keep more money invested.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_137-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_138-0"><span class="heading-toc" id="toc-what-is-the-wash-sale-rule"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Wash-Sale Rule?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The wash-sale rule is an IRS regulation that prohibits investors from using a capital loss for tax-loss harvesting if the identical security, a “substantially identical” security, or an option on such a security has been purchased within 60 days of the sale that generated the capital loss (30 days before and 30 days after the sale).</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_139-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_140-0"><span class="heading-toc" id="toc-what-is-the-difference-between-short-term-and-long-term-capital-gains"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between Short-Term and Long-Term Capital Gains?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Short-term capital gains are realized on assets that were held for less than a year. Long-term capital gains are realized on assets that were held for more than a year. These are subject to different tax rates. The long-term capital gains tax rate is lower than the ordinary income tax rate across tax brackets. Short-term capital gains are taxed as ordinary income.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_141-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_142-0"><span class="heading-toc" id="toc-what-is-the-tax-loss-harvesting-process"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Tax-Loss Harvesting Process?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The three steps in the tax-loss harvesting process are: 1) Sell securities that have lost value; 2) Use the capital loss to offset capital gains on other sales; 3) Replace the exited investments with similar (but not too similar) investments to maintain the desired investment exposure.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_143-0"></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_144-0"> <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_145-0"> Tax loss harvesting is the strategic approach to making the most of capital losses. Due to tax treatment of gains and losses, taxpayers may find it favorable to time when they sell securities at a loss and how they net this activity against favorable investment gains. Advances in fintech have made this strategy more accessible to average investors with smaller portfolios. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_146-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_147-0"> Any investors making use of a tax-loss harvesting strategy must keep in mind wash-sale rules, which stipulate restrictions on benefits and treatments of selling a security and rebuying it within a specific window. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_148-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_149-0"> <em><strong>Correction—April 17, 2024:</strong> </em>This article has been corrected with the proper calculation for determining the tax bill in the example about a lower cost basis leading to a higher tax bill. </p></div>

Tax-loss harvesting is a stock investing strategy that attempts to lower the taxes an investor will pay to the U.S. federal government during a current taxable year. Investors using tax-loss harvesting may choose to sell some securities at a loss, then use those losses to offset capital gains or other taxable income. This lowers the tax bill the investor pays in that year, allowing them to reinvest the money they earned back into their portfolio. Tax-loss harvesting is not appropriate for all investors or all situations. However, advances in financial technology have made it more accessible for average investors with smaller, personal investment portfolios. ### Key Takeaways * Tax-loss harvesting involves using the losses from the sale of one investment to offset gains made from the sale of another investment, lowering the federal tax owed that year. * Tax-loss harvesting only defers tax payments, it does not cancel them. * If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. There is no expiration date. * Tax-loss harvesting is not appropriate for all investors, but it can be used effectively even by average investors with only personal investment porfolios. ## What Is Tax-Loss Harvesting? Tax-loss harvesting is a strategy that uses the [capital losses](https://www.investopedia.com/terms/c/capitalloss.asp) from one investment to offset taxes owed on [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) (profit) from another investment. It is permitted under Internal Revenue Service (IRS) rules, though certain conditions must be met. The investment can be any tradable [security](https://www.investopedia.com/terms/s/security.asp) (stocks, bonds, shares in an exchange-traded fund) or even cryptocurrencies. To use this strategy, investors must sell an asset at a loss. This loss can then be used to offset taxes owed on other income, whether from a capital gain or even personal income. This lowers the tax bill the investor owes for that year, allowing them to take the total profit they made from both sales and reinvest it in a similar asset to maintain a balanced investment portfolio. Tax-loss harvesting is relevant only for taxable investment accounts. The benefit is [tax deferral](https://www.investopedia.com/terms/t/taxdeferred.asp), not tax cancellation. The rationale for the tax postponement is that a dollar today is worth more than a dollar in the future—especially if the money saved on taxes this year is wisely reinvested and builds more wealth than the amount of any future tax bill at liquidation. When tax-loss harvesting works as planned, the reinvested tax savings can drive the growth of a portfolio, even if the taxpayer makes no further contributions to the account. Tax-loss harvesting can be executed by anyone with a taxable investment account and taxable income over the limits set by the tax code, as long as they have a fairly long [investment horizon](https://www.investopedia.com/terms/i/investment_horizon.asp). However, this doesn't mean it is appropriate for all taxpayers in all circumstances. Tax-loss harvesting can be used as a hedge against market downturns, but using it correctly requires expertise that average investors may not have. To avoid tax pitfalls, all taxpayers should consult an [investment tax](https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp) professional before attempting tax-loss harvesting. ## How Tax Loss Harvesting Works Tax-loss harvesting uses the balance of capital losses and capital gains to minimize an investor's tax burden. A capital gain is the profit that an investor makes when selling an asset. It is the difference between the cost basis—what a taxpayer paid for an investment—and the sale price. If the cost basis was higher than the sale price, the investor experiences a capital loss, rather than a capital gain. For example, as soon as an investor sells stock with a [cost basis](https://www.investopedia.com/articles/investing/060313/what-determines-your-cost-basis.asp) of $25,000 for $27,000, they have realized a capital gain of $2,000—and that gain is taxable in the year they sold the stock and took the profit. If the investor sells the same stock for $23,000, then they instead have a capital loss of $2,000. This is where the IRS-approved strategy of tax-loss harvesting comes into play. The investor who realized a capital gain of $2,000 can deliberately sell one of their other investments at a loss to offset the gain on their tax return. For example, if the same investor had another stock that they bought for $30,000 and then sold for $25,000 when the price dropped, they can “harvest” that price difference of $5,000 as a capital loss. ### For tax purposes, a capital loss is not considered [realized](https://www.investopedia.com/terms/a/amount-realized.asp#:~:text=Understanding%20Amount%20Realized,a%20result%20of%20the%20transaction.) until the investment has been sold for a price lower than the cost basis. Not only can capital losses offset capital gains, but if losses exceed gains that year, the investor could also use the remaining capital-loss balance to offset personal income (up to a limited amount). It may even be possible for the investor to carry the loss over to future years to offset future gains. Although tax-loss harvesting can be done throughout the year, the most common time is year-end, when annual income taxes are looming. December 31 is the deadline to take the capital losses that will be used to offset capital gains for that year, so that adds to the urgency. However, according to advocates, the danger of waiting until year-end for all tax-loss harvesting trades is that a capital loss that was available to be harvested in June may no longer be available in December. ## Who Should Use Tax-Loss Harvesting? Tax-loss harvesting is not appropriate for every taxpayer and every scenario. As a strategy, it assumes ideal conditions for factors that can be highly unpredictable in the real world. For example, postponing tax payments works only if tax rates (for both capital gains and the individual taxpayer) remain at the same level (or drop). But in the real world, tax rates can never be predicted, especially over the lifetime of most investment portfolios. When tax-loss harvesting backfires, the taxpayer could wind up with a future tax bill that is far higher than any profits from reinvested tax savings. Average investors also may not have the large, frequent capital gains that make tax-loss harvesting profitable for large investors, so capital losses might just accumulate indefinitely without lowering taxes. A study originally published in the Financial Analysts Journal found that 40% of what determines how profitable tax-loss harvesting is to small investors is driven by uncontrollable factors in the return environment and the remaining 60% of the variation is driven by differences in individual investor profiles (income, tax rates, cash contributions/liquidations, percentage of income offset with losses). For this reason, the analysts on this study advocated a case-by-case approach to tax-loss harvesting, especially for average investors. ### Transaction Fees and Administrative Costs Other developments in financial technology have made tax-loss harvesting more accessible and appropriate for average investors. Whenever trades are executed—including tax-loss harvesting trades—costs hit the account: both transaction costs (for commissions and [bid-ask spreads](https://www.investopedia.com/terms/b/bid-askspread.asp#:~:text=our%20editorial%20policies-,What%20Is%20a%20Bid%2DAsk%20Spread%3F,seller%20is%20willing%20to%20accept.)) and administrative costs (for [trade execution](https://www.investopedia.com/articles/01/022801.asp) and [regulatory filings](https://www.investopedia.com/articles/fundamental-analysis/08/sec-forms.asp#:~:text=SEC%20Filings%20are%20regulatory%20documents,investors%2C%20analysts%2C%20and%20regulators.)). This traditionally made tax-loss harvest more appropriate for larger accounts (both [institutional](https://www.investopedia.com/terms/i/institutionalinvestor.asp#:~:text=Key%20Takeaways-,An%20institutional%20investor%20is%20a%20company%20or%20organization%20that%20invests,subject%20to%20less%20regulatory%20oversight.) and individual), where these costs are a smaller percentage of the total portfolio. However, a 2020 study conducted by the [MIT Laboratory for Financial Engineering](https://lfe.mit.edu/) looked at the impact of recent advances in [financial technology](https://www.investopedia.com/terms/f/fintech.asp) (fintech). These new technologies, and the overall decline in computing costs, have lowered or even eliminated the transaction and administrative costs that used to wipe out the benefits of tax-loss harvesting for small investors. Now that fintech (especially [robo-advisors](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp)) has removed the cost barrier, the MIT analysts argued that tax-loss harvesting has become practical for small accounts as well as large investors. The study's analysts also argued that fintech has the potential to make tax-loss harvesting a common strategy for average investors, the same way it stimulated the growth of index funds and the options market. ### Tax-loss harvesting should be tailored to individual tax and income profiles—exactly as investment advisors do when they match [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) and [risk profile](https://www.investopedia.com/terms/r/risk-profile.asp) to each investor’s investment objectives and time horizons. ## Important Considerations for Tax-Loss Harvesting Tax-loss harvesting is a legal strategy that even average investors can use to decrease their tax bill, if they are strategic with their investments. However, there are important considerations to keep in mind that impact how you manage your capital gains and losses. ### Short-Term vs. Long-Term Tax Rates Whenever a capital gain or a capital loss is realized, it is classified by the IRS as either short-term (on assets held for less than a year) or long-term (on assets held for more than a year). From a tax-loss harvesting perspective, the most important [short-term/long-term](https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp) considerations are: * All decisions about tax-loss harvesting must take into consideration that tax rates are much higher on short-term capital gains than on long-term capital gains. * Short-term capital gains are taxed as [ordinary income](https://www.investopedia.com/terms/o/ordinaryincome.asp) at the [marginal tax rate](https://www.investopedia.com/terms/m/marginaltaxrate.asp), which can be up to 37%, depending on income bracket. * For most individuals, long-term capital gains are taxed at a rate of 15% to 20%, depending on income. * For investors with income tax rates higher than their long-term capital gains tax rates, it might make sense to use capital losses to offset income rather than capital gains. * For investors with income below certain levels—$40,400 for single filers or $80,800 for married couples filing jointly—capital gains are taxed at 0%. ### Delayed Tax Obligation Tax-loss harvesting is relevant only for [taxable investment](https://www.investopedia.com/brokerage-account-vs-ira-5213909) accounts, and it doesn't cancel the investor's tax obligation. Instead, the benefit is the same one offered by [tax-deferred](https://www.investopedia.com/brokerage-account-vs-ira-5213909) accounts: the tax obligation is postponed. The rationale behind tax-loss harvesting is that deferring current tax payments allows investors to use the savings to fuel portfolio growth in the present. The assumption is that the dollar amount generated over the years will be significantly more than the eventual tax bill when it comes due. ### The Lower the Cost Basis, the Higher the Tax Bill Another important consideration for investors is that although tax-loss harvesting can reduce the tax bill due this year, the process automatically lowers the cost basis of the investment. This could result in a higher tax bill on future capital gains. As explained above, a capital gain (or a capital loss) is the difference between what a taxpayer paid for an investment (the cost basis) and what they later earn when the investment is sold (the sale price). When the cost basis goes down, capital gains go up, and so does the future tax bill. For example, an investor might harvest a capital loss by selling an investment with a cost basis of $30,000 when the price drops to $25,000. Their capital loss is: > $30,000 - $25,000 = $5,000 If this was a long-term capital gain (meaning it was held for more than one year) and their income qualifies them for a 15% tax on capital gains, then the investor could lower this year's tax bill by: > $5,000 x 15% = $750 In this example, tax-loss harvesting has worked this year, but that tax savings of $750 is not necessarily permanent over the long term. If the investor uses the $25,000 from the asset they sold to reinvest in a new security, then the new lower cost basis is $25,000, down from $30,000. If the value of the new investment increases to $30,000 by the time the portfolio is [liquidated](https://www.investopedia.com/terms/l/liquidate.asp#:~:text=To%20liquidate%20means%20to%20sell,investment%2C%20or%20consolidating%20portfolio%20holdings.) (sold for cash), the investor will have incurred a capital gain of: > $30,000 - $25,000 = $5,000 If their tax rate stays the same, the tax savings of $750 this year will be wiped out on a future tax bill. However, if the value of the new investment increases above $30,000 to $35,000, then the investor will have lost money, despite the increase in value of the investment. The reason is that the capital gains bill at liquidation will be calculated by subtracting the sale price of $35,000 from the lower cost basis: > $35,000 - $25,000 = $10,000 If their tax rate is still 15%, then their tax bill will be: > $10,000 x 15% = $1,500 This ends up being double the loss they harvested this year. Of course, if the new investment drops even further (instead of increasing), there are additional opportunities for tax-loss harvesting, but buying losing investments should never be the objective. The caution for investors is that, from the time the capital loss is harvested until the tax bill comes due at portfolio liquidation, tax rates can change, personal income can go up or down, and the market can fluctuate. Taxes on capital gains, however, will always be calculated on the cost basis of the investment. The fact that tax-loss harvesting automatically lowers the cost basis could make the strategy deliver no benefit—or even create a loss—as in the examples above. ## Allowances and Restrictions on Tax-Loss Harvesting There are a few important allowances and restrictions on tax-loss harvesting. Investors will need to keep these in mind in order to take advantage of this tax strategy. ### Consult a tax and investment professional before using a tax-loss harvesting strategy. They may spot pitfalls or concerns that you miss, which can save you time, money, and possibly an IRS audit. ### Annual Tax Deduction Limit There is an annual limit of $3,000 on tax-loss harvesting for income tax deductions. A taxpayer may only deduct up to $3,000 ($1,500 if you are married and file a separate return) or your total net loss shown on Line 16 of your Form 1040, Schedule D. Any total net loss on line 16 that is not used in the current tax year may be carried forward. ### No Expiration Date on Capital Losses In the example above, the investor can use their capital loss of $5,000 dollar for dollar to offset their entire capital gain of $2,000 this year—and the remaining capital-loss balance of $3,000 can be carried over to offset future capital gains (or income) until it is used up—there is no expiration date. In fact, even if the investor had no gains to offset that year, any capital losses they decided to harvest would carry over to future years until they are needed. ### Losses Must First Offset Gains of Same Type Another important consideration is that losses of one type must be used first to offset gains of the same type. Short-term capital losses must be used first to offset short-term capital gains; long-term capital losses must be used first to offset long-term capital gains. Fortunately, if losses in one category exceed gains in the same category, then the remaining losses can be applied to gains in the other category. Of course, due to the large difference in tax rates, the most profitable way for most investors to apply tax-loss harvesting is to use short-term losses to offset short-term gains. ## The Wash-Sale Rule Of all the restrictions on tax-loss harvesting, the [wash-sale rule](https://www.investopedia.com/terms/w/washsalerule.asp) requires the most planning. This is how it works. Most investors who use tax-loss harvesting to lower their taxes want to maintain their level of exposure to the sector in which they took capital losses. Although reinvesting after realizing capital losses is allowed, investors must be careful not to violate the wash-sale rule—or the IRS will disallow the offset of capital gains. ### The wash-sale rule is cited by critics as a reason that many investors should think twice before attempting tax-loss harvesting. Markets can move a lot in 60 days, and if an investor hasn’t found an IRS-compliant replacement security, the profits they miss by sitting on the sidelines with insufficient investment in a hot sector could be greater than their tax savings from tax-loss harvesting. Here are the most important considerations for investors who want to stay both invested and compliant with the IRS wash-sale rule. ### 60-Day Waiting Period To prevent investors from gaming the system to get a tax break, the tax code prohibits investors from deducting capital losses on what the IRS calls "wash sales," i.e., using a capital loss for tax-loss harvesting and then repurchasing the identical security (or a “substantially identical” security) within 60 days of the sale that generated the capital loss. This means that investors must refrain from purchasing an identical or “substantially identical” security—or even an [option](https://www.investopedia.com/ask/answers/05/052505.asp) to buy such securities—for 30 days before and 30 days after the capital loss is realized. ### Stock Bonuses and ESPPs In addition to options, investors need to be aware that the [vesting](https://www.investopedia.com/terms/v/vesting.asp) dates of [stock bonuses](https://www.investopedia.com/terms/s/stockcompensation.asp) or the purchase dates in [employee stock purchase plans](https://www.investopedia.com/terms/e/espp.asp) (ESPPs) could possibly trigger violations of the wash-sale rule. ### Applies to All Accounts It is also important to remember that the wash-sale rule applies to all trades under the investor's or the couple's social security number(s)—which means that it applies to all their tax-deferred accounts, too. This means that an investor will trigger a wash-sale violation if they sell a stock in their [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp) and buy the same stock in their IRA account within the 60-day waiting period. For married couples filing jointly, spouses are not allowed to use each other's accounts to get around the wash-sale rule. ### The IRS wash-sale rule does not clearly define what would make a replacement security “substantially identical” to the one sold to harvest a capital loss. With limited guidance from the IRS, investors trying to avoid wash-sale violations always have to consider the degree of overlap with the original investment. To maintain exposure to the industry of the security sold at a loss without violating the wash-sale rule, one option is investing in an exchange-traded fund (ETF) or a mutual fund that targets the same sector. ### Cryptocurrency Although cryptocurrency trades must be reported on tax returns as capital losses or capital gains, the IRS still considers [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) a digital asset rather than a security. Because the wash-sale rule applied to securities, it doesn't apply to cryptocurrency. In the crypto market, an investor could do exactly what the wash-sale rule disallows for securities—sell cryptocurrency at a loss, buy back the same cryptocurrency without observing the 60-day waiting period, and then use the capital loss to offset capital gains. However, as the U.S. Congress considers options to regulate the crypto market, the classification of cryptocurrency as a property may be subject to change in the future. ## Does Tax-Loss Harvesting Cancel Your Tax Obligation? Tax-loss harvesting does not permanently cancel your tax obligation on capital gains. Instead, this strategy postpones the taxes you owe. Once the taxable account has been liquidated, taxes are due on any capital gains. ## What Is the Point of Tax-Loss Harvesting? If executed correctly, tax-loss harvesting allows investors to lower their current tax bill, rebalance their portfolios, and keep more money invested. ## What Is the Wash-Sale Rule? The wash-sale rule is an IRS regulation that prohibits investors from using a capital loss for tax-loss harvesting if the identical security, a “substantially identical” security, or an option on such a security has been purchased within 60 days of the sale that generated the capital loss (30 days before and 30 days after the sale). ## What Is the Difference Between Short-Term and Long-Term Capital Gains? Short-term capital gains are realized on assets that were held for less than a year. Long-term capital gains are realized on assets that were held for more than a year. These are subject to different tax rates. The long-term capital gains tax rate is lower than the ordinary income tax rate across tax brackets. Short-term capital gains are taxed as ordinary income. ## What Is the Tax-Loss Harvesting Process? The three steps in the tax-loss harvesting process are: 1) Sell securities that have lost value; 2) Use the capital loss to offset capital gains on other sales; 3) Replace the exited investments with similar (but not too similar) investments to maintain the desired investment exposure. ## The Bottom Line Tax loss harvesting is the strategic approach to making the most of capital losses. Due to tax treatment of gains and losses, taxpayers may find it favorable to time when they sell securities at a loss and how they net this activity against favorable investment gains. Advances in fintech have made this strategy more accessible to average investors with smaller portfolios. Any investors making use of a tax-loss harvesting strategy must keep in mind wash-sale rules, which stipulate restrictions on benefits and treatments of selling a security and rebuying it within a specific window. ***Correction—April 17, 2024:*** This article has been corrected with the proper calculation for determining the tax bill in the example about a lower cost basis leading to a higher tax bill.

Tax-loss harvesting is a stock investing strategy that attempts to lower the taxes an investor will pay to the U.S. federal government during a current taxable year. Investors using tax-loss harvesting may choose to sell some securities at a loss, then use those losses to offset capital gains or other taxable income. This lowers the tax bill the investor pays in that year, allowing them to reinvest the money they earned back into their portfolio. Tax-loss harvesting is not appropriate for all investors or all situations. However, advances in financial technology have made it more accessible for average investors with smaller, personal investment portfolios. Key Takeaways Tax-loss harvesting involves using the losses from the sale of one investment to offset gains made from the sale of another investment, lowering the federal tax owed that year.Tax-loss harvesting only defers tax payments, it does not cancel them.If an investor has no capital gains to offset in the year the capital loss was “harvested,” the loss can be carried over to offset future gains or future income. There is no expiration date.Tax-loss harvesting is not appropriate for all investors, but it can be used effectively even by average investors with only personal investment porfolios. What Is Tax-Loss Harvesting? Tax-loss harvesting is a strategy that uses the capital losses from one investment to offset taxes owed on capital gains (profit) from another investment. It is permitted under Internal Revenue Service (IRS) rules, though certain conditions must be met. The investment can be any tradable security (stocks, bonds, shares in an exchange-traded fund) or even cryptocurrencies. To use this strategy, investors must sell an asset at a loss. This loss can then be used to offset taxes owed on other income, whether from a capital gain or even personal income. This lowers the tax bill the investor owes for that year, allowing them to take the total profit they made from both sales and reinvest it in a similar asset to maintain a balanced investment portfolio. Tax-loss harvesting is relevant only for taxable investment accounts. The benefit is tax deferral, not tax cancellation. The rationale for the tax postponement is that a dollar today is worth more than a dollar in the future—especially if the money saved on taxes this year is wisely reinvested and builds more wealth than the amount of any future tax bill at liquidation. When tax-loss harvesting works as planned, the reinvested tax savings can drive the growth of a portfolio, even if the taxpayer makes no further contributions to the account. Tax-loss harvesting can be executed by anyone with a taxable investment account and taxable income over the limits set by the tax code, as long as they have a fairly long investment horizon. However, this doesn't mean it is appropriate for all taxpayers in all circumstances. Tax-loss harvesting can be used as a hedge against market downturns, but using it correctly requires expertise that average investors may not have. To avoid tax pitfalls, all taxpayers should consult an investment tax professional before attempting tax-loss harvesting. How Tax Loss Harvesting Works Tax-loss harvesting uses the balance of capital losses and capital gains to minimize an investor's tax burden. A capital gain is the profit that an investor makes when selling an asset. It is the difference between the cost basis—what a taxpayer paid for an investment—and the sale price. If the cost basis was higher than the sale price, the investor experiences a capital loss, rather than a capital gain. For example, as soon as an investor sells stock with a cost basis of $25,000 for $27,000, they have realized a capital gain of $2,000—and that gain is taxable in the year they sold the stock and took the profit. If the investor sells the same stock for $23,000, then they instead have a capital loss of $2,000. This is where the IRS-approved strategy of tax-loss harvesting comes into play. The investor who realized a capital gain of $2,000 can deliberately sell one of their other investments at a loss to offset the gain on their tax return. For example, if the same investor had another stock that they bought for $30,000 and then sold for $25,000 when the price dropped, they can “harvest” that price difference of $5,000 as a capital loss. For tax purposes, a capital loss is not considered realized until the investment has been sold for a price lower than the cost basis. Not only can capital losses offset capital gains, but if losses exceed gains that year, the investor could also use the remaining capital-loss balance to offset personal income (up to a limited amount). It may even be possible for the investor to carry the loss over to future years to offset future gains. Although tax-loss harvesting can be done throughout the year, the most common time is year-end, when annual income taxes are looming. December 31 is the deadline to take the capital losses that will be used to offset capital gains for that year, so that adds to the urgency. However, according to advocates, the danger of waiting until year-end for all tax-loss harvesting trades is that a capital loss that was available to be harvested in June may no longer be available in December. Who Should Use Tax-Loss Harvesting? Tax-loss harvesting is not appropriate for every taxpayer and every scenario. As a strategy, it assumes ideal conditions for factors that can be highly unpredictable in the real world. For example, postponing tax payments works only if tax rates (for both capital gains and the individual taxpayer) remain at the same level (or drop). But in the real world, tax rates can never be predicted, especially over the lifetime of most investment portfolios. When tax-loss harvesting backfires, the taxpayer could wind up with a future tax bill that is far higher than any profits from reinvested tax savings. Average investors also may not have the large, frequent capital gains that make tax-loss harvesting profitable for large investors, so capital losses might just accumulate indefinitely without lowering taxes. A study originally published in the Financial Analysts Journal found that 40% of what determines how profitable tax-loss harvesting is to small investors is driven by uncontrollable factors in the return environment and the remaining 60% of the variation is driven by differences in individual investor profiles (income, tax rates, cash contributions/liquidations, percentage of income offset with losses). For this reason, the analysts on this study advocated a case-by-case approach to tax-loss harvesting, especially for average investors. Transaction Fees and Administrative Costs Other developments in financial technology have made tax-loss harvesting more accessible and appropriate for average investors. Whenever trades are executed—including tax-loss harvesting trades—costs hit the account: both transaction costs (for commissions and bid-ask spreads) and administrative costs (for trade execution and regulatory filings). This traditionally made tax-loss harvest more appropriate for larger accounts (both institutional and individual), where these costs are a smaller percentage of the total portfolio. However, a 2020 study conducted by the MIT Laboratory for Financial Engineering looked at the impact of recent advances in financial technology (fintech). These new technologies, and the overall decline in computing costs, have lowered or even eliminated the transaction and administrative costs that used to wipe out the benefits of tax-loss harvesting for small investors. Now that fintech (especially robo-advisors) has removed the cost barrier, the MIT analysts argued that tax-loss harvesting has become practical for small accounts as well as large investors. The study's analysts also argued that fintech has the potential to make tax-loss harvesting a common strategy for average investors, the same way it stimulated the growth of index funds and the options market. Tax-loss harvesting should be tailored to individual tax and income profiles—exactly as investment advisors do when they match asset allocation and risk profile to each investor’s investment objectives and time horizons. Important Considerations for Tax-Loss Harvesting Tax-loss harvesting is a legal strategy that even average investors can use to decrease their tax bill, if they are strategic with their investments. However, there are important considerations to keep in mind that impact how you manage your capital gains and losses. Short-Term vs. Long-Term Tax Rates Whenever a capital gain or a capital loss is realized, it is classified by the IRS as either short-term (on assets held for less than a year) or long-term (on assets held for more than a year). From a tax-loss harvesting perspective, the most important short-term/long-term considerations are: All decisions about tax-loss harvesting must take into consideration that tax rates are much higher on short-term capital gains than on long-term capital gains. Short-term capital gains are taxed as ordinary income at the marginal tax rate, which can be up to 37%, depending on income bracket. For most individuals, long-term capital gains are taxed at a rate of 15% to 20%, depending on income. For investors with income tax rates higher than their long-term capital gains tax rates, it might make sense to use capital losses to offset income rather than capital gains. For investors with income below certain levels—$40,400 for single filers or $80,800 for married couples filing jointly—capital gains are taxed at 0%. Delayed Tax Obligation Tax-loss harvesting is relevant only for taxable investment accounts, and it doesn't cancel the investor's tax obligation. Instead, the benefit is the same one offered by tax-deferred accounts: the tax obligation is postponed. The rationale behind tax-loss harvesting is that deferring current tax payments allows investors to use the savings to fuel portfolio growth in the present. The assumption is that the dollar amount generated over the years will be significantly more than the eventual tax bill when it comes due. The Lower the Cost Basis, the Higher the Tax Bill Another important consideration for investors is that although tax-loss harvesting can reduce the tax bill due this year, the process automatically lowers the cost basis of the investment. This could result in a higher tax bill on future capital gains. As explained above, a capital gain (or a capital loss) is the difference between what a taxpayer paid for an investment (the cost basis) and what they later earn when the investment is sold (the sale price). When the cost basis goes down, capital gains go up, and so does the future tax bill. For example, an investor might harvest a capital loss by selling an investment with a cost basis of $30,000 when the price drops to $25,000. Their capital loss is: $30,000 - $25,000 = $5,000 If this was a long-term capital gain (meaning it was held for more than one year) and their income qualifies them for a 15% tax on capital gains, then the investor could lower this year's tax bill by: $5,000 x 15% = $750 In this example, tax-loss harvesting has worked this year, but that tax savings of $750 is not necessarily permanent over the long term. If the investor uses the $25,000 from the asset they sold to reinvest in a new security, then the new lower cost basis is $25,000, down from $30,000. If the value of the new investment increases to $30,000 by the time the portfolio is liquidated (sold for cash), the investor will have incurred a capital gain of: $30,000 - $25,000 = $5,000 If their tax rate stays the same, the tax savings of $750 this year will be wiped out on a future tax bill. However, if the value of the new investment increases above $30,000 to $35,000, then the investor will have lost money, despite the increase in value of the investment. The reason is that the capital gains bill at liquidation will be calculated by subtracting the sale price of $35,000 from the lower cost basis: $35,000 - $25,000 = $10,000 If their tax rate is still 15%, then their tax bill will be: $10,000 x 15% = $1,500 This ends up being double the loss they harvested this year. Of course, if the new investment drops even further (instead of increasing), there are additional opportunities for tax-loss harvesting, but buying losing investments should never be the objective. The caution for investors is that, from the time the capital loss is harvested until the tax bill comes due at portfolio liquidation, tax rates can change, personal income can go up or down, and the market can fluctuate. Taxes on capital gains, however, will always be calculated on the cost basis of the investment. The fact that tax-loss harvesting automatically lowers the cost basis could make the strategy deliver no benefit—or even create a loss—as in the examples above. Allowances and Restrictions on Tax-Loss Harvesting There are a few important allowances and restrictions on tax-loss harvesting. Investors will need to keep these in mind in order to take advantage of this tax strategy. Consult a tax and investment professional before using a tax-loss harvesting strategy. They may spot pitfalls or concerns that you miss, which can save you time, money, and possibly an IRS audit. Annual Tax Deduction Limit There is an annual limit of $3,000 on tax-loss harvesting for income tax deductions. A taxpayer may only deduct up to $3,000 ($1,500 if you are married and file a separate return) or your total net loss shown on Line 16 of your Form 1040, Schedule D. Any total net loss on line 16 that is not used in the current tax year may be carried forward. No Expiration Date on Capital Losses In the example above, the investor can use their capital loss of $5,000 dollar for dollar to offset their entire capital gain of $2,000 this year—and the remaining capital-loss balance of $3,000 can be carried over to offset future capital gains (or income) until it is used up—there is no expiration date. In fact, even if the investor had no gains to offset that year, any capital losses they decided to harvest would carry over to future years until they are needed. Losses Must First Offset Gains of Same Type Another important consideration is that losses of one type must be used first to offset gains of the same type. Short-term capital losses must be used first to offset short-term capital gains; long-term capital losses must be used first to offset long-term capital gains. Fortunately, if losses in one category exceed gains in the same category, then the remaining losses can be applied to gains in the other category. Of course, due to the large difference in tax rates, the most profitable way for most investors to apply tax-loss harvesting is to use short-term losses to offset short-term gains. The Wash-Sale Rule Of all the restrictions on tax-loss harvesting, the wash-sale rule requires the most planning. This is how it works. Most investors who use tax-loss harvesting to lower their taxes want to maintain their level of exposure to the sector in which they took capital losses. Although reinvesting after realizing capital losses is allowed, investors must be careful not to violate the wash-sale rule—or the IRS will disallow the offset of capital gains. The wash-sale rule is cited by critics as a reason that many investors should think twice before attempting tax-loss harvesting. Markets can move a lot in 60 days, and if an investor hasn’t found an IRS-compliant replacement security, the profits they miss by sitting on the sidelines with insufficient investment in a hot sector could be greater than their tax savings from tax-loss harvesting. Here are the most important considerations for investors who want to stay both invested and compliant with the IRS wash-sale rule. 60-Day Waiting Period To prevent investors from gaming the system to get a tax break, the tax code prohibits investors from deducting capital losses on what the IRS calls "wash sales," i.e., using a capital loss for tax-loss harvesting and then repurchasing the identical security (or a “substantially identical” security) within 60 days of the sale that generated the capital loss. This means that investors must refrain from purchasing an identical or “substantially identical” security—or even an option to buy such securities—for 30 days before and 30 days after the capital loss is realized. Stock Bonuses and ESPPs In addition to options, investors need to be aware that the vesting dates of stock bonuses or the purchase dates in employee stock purchase plans (ESPPs) could possibly trigger violations of the wash-sale rule. Applies to All Accounts It is also important to remember that the wash-sale rule applies to all trades under the investor's or the couple's social security number(s)—which means that it applies to all their tax-deferred accounts, too. This means that an investor will trigger a wash-sale violation if they sell a stock in their brokerage account and buy the same stock in their IRA account within the 60-day waiting period. For married couples filing jointly, spouses are not allowed to use each other's accounts to get around the wash-sale rule. The IRS wash-sale rule does not clearly define what would make a replacement security “substantially identical” to the one sold to harvest a capital loss. With limited guidance from the IRS, investors trying to avoid wash-sale violations always have to consider the degree of overlap with the original investment. To maintain exposure to the industry of the security sold at a loss without violating the wash-sale rule, one option is investing in an exchange-traded fund (ETF) or a mutual fund that targets the same sector. Cryptocurrency Although cryptocurrency trades must be reported on tax returns as capital losses or capital gains, the IRS still considers cryptocurrency a digital asset rather than a security. Because the wash-sale rule applied to securities, it doesn't apply to cryptocurrency. In the crypto market, an investor could do exactly what the wash-sale rule disallows for securities—sell cryptocurrency at a loss, buy back the same cryptocurrency without observing the 60-day waiting period, and then use the capital loss to offset capital gains. However, as the U.S. Congress considers options to regulate the crypto market, the classification of cryptocurrency as a property may be subject to change in the future. Does Tax-Loss Harvesting Cancel Your Tax Obligation? Tax-loss harvesting does not permanently cancel your tax obligation on capital gains. Instead, this strategy postpones the taxes you owe. Once the taxable account has been liquidated, taxes are due on any capital gains. What Is the Point of Tax-Loss Harvesting? If executed correctly, tax-loss harvesting allows investors to lower their current tax bill, rebalance their portfolios, and keep more money invested. What Is the Wash-Sale Rule? The wash-sale rule is an IRS regulation that prohibits investors from using a capital loss for tax-loss harvesting if the identical security, a “substantially identical” security, or an option on such a security has been purchased within 60 days of the sale that generated the capital loss (30 days before and 30 days after the sale). What Is the Difference Between Short-Term and Long-Term Capital Gains? Short-term capital gains are realized on assets that were held for less than a year. Long-term capital gains are realized on assets that were held for more than a year. These are subject to different tax rates. The long-term capital gains tax rate is lower than the ordinary income tax rate across tax brackets. Short-term capital gains are taxed as ordinary income. What Is the Tax-Loss Harvesting Process? The three steps in the tax-loss harvesting process are: 1) Sell securities that have lost value; 2) Use the capital loss to offset capital gains on other sales; 3) Replace the exited investments with similar (but not too similar) investments to maintain the desired investment exposure. The Bottom Line Tax loss harvesting is the strategic approach to making the most of capital losses. Due to tax treatment of gains and losses, taxpayers may find it favorable to time when they sell securities at a loss and how they net this activity against favorable investment gains. Advances in fintech have made this strategy more accessible to average investors with smaller portfolios. Any investors making use of a tax-loss harvesting strategy must keep in mind wash-sale rules, which stipulate restrictions on benefits and treatments of selling a security and rebuying it within a specific window. Correction—April 17, 2024: This article has been corrected with the proper calculation for determining the tax bill in the example about a lower cost basis leading to a higher tax bill.

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

Retirement Planner: Who They are, What They do

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-retirement-planner"></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 Retirement Planner? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A retirement planner is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialplanner.asp">financial planner</a> who specializes in helping people to prepare a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-planning.asp">retirement plan</a> and live out their final years financially secure. As implied in the name, these professionals focus on what a client’s needs<strong> </strong>will be<strong> </strong>once they stop working. This means not only ensuring that retirees have a big-enough pension to live comfortably but also addressing other requirements such as estate planning and insurance. </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 retirement planner is a professional who helps individuals financially prepare for retirement.</li><li>Their job is basically to make sure clients have enough money on which to live in retirement and are well placed to overcome any challenges associated with aging.</li><li>Retirement planners can advise on topics, such as Social Security benefits, insurance, estate plans, and taxes.</li><li>In most cases, clients will be charged either a one-off flat fee or, for ongoing guidance, a percentage of assets managed.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-retirement-planners"></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 Retirement Planners </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/articles/retirement/07/retirement-questions.asp">Thinking ahead to retirement is critical</a>, no matter how far away it may seem. People are now living longer and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp">defined-benefit plans</a> are becoming rarer, leaving it up to the individual to contribute adequate funds to survive on what could amount to multiple years without income from a job. </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"> Retirement planners—essentially a subset of the traditional financial planner—are specialized in helping people to enjoy a stress-free life after finishing up in the workplace. Their job is to make sure that clients have the right tools in place to overcome any challenges that may develop during this phase of life.<br/> </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>Retirement planner is not an official designation or credential, but a title used by financial planners to communicate that they specialize in financial matters concerning life after work.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> A decent retirement planner should have a broad arsenal of expertise. Other than giving you an indication of what retirement income you’ll likely have to live on, they are qualified to advise you on matters such as when to take Social Security benefits, whether to opt for an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp">annuity</a>, how to reduce the amount of tax you pay, which type of insurance you may need, and sensible methods to pass down your valuable possessions to loved ones. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Some retirement planners also deal with the nonfinancial aspects, including how to spend one’s time in retirement, where to live, and when to quit work, to name just a few.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Retirement planners rely heavily on client input and retirement-planning forecasting software, so the plans they create are not a complete predictor of retirement spending or income needs.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> As with regular financial planners, the relationship generally starts with an introductory chat. During this meeting, the client will discuss their situation and goals while the retirement planner will provide a breakdown of how much they charge as well as some details about how they operate and address client needs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> If the client is happy to proceed, a more in-depth meeting will be scheduled. Feedback from this conversation will help to shape the retirement planner’s recommendations and form the basis of a bespoke <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_plan.asp">financial plan</a>. </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-much-do-retirement-planners-charge"></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 Much Do Retirement Planners Charge? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Fees vary, depending on the retirement planner and type of service being offered. Some may charge an hourly rate or a flat fee to draw up a retirement income plan and cash flow projection. Alternatively, if you want ongoing advice and someone to manage your plan on a consistent basis, you may be billed an annual fee and/or a percentage of the <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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> It’s important to ask all retirement planner candidates for a breakdown of their charges and, if presented with two fee structures, to think carefully about the one that best suits your needs. You should also consider other expenses paid on top of the advice, including for the financial products that you’ve been advised to purchase.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_29-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Financial advisors generally charge in the region of $1,500 to $2,500 to create a financial plan or roughly 1% of assets under management for ongoing portfolio management.<span class="ql-inline-citation" data-cite="8"></span><br/></p></div></div></div> <span class="heading-toc" id="toc-retirement-planner-vs-financial-planner"></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"> Retirement Planner vs. Financial Planner </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Retirement and financial planners are tasked with helping clients meet their current money needs and long-term financial goals. Where they differ is in their focal points. Regular financial planners offer their services to people of all ages. Retirement planners, on the other hand, deal with clients in or near retirement. </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 distinction can prove important if you are specifically looking for a professional to get your retirement affairs in order. The needs of older clients and younger clients are very different. Traditional financial planners should be well equipped to steer you on the right path, but retirement planners are specialists in the field and so, in theory, are even better qualified to help you reach the objectives of your later years.<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_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Opinion on when to hire a retirement planner varies. Some suggest consulting a specialist in this area about 10 years before retirement, while others say it’s OK to wait until just before you finish working.</p></div></div></div> <span class="heading-toc" id="toc-how-to-choose-a-retirement-planner"></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 Choose a Retirement Planner </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Anyone can call themselves a retirement planner, which is why it’s wise to look for credentials and references before hiring one. </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 most commonly held professional designation is <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp">certified financial planner (CFP)</a>. CFPs are bound by rigorous requirements set by the Certified Financial Planner Board of Standards Inc. (CFP Board) and have to pass several exams covering taxes, insurance, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a>, retirement, and so on before earning this badge of honor.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> You could also look for a planner with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-income-certified-professional-ricp.asp">retirement income certified professional (RICP)</a> designation. This qualification is issued to CFPs, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chartered-financial-consultant-chfc.asp">chartered financial consultants</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clu.asp">chartered life underwriters</a>, and other financial experts who complete an accredited training program focused specifically on <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-planning.asp">retirement income planning</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_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Other notable job titles include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfa.asp">chartered financial analyst (CFA)</a>, which is awarded to financial professionals who excel in accounting, economics, ethics, money management, and security analysis, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-financial-specialist-pfs.asp">personal financial specialist (PFS)</a>, which is issued to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cpa.asp">certified public accountants (CPAs)</a> with additional expertise in all aspects of financial and wealth management.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="13"></span><br/><br/>When choosing among qualified planners, you’ll want to find one with experience addressing your biggest needs. Retirement is a loose term, and requirements within this age group can vary. You could be seeking an advisor to manage your pension and make sure it lasts—or you may specifically be seeking help with estate planning or insurance. </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"> Once you’ve narrowed down the choice, character becomes a key consideration. Meet with a couple of candidates and opt for the one who impresses you the most, in terms of both expertise and personality. You’re going to entrust this person with your finances, so it’s important to feel in safe hands and that you will be comfortable working with the planner. A person who speaks in plain English rather than industry jargon is also a major plus.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-what-does-a-retirement-planner-do"></span> <h2 class="mntl-sc-block-questionandanswer__question">What does a retirement planner do?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A retirement planner helps people to plan for their retirement. Typical tasks include ensuring that your money is well invested, providing a breakdown of how much you will have to spend, considering which insurance products may be beneficial, reducing tax liabilities, and coming up with cost-effective ways to pass your assets on to your beneficiaries without a hitch.</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-a-good-monthly-retirement-income"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is a good monthly retirement income?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While it’s true that older people generally have fewer expenses than younger people, a decent income is still necessary. You don’t want to be worried about how to pay your bills when you stop working. You also want to be able to enjoy your retirement and the free time that you suddenly have at your disposal. Remember complaining before that you never had enough free time to do anything? With enough funds behind you, retirement can represent a perfect time to finally start ticking off your bucket list.</p><p>In 2021, the U.S. <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> estimated that the average age-65-plus household has an income of $55,335 per year before taxes and $53,149 after taxes. Everyone is different, though, and needs vary—<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/060215/most-expensive-states-retire.asp">as does the cost of living</a> in different locations. One popular theory states that the average person requires about 80% of their preretirement income to maintain the same lifestyle during retirement.<span class="ql-inline-citation" data-cite="11"></span><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm"><span class="ql-inline-citation" data-cite="10"></span><br/></a></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-how-much-do-retirement-planners-charge"></span> <h2 class="mntl-sc-block-questionandanswer__question">How much do retirement planners charge?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Financial or retirement planner fees can vary considerably. In a 2021 article, AARP noted that the average cost of ongoing financial advice is typically, 0.25% to 1% of assets under management per year, with lower percentages for higher sums. For one-off jobs, AARP financial advisors reckon you could spend around $2,500.<span class="ql-inline-citation" data-cite="12"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> A retirement planner can help you address your financial needs after you stop working by reviewing investments, providing budgets, suggesting insurance products, reducing tax liabilities, and managing your estate. Therefore, it’s crucial to choose a financial planner you are compatible with and whose expertise can fill your personal financial needs.<br/> </p></div>

## What Is a Retirement Planner? A retirement planner is a [financial planner](https://www.investopedia.com/terms/f/financialplanner.asp) who specializes in helping people to prepare a [retirement plan](https://www.investopedia.com/terms/r/retirement-planning.asp) and live out their final years financially secure. As implied in the name, these professionals focus on what a client’s needswill beonce they stop working. This means not only ensuring that retirees have a big-enough pension to live comfortably but also addressing other requirements such as estate planning and insurance. ### Key Takeaways * A retirement planner is a professional who helps individuals financially prepare for retirement. * Their job is basically to make sure clients have enough money on which to live in retirement and are well placed to overcome any challenges associated with aging. * Retirement planners can advise on topics, such as Social Security benefits, insurance, estate plans, and taxes. * In most cases, clients will be charged either a one-off flat fee or, for ongoing guidance, a percentage of assets managed. ## Understanding Retirement Planners [Thinking ahead to retirement is critical](https://www.investopedia.com/articles/retirement/07/retirement-questions.asp), no matter how far away it may seem. People are now living longer and [defined-benefit plans](https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp) are becoming rarer, leaving it up to the individual to contribute adequate funds to survive on what could amount to multiple years without income from a job. Retirement planners—essentially a subset of the traditional financial planner—are specialized in helping people to enjoy a stress-free life after finishing up in the workplace. Their job is to make sure that clients have the right tools in place to overcome any challenges that may develop during this phase of life. ### Retirement planner is not an official designation or credential, but a title used by financial planners to communicate that they specialize in financial matters concerning life after work. A decent retirement planner should have a broad arsenal of expertise. Other than giving you an indication of what retirement income you’ll likely have to live on, they are qualified to advise you on matters such as when to take Social Security benefits, whether to opt for an [annuity](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp), how to reduce the amount of tax you pay, which type of insurance you may need, and sensible methods to pass down your valuable possessions to loved ones. Some retirement planners also deal with the nonfinancial aspects, including how to spend one’s time in retirement, where to live, and when to quit work, to name just a few. ### Retirement planners rely heavily on client input and retirement-planning forecasting software, so the plans they create are not a complete predictor of retirement spending or income needs. As with regular financial planners, the relationship generally starts with an introductory chat. During this meeting, the client will discuss their situation and goals while the retirement planner will provide a breakdown of how much they charge as well as some details about how they operate and address client needs. If the client is happy to proceed, a more in-depth meeting will be scheduled. Feedback from this conversation will help to shape the retirement planner’s recommendations and form the basis of a bespoke [financial plan](https://www.investopedia.com/terms/f/financial_plan.asp). ## How Much Do Retirement Planners Charge? Fees vary, depending on the retirement planner and type of service being offered. Some may charge an hourly rate or a flat fee to draw up a retirement income plan and cash flow projection. Alternatively, if you want ongoing advice and someone to manage your plan on a consistent basis, you may be billed an annual fee and/or a percentage of the [assets under management](https://www.investopedia.com/terms/a/aum.asp). It’s important to ask all retirement planner candidates for a breakdown of their charges and, if presented with two fee structures, to think carefully about the one that best suits your needs. You should also consider other expenses paid on top of the advice, including for the financial products that you’ve been advised to purchase. ### Financial advisors generally charge in the region of $1,500 to $2,500 to create a financial plan or roughly 1% of assets under management for ongoing portfolio management. ## Retirement Planner vs. Financial Planner Retirement and financial planners are tasked with helping clients meet their current money needs and long-term financial goals. Where they differ is in their focal points. Regular financial planners offer their services to people of all ages. Retirement planners, on the other hand, deal with clients in or near retirement. This distinction can prove important if you are specifically looking for a professional to get your retirement affairs in order. The needs of older clients and younger clients are very different. Traditional financial planners should be well equipped to steer you on the right path, but retirement planners are specialists in the field and so, in theory, are even better qualified to help you reach the objectives of your later years. ### Opinion on when to hire a retirement planner varies. Some suggest consulting a specialist in this area about 10 years before retirement, while others say it’s OK to wait until just before you finish working. ## How to Choose a Retirement Planner Anyone can call themselves a retirement planner, which is why it’s wise to look for credentials and references before hiring one. The most commonly held professional designation is [certified financial planner (CFP)](https://www.investopedia.com/terms/c/cfp.asp). CFPs are bound by rigorous requirements set by the Certified Financial Planner Board of Standards Inc. (CFP Board) and have to pass several exams covering taxes, insurance, [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp), retirement, and so on before earning this badge of honor. You could also look for a planner with the [retirement income certified professional (RICP)](https://www.investopedia.com/terms/r/retirement-income-certified-professional-ricp.asp) designation. This qualification is issued to CFPs, [chartered financial consultants](https://www.investopedia.com/terms/c/chartered-financial-consultant-chfc.asp), [chartered life underwriters](https://www.investopedia.com/terms/c/clu.asp), and other financial experts who complete an accredited training program focused specifically on [retirement income planning](https://www.investopedia.com/terms/r/retirement-planning.asp). Other notable job titles include [chartered financial analyst (CFA)](https://www.investopedia.com/terms/c/cfa.asp), which is awarded to financial professionals who excel in accounting, economics, ethics, money management, and security analysis, and [personal financial specialist (PFS)](https://www.investopedia.com/terms/p/personal-financial-specialist-pfs.asp), which is issued to [certified public accountants (CPAs)](https://www.investopedia.com/terms/c/cpa.asp) with additional expertise in all aspects of financial and wealth management. When choosing among qualified planners, you’ll want to find one with experience addressing your biggest needs. Retirement is a loose term, and requirements within this age group can vary. You could be seeking an advisor to manage your pension and make sure it lasts—or you may specifically be seeking help with estate planning or insurance. Once you’ve narrowed down the choice, character becomes a key consideration. Meet with a couple of candidates and opt for the one who impresses you the most, in terms of both expertise and personality. You’re going to entrust this person with your finances, so it’s important to feel in safe hands and that you will be comfortable working with the planner. A person who speaks in plain English rather than industry jargon is also a major plus. ## What does a retirement planner do? A retirement planner helps people to plan for their retirement. Typical tasks include ensuring that your money is well invested, providing a breakdown of how much you will have to spend, considering which insurance products may be beneficial, reducing tax liabilities, and coming up with cost-effective ways to pass your assets on to your beneficiaries without a hitch. ## What is a good monthly retirement income? While it’s true that older people generally have fewer expenses than younger people, a decent income is still necessary. You don’t want to be worried about how to pay your bills when you stop working. You also want to be able to enjoy your retirement and the free time that you suddenly have at your disposal. Remember complaining before that you never had enough free time to do anything? With enough funds behind you, retirement can represent a perfect time to finally start ticking off your bucket list. In 2021, the U.S. [Bureau of Labor Statistics](https://www.investopedia.com/terms/b/bls.asp) estimated that the average age-65-plus household has an income of $55,335 per year before taxes and $53,149 after taxes. Everyone is different, though, and needs vary—[as does the cost of living](https://www.investopedia.com/articles/personal-finance/060215/most-expensive-states-retire.asp) in different locations. One popular theory states that the average person requires about 80% of their preretirement income to maintain the same lifestyle during retirement. ## How much do retirement planners charge? Financial or retirement planner fees can vary considerably. In a 2021 article, AARP noted that the average cost of ongoing financial advice is typically, 0.25% to 1% of assets under management per year, with lower percentages for higher sums. For one-off jobs, AARP financial advisors reckon you could spend around $2,500. ## The Bottom Line A retirement planner can help you address your financial needs after you stop working by reviewing investments, providing budgets, suggesting insurance products, reducing tax liabilities, and managing your estate. Therefore, it’s crucial to choose a financial planner you are compatible with and whose expertise can fill your personal financial needs.

What Is a Retirement Planner? A retirement planner is a financial planner who specializes in helping people to prepare a retirement plan and live out their final years financially secure. As implied in the name, these professionals focus on what a client’s needs will be once they stop working. This means not only ensuring that retirees have a big-enough pension to live comfortably but also addressing other requirements such as estate planning and insurance. Key Takeaways A retirement planner is a professional who helps individuals financially prepare for retirement.Their job is basically to make sure clients have enough money on which to live in retirement and are well placed to overcome any challenges associated with aging.Retirement planners can advise on topics, such as Social Security benefits, insurance, estate plans, and taxes.In most cases, clients will be charged either a one-off flat fee or, for ongoing guidance, a percentage of assets managed. Understanding Retirement Planners Thinking ahead to retirement is critical, no matter how far away it may seem. People are now living longer and defined-benefit plans are becoming rarer, leaving it up to the individual to contribute adequate funds to survive on what could amount to multiple years without income from a job. Retirement planners—essentially a subset of the traditional financial planner—are specialized in helping people to enjoy a stress-free life after finishing up in the workplace. Their job is to make sure that clients have the right tools in place to overcome any challenges that may develop during this phase of life. Retirement planner is not an official designation or credential, but a title used by financial planners to communicate that they specialize in financial matters concerning life after work. A decent retirement planner should have a broad arsenal of expertise. Other than giving you an indication of what retirement income you’ll likely have to live on, they are qualified to advise you on matters such as when to take Social Security benefits, whether to opt for an annuity, how to reduce the amount of tax you pay, which type of insurance you may need, and sensible methods to pass down your valuable possessions to loved ones. Some retirement planners also deal with the nonfinancial aspects, including how to spend one’s time in retirement, where to live, and when to quit work, to name just a few. Retirement planners rely heavily on client input and retirement-planning forecasting software, so the plans they create are not a complete predictor of retirement spending or income needs. As with regular financial planners, the relationship generally starts with an introductory chat. During this meeting, the client will discuss their situation and goals while the retirement planner will provide a breakdown of how much they charge as well as some details about how they operate and address client needs. If the client is happy to proceed, a more in-depth meeting will be scheduled. Feedback from this conversation will help to shape the retirement planner’s recommendations and form the basis of a bespoke financial plan. How Much Do Retirement Planners Charge? Fees vary, depending on the retirement planner and type of service being offered. Some may charge an hourly rate or a flat fee to draw up a retirement income plan and cash flow projection. Alternatively, if you want ongoing advice and someone to manage your plan on a consistent basis, you may be billed an annual fee and/or a percentage of the assets under management. It’s important to ask all retirement planner candidates for a breakdown of their charges and, if presented with two fee structures, to think carefully about the one that best suits your needs. You should also consider other expenses paid on top of the advice, including for the financial products that you’ve been advised to purchase. Financial advisors generally charge in the region of $1,500 to $2,500 to create a financial plan or roughly 1% of assets under management for ongoing portfolio management. Retirement Planner vs. Financial Planner Retirement and financial planners are tasked with helping clients meet their current money needs and long-term financial goals. Where they differ is in their focal points. Regular financial planners offer their services to people of all ages. Retirement planners, on the other hand, deal with clients in or near retirement. This distinction can prove important if you are specifically looking for a professional to get your retirement affairs in order. The needs of older clients and younger clients are very different. Traditional financial planners should be well equipped to steer you on the right path, but retirement planners are specialists in the field and so, in theory, are even better qualified to help you reach the objectives of your later years. Opinion on when to hire a retirement planner varies. Some suggest consulting a specialist in this area about 10 years before retirement, while others say it’s OK to wait until just before you finish working. How to Choose a Retirement Planner Anyone can call themselves a retirement planner, which is why it’s wise to look for credentials and references before hiring one. The most commonly held professional designation is certified financial planner (CFP). CFPs are bound by rigorous requirements set by the Certified Financial Planner Board of Standards Inc. (CFP Board) and have to pass several exams covering taxes, insurance, estate planning, retirement, and so on before earning this badge of honor. You could also look for a planner with the retirement income certified professional (RICP) designation. This qualification is issued to CFPs, chartered financial consultants, chartered life underwriters, and other financial experts who complete an accredited training program focused specifically on retirement income planning. Other notable job titles include chartered financial analyst (CFA), which is awarded to financial professionals who excel in accounting, economics, ethics, money management, and security analysis, and personal financial specialist (PFS), which is issued to certified public accountants (CPAs) with additional expertise in all aspects of financial and wealth management.When choosing among qualified planners, you’ll want to find one with experience addressing your biggest needs. Retirement is a loose term, and requirements within this age group can vary. You could be seeking an advisor to manage your pension and make sure it lasts—or you may specifically be seeking help with estate planning or insurance. Once you’ve narrowed down the choice, character becomes a key consideration. Meet with a couple of candidates and opt for the one who impresses you the most, in terms of both expertise and personality. You’re going to entrust this person with your finances, so it’s important to feel in safe hands and that you will be comfortable working with the planner. A person who speaks in plain English rather than industry jargon is also a major plus. What does a retirement planner do? A retirement planner helps people to plan for their retirement. Typical tasks include ensuring that your money is well invested, providing a breakdown of how much you will have to spend, considering which insurance products may be beneficial, reducing tax liabilities, and coming up with cost-effective ways to pass your assets on to your beneficiaries without a hitch. What is a good monthly retirement income? While it’s true that older people generally have fewer expenses than younger people, a decent income is still necessary. You don’t want to be worried about how to pay your bills when you stop working. You also want to be able to enjoy your retirement and the free time that you suddenly have at your disposal. Remember complaining before that you never had enough free time to do anything? With enough funds behind you, retirement can represent a perfect time to finally start ticking off your bucket list.In 2021, the U.S. Bureau of Labor Statistics estimated that the average age-65-plus household has an income of $55,335 per year before taxes and $53,149 after taxes. Everyone is different, though, and needs vary—as does the cost of living in different locations. One popular theory states that the average person requires about 80% of their preretirement income to maintain the same lifestyle during retirement. How much do retirement planners charge? Financial or retirement planner fees can vary considerably. In a 2021 article, AARP noted that the average cost of ongoing financial advice is typically, 0.25% to 1% of assets under management per year, with lower percentages for higher sums. For one-off jobs, AARP financial advisors reckon you could spend around $2,500. The Bottom Line A retirement planner can help you address your financial needs after you stop working by reviewing investments, providing budgets, suggesting insurance products, reducing tax liabilities, and managing your estate. Therefore, it’s crucial to choose a financial planner you are compatible with and whose expertise can fill your personal financial needs.

https://www.investopedia.com/how-many-cd-terms-are-there-5235795

How Many CD Terms Are There?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> When you're looking for a certificate of deposit (CD), you'll see that many banks and credit unions offer them with different term lengths, also known as maturities. Each provider can set its own terms, as well as its own interest rates, and there is a wide variation among providers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> But a few term lengths have become fairly standard. In this article, we'll take a look at the most common CD terms and explain how to build a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">CD ladder</a> using CDs of staggered terms as a hedge against interest rate changes. </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) come in a variety of terms, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturities</a>.</li> <li>A CD's term determines how long you must leave your money in the CD before you have cost-free access to it again.</li> <li>CD issuers, such as banks and credit unions, are free to set their own terms. Some of the most common CD terms are three months, six months, one year, two years, three years, and five years.</li> <li>If you are looking to hedge against interest-rate changes and want access to a portion of your money every year, consider building a CD ladder.</li> </ul></div></div></div> <span class="heading-toc" id="toc-how-cd-terms-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> How CD Terms Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> When you take out a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">CD</a>, you agree to leave your money in it for a set period of time, known as the CD's term. In exchange, the bank or credit union that issues your CD will pay you a set interest rate on your money, one that is typically higher than other types of savings accounts. The downside is that your money isn't <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquid</a>.<span class="ql-inline-citation" data-cite="3"></span> If you need to take it out before the CD's term ends, you'll usually have to pay hefty penalties.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Each provider of CDs is free to set its own terms. Most CD terms range from three months to five years, although CDs with terms of less than three months or 10 years and up are also available. These are fairly standard lengths:  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Three months</li><li>Six months</li><li>One year</li><li>Two years</li><li>Three years</li><li>Five years</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When deciding which CD to choose, <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">the term is an important consideration</a>. If you are saving money in a CD in anticipation of a big purchase at some point in the future or for a specific goal or project, that can help you determine your maximum CD term length. In contrast, if you're just socking away cash you don't have a specific purpose for, you might opt for a longer term to maximize your interest rate.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Alongside the typical terms, you might also see some CDs with unusual term lengths. In fact, some of the best CD rates can be for terms like five months, 17 months, or 21 months. That may be to stand out from the competition, to match a birthday the bank is celebrating, or any number of other reasons. So by looking beyond the conventional terms, you can sometimes find a better-paying opportunity.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Generally, the longer the term of your CD, the higher its interest rate will be. So you'll earn more with a 5-year CD than with a one-year CD, for example. However, the longer the term, the greater the risk that you'll miss out if interest rates rise. One way to protect yourself is to build a CD ladder. It will allow you to earn the high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp">interest rates</a> of long-term CDs on a portion of your investment while also giving you access to some of your money on regular basis.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <span class="heading-toc" id="toc-building-a-cd-ladder"></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"> Building a CD Ladder </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> There are two main considerations when choosing a CD term. One is how long you are willing to go without access to your money. The other is the current interest rate. If interest rates rise over the next few years and your money is locked away in a relatively long-term CD, you could miss out on the higher returns. In addition, your money could be losing purchasing power due to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflationrisk.asp">inflation</a>. Unfortunately, interest rates are hard to predict. </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"> It is possible to mitigate both of these risks by building a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">CD ladder</a>. A ladder enables you to access the higher rates offered by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473">5-year CDs</a>, but with the bonus that a portion of your money becomes available every year, rather than every five years. Here's an example of how to do it: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li>Take the amount of money you want 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 CDs</a> and divide it by five. </li> <li>Put a fifth of the funds into a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">1-year CD</a>, another fifth into a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-2-year-cd-rates-4801682">2-year CD</a>, another into a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-year-cd-rates-4782938">3-year CD</a>, and the rest into a 4- and 5-year CDs. Let's say you have $25,000 available. That would give you five CDs of varying terms, each with a value of $5,000.</li> <li>When the first CD matures in a year, you take the proceeds and open a new five-year CD. </li> <li>A year later, your initial two-year CD will mature and you'll invest those funds into another 5-year CD. </li> <li>You continue doing this every year with whichever CD is maturing.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Eventually, you’ll have a portfolio of five CDs all earning 5-year <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 (APYs)</a>, but with one of them maturing every 12 months—making your money more accessible than if all of it were locked up for a full five years. You can make it even more readily accessible by adding 3- or 6-month CDs to the mix.<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-shortest-term-for-a-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Shortest Term for a CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The shortest term for a CD that you'll commonly see is one month.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-what-is-the-longest-term-for-a-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Longest Term for a CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In recent years, CDs with terms longer than 10 years are uncommon. Most CDs mature in five years or less. CD issuers could offer longer maturities, but anyone looking to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-age-to-get-a-cd-5270827">invest for the long haul</a> is likely to prefer other investment products that generally provide a greater return over time, such as stocks and bonds.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-is-the-best-cd-term"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Best CD Term?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The best CD term depends on your circumstances. If you have a particular project or purchase in mind, put your money into a CD until then. If you want to earn the highest interest rates, put your money into a longer-term CD. But just make sure you won't need to withdraw it before the term is over or you'll have to pay a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">penalty</a>.</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"> CDs are available in a range of terms, with three months to five years being the most common. The longer the term, the higher the interest rate your CD may earn, but the more you're likely to lose if you need to get your money out early. If you are looking to hedge against interest-rate changes, and want access to a portion of your money every year (or sooner), you can build a ladder with CDs of different terms.<br> </br></p></div>

When you're looking for a certificate of deposit (CD), you'll see that many banks and credit unions offer them with different term lengths, also known as maturities. Each provider can set its own terms, as well as its own interest rates, and there is a wide variation among providers. But a few term lengths have become fairly standard. In this article, we'll take a look at the most common CD terms and explain how to build a [CD ladder](https://www.investopedia.com/terms/c/cd-ladder.asp) using CDs of staggered terms as a hedge against interest rate changes. ### Key Takeaways * Certificates of deposit (CDs) come in a variety of terms, or [maturities](https://www.investopedia.com/terms/m/maturity.asp). * A CD's term determines how long you must leave your money in the CD before you have cost-free access to it again. * CD issuers, such as banks and credit unions, are free to set their own terms. Some of the most common CD terms are three months, six months, one year, two years, three years, and five years. * If you are looking to hedge against interest-rate changes and want access to a portion of your money every year, consider building a CD ladder. ## How CD Terms Work When you take out a [CD](https://www.investopedia.com/terms/c/certificateofdeposit.asp), you agree to leave your money in it for a set period of time, known as the CD's term. In exchange, the bank or credit union that issues your CD will pay you a set interest rate on your money, one that is typically higher than other types of savings accounts. The downside is that your money isn't [liquid](https://www.investopedia.com/terms/l/liquidity.asp). If you need to take it out before the CD's term ends, you'll usually have to pay hefty penalties. Each provider of CDs is free to set its own terms. Most CD terms range from three months to five years, although CDs with terms of less than three months or 10 years and up are also available. These are fairly standard lengths:  * Three months * Six months * One year * Two years * Three years * Five years When deciding which CD to choose, [the term is an important consideration](https://www.investopedia.com/short-term-vs-long-term-cd-terms-5270644). If you are saving money in a CD in anticipation of a big purchase at some point in the future or for a specific goal or project, that can help you determine your maximum CD term length. In contrast, if you're just socking away cash you don't have a specific purpose for, you might opt for a longer term to maximize your interest rate. Alongside the typical terms, you might also see some CDs with unusual term lengths. In fact, some of the best CD rates can be for terms like five months, 17 months, or 21 months. That may be to stand out from the competition, to match a birthday the bank is celebrating, or any number of other reasons. So by looking beyond the conventional terms, you can sometimes find a better-paying opportunity.  Generally, the longer the term of your CD, the higher its interest rate will be. So you'll earn more with a 5-year CD than with a one-year CD, for example. However, the longer the term, the greater the risk that you'll miss out if interest rates rise. One way to protect yourself is to build a CD ladder. It will allow you to earn the high [interest rates](https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp) of long-term CDs on a portion of your investment while also giving you access to some of your money on regular basis. ## Building a CD Ladder There are two main considerations when choosing a CD term. One is how long you are willing to go without access to your money. The other is the current interest rate. If interest rates rise over the next few years and your money is locked away in a relatively long-term CD, you could miss out on the higher returns. In addition, your money could be losing purchasing power due to [inflation](https://www.investopedia.com/terms/i/inflationrisk.asp). Unfortunately, interest rates are hard to predict. It is possible to mitigate both of these risks by building a [CD ladder](https://www.investopedia.com/terms/c/cd-ladder.asp). A ladder enables you to access the higher rates offered by [5-year CDs](https://www.investopedia.com/best-5-year-cd-rates-4801473), but with the bonus that a portion of your money becomes available every year, rather than every five years. Here's an example of how to do it: * Take the amount of money you want to [invest in CDs](https://www.investopedia.com/how-to-invest-with-cds-4795661) and divide it by five. * Put a fifth of the funds into a [1-year CD](https://www.investopedia.com/best-1-year-cd-rates-4796650), another fifth into a [2-year CD](https://www.investopedia.com/best-2-year-cd-rates-4801682), another into a [3-year CD](https://www.investopedia.com/best-3-year-cd-rates-4782938), and the rest into a 4- and 5-year CDs. Let's say you have $25,000 available. That would give you five CDs of varying terms, each with a value of $5,000. * When the first CD matures in a year, you take the proceeds and open a new five-year CD. * A year later, your initial two-year CD will mature and you'll invest those funds into another 5-year CD. * You continue doing this every year with whichever CD is maturing. Eventually, you’ll have a portfolio of five CDs all earning 5-year [annual percentage yields (APYs)](https://www.investopedia.com/terms/a/apy.asp), but with one of them maturing every 12 months—making your money more accessible than if all of it were locked up for a full five years. You can make it even more readily accessible by adding 3- or 6-month CDs to the mix. ## What Is the Shortest Term for a CD? The shortest term for a CD that you'll commonly see is one month. ## What Is the Longest Term for a CD? In recent years, CDs with terms longer than 10 years are uncommon. Most CDs mature in five years or less. CD issuers could offer longer maturities, but anyone looking to [invest for the long haul](https://www.investopedia.com/best-age-to-get-a-cd-5270827) is likely to prefer other investment products that generally provide a greater return over time, such as stocks and bonds. ## What Is the Best CD Term? The best CD term depends on your circumstances. If you have a particular project or purchase in mind, put your money into a CD until then. If you want to earn the highest interest rates, put your money into a longer-term CD. But just make sure you won't need to withdraw it before the term is over or you'll have to pay a [penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111). ## The Bottom Line CDs are available in a range of terms, with three months to five years being the most common. The longer the term, the higher the interest rate your CD may earn, but the more you're likely to lose if you need to get your money out early. If you are looking to hedge against interest-rate changes, and want access to a portion of your money every year (or sooner), you can build a ladder with CDs of different terms.

When you're looking for a certificate of deposit (CD), you'll see that many banks and credit unions offer them with different term lengths, also known as maturities. Each provider can set its own terms, as well as its own interest rates, and there is a wide variation among providers. But a few term lengths have become fairly standard. In this article, we'll take a look at the most common CD terms and explain how to build a CD ladder using CDs of staggered terms as a hedge against interest rate changes. Key Takeaways Certificates of deposit (CDs) come in a variety of terms, or maturities. A CD's term determines how long you must leave your money in the CD before you have cost-free access to it again. CD issuers, such as banks and credit unions, are free to set their own terms. Some of the most common CD terms are three months, six months, one year, two years, three years, and five years. If you are looking to hedge against interest-rate changes and want access to a portion of your money every year, consider building a CD ladder. How CD Terms Work When you take out a CD, you agree to leave your money in it for a set period of time, known as the CD's term. In exchange, the bank or credit union that issues your CD will pay you a set interest rate on your money, one that is typically higher than other types of savings accounts. The downside is that your money isn't liquid. If you need to take it out before the CD's term ends, you'll usually have to pay hefty penalties. Each provider of CDs is free to set its own terms. Most CD terms range from three months to five years, although CDs with terms of less than three months or 10 years and up are also available. These are fairly standard lengths:  Three monthsSix monthsOne yearTwo yearsThree yearsFive years When deciding which CD to choose, the term is an important consideration. If you are saving money in a CD in anticipation of a big purchase at some point in the future or for a specific goal or project, that can help you determine your maximum CD term length. In contrast, if you're just socking away cash you don't have a specific purpose for, you might opt for a longer term to maximize your interest rate. Alongside the typical terms, you might also see some CDs with unusual term lengths. In fact, some of the best CD rates can be for terms like five months, 17 months, or 21 months. That may be to stand out from the competition, to match a birthday the bank is celebrating, or any number of other reasons. So by looking beyond the conventional terms, you can sometimes find a better-paying opportunity.  Generally, the longer the term of your CD, the higher its interest rate will be. So you'll earn more with a 5-year CD than with a one-year CD, for example. However, the longer the term, the greater the risk that you'll miss out if interest rates rise. One way to protect yourself is to build a CD ladder. It will allow you to earn the high interest rates of long-term CDs on a portion of your investment while also giving you access to some of your money on regular basis. Building a CD Ladder There are two main considerations when choosing a CD term. One is how long you are willing to go without access to your money. The other is the current interest rate. If interest rates rise over the next few years and your money is locked away in a relatively long-term CD, you could miss out on the higher returns. In addition, your money could be losing purchasing power due to inflation. Unfortunately, interest rates are hard to predict. It is possible to mitigate both of these risks by building a CD ladder. A ladder enables you to access the higher rates offered by 5-year CDs, but with the bonus that a portion of your money becomes available every year, rather than every five years. Here's an example of how to do it: Take the amount of money you want to invest in CDs and divide it by five.  Put a fifth of the funds into a 1-year CD, another fifth into a 2-year CD, another into a 3-year CD, and the rest into a 4- and 5-year CDs. Let's say you have $25,000 available. That would give you five CDs of varying terms, each with a value of $5,000. When the first CD matures in a year, you take the proceeds and open a new five-year CD.  A year later, your initial two-year CD will mature and you'll invest those funds into another 5-year CD.  You continue doing this every year with whichever CD is maturing. Eventually, you’ll have a portfolio of five CDs all earning 5-year annual percentage yields (APYs), but with one of them maturing every 12 months—making your money more accessible than if all of it were locked up for a full five years. You can make it even more readily accessible by adding 3- or 6-month CDs to the mix. What Is the Shortest Term for a CD? The shortest term for a CD that you'll commonly see is one month. What Is the Longest Term for a CD? In recent years, CDs with terms longer than 10 years are uncommon. Most CDs mature in five years or less. CD issuers could offer longer maturities, but anyone looking to invest for the long haul is likely to prefer other investment products that generally provide a greater return over time, such as stocks and bonds. What Is the Best CD Term? The best CD term depends on your circumstances. If you have a particular project or purchase in mind, put your money into a CD until then. If you want to earn the highest interest rates, put your money into a longer-term CD. But just make sure you won't need to withdraw it before the term is over or you'll have to pay a penalty. The Bottom Line CDs are available in a range of terms, with three months to five years being the most common. The longer the term, the higher the interest rate your CD may earn, but the more you're likely to lose if you need to get your money out early. If you are looking to hedge against interest-rate changes, and want access to a portion of your money every year (or sooner), you can build a ladder with CDs of different terms.

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

What Is a Credit Limit? How It's Determined and How to Increase 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-a-credit-limit"></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 Limit? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A credit limit is the maximum amount of credit a financial institution extends to a client on a credit card or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit</a>. Lenders usually set credit limits based on specific information about the credit-seeking applicant, including their income and employment status. Credit limits are an important factor that can affect consumers' <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a> and their ability to obtain credit in the future. </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 credit limit is the maximum amount of credit you receive from a financial institution.</li><li>Products like credit cards and lines of credit have credit limits.</li><li>Lenders usually set credit limits based on the information in a consumer's credit report, among other factors.</li><li>High-risk borrowers generally have lower credit limits, while lower-risk borrowers typically receive higher credit limits.</li><li>It is usually not ideal to use your maximum credit limit.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-credit-limit-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 Credit Limit Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A credit limit is the maximum amount of money a lender will allow you to spend using a particular credit card or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolvingcredit.asp">revolving</a> line of credit. Lenders set those limits based on several factors, including your credit score, personal income, and loan repayment history. Lenders generally offer higher limits to borrowers they view as lower risks.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Credit limits can apply to both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/secured-loans-5076025">secured</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredloan.asp">unsecured</a> credit. If the line of credit is secured, or backed by collateral, the lender takes the value of the collateral into account and may offer a higher limit. For example, if you take out a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/home_equity.asp">home equity</a> line of credit (HELOC), your credit limit will be based, in part, on the equity in your home.<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"> Lenders will generally issue higher credit limits to creditors they consider to be lower risk and put lower credit limits on riskier borrowers. </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 credit limit works the same way regardless of whether you have a credit card or a line of credit. You can spend up to the credit limit. If you exceed the credit limit, you may face fines or penalties on top of your regular payment. If the you spend less than the limit, you can continue to use the card or line of credit until you reach the limit. </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 downside to high credit limits is that they can potentially lead to overspending, to the point where you cannot afford your monthly payments.</p></div></div></div> <span class="heading-toc" id="toc-credit-limit-vs-available-credit"></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"> Credit Limit vs. Available Credit </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> A credit limit and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102814/what-difference-between-available-credit-and-credit-limit.asp">available credit</a> are not the same. The credit limit is the total amount you can borrow, whereas available credit is the amount that is remaining for you to use, including if you carry a balance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> For example, if you have a credit card with a $1,000 credit limit, and you charge $600, you have an additional $400 to spend. If you make a $40 payment, your balance would fall to $560, and you would then have $440 in available credit. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-how-credit-limits-affect-your-credit-score"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> How Credit Limits Affect Your Credit Score </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Your credit limits can have an impact on your credit score, an important number that lenders use to decide whether to issue you new credit and what interest rate to charge you for it. That's because your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a>, or the amount of debt you have outstanding at any given time as a percentage of the total credit you have access to, is one of the factors that goes into computing your score. </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 lower that percentage, the better. So it pays to be aware of your credit limits and try to keep your borrowing well beneath them. Generally speaking, lenders look unfavorably on a credit utilization ratio that exceeds 30%.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-can-lenders-change-your-credit-limit"></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"> Can Lenders Change Your Credit Limit? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> In most cases, lenders reserve the right to change credit limits, either raising or lowering them. If you pay your bills on time every month and do not max out a credit card or line of credit, the lender may <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/082115/should-you-increase-your-credit-card-limit.asp">increase your credit limit</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_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> An increased credit limit has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0212/6-benefits-to-increasing-your-credit-limit.aspx">a number of benefits</a>, including potentially increasing your credit score by lowering your credit utilization ratio. It also gives you access to more credit if you should need it, such as in an unexpected emergency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> On the other hand, if you fail to make regular, timely payments, or if there are other signs of risk, the lender may opt to reduce your credit limit. A reduction of your credit limit will raise your credit utilization ratio and potentially damage your credit score. If a lender decides to lower your credit limit, it is generally required to notify 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_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-what-is-available-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is Available Credit?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/available-credit.asp">Available credit</a> is the unused portion of a credit limit. So, if you have a total credit limit of $10,000 on your credit card and you have used $5,000, you would have the remaining $5,000 as available credit. Available credit can fluctuate throughout the billing cycle based on account usage.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-is-a-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Credit Score?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A credit score is a calculated value that serves as a proxy for your creditworthiness or ability and likelihood that you will repay any debts on time according to the terms of the loan agreement. Credit scores are generated based on information collected by credit reporting agencies such as Experian, Equifax, and TransUnion. They use formulas that assign weights to factors like payment history, amounts owed, length of credit history, and credit utilization.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-why-does-a-credit-limit-matter"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Does a Credit Limit Matter?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A credit limit matters because it dictates how much money you can access to pay for expenses. You need to know your credit limit when you make purchases, so you do not go over the limit and incur fees. A merchant in that situation may also refuse to accept your card. In addition, your collective credit limits can impact your credit score, which is based in part on how much of your available credit you are using at any given time.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Credit limits can play a key role in your financial picture, and they are different for each person and for each financial product. If you use your credit according to your lender's terms, and avoid exceeding (or even coming too close to) your limits, you are more likely to establish a good credit history, which can open up other financial opportunities. </p></div>

## What Is a Credit Limit? A credit limit is the maximum amount of credit a financial institution extends to a client on a credit card or a [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp). Lenders usually set credit limits based on specific information about the credit-seeking applicant, including their income and employment status. Credit limits are an important factor that can affect consumers' [credit scores](https://www.investopedia.com/terms/c/credit_score.asp) and their ability to obtain credit in the future. ### Key Takeaways * A credit limit is the maximum amount of credit you receive from a financial institution. * Products like credit cards and lines of credit have credit limits. * Lenders usually set credit limits based on the information in a consumer's credit report, among other factors. * High-risk borrowers generally have lower credit limits, while lower-risk borrowers typically receive higher credit limits. * It is usually not ideal to use your maximum credit limit. ## How a Credit Limit Works A credit limit is the maximum amount of money a lender will allow you to spend using a particular credit card or [revolving](https://www.investopedia.com/terms/r/revolvingcredit.asp) line of credit. Lenders set those limits based on several factors, including your credit score, personal income, and loan repayment history. Lenders generally offer higher limits to borrowers they view as lower risks. Credit limits can apply to both [secured](https://www.investopedia.com/secured-loans-5076025) and [unsecured](https://www.investopedia.com/terms/u/unsecuredloan.asp) credit. If the line of credit is secured, or backed by collateral, the lender takes the value of the collateral into account and may offer a higher limit. For example, if you take out a [home equity](https://www.investopedia.com/terms/h/home_equity.asp) line of credit (HELOC), your credit limit will be based, in part, on the equity in your home. Lenders will generally issue higher credit limits to creditors they consider to be lower risk and put lower credit limits on riskier borrowers. A credit limit works the same way regardless of whether you have a credit card or a line of credit. You can spend up to the credit limit. If you exceed the credit limit, you may face fines or penalties on top of your regular payment. If the you spend less than the limit, you can continue to use the card or line of credit until you reach the limit. ### A downside to high credit limits is that they can potentially lead to overspending, to the point where you cannot afford your monthly payments. ## Credit Limit vs. Available Credit A credit limit and [available credit](https://www.investopedia.com/ask/answers/102814/what-difference-between-available-credit-and-credit-limit.asp) are not the same. The credit limit is the total amount you can borrow, whereas available credit is the amount that is remaining for you to use, including if you carry a balance. For example, if you have a credit card with a $1,000 credit limit, and you charge $600, you have an additional $400 to spend. If you make a $40 payment, your balance would fall to $560, and you would then have $440 in available credit. ## How Credit Limits Affect Your Credit Score Your credit limits can have an impact on your credit score, an important number that lenders use to decide whether to issue you new credit and what interest rate to charge you for it. That's because your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp), or the amount of debt you have outstanding at any given time as a percentage of the total credit you have access to, is one of the factors that goes into computing your score. The lower that percentage, the better. So it pays to be aware of your credit limits and try to keep your borrowing well beneath them. Generally speaking, lenders look unfavorably on a credit utilization ratio that exceeds 30%. ## Can Lenders Change Your Credit Limit? In most cases, lenders reserve the right to change credit limits, either raising or lowering them. If you pay your bills on time every month and do not max out a credit card or line of credit, the lender may [increase your credit limit](https://www.investopedia.com/articles/investing/082115/should-you-increase-your-credit-card-limit.asp). An increased credit limit has [a number of benefits](https://www.investopedia.com/financial-edge/0212/6-benefits-to-increasing-your-credit-limit.aspx), including potentially increasing your credit score by lowering your credit utilization ratio. It also gives you access to more credit if you should need it, such as in an unexpected emergency. On the other hand, if you fail to make regular, timely payments, or if there are other signs of risk, the lender may opt to reduce your credit limit. A reduction of your credit limit will raise your credit utilization ratio and potentially damage your credit score. If a lender decides to lower your credit limit, it is generally required to notify you. ## What is Available Credit? [Available credit](https://www.investopedia.com/terms/a/available-credit.asp) is the unused portion of a credit limit. So, if you have a total credit limit of $10,000 on your credit card and you have used $5,000, you would have the remaining $5,000 as available credit. Available credit can fluctuate throughout the billing cycle based on account usage. ## What Is a Credit Score? A credit score is a calculated value that serves as a proxy for your creditworthiness or ability and likelihood that you will repay any debts on time according to the terms of the loan agreement. Credit scores are generated based on information collected by credit reporting agencies such as Experian, Equifax, and TransUnion. They use formulas that assign weights to factors like payment history, amounts owed, length of credit history, and credit utilization. ## Why Does a Credit Limit Matter? A credit limit matters because it dictates how much money you can access to pay for expenses. You need to know your credit limit when you make purchases, so you do not go over the limit and incur fees. A merchant in that situation may also refuse to accept your card. In addition, your collective credit limits can impact your credit score, which is based in part on how much of your available credit you are using at any given time. ## The Bottom Line Credit limits can play a key role in your financial picture, and they are different for each person and for each financial product. If you use your credit according to your lender's terms, and avoid exceeding (or even coming too close to) your limits, you are more likely to establish a good credit history, which can open up other financial opportunities.

What Is a Credit Limit? A credit limit is the maximum amount of credit a financial institution extends to a client on a credit card or a line of credit. Lenders usually set credit limits based on specific information about the credit-seeking applicant, including their income and employment status. Credit limits are an important factor that can affect consumers' credit scores and their ability to obtain credit in the future. Key Takeaways A credit limit is the maximum amount of credit you receive from a financial institution.Products like credit cards and lines of credit have credit limits.Lenders usually set credit limits based on the information in a consumer's credit report, among other factors.High-risk borrowers generally have lower credit limits, while lower-risk borrowers typically receive higher credit limits.It is usually not ideal to use your maximum credit limit. How a Credit Limit Works A credit limit is the maximum amount of money a lender will allow you to spend using a particular credit card or revolving line of credit. Lenders set those limits based on several factors, including your credit score, personal income, and loan repayment history. Lenders generally offer higher limits to borrowers they view as lower risks. Credit limits can apply to both secured and unsecured credit. If the line of credit is secured, or backed by collateral, the lender takes the value of the collateral into account and may offer a higher limit. For example, if you take out a home equity line of credit (HELOC), your credit limit will be based, in part, on the equity in your home. Lenders will generally issue higher credit limits to creditors they consider to be lower risk and put lower credit limits on riskier borrowers. A credit limit works the same way regardless of whether you have a credit card or a line of credit. You can spend up to the credit limit. If you exceed the credit limit, you may face fines or penalties on top of your regular payment. If the you spend less than the limit, you can continue to use the card or line of credit until you reach the limit. A downside to high credit limits is that they can potentially lead to overspending, to the point where you cannot afford your monthly payments. Credit Limit vs. Available Credit A credit limit and available credit are not the same. The credit limit is the total amount you can borrow, whereas available credit is the amount that is remaining for you to use, including if you carry a balance. For example, if you have a credit card with a $1,000 credit limit, and you charge $600, you have an additional $400 to spend. If you make a $40 payment, your balance would fall to $560, and you would then have $440 in available credit. How Credit Limits Affect Your Credit Score Your credit limits can have an impact on your credit score, an important number that lenders use to decide whether to issue you new credit and what interest rate to charge you for it. That's because your credit utilization ratio, or the amount of debt you have outstanding at any given time as a percentage of the total credit you have access to, is one of the factors that goes into computing your score. The lower that percentage, the better. So it pays to be aware of your credit limits and try to keep your borrowing well beneath them. Generally speaking, lenders look unfavorably on a credit utilization ratio that exceeds 30%. Can Lenders Change Your Credit Limit? In most cases, lenders reserve the right to change credit limits, either raising or lowering them. If you pay your bills on time every month and do not max out a credit card or line of credit, the lender may increase your credit limit. An increased credit limit has a number of benefits, including potentially increasing your credit score by lowering your credit utilization ratio. It also gives you access to more credit if you should need it, such as in an unexpected emergency. On the other hand, if you fail to make regular, timely payments, or if there are other signs of risk, the lender may opt to reduce your credit limit. A reduction of your credit limit will raise your credit utilization ratio and potentially damage your credit score. If a lender decides to lower your credit limit, it is generally required to notify you. What is Available Credit? Available credit is the unused portion of a credit limit. So, if you have a total credit limit of $10,000 on your credit card and you have used $5,000, you would have the remaining $5,000 as available credit. Available credit can fluctuate throughout the billing cycle based on account usage. What Is a Credit Score? A credit score is a calculated value that serves as a proxy for your creditworthiness or ability and likelihood that you will repay any debts on time according to the terms of the loan agreement. Credit scores are generated based on information collected by credit reporting agencies such as Experian, Equifax, and TransUnion. They use formulas that assign weights to factors like payment history, amounts owed, length of credit history, and credit utilization. Why Does a Credit Limit Matter? A credit limit matters because it dictates how much money you can access to pay for expenses. You need to know your credit limit when you make purchases, so you do not go over the limit and incur fees. A merchant in that situation may also refuse to accept your card. In addition, your collective credit limits can impact your credit score, which is based in part on how much of your available credit you are using at any given time. The Bottom Line Credit limits can play a key role in your financial picture, and they are different for each person and for each financial product. If you use your credit according to your lender's terms, and avoid exceeding (or even coming too close to) your limits, you are more likely to establish a good credit history, which can open up other financial opportunities.

https://www.investopedia.com/mortgage-rates-rise-8602160

30-Year Mortgage Rates Rise

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Mortgage rates ticked up slightly to 6.94% this week, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gse.asp">government-sponsored enterprise</a> Freddie Mac.</li> <li>Mortgage rates are still down from their late October peak, but have been creeping back up in January.</li> <li>High interest on mortgages is keeping buyers from the market and is pushing down the number of homes for sale.</li> </ul></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_3-0"><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_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Mortgage rates approached the 7% threshold Thursday, keeping potential buyers on the sidelines during a historically busy season for selling houses. </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"> Mortgage rates ticked up slightly to 6.94% this week up from 6.90%, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gse.asp">government-sponsored enterprise</a> Freddie Mac. </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"> Mortgage rates hit a peak of 7.79% in October and have been trending down since, according to Freddie Mac. The falling rates had pulled more shoppers back into the market, but increases over the last four weeks are pushing home buying back out of reach for many. </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 recent boomerang in rates has dampened already tentative homebuyer momentum as we approach the spring, a historically busy season for home buying," said Freddie Mac’s Chief Economist Sam Khater in a statement. “ While sales of newly built homes are trending in a positive direction, higher rates and elevated prices continue to pose affordability challenges that may leave potential homebuyers on the sidelines.”<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> According to a recent survey released by Realtor.com, nearly two-thirds of potential homebuyers said <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-february-21-8597884#toc-2024-02-21t152750810z">interest rates would need to fall</a> for it to be feasible for them to buy. For almost a third of the survey respondents, mortgage rates would have to fall below 5% to consider buying a home. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> An Investopedia analysis of daily changes in mortgage rates found <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-edge-down-8602116">rates fell Thursday</a> but have been holding mostly steady in the broader trend for the past two weeks, echoing Freddie Mac's data. </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"> High mortgage rates have historically pushed home prices down by reducing the number of people looking to buy a home. But recently, prices have continued to rise largely because there are fewer homes for sale. The “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lock-in-effect-grows-for-homeowners-with-low-mortgages-8420236">lock-in effect</a>" has many homeowners avoiding putting their homes on the market because that would mean giving up an affordable fixed-rate mortgage they secured during the pandemic when rates hit record lows. </p></div>

### Key Takeaways * Mortgage rates ticked up slightly to 6.94% this week, according to [government-sponsored enterprise](https://www.investopedia.com/terms/g/gse.asp) Freddie Mac. * Mortgage rates are still down from their late October peak, but have been creeping back up in January. * High interest on mortgages is keeping buyers from the market and is pushing down the number of homes for sale. Mortgage rates approached the 7% threshold Thursday, keeping potential buyers on the sidelines during a historically busy season for selling houses. Mortgage rates ticked up slightly to 6.94% this week up from 6.90%, according to [government-sponsored enterprise](https://www.investopedia.com/terms/g/gse.asp) Freddie Mac. Mortgage rates hit a peak of 7.79% in October and have been trending down since, according to Freddie Mac. The falling rates had pulled more shoppers back into the market, but increases over the last four weeks are pushing home buying back out of reach for many. "The recent boomerang in rates has dampened already tentative homebuyer momentum as we approach the spring, a historically busy season for home buying," said Freddie Mac’s Chief Economist Sam Khater in a statement. “ While sales of newly built homes are trending in a positive direction, higher rates and elevated prices continue to pose affordability challenges that may leave potential homebuyers on the sidelines.” According to a recent survey released by Realtor.com, nearly two-thirds of potential homebuyers said [interest rates would need to fall](https://www.investopedia.com/us-economy-news-today-february-21-8597884#toc-2024-02-21t152750810z) for it to be feasible for them to buy. For almost a third of the survey respondents, mortgage rates would have to fall below 5% to consider buying a home. An Investopedia analysis of daily changes in mortgage rates found [rates fell Thursday](https://www.investopedia.com/mortgage-rates-edge-down-8602116) but have been holding mostly steady in the broader trend for the past two weeks, echoing Freddie Mac's data. High mortgage rates have historically pushed home prices down by reducing the number of people looking to buy a home. But recently, prices have continued to rise largely because there are fewer homes for sale. The “[lock-in effect](https://www.investopedia.com/lock-in-effect-grows-for-homeowners-with-low-mortgages-8420236)" has many homeowners avoiding putting their homes on the market because that would mean giving up an affordable fixed-rate mortgage they secured during the pandemic when rates hit record lows.

Key Takeaways Mortgage rates ticked up slightly to 6.94% this week, according to government-sponsored enterprise Freddie Mac. Mortgage rates are still down from their late October peak, but have been creeping back up in January. High interest on mortgages is keeping buyers from the market and is pushing down the number of homes for sale. Mortgage rates approached the 7% threshold Thursday, keeping potential buyers on the sidelines during a historically busy season for selling houses. Mortgage rates ticked up slightly to 6.94% this week up from 6.90%, according to government-sponsored enterprise Freddie Mac. Mortgage rates hit a peak of 7.79% in October and have been trending down since, according to Freddie Mac. The falling rates had pulled more shoppers back into the market, but increases over the last four weeks are pushing home buying back out of reach for many. "The recent boomerang in rates has dampened already tentative homebuyer momentum as we approach the spring, a historically busy season for home buying," said Freddie Mac’s Chief Economist Sam Khater in a statement. “ While sales of newly built homes are trending in a positive direction, higher rates and elevated prices continue to pose affordability challenges that may leave potential homebuyers on the sidelines.” According to a recent survey released by Realtor.com, nearly two-thirds of potential homebuyers said interest rates would need to fall for it to be feasible for them to buy. For almost a third of the survey respondents, mortgage rates would have to fall below 5% to consider buying a home. An Investopedia analysis of daily changes in mortgage rates found rates fell Thursday but have been holding mostly steady in the broader trend for the past two weeks, echoing Freddie Mac's data. High mortgage rates have historically pushed home prices down by reducing the number of people looking to buy a home. But recently, prices have continued to rise largely because there are fewer homes for sale. The “lock-in effect" has many homeowners avoiding putting their homes on the market because that would mean giving up an affordable fixed-rate mortgage they secured during the pandemic when rates hit record lows.

https://www.investopedia.com/terms/n/nqgm.asp

NASDAQ Global Market Composite: Meaning, Tiers

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-nasdaq-global-market-composite"></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 NASDAQ Global Market Composite? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The NASDAQ Global Market Composite is an international <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">stock market index</a> comprising 1,450 stocks that represent the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">NASDAQ</a> Global Market. Stocks in this index must meet NASDAQ’s strict corporate governance standards and financial and liquidity requirements. The Global Market Composite is less exclusive than the Global Select Market Composite. </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 NASDAQ Global Market Composite is an international equity index containing 1,450 stocks in the NASDAQ Global Market.</li><li>The Composite is composed of three distinct tiers: The NASDAQ Global Select Market, the NASDAQ Global Market, and the NASDAQ Capital Market.</li><li>The Global Select Market differs from the Global Market in that it is more exclusive and must meet more stringent financial and liquidity requirements.</li><li>Companies in the Capital Market tier meet less stringent requirements and have lower levels of market capitalization compared to the other two tiers.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-nasdaq-global-market-composite"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding the NASDAQ Global Market Composite </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The NASDAQ Global Market Composite stock market index was established by NASDAQ in 2006 when the Nasdaq National Market split into two tiers, the Nasdaq Global Market and the Nasdaq Global Select Market.<span class="ql-inline-citation" data-cite="2"></span> It focuses on companies that do not possess the financial strength to be included in the NASDAQ Global Select Market Composite. The Global Market Composite is less exclusive than the Global Select Market Composite.<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"> This change by NASDAQ was nominal, as it did not affect listing standards or alter the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corporategovernance.asp">corporate governance standards</a> and financial and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> requirements. The split was designed to reflect the global scope of the index and the companies listed on it.<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> <span class="heading-toc" id="toc-the-nasdaq-tiers"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> The NASDAQ Tiers </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The NASDAQ had three distinct tiers: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nqgs.asp">NASDAQ Global Select Market (NQGS)</a></li> <li>The NASDAQ Global Market</li> <li>The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq-smallcap-market.asp">NASDAQ Capital Market</a><span class="ql-inline-citation" data-cite="1"></span></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Requirements for inclusion in the NASDAQ Global Select Market are the most stringent, and requirements for the NASDAQ Global Market are more stringent than those for the NASDAQ Capital Market.<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"> Corporate governance requirements are the same across all NASDAQ market tiers. All companies listed by NASDAQ must satisfy a variety of financial, liquidity, and corporate governance requirements, and while a company’s securities may qualify for initial inclusion, NASDAQ may deny a listing, when necessary, in order to protect investors and the public interest.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The performance of all NASDAQ tiers is based on market capitalization weights.<span class="ql-inline-citation" data-cite="4"></span> As a result, the movement of common stocks of larger companies has a greater impact on the movement of each index as a whole. </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"> The NASDAQ Global Select Market Composite </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The NASDAQ Global Select Market index is a portfolio of securities issued by companies that meet the highest standards for financial and liquidity strength.<span class="ql-inline-citation" data-cite="4"></span> The origin point of the NASDAQ Global Select Market Composite was the NASDAQ National Market Composite Index, which began in 1984 and was ultimately replaced by the NASDAQ Global Select Market Composite Index.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> The NASDAQ Global Market Index </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The NASDAQ Global Market Index is a portfolio of securities issued by companies that meet the NASDAQ standards for financial strength and liquidity. Companies that do not have the financial strength to be included in NASDAQ's Global Select Market Composite are included in NASDAQ's Global Market.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <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"> The NASDAQ Capital Market Composite </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The NASDAQ Capital Market Index is a portfolio of securities issued by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small-cap</a> companies trading on NASDAQ. Nominally, these are smaller companies that indicate a need to raise additional capital. The listing requirements for the NASDAQ Capital Market are less stringent than the other NASDAQ markets.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="1"></span> </p></div>

## What Is the NASDAQ Global Market Composite? The NASDAQ Global Market Composite is an international [stock market index](https://www.investopedia.com/terms/m/marketindex.asp) comprising 1,450 stocks that represent the [NASDAQ](https://www.investopedia.com/terms/n/nasdaq.asp) Global Market. Stocks in this index must meet NASDAQ’s strict corporate governance standards and financial and liquidity requirements. The Global Market Composite is less exclusive than the Global Select Market Composite. ### Key Takeaways * The NASDAQ Global Market Composite is an international equity index containing 1,450 stocks in the NASDAQ Global Market. * The Composite is composed of three distinct tiers: The NASDAQ Global Select Market, the NASDAQ Global Market, and the NASDAQ Capital Market. * The Global Select Market differs from the Global Market in that it is more exclusive and must meet more stringent financial and liquidity requirements. * Companies in the Capital Market tier meet less stringent requirements and have lower levels of market capitalization compared to the other two tiers. ## Understanding the NASDAQ Global Market Composite The NASDAQ Global Market Composite stock market index was established by NASDAQ in 2006 when the Nasdaq National Market split into two tiers, the Nasdaq Global Market and the Nasdaq Global Select Market. It focuses on companies that do not possess the financial strength to be included in the NASDAQ Global Select Market Composite. The Global Market Composite is less exclusive than the Global Select Market Composite. This change by NASDAQ was nominal, as it did not affect listing standards or alter the [corporate governance standards](https://www.investopedia.com/terms/c/corporategovernance.asp) and financial and [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) requirements. The split was designed to reflect the global scope of the index and the companies listed on it. ## The NASDAQ Tiers The NASDAQ had three distinct tiers: 1. The [NASDAQ Global Select Market (NQGS)](https://www.investopedia.com/terms/n/nqgs.asp) 2. The NASDAQ Global Market 3. The [NASDAQ Capital Market](https://www.investopedia.com/terms/n/nasdaq-smallcap-market.asp) Requirements for inclusion in the NASDAQ Global Select Market are the most stringent, and requirements for the NASDAQ Global Market are more stringent than those for the NASDAQ Capital Market. Corporate governance requirements are the same across all NASDAQ market tiers. All companies listed by NASDAQ must satisfy a variety of financial, liquidity, and corporate governance requirements, and while a company’s securities may qualify for initial inclusion, NASDAQ may deny a listing, when necessary, in order to protect investors and the public interest. The performance of all NASDAQ tiers is based on market capitalization weights. As a result, the movement of common stocks of larger companies has a greater impact on the movement of each index as a whole. ### The NASDAQ Global Select Market Composite The NASDAQ Global Select Market index is a portfolio of securities issued by companies that meet the highest standards for financial and liquidity strength. The origin point of the NASDAQ Global Select Market Composite was the NASDAQ National Market Composite Index, which began in 1984 and was ultimately replaced by the NASDAQ Global Select Market Composite Index. ### The NASDAQ Global Market Index The NASDAQ Global Market Index is a portfolio of securities issued by companies that meet the NASDAQ standards for financial strength and liquidity. Companies that do not have the financial strength to be included in NASDAQ's Global Select Market Composite are included in NASDAQ's Global Market. ### The NASDAQ Capital Market Composite The NASDAQ Capital Market Index is a portfolio of securities issued by [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) companies trading on NASDAQ. Nominally, these are smaller companies that indicate a need to raise additional capital. The listing requirements for the NASDAQ Capital Market are less stringent than the other NASDAQ markets.

What Is the NASDAQ Global Market Composite? The NASDAQ Global Market Composite is an international stock market index comprising 1,450 stocks that represent the NASDAQ Global Market. Stocks in this index must meet NASDAQ’s strict corporate governance standards and financial and liquidity requirements. The Global Market Composite is less exclusive than the Global Select Market Composite. Key Takeaways The NASDAQ Global Market Composite is an international equity index containing 1,450 stocks in the NASDAQ Global Market.The Composite is composed of three distinct tiers: The NASDAQ Global Select Market, the NASDAQ Global Market, and the NASDAQ Capital Market.The Global Select Market differs from the Global Market in that it is more exclusive and must meet more stringent financial and liquidity requirements.Companies in the Capital Market tier meet less stringent requirements and have lower levels of market capitalization compared to the other two tiers. Understanding the NASDAQ Global Market Composite The NASDAQ Global Market Composite stock market index was established by NASDAQ in 2006 when the Nasdaq National Market split into two tiers, the Nasdaq Global Market and the Nasdaq Global Select Market. It focuses on companies that do not possess the financial strength to be included in the NASDAQ Global Select Market Composite. The Global Market Composite is less exclusive than the Global Select Market Composite. This change by NASDAQ was nominal, as it did not affect listing standards or alter the corporate governance standards and financial and liquidity requirements. The split was designed to reflect the global scope of the index and the companies listed on it. The NASDAQ Tiers The NASDAQ had three distinct tiers: The NASDAQ Global Select Market (NQGS) The NASDAQ Global Market The NASDAQ Capital Market Requirements for inclusion in the NASDAQ Global Select Market are the most stringent, and requirements for the NASDAQ Global Market are more stringent than those for the NASDAQ Capital Market. Corporate governance requirements are the same across all NASDAQ market tiers. All companies listed by NASDAQ must satisfy a variety of financial, liquidity, and corporate governance requirements, and while a company’s securities may qualify for initial inclusion, NASDAQ may deny a listing, when necessary, in order to protect investors and the public interest. The performance of all NASDAQ tiers is based on market capitalization weights. As a result, the movement of common stocks of larger companies has a greater impact on the movement of each index as a whole. The NASDAQ Global Select Market Composite The NASDAQ Global Select Market index is a portfolio of securities issued by companies that meet the highest standards for financial and liquidity strength. The origin point of the NASDAQ Global Select Market Composite was the NASDAQ National Market Composite Index, which began in 1984 and was ultimately replaced by the NASDAQ Global Select Market Composite Index. The NASDAQ Global Market Index The NASDAQ Global Market Index is a portfolio of securities issued by companies that meet the NASDAQ standards for financial strength and liquidity. Companies that do not have the financial strength to be included in NASDAQ's Global Select Market Composite are included in NASDAQ's Global Market. The NASDAQ Capital Market Composite The NASDAQ Capital Market Index is a portfolio of securities issued by small-cap companies trading on NASDAQ. Nominally, these are smaller companies that indicate a need to raise additional capital. The listing requirements for the NASDAQ Capital Market are less stringent than the other NASDAQ markets.

https://www.investopedia.com/articles/personal-finance/071415/how-cut-financial-advisor-expenses.asp

How To Cut Financial Advisor Fees

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 an ideal relationship, you and your <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> should both be happy with what you’re paying. But what if you feel you’re paying too much? Perhaps you can convince your advisor to agree to lower their cost. There is that balance between charging so much that it drives away business and charging so little that their services don’t appear to be valuable. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Let’s examine what advisors are usually paid, what bang you can expect for your buck, and possible ways to reduce the price tag. </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 average fee for a financial advisor’s services is 1.02% of assets under management (AUM) annually for an account of $1 million.<span class="ql-inline-citation" data-cite="1"></span></li><li>An actively managed portfolio usually involves a team of investment professionals buying and selling holdings, which leads to higher fees.</li><li>Financial advisors who offer passively managed portfolios tend to charge lower fees.</li><li>Hiring a fee-based advisor, not a commission-based one, can also help lower the costs of a financial advisor.</li><li>Be mindful that the dollar amount you may increase while the effective percentage of your fees may decrease as your fee is calculated on a higher portfolio balance.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-the-average-cost-of-a-financial-advisor"></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 the Average Cost of a Financial Advisor? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In 2021, the average fee for a financial advisor’s services was 1.02% 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> annually for an account of $1 million, according to research done by Advisory HQ News Corp.<span class="ql-inline-citation" data-cite="1"></span> A 2019 RIA in a Box study of more than 1,350 registered investment advisor firms put the total industry average advisory fee at 1.17%, decreasing depending on the size of your account.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> However, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp">high-net-worth individuals</a> may pay less, because the fee structure works on a sliding scale. “A reasonable fee would be 1% at $1 million down to 0.50% at $10 million and 0.10% thereafter,” says <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.ogwealth.com/who-we-are">Ryan O’Donnell</a>, CFP, wealth manager, and founding partner of the O’Donnell Group in Chico, Calif. </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 other words, clients should expect to pay a maximum of $50,000 on a $10 million account. Online advisors have shown that a reasonable fee for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymanagement.asp">money management</a> only is about 0.25% to 0.30% of assets, so if you don’t want advice on anything else, that’s a reasonable fee, says O’Donnell.<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-what-types-of-fees-do-financial-advisors-charge"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> What Types of Fees Do Financial Advisors Charge? </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_15-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Financial Advisor Fees by Type</th> </tr> <tr> <th><b>Fee Structure</b></th> <th><b>How It Works</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>Asset-Based</td> <td>Clients pay a percentage of assets under management, often in a tiered structure. This type of financial advisor fee is common.</td> </tr> <tr> <td>Commission</td> <td>Advisors earn fees by the trade or transaction.</td> </tr> <tr> <td>Fee-Only</td> <td>In contrast with commissions-based structures, fee-only services charge per service.</td> </tr> <tr> <td>Hourly Fee</td> <td>Some financial advisors charge on an hourly basis for services.</td> </tr> <tr> <td>Flat Fee</td> <td>Typically, advisors who charge a flat fee offer a specific service for a set rate. Flat fees may also be combined with commissions in some cases.</td> </tr> <tr> <td>Performance-Based Fees</td> <td>Some advisors may assess an additional fee if their service outperforms a specified benchmark.<span data-cite="9"></span><span data-cite="8"></span></td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-value-for-your-money"></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"> Value for Your Money </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> For the traditional 1% fee, clients can expect <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inv-100-top-financial-advisors-7556227">asset management services</a> and a full financial plan that is updated at least annually, says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University. </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"> Some firms provide tax-planning services at no additional cost, but many partners with accounting firms charge for all tax-related services. The same is true of legal services, he adds.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> “For high-net-worth clients with advanced planning needs, these fees can be worthwhile,” says Lumby. “They need high-touch, custom plans with many different professionals involved.” High-net-worth clients are very sophisticated, and they’re also very busy, says O’Donnell. They aren’t going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> An advisor should be able to explain how they’re adding value for any amount charged above standard rates. Is the advisor acting as your personal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfo.asp">chief financial officer (CFO)</a>, for example, and helping with tax planning or estate planning? Are they evaluating where you are vulnerable from an asset protection standpoint? Is the advisor helping you ensure that your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/05/giftingtocharity.asp">charitable gifts</a> have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wealthmanagement.asp">wealth management</a>. </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-passive-vs-active-management-value-vs-cost"></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"> Passive vs. Active Management: Value vs. Cost </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive investment</a> strategy involves <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyandhold.asp">buying and holding</a> investments long-term. It looks to maximize returns by minimizing buying and selling. It relies on the theory that the market ultimately posts positive returns over time, and it eschews attempting to make money off short-term fluctuations or market timing. It is intended to build wealth incrementally but inevitably. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> For example, “If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/davidpaulsims/" rel="sponsored nofollow">David P. Sims</a>, a certified public accountant and the Director of Finance and Revenue Cycle Management for Master Center for Addiction in Richmond, VA. <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> usually contain a basket of equities or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a> that mirror an underlying index, such as the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500</a> or an index of <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">U.S. Treasury bonds</a>. Passive management requires less work from the investment advisor and usually results in lower fees for the investor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> A portfolio that’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">actively managed</a> usually involves a team of investment professionals, headed up by a portfolio manager, who is engaged in monitoring the portfolio’s performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> index, such as the S&amp;P 500. </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"> “Expect to pay more for actively managed portfolios,” says Sims. “If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> However, just because you can pay extra for active management doesn’t mean you should. Actively managed funds tend to underperform index funds, according to S&amp;P Dow Jones Indices, which tracks the performance of actively managed funds versus market benchmarks. Per the SPIVA U.S. Scorecard for mid-2023: "a majority of large-cap managers outperformed in only (three) of the last 23 years (missing by a whisker in 2022)."<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_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> If you’re going to hire a financial advisor with an actively managed strategy, be sure to know the types of securities in which the advisor will be investing and whether those holdings align with 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/">long-term financial goals</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a> level. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>Studies have shown that actively managed portfolios more often than not underperform their stated benchmarks over time, though there are some that hit them or even exceed them.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_41-0"> <span class="mntl-sc-block-subheading__text"> Vanguard and Betterment </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> If you want to work with a professional advisor but don’t need highly personalized service, Lumby suggests looking at Vanguard’s Personal Advisor, which offers financial planning and wealth management for an annual gross advisory fee of 0.35% for all-index options or 0.4% for active/index options.<span class="ql-inline-citation" data-cite="4"></span> And if you need only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financialcareers/07/portfolio_management.asp">portfolio management</a>, not financial planning or advising, consider wealth management services such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/betterment-review-4587887">Betterment</a>, which has a fee of $4 per month or 0.25% of AUM annually.<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_43-0"></div> <span class="heading-toc" id="toc-how-to-reduce-costs-but-get-quality-advice"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-heading__text"> How To Reduce Costs, But Get Quality Advice </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Although the goal is to reduce fees and expenses by as much as possible, it’s important to consider the level of service and performance the financial advisor offers. Below are some effective tactics for cutting financial advisor expenses. </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"> Use a Fee-Based Financial Advisor </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> You’ve probably heard this before, but the best way to make sure you’re getting unbiased financial advice that’s in your best interest is to hire a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102014/feeonly-financial-advisers-what-you-need-know.asp">fee-based advisor</a>, not a commission-based one. Fee-based advisors have a greater incentive to grow their clients’ assets, according to Sims. “In the long run, this is a win-win solution for the client and the advisor,” he says. </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"> Avoid Up-Front Loads </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Try to avoid “big <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/front-endload.asp">upfront loads</a> and other silly fees that often accompany products being sold by select brokers,” says Lumby. “Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> In today’s low-cost investment world, there is no place for loaded <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> or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on.”<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-subheading__text"> Negotiate a Lower Fee </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges. </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"> If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage. </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"> Hire a Newbie </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> You could also take a chance on a newcomer to financial advising. "Often, they know they can’t demand top dollar and are hungry, need the business, and are willing to dicker," says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.personalmoneyplanning.com/team-member-01/gary-silverman">Gary Silverman</a>, CFP, founder of Personal Money Planning in Wichita Falls, Texas, where he serves as its investment advisor and a financial planner.<strong> </strong> </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"> Though you might get what you pay for, you’ll probably get more attention, says Silverman. What’s more, he adds, “Folks that are new usually know they are a bit ignorant, so they’ll study hard before handing you a recommendation. Just because someone has been doing this for three years doesn’t mean they do a poorer job than someone who’s been at it for three decades.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-what-is-the-average-fee-for-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Average Fee for a Financial Advisor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The average fee for a financial advisor generally comes in at about 1% of the assets they are managing. Be mindful that you may still pay a higher nominal dollar as there's a higher base the percent fee is applied to. However, this may mean that the effective percentage of assets may decrease as your portfolio increases.<span class="ql-inline-citation" data-cite="1"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-active-vs-passive-management-which-is-better"></span> <h2 class="mntl-sc-block-questionandanswer__question">Active vs. Passive Management: Which Is Better?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There really is no answer to this question. Active management allows you to take advantage of short-term market fluctuations, but it also carries greater risk. Passive management may not generate as much return in the short run, but over time, it may do as well or better than active management.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-fee-based-vs-commission-based-financial-advisor-which-is-better"></span> <h2 class="mntl-sc-block-questionandanswer__question">Fee-Based vs. Commission-Based Financial Advisor: Which Is Better?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A fee-based advisor is definitely the way to go because their fees are fed by their success in making you money. A commission-based advisor has too much incentive to sell you investments that may be better for them than they are for you.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> When looking for a financial advisor or deciding whether to stay with your existing one, remember that you want the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about which services you really need and how much they’re worth to you, then <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/find-financial-advisor-planner/">find a financial advisor</a> who fits your criteria. </p></div>

In an ideal relationship, you and your [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) should both be happy with what you’re paying. But what if you feel you’re paying too much? Perhaps you can convince your advisor to agree to lower their cost. There is that balance between charging so much that it drives away business and charging so little that their services don’t appear to be valuable. Let’s examine what advisors are usually paid, what bang you can expect for your buck, and possible ways to reduce the price tag. ### Key Takeaways * The average fee for a financial advisor’s services is 1.02% of assets under management (AUM) annually for an account of $1 million. * An actively managed portfolio usually involves a team of investment professionals buying and selling holdings, which leads to higher fees. * Financial advisors who offer passively managed portfolios tend to charge lower fees. * Hiring a fee-based advisor, not a commission-based one, can also help lower the costs of a financial advisor. * Be mindful that the dollar amount you may increase while the effective percentage of your fees may decrease as your fee is calculated on a higher portfolio balance. ## What Is the Average Cost of a Financial Advisor? In 2021, the average fee for a financial advisor’s services was 1.02% of [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp) annually for an account of $1 million, according to research done by Advisory HQ News Corp. A 2019 RIA in a Box study of more than 1,350 registered investment advisor firms put the total industry average advisory fee at 1.17%, decreasing depending on the size of your account. However, [high-net-worth individuals](https://www.investopedia.com/terms/h/hnwi.asp) may pay less, because the fee structure works on a sliding scale. “A reasonable fee would be 1% at $1 million down to 0.50% at $10 million and 0.10% thereafter,” says [Ryan O’Donnell](https://www.ogwealth.com/who-we-are), CFP, wealth manager, and founding partner of the O’Donnell Group in Chico, Calif. In other words, clients should expect to pay a maximum of $50,000 on a $10 million account. Online advisors have shown that a reasonable fee for [money management](https://www.investopedia.com/terms/m/moneymanagement.asp) only is about 0.25% to 0.30% of assets, so if you don’t want advice on anything else, that’s a reasonable fee, says O’Donnell. ## What Types of Fees Do Financial Advisors Charge? | Financial Advisor Fees by Type | | | --- | --- | | **Fee Structure** | **How It Works** | | Asset-Based | Clients pay a percentage of assets under management, often in a tiered structure. This type of financial advisor fee is common. | | Commission | Advisors earn fees by the trade or transaction. | | Fee-Only | In contrast with commissions-based structures, fee-only services charge per service. | | Hourly Fee | Some financial advisors charge on an hourly basis for services. | | Flat Fee | Typically, advisors who charge a flat fee offer a specific service for a set rate. Flat fees may also be combined with commissions in some cases. | | Performance-Based Fees | Some advisors may assess an additional fee if their service outperforms a specified benchmark. | ## Value for Your Money For the traditional 1% fee, clients can expect [asset management services](https://www.investopedia.com/inv-100-top-financial-advisors-7556227) and a full financial plan that is updated at least annually, says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University. Some firms provide tax-planning services at no additional cost, but many partners with accounting firms charge for all tax-related services. The same is true of legal services, he adds.  “For high-net-worth clients with advanced planning needs, these fees can be worthwhile,” says Lumby. “They need high-touch, custom plans with many different professionals involved.” High-net-worth clients are very sophisticated, and they’re also very busy, says O’Donnell. They aren’t going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile.  An advisor should be able to explain how they’re adding value for any amount charged above standard rates. Is the advisor acting as your personal [chief financial officer (CFO)](https://www.investopedia.com/terms/c/cfo.asp), for example, and helping with tax planning or estate planning? Are they evaluating where you are vulnerable from an asset protection standpoint? Is the advisor helping you ensure that your [charitable gifts](https://www.investopedia.com/articles/retirement/05/giftingtocharity.asp) have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of [wealth management](https://www.investopedia.com/terms/w/wealthmanagement.asp). ## Passive vs. Active Management: Value vs. Cost A [passive investment](https://www.investopedia.com/terms/p/passiveinvesting.asp) strategy involves [buying and holding](https://www.investopedia.com/terms/b/buyandhold.asp) investments long-term. It looks to maximize returns by minimizing buying and selling. It relies on the theory that the market ultimately posts positive returns over time, and it eschews attempting to make money off short-term fluctuations or market timing. It is intended to build wealth incrementally but inevitably. For example, “If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market,” says [David P. Sims](https://www.linkedin.com/in/davidpaulsims/), a certified public accountant and the Director of Finance and Revenue Cycle Management for Master Center for Addiction in Richmond, VA. [Exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) usually contain a basket of equities or [bonds](https://www.investopedia.com/terms/b/bond.asp) that mirror an underlying index, such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) or an index of [U.S. Treasury bonds](https://www.investopedia.com/terms/t/treasurybond.asp). Passive management requires less work from the investment advisor and usually results in lower fees for the investor. A portfolio that’s [actively managed](https://www.investopedia.com/terms/a/activemanagement.asp) usually involves a team of investment professionals, headed up by a portfolio manager, who is engaged in monitoring the portfolio’s performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) index, such as the S&P 500. “Expect to pay more for actively managed portfolios,” says Sims. “If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management.” However, just because you can pay extra for active management doesn’t mean you should. Actively managed funds tend to underperform index funds, according to S&P Dow Jones Indices, which tracks the performance of actively managed funds versus market benchmarks. Per the SPIVA U.S. Scorecard for mid-2023: "a majority of large-cap managers outperformed in only (three) of the last 23 years (missing by a whisker in 2022)." If you’re going to hire a financial advisor with an actively managed strategy, be sure to know the types of securities in which the advisor will be investing and whether those holdings align with your [long-term financial goals](https://www.investopedia.com/articles/personal-finance/100516/setting-financial-goals/) and [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) level. ### Studies have shown that actively managed portfolios more often than not underperform their stated benchmarks over time, though there are some that hit them or even exceed them. ### Vanguard and Betterment If you want to work with a professional advisor but don’t need highly personalized service, Lumby suggests looking at Vanguard’s Personal Advisor, which offers financial planning and wealth management for an annual gross advisory fee of 0.35% for all-index options or 0.4% for active/index options. And if you need only [portfolio management](https://www.investopedia.com/articles/financialcareers/07/portfolio_management.asp), not financial planning or advising, consider wealth management services such as [Betterment](https://www.investopedia.com/betterment-review-4587887), which has a fee of $4 per month or 0.25% of AUM annually. ## How To Reduce Costs, But Get Quality Advice Although the goal is to reduce fees and expenses by as much as possible, it’s important to consider the level of service and performance the financial advisor offers. Below are some effective tactics for cutting financial advisor expenses. ### Use a Fee-Based Financial Advisor You’ve probably heard this before, but the best way to make sure you’re getting unbiased financial advice that’s in your best interest is to hire a [fee-based advisor](https://www.investopedia.com/articles/investing/102014/feeonly-financial-advisers-what-you-need-know.asp), not a commission-based one. Fee-based advisors have a greater incentive to grow their clients’ assets, according to Sims. “In the long run, this is a win-win solution for the client and the advisor,” he says. ### Avoid Up-Front Loads Try to avoid “big [upfront loads](https://www.investopedia.com/terms/f/front-endload.asp) and other silly fees that often accompany products being sold by select brokers,” says Lumby. “Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them. In today’s low-cost investment world, there is no place for loaded [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on.” ### Negotiate a Lower Fee Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges. If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage. ### Hire a Newbie You could also take a chance on a newcomer to financial advising. "Often, they know they can’t demand top dollar and are hungry, need the business, and are willing to dicker," says [Gary Silverman](https://www.personalmoneyplanning.com/team-member-01/gary-silverman), CFP, founder of Personal Money Planning in Wichita Falls, Texas, where he serves as its investment advisor and a financial planner. Though you might get what you pay for, you’ll probably get more attention, says Silverman. What’s more, he adds, “Folks that are new usually know they are a bit ignorant, so they’ll study hard before handing you a recommendation. Just because someone has been doing this for three years doesn’t mean they do a poorer job than someone who’s been at it for three decades.” ## What Is the Average Fee for a Financial Advisor? The average fee for a financial advisor generally comes in at about 1% of the assets they are managing. Be mindful that you may still pay a higher nominal dollar as there's a higher base the percent fee is applied to. However, this may mean that the effective percentage of assets may decrease as your portfolio increases. ## Active vs. Passive Management: Which Is Better? There really is no answer to this question. Active management allows you to take advantage of short-term market fluctuations, but it also carries greater risk. Passive management may not generate as much return in the short run, but over time, it may do as well or better than active management. ## Fee-Based vs. Commission-Based Financial Advisor: Which Is Better? A fee-based advisor is definitely the way to go because their fees are fed by their success in making you money. A commission-based advisor has too much incentive to sell you investments that may be better for them than they are for you. ## The Bottom Line When looking for a financial advisor or deciding whether to stay with your existing one, remember that you want the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about which services you really need and how much they’re worth to you, then [find a financial advisor](https://www.investopedia.com/updates/find-financial-advisor-planner/) who fits your criteria.

In an ideal relationship, you and your financial advisor should both be happy with what you’re paying. But what if you feel you’re paying too much? Perhaps you can convince your advisor to agree to lower their cost. There is that balance between charging so much that it drives away business and charging so little that their services don’t appear to be valuable. Let’s examine what advisors are usually paid, what bang you can expect for your buck, and possible ways to reduce the price tag. Key Takeaways The average fee for a financial advisor’s services is 1.02% of assets under management (AUM) annually for an account of $1 million.An actively managed portfolio usually involves a team of investment professionals buying and selling holdings, which leads to higher fees.Financial advisors who offer passively managed portfolios tend to charge lower fees.Hiring a fee-based advisor, not a commission-based one, can also help lower the costs of a financial advisor.Be mindful that the dollar amount you may increase while the effective percentage of your fees may decrease as your fee is calculated on a higher portfolio balance. What Is the Average Cost of a Financial Advisor? In 2021, the average fee for a financial advisor’s services was 1.02% of assets under management (AUM) annually for an account of $1 million, according to research done by Advisory HQ News Corp. A 2019 RIA in a Box study of more than 1,350 registered investment advisor firms put the total industry average advisory fee at 1.17%, decreasing depending on the size of your account. However, high-net-worth individuals may pay less, because the fee structure works on a sliding scale. “A reasonable fee would be 1% at $1 million down to 0.50% at $10 million and 0.10% thereafter,” says Ryan O’Donnell, CFP, wealth manager, and founding partner of the O’Donnell Group in Chico, Calif. In other words, clients should expect to pay a maximum of $50,000 on a $10 million account. Online advisors have shown that a reasonable fee for money management only is about 0.25% to 0.30% of assets, so if you don’t want advice on anything else, that’s a reasonable fee, says O’Donnell. What Types of Fees Do Financial Advisors Charge? Financial Advisor Fees by Type Fee Structure How It Works Asset-Based Clients pay a percentage of assets under management, often in a tiered structure. This type of financial advisor fee is common. Commission Advisors earn fees by the trade or transaction. Fee-Only In contrast with commissions-based structures, fee-only services charge per service. Hourly Fee Some financial advisors charge on an hourly basis for services. Flat Fee Typically, advisors who charge a flat fee offer a specific service for a set rate. Flat fees may also be combined with commissions in some cases. Performance-Based Fees Some advisors may assess an additional fee if their service outperforms a specified benchmark. Value for Your Money For the traditional 1% fee, clients can expect asset management services and a full financial plan that is updated at least annually, says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University. Some firms provide tax-planning services at no additional cost, but many partners with accounting firms charge for all tax-related services. The same is true of legal services, he adds.  “For high-net-worth clients with advanced planning needs, these fees can be worthwhile,” says Lumby. “They need high-touch, custom plans with many different professionals involved.” High-net-worth clients are very sophisticated, and they’re also very busy, says O’Donnell. They aren’t going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile.  An advisor should be able to explain how they’re adding value for any amount charged above standard rates. Is the advisor acting as your personal chief financial officer (CFO), for example, and helping with tax planning or estate planning? Are they evaluating where you are vulnerable from an asset protection standpoint? Is the advisor helping you ensure that your charitable gifts have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of wealth management. Passive vs. Active Management: Value vs. Cost A passive investment strategy involves buying and holding investments long-term. It looks to maximize returns by minimizing buying and selling. It relies on the theory that the market ultimately posts positive returns over time, and it eschews attempting to make money off short-term fluctuations or market timing. It is intended to build wealth incrementally but inevitably. For example, “If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market,” says David P. Sims, a certified public accountant and the Director of Finance and Revenue Cycle Management for Master Center for Addiction in Richmond, VA. Exchange-traded funds (ETFs) usually contain a basket of equities or bonds that mirror an underlying index, such as the S&P 500 or an index of U.S. Treasury bonds. Passive management requires less work from the investment advisor and usually results in lower fees for the investor. A portfolio that’s actively managed usually involves a team of investment professionals, headed up by a portfolio manager, who is engaged in monitoring the portfolio’s performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a benchmark index, such as the S&P 500. “Expect to pay more for actively managed portfolios,” says Sims. “If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management.” However, just because you can pay extra for active management doesn’t mean you should. Actively managed funds tend to underperform index funds, according to S&P Dow Jones Indices, which tracks the performance of actively managed funds versus market benchmarks. Per the SPIVA U.S. Scorecard for mid-2023: "a majority of large-cap managers outperformed in only (three) of the last 23 years (missing by a whisker in 2022)." If you’re going to hire a financial advisor with an actively managed strategy, be sure to know the types of securities in which the advisor will be investing and whether those holdings align with your long-term financial goals and risk tolerance level. Studies have shown that actively managed portfolios more often than not underperform their stated benchmarks over time, though there are some that hit them or even exceed them. Vanguard and Betterment If you want to work with a professional advisor but don’t need highly personalized service, Lumby suggests looking at Vanguard’s Personal Advisor, which offers financial planning and wealth management for an annual gross advisory fee of 0.35% for all-index options or 0.4% for active/index options. And if you need only portfolio management, not financial planning or advising, consider wealth management services such as Betterment, which has a fee of $4 per month or 0.25% of AUM annually. How To Reduce Costs, But Get Quality Advice Although the goal is to reduce fees and expenses by as much as possible, it’s important to consider the level of service and performance the financial advisor offers. Below are some effective tactics for cutting financial advisor expenses. Use a Fee-Based Financial Advisor You’ve probably heard this before, but the best way to make sure you’re getting unbiased financial advice that’s in your best interest is to hire a fee-based advisor, not a commission-based one. Fee-based advisors have a greater incentive to grow their clients’ assets, according to Sims. “In the long run, this is a win-win solution for the client and the advisor,” he says. Avoid Up-Front Loads Try to avoid “big upfront loads and other silly fees that often accompany products being sold by select brokers,” says Lumby. “Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them. In today’s low-cost investment world, there is no place for loaded mutual funds or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on.” Negotiate a Lower Fee Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges. If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage. Hire a Newbie You could also take a chance on a newcomer to financial advising. "Often, they know they can’t demand top dollar and are hungry, need the business, and are willing to dicker," says Gary Silverman, CFP, founder of Personal Money Planning in Wichita Falls, Texas, where he serves as its investment advisor and a financial planner. Though you might get what you pay for, you’ll probably get more attention, says Silverman. What’s more, he adds, “Folks that are new usually know they are a bit ignorant, so they’ll study hard before handing you a recommendation. Just because someone has been doing this for three years doesn’t mean they do a poorer job than someone who’s been at it for three decades.” What Is the Average Fee for a Financial Advisor? The average fee for a financial advisor generally comes in at about 1% of the assets they are managing. Be mindful that you may still pay a higher nominal dollar as there's a higher base the percent fee is applied to. However, this may mean that the effective percentage of assets may decrease as your portfolio increases. Active vs. Passive Management: Which Is Better? There really is no answer to this question. Active management allows you to take advantage of short-term market fluctuations, but it also carries greater risk. Passive management may not generate as much return in the short run, but over time, it may do as well or better than active management. Fee-Based vs. Commission-Based Financial Advisor: Which Is Better? A fee-based advisor is definitely the way to go because their fees are fed by their success in making you money. A commission-based advisor has too much incentive to sell you investments that may be better for them than they are for you. The Bottom Line When looking for a financial advisor or deciding whether to stay with your existing one, remember that you want the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about which services you really need and how much they’re worth to you, then find a financial advisor who fits your criteria.

https://www.investopedia.com/articles/markets/100215/5-best-alternatives-zillow-trulia.asp

15 Top Alternatives to Zillow and Trulia

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Zillow Group, Inc. is a popular online real estate company founded in 2006. Zillow operates as a real estate search engine with more than 160 million homes in its database as of 2024.<span class="ql-inline-citation" data-cite="2"></span> It also offers a value estimate known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111115/zillow-estimates-not-accurate-you-think.asp">Zestimate</a>, along with comparables for each of the homes listed on the site. Many analysts consider Zillow to be a media company that makes its money from its ad placements. </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>Zillow Group, which includes Zillow and Trulia, is the biggest online real estate company in the United States.</li><li>You can use online real estate websites to list your home or shop for your next one.</li><li>Many online real estate websites use information from databases of properties shared by agents and brokers for their own online portals.</li><li>Housing discrimination online or in-person is illegal. </li><li>Use several real estate websites to cull information to search for a new home.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-merger-of-zillow-and-trulia"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> The Merger of Zillow and Trulia </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Like Zillow, Trulia is also an online residential real estate website that connects home sellers with buyers, renters, and real estate professionals in the United States. With a business model similar to Zillow’s, Trulia was acquired by Zillow Group in 2015 for $3.5 billion.<span class="ql-inline-citation" data-cite="3"></span> The resulting entity is considered the most prominent online real estate company operating in the United States. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> An entity as large as Zillow Group provides its users with the benefits of scale, but its market domination means it hasn't needed to adopt some of the smaller competitors' features in the space offer. Many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-real-estate-websites-5069964">online real estate</a> websites have cropped up to dethrone Zillow Group as an industry leader. The following are four options that provide alternatives to Zillow and its subsidiary, Trulia. </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-homebuying-and-selling-alternatives"></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"> Homebuying and Selling Alternatives </span> </h2> <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"> Redfin </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Redfin is a large online real estate company that seeks to redesign the way people buy homes. It offers several benefits that make it a viable alternative to Zillow and Trulia. The Redfin app, available on iOS and Android, claims to update its data every five minutes.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> First, Redfin's user interface and site design are very similar to Zillow's and Trulia's, allowing users to search for properties through a map-based function. After searching the site with a city or ZIP code, Redfin displays information—home value, home appreciation, square footage, year built, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeowners-association-fee-hoa.asp">homeowners association fees</a>, construction components, sewage system specifics, and other housing data points—that a homebuyer might want to know. Also, users browsing for homes can compare units side by side. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Second, Redfin offers features that Zillow and Trulia do not. The company, which began as a real estate broker, employs a team of real estate agents whom Redfin users rate. The compensation these real estate agents receive correlates directly to the ratings they receive. To <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/homebuying-guide-4776300">help homebuyers</a>, the company also rebates part of the real estate commission back to the purchaser. </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-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>On Oct. 29, 2020, several fair housing organizations filed suit against Redfin, accusing the company of systemic racial discrimination. The complaint says the online real estate broker offers fewer services to homebuyers and sellers in minority communities.<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/housing-discrimination-what-can-you-do-5074478">Housing discrimination</a> is illegal, but it does persist today, and you can fight against it.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Users should be aware that in some cities, Redfin does not disclose exact addresses if sellers prefer to keep them hidden, and the site does not automatically provide home value data if the listing agent chooses not to have it displayed. In other cities, Redfin automatically provides complete sales and listing data. </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"> Finally, though the full data might not always be there, the company integrates with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp">Multiple Listing Service</a> (MLS) and lists homes within 15 minutes of when they go live on the MLS. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-subheading__text"> Homesnap </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Homesnap is an online real estate platform that includes features such as an intuitive map-based search function and a robust amount of property information. Much like Zillow and Trulia, its real estate browse function is easy to use. </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"> What sets Homesnap apart from the competition is its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-real-estate-apps-5071405">mobile app</a>. With the app, it is possible to take a real-time picture of a house that is for sale with a mobile device and have the app query all the necessary listing information about the property. </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 mobile app even works on unlisted homes, apartments, and condos, showing users the property values of places currently off the market. The app is available for Android, iPhone, Apple Watch, and Apple TV users.<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> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_31-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_32-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Many online real estate websites are portals that get their information from property databases agents and brokers share. As a brokerage, Redfin is an exception.</p></div></div></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"> NeighborhoodScout </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> NeighborhoodScout provides users with information regarding neighborhoods in the United States. Users can access the company’s neighborhood information using the search function by entering a city or specific address. When a user enters these search criteria, NeighborhoodScout provides average house values, local school information, demographic data, crime rates, traffic data, and more. </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"> Though most of this information is free for users, a subscription is required for some of the more robust data. With plans starting at $112.50 per month, users can access detailed school reports, crime rates, and housing appreciation rates.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The information given to users through NeighborhoodScout’s subscription service is currently not offered by either Zillow or Trulia, making it a viable alternative to either company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Realtor.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Realtor.com is an online real estate website owned by News Corp. (It licenses the term Realtor from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/national-association-of-realtors.asp">National Association of Realtors</a>.) Though the information is current, the site is more basic and doesn't have the robust features of Zillow, Trulia, or the other companies on this list. </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"> However, it's connected to the MLS with the most current listings on the market and is a good place to start searching for a home. It also has a texting option to connect to real estate professionals and a pricing feature to assess how specific home features, such as a garage, affect cost. </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"> Upon finding a home listing, a user can employ a blended strategy to search for that home on one of the three websites listed previously. This way, it's possible to have the most information about a listing, so a buyer can be the first to view the property on Redfin, Homesnap, or NeighborhoodScout, then contact the Realtor quickly.<br/> </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"> Foreclosure.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The name of this website is expository. Foreclosure.com focuses on foreclosures and allows users to search by a number of options. In addition to the popular city and price search options of other websites, Foreclosure.com has options to look for "cheap homes" nationwide, a feature that is sure to be a hit with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/real-estate-investing-guide/">real estate investors</a>. The cheap homes section of the website also includes estimated potential profit on the property and dozens of other features investors who create a free account will appreciate. The site also offers options to search nationwide for rent-to-own homes and city-owned homes.<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_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"> FSBO.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> FSBO stands for "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/for-sale-by-owner.asp">for sale by owner</a>", and FSBO.com is a website that focuses on homes the owners and not real estate agents are selling. The website makes its money by offering listing services for home sellers. It has two packages for listing homes. </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"> Its FSBO package includes a listing on FSBO.com for six months, a free Redfin listing, unlimited photos, and one video upload, and 24/7 access to edit or cancel the listing. Yard signs and supplies are sold separately from this package. The cost of their FSBO package is $99.95. </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"> Their MLS package includes a listing on FSBO.com for six months, a listing on the MLS for six months, listing syndication to other popular real estate websites like Zillow, and other features (some of which can vary by state). Be aware that signing on to this package includes agreeing to pay the buyer's broker commission (which averages 2% to 3% of the sale price) to be posted on the MLS. The cost of their MLS package is $399.95.<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_56-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-subheading__text"> Home Bay </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Home Bay is a website most similar to Redfin and is currently only available in California. It offers both listings and services to visitors. It includes flat fee services for both buying and selling a home through their website without paying the full commission costs of a real estate agent.<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_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"> Homes for Heroes </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Homes for Heroes is a website that specifically targets firefighters, EMS workers, law enforcement, military, healthcare professionals, and teachers. It doesn't provide listings, but it does link homebuyers who qualify to real estate agents and lenders who can find them the best local deals and rewards possible.<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_62-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-subheading__text"> Eppraisal </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Eppraisal is a website that mostly helps homebuyers and sellers look at comparable sales and appraisal estimates. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111115/zillow-estimates-not-accurate-you-think.asp">Zillow estimates</a> can be notoriously inaccurate, and a website like Eppraisal can help individuals get another data point on what a specific property might be worth before the official appraisal comes back.<span class="ql-inline-citation" data-cite="14"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> Xome </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Xome includes all the same listings as the MLS and also includes foreclosures and bank-owned auctions. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-home-buying-apps-5079632">Xome</a> has partnered with the mortgage lender Mr. Cooper to provide <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equity.asp">equity</a> estimates to borrowers when they login to their loan servicing page. This estimate works to encourage borrowers to consider a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashout_refinance.asp">cash-out refinance</a> through Mr. Cooper.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <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"> Your State's MLS </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Depending on where you live you may be able to access your state's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp">MLS</a> without first getting a real estate agent. In Utah, for example, viewing the MLS is possible through the website UtahRealEstate.com whether or not you are working with an agent. In New England, you can access the MLS for New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and portions of New York through the website NEREN.com. </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"> If you are able to view the MLS in your area online directly, you will only see properties that are currently active on the market. This makes the MLS more accurate than Zillow, which frequently keeps properties listed as available long after they have been taken off the market. </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-rental-housing-alternatives"></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"> Rental Housing Alternatives </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> In addition to providing a home selling and buying platform, Zillow lists rentals on their platform. Here are some great <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-rental-listing-sites-5075293">rental listing sites</a> that can serve as alternatives to Zillow and Trulia. </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"> Apartments.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Apartments.com provides listings for traditional apartments in complexes, multifamily properties, condos, duplexes, townhomes, and single-family homes for rent. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_80-0"> <span class="mntl-sc-block-subheading__text"> Zumper.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Zumper.com's listings are similar to Apartments.com's and include the additional features of allowing users to search for monthly rentals and vacation rentals. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> FurnishedFinder.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> FurnishedFinder.com includes listings of furnished rooms and entirely furnished homes. This website specifically caters to travel nurses and other traveling professionals. It mostly offers shorter-term rentals than a website like Apartments.com but longer-term rentals at cheaper rates than a website like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/032814/pros-and-cons-using-airbnb.asp">Airbnb</a>. Furnished Finder is an excellent resource for those looking to stay in an area without having to deal with buying or moving furniture and household goods. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_86-0"> <span class="mntl-sc-block-subheading__text"> Rentler.com </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Rentler.com is most similar to Apartments.com but lists rooms for rent in addition to stand-alone units. Renting a room can be a great option for a recent graduate looking to live cheaply, or anyone looking to significantly reduce their housing costs to pay down debt, travel more, or save up for a home purchase. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_89-0"><span class="heading-toc" id="toc-do-zillow-and-trulia-cost-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Zillow and Trulia Cost Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Looking at properties on Zillow is free. Listing properties for rent on Zillow does come with a fee.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_91-0"><span class="heading-toc" id="toc-how-do-zillow-and-trulia-make-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Zillow and Trulia Make Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110615/why-zillow-free-and-how-it-makes-money.asp">Zillow and Trulia make money</a> by charging for rental listings, selling advertisements to real estate agents, and selling the Premier Agent branding designation on their website. Zillow attempted to make money by flipping homes in 2021 but famously failed to turn a profit.<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_92-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_93-0"><span class="heading-toc" id="toc-can-you-buy-a-house-on-craigslist"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Buy a House on Craigslist?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can't buy a house directly through Craigslist, but the site still does have properties listed both for sale and for rent and remains popular in many parts of the United States.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_95-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Though Zillow and Trulia are popular real estate sites, excellent alternatives do exist. Buying a home is one of the biggest financial decisions you will likely make, so it’s important to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121415/how-find-and-buy-offmarket-homes.asp">pull information</a> from a variety of reputable sources. </p></div>

Zillow Group, Inc. is a popular online real estate company founded in 2006. Zillow operates as a real estate search engine with more than 160 million homes in its database as of 2024. It also offers a value estimate known as the [Zestimate](https://www.investopedia.com/articles/personal-finance/111115/zillow-estimates-not-accurate-you-think.asp), along with comparables for each of the homes listed on the site. Many analysts consider Zillow to be a media company that makes its money from its ad placements. ### Key Takeaways * Zillow Group, which includes Zillow and Trulia, is the biggest online real estate company in the United States. * You can use online real estate websites to list your home or shop for your next one. * Many online real estate websites use information from databases of properties shared by agents and brokers for their own online portals. * Housing discrimination online or in-person is illegal. * Use several real estate websites to cull information to search for a new home. ## The Merger of Zillow and Trulia Like Zillow, Trulia is also an online residential real estate website that connects home sellers with buyers, renters, and real estate professionals in the United States. With a business model similar to Zillow’s, Trulia was acquired by Zillow Group in 2015 for $3.5 billion. The resulting entity is considered the most prominent online real estate company operating in the United States. An entity as large as Zillow Group provides its users with the benefits of scale, but its market domination means it hasn't needed to adopt some of the smaller competitors' features in the space offer. Many [online real estate](https://www.investopedia.com/best-real-estate-websites-5069964) websites have cropped up to dethrone Zillow Group as an industry leader. The following are four options that provide alternatives to Zillow and its subsidiary, Trulia. ## Homebuying and Selling Alternatives ### Redfin Redfin is a large online real estate company that seeks to redesign the way people buy homes. It offers several benefits that make it a viable alternative to Zillow and Trulia. The Redfin app, available on iOS and Android, claims to update its data every five minutes. First, Redfin's user interface and site design are very similar to Zillow's and Trulia's, allowing users to search for properties through a map-based function. After searching the site with a city or ZIP code, Redfin displays information—home value, home appreciation, square footage, year built, [homeowners association fees](https://www.investopedia.com/terms/h/homeowners-association-fee-hoa.asp), construction components, sewage system specifics, and other housing data points—that a homebuyer might want to know. Also, users browsing for homes can compare units side by side. Second, Redfin offers features that Zillow and Trulia do not. The company, which began as a real estate broker, employs a team of real estate agents whom Redfin users rate. The compensation these real estate agents receive correlates directly to the ratings they receive. To [help homebuyers](https://www.investopedia.com/homebuying-guide-4776300), the company also rebates part of the real estate commission back to the purchaser. ### On Oct. 29, 2020, several fair housing organizations filed suit against Redfin, accusing the company of systemic racial discrimination. The complaint says the online real estate broker offers fewer services to homebuyers and sellers in minority communities. [Housing discrimination](https://www.investopedia.com/housing-discrimination-what-can-you-do-5074478) is illegal, but it does persist today, and you can fight against it. Users should be aware that in some cities, Redfin does not disclose exact addresses if sellers prefer to keep them hidden, and the site does not automatically provide home value data if the listing agent chooses not to have it displayed. In other cities, Redfin automatically provides complete sales and listing data. Finally, though the full data might not always be there, the company integrates with the [Multiple Listing Service](https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp) (MLS) and lists homes within 15 minutes of when they go live on the MLS. ### Homesnap Homesnap is an online real estate platform that includes features such as an intuitive map-based search function and a robust amount of property information. Much like Zillow and Trulia, its real estate browse function is easy to use. What sets Homesnap apart from the competition is its [mobile app](https://www.investopedia.com/best-real-estate-apps-5071405). With the app, it is possible to take a real-time picture of a house that is for sale with a mobile device and have the app query all the necessary listing information about the property. The mobile app even works on unlisted homes, apartments, and condos, showing users the property values of places currently off the market. The app is available for Android, iPhone, Apple Watch, and Apple TV users. ### Many online real estate websites are portals that get their information from property databases agents and brokers share. As a brokerage, Redfin is an exception. ### NeighborhoodScout NeighborhoodScout provides users with information regarding neighborhoods in the United States. Users can access the company’s neighborhood information using the search function by entering a city or specific address. When a user enters these search criteria, NeighborhoodScout provides average house values, local school information, demographic data, crime rates, traffic data, and more. Though most of this information is free for users, a subscription is required for some of the more robust data. With plans starting at $112.50 per month, users can access detailed school reports, crime rates, and housing appreciation rates. The information given to users through NeighborhoodScout’s subscription service is currently not offered by either Zillow or Trulia, making it a viable alternative to either company. ### Realtor.com Realtor.com is an online real estate website owned by News Corp. (It licenses the term Realtor from the [National Association of Realtors](https://www.investopedia.com/terms/n/national-association-of-realtors.asp).) Though the information is current, the site is more basic and doesn't have the robust features of Zillow, Trulia, or the other companies on this list. However, it's connected to the MLS with the most current listings on the market and is a good place to start searching for a home. It also has a texting option to connect to real estate professionals and a pricing feature to assess how specific home features, such as a garage, affect cost. Upon finding a home listing, a user can employ a blended strategy to search for that home on one of the three websites listed previously. This way, it's possible to have the most information about a listing, so a buyer can be the first to view the property on Redfin, Homesnap, or NeighborhoodScout, then contact the Realtor quickly. ### Foreclosure.com The name of this website is expository. Foreclosure.com focuses on foreclosures and allows users to search by a number of options. In addition to the popular city and price search options of other websites, Foreclosure.com has options to look for "cheap homes" nationwide, a feature that is sure to be a hit with [real estate investors](https://www.investopedia.com/mortgage/real-estate-investing-guide/). The cheap homes section of the website also includes estimated potential profit on the property and dozens of other features investors who create a free account will appreciate. The site also offers options to search nationwide for rent-to-own homes and city-owned homes. ### FSBO.com FSBO stands for "[for sale by owner](https://www.investopedia.com/terms/f/for-sale-by-owner.asp)", and FSBO.com is a website that focuses on homes the owners and not real estate agents are selling. The website makes its money by offering listing services for home sellers. It has two packages for listing homes. Its FSBO package includes a listing on FSBO.com for six months, a free Redfin listing, unlimited photos, and one video upload, and 24/7 access to edit or cancel the listing. Yard signs and supplies are sold separately from this package. The cost of their FSBO package is $99.95. Their MLS package includes a listing on FSBO.com for six months, a listing on the MLS for six months, listing syndication to other popular real estate websites like Zillow, and other features (some of which can vary by state). Be aware that signing on to this package includes agreeing to pay the buyer's broker commission (which averages 2% to 3% of the sale price) to be posted on the MLS. The cost of their MLS package is $399.95. ### Home Bay Home Bay is a website most similar to Redfin and is currently only available in California. It offers both listings and services to visitors. It includes flat fee services for both buying and selling a home through their website without paying the full commission costs of a real estate agent. ### Homes for Heroes Homes for Heroes is a website that specifically targets firefighters, EMS workers, law enforcement, military, healthcare professionals, and teachers. It doesn't provide listings, but it does link homebuyers who qualify to real estate agents and lenders who can find them the best local deals and rewards possible. ### Eppraisal Eppraisal is a website that mostly helps homebuyers and sellers look at comparable sales and appraisal estimates. [Zillow estimates](https://www.investopedia.com/articles/personal-finance/111115/zillow-estimates-not-accurate-you-think.asp) can be notoriously inaccurate, and a website like Eppraisal can help individuals get another data point on what a specific property might be worth before the official appraisal comes back. ### Xome Xome includes all the same listings as the MLS and also includes foreclosures and bank-owned auctions. [Xome](https://www.investopedia.com/best-home-buying-apps-5079632) has partnered with the mortgage lender Mr. Cooper to provide [equity](https://www.investopedia.com/terms/e/equity.asp) estimates to borrowers when they login to their loan servicing page. This estimate works to encourage borrowers to consider a [cash-out refinance](https://www.investopedia.com/terms/c/cashout_refinance.asp) through Mr. Cooper. ### Your State's MLS Depending on where you live you may be able to access your state's [MLS](https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp) without first getting a real estate agent. In Utah, for example, viewing the MLS is possible through the website UtahRealEstate.com whether or not you are working with an agent. In New England, you can access the MLS for New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and portions of New York through the website NEREN.com. If you are able to view the MLS in your area online directly, you will only see properties that are currently active on the market. This makes the MLS more accurate than Zillow, which frequently keeps properties listed as available long after they have been taken off the market. ## Rental Housing Alternatives In addition to providing a home selling and buying platform, Zillow lists rentals on their platform. Here are some great [rental listing sites](https://www.investopedia.com/best-rental-listing-sites-5075293) that can serve as alternatives to Zillow and Trulia. ### Apartments.com Apartments.com provides listings for traditional apartments in complexes, multifamily properties, condos, duplexes, townhomes, and single-family homes for rent. ### Zumper.com Zumper.com's listings are similar to Apartments.com's and include the additional features of allowing users to search for monthly rentals and vacation rentals. ### FurnishedFinder.com FurnishedFinder.com includes listings of furnished rooms and entirely furnished homes. This website specifically caters to travel nurses and other traveling professionals. It mostly offers shorter-term rentals than a website like Apartments.com but longer-term rentals at cheaper rates than a website like [Airbnb](https://www.investopedia.com/articles/personal-finance/032814/pros-and-cons-using-airbnb.asp). Furnished Finder is an excellent resource for those looking to stay in an area without having to deal with buying or moving furniture and household goods. ### Rentler.com Rentler.com is most similar to Apartments.com but lists rooms for rent in addition to stand-alone units. Renting a room can be a great option for a recent graduate looking to live cheaply, or anyone looking to significantly reduce their housing costs to pay down debt, travel more, or save up for a home purchase. ## Do Zillow and Trulia Cost Money? Looking at properties on Zillow is free. Listing properties for rent on Zillow does come with a fee. ## How Do Zillow and Trulia Make Money? [Zillow and Trulia make money](https://www.investopedia.com/articles/personal-finance/110615/why-zillow-free-and-how-it-makes-money.asp) by charging for rental listings, selling advertisements to real estate agents, and selling the Premier Agent branding designation on their website. Zillow attempted to make money by flipping homes in 2021 but famously failed to turn a profit. ## Can You Buy a House on Craigslist? You can't buy a house directly through Craigslist, but the site still does have properties listed both for sale and for rent and remains popular in many parts of the United States. ## The Bottom Line Though Zillow and Trulia are popular real estate sites, excellent alternatives do exist. Buying a home is one of the biggest financial decisions you will likely make, so it’s important to [pull information](https://www.investopedia.com/articles/personal-finance/121415/how-find-and-buy-offmarket-homes.asp) from a variety of reputable sources.

Zillow Group, Inc. is a popular online real estate company founded in 2006. Zillow operates as a real estate search engine with more than 160 million homes in its database as of 2024. It also offers a value estimate known as the Zestimate, along with comparables for each of the homes listed on the site. Many analysts consider Zillow to be a media company that makes its money from its ad placements. Key Takeaways Zillow Group, which includes Zillow and Trulia, is the biggest online real estate company in the United States.You can use online real estate websites to list your home or shop for your next one.Many online real estate websites use information from databases of properties shared by agents and brokers for their own online portals.Housing discrimination online or in-person is illegal. Use several real estate websites to cull information to search for a new home. The Merger of Zillow and Trulia Like Zillow, Trulia is also an online residential real estate website that connects home sellers with buyers, renters, and real estate professionals in the United States. With a business model similar to Zillow’s, Trulia was acquired by Zillow Group in 2015 for $3.5 billion. The resulting entity is considered the most prominent online real estate company operating in the United States. An entity as large as Zillow Group provides its users with the benefits of scale, but its market domination means it hasn't needed to adopt some of the smaller competitors' features in the space offer. Many online real estate websites have cropped up to dethrone Zillow Group as an industry leader. The following are four options that provide alternatives to Zillow and its subsidiary, Trulia. Homebuying and Selling Alternatives Redfin Redfin is a large online real estate company that seeks to redesign the way people buy homes. It offers several benefits that make it a viable alternative to Zillow and Trulia. The Redfin app, available on iOS and Android, claims to update its data every five minutes. First, Redfin's user interface and site design are very similar to Zillow's and Trulia's, allowing users to search for properties through a map-based function. After searching the site with a city or ZIP code, Redfin displays information—home value, home appreciation, square footage, year built, homeowners association fees, construction components, sewage system specifics, and other housing data points—that a homebuyer might want to know. Also, users browsing for homes can compare units side by side. Second, Redfin offers features that Zillow and Trulia do not. The company, which began as a real estate broker, employs a team of real estate agents whom Redfin users rate. The compensation these real estate agents receive correlates directly to the ratings they receive. To help homebuyers, the company also rebates part of the real estate commission back to the purchaser. On Oct. 29, 2020, several fair housing organizations filed suit against Redfin, accusing the company of systemic racial discrimination. The complaint says the online real estate broker offers fewer services to homebuyers and sellers in minority communities. Housing discrimination is illegal, but it does persist today, and you can fight against it. Users should be aware that in some cities, Redfin does not disclose exact addresses if sellers prefer to keep them hidden, and the site does not automatically provide home value data if the listing agent chooses not to have it displayed. In other cities, Redfin automatically provides complete sales and listing data. Finally, though the full data might not always be there, the company integrates with the Multiple Listing Service (MLS) and lists homes within 15 minutes of when they go live on the MLS. Homesnap Homesnap is an online real estate platform that includes features such as an intuitive map-based search function and a robust amount of property information. Much like Zillow and Trulia, its real estate browse function is easy to use. What sets Homesnap apart from the competition is its mobile app. With the app, it is possible to take a real-time picture of a house that is for sale with a mobile device and have the app query all the necessary listing information about the property. The mobile app even works on unlisted homes, apartments, and condos, showing users the property values of places currently off the market. The app is available for Android, iPhone, Apple Watch, and Apple TV users. Many online real estate websites are portals that get their information from property databases agents and brokers share. As a brokerage, Redfin is an exception. NeighborhoodScout NeighborhoodScout provides users with information regarding neighborhoods in the United States. Users can access the company’s neighborhood information using the search function by entering a city or specific address. When a user enters these search criteria, NeighborhoodScout provides average house values, local school information, demographic data, crime rates, traffic data, and more. Though most of this information is free for users, a subscription is required for some of the more robust data. With plans starting at $112.50 per month, users can access detailed school reports, crime rates, and housing appreciation rates. The information given to users through NeighborhoodScout’s subscription service is currently not offered by either Zillow or Trulia, making it a viable alternative to either company. Realtor.com Realtor.com is an online real estate website owned by News Corp. (It licenses the term Realtor from the National Association of Realtors.) Though the information is current, the site is more basic and doesn't have the robust features of Zillow, Trulia, or the other companies on this list. However, it's connected to the MLS with the most current listings on the market and is a good place to start searching for a home. It also has a texting option to connect to real estate professionals and a pricing feature to assess how specific home features, such as a garage, affect cost. Upon finding a home listing, a user can employ a blended strategy to search for that home on one of the three websites listed previously. This way, it's possible to have the most information about a listing, so a buyer can be the first to view the property on Redfin, Homesnap, or NeighborhoodScout, then contact the Realtor quickly. Foreclosure.com The name of this website is expository. Foreclosure.com focuses on foreclosures and allows users to search by a number of options. In addition to the popular city and price search options of other websites, Foreclosure.com has options to look for "cheap homes" nationwide, a feature that is sure to be a hit with real estate investors. The cheap homes section of the website also includes estimated potential profit on the property and dozens of other features investors who create a free account will appreciate. The site also offers options to search nationwide for rent-to-own homes and city-owned homes. FSBO.com FSBO stands for "for sale by owner", and FSBO.com is a website that focuses on homes the owners and not real estate agents are selling. The website makes its money by offering listing services for home sellers. It has two packages for listing homes. Its FSBO package includes a listing on FSBO.com for six months, a free Redfin listing, unlimited photos, and one video upload, and 24/7 access to edit or cancel the listing. Yard signs and supplies are sold separately from this package. The cost of their FSBO package is $99.95. Their MLS package includes a listing on FSBO.com for six months, a listing on the MLS for six months, listing syndication to other popular real estate websites like Zillow, and other features (some of which can vary by state). Be aware that signing on to this package includes agreeing to pay the buyer's broker commission (which averages 2% to 3% of the sale price) to be posted on the MLS. The cost of their MLS package is $399.95. Home Bay Home Bay is a website most similar to Redfin and is currently only available in California. It offers both listings and services to visitors. It includes flat fee services for both buying and selling a home through their website without paying the full commission costs of a real estate agent. Homes for Heroes Homes for Heroes is a website that specifically targets firefighters, EMS workers, law enforcement, military, healthcare professionals, and teachers. It doesn't provide listings, but it does link homebuyers who qualify to real estate agents and lenders who can find them the best local deals and rewards possible. Eppraisal Eppraisal is a website that mostly helps homebuyers and sellers look at comparable sales and appraisal estimates. Zillow estimates can be notoriously inaccurate, and a website like Eppraisal can help individuals get another data point on what a specific property might be worth before the official appraisal comes back. Xome Xome includes all the same listings as the MLS and also includes foreclosures and bank-owned auctions. Xome has partnered with the mortgage lender Mr. Cooper to provide equity estimates to borrowers when they login to their loan servicing page. This estimate works to encourage borrowers to consider a cash-out refinance through Mr. Cooper. Your State's MLS Depending on where you live you may be able to access your state's MLS without first getting a real estate agent. In Utah, for example, viewing the MLS is possible through the website UtahRealEstate.com whether or not you are working with an agent. In New England, you can access the MLS for New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, and portions of New York through the website NEREN.com. If you are able to view the MLS in your area online directly, you will only see properties that are currently active on the market. This makes the MLS more accurate than Zillow, which frequently keeps properties listed as available long after they have been taken off the market. Rental Housing Alternatives In addition to providing a home selling and buying platform, Zillow lists rentals on their platform. Here are some great rental listing sites that can serve as alternatives to Zillow and Trulia. Apartments.com Apartments.com provides listings for traditional apartments in complexes, multifamily properties, condos, duplexes, townhomes, and single-family homes for rent. Zumper.com Zumper.com's listings are similar to Apartments.com's and include the additional features of allowing users to search for monthly rentals and vacation rentals. FurnishedFinder.com FurnishedFinder.com includes listings of furnished rooms and entirely furnished homes. This website specifically caters to travel nurses and other traveling professionals. It mostly offers shorter-term rentals than a website like Apartments.com but longer-term rentals at cheaper rates than a website like Airbnb. Furnished Finder is an excellent resource for those looking to stay in an area without having to deal with buying or moving furniture and household goods. Rentler.com Rentler.com is most similar to Apartments.com but lists rooms for rent in addition to stand-alone units. Renting a room can be a great option for a recent graduate looking to live cheaply, or anyone looking to significantly reduce their housing costs to pay down debt, travel more, or save up for a home purchase. Do Zillow and Trulia Cost Money? Looking at properties on Zillow is free. Listing properties for rent on Zillow does come with a fee. How Do Zillow and Trulia Make Money? Zillow and Trulia make money by charging for rental listings, selling advertisements to real estate agents, and selling the Premier Agent branding designation on their website. Zillow attempted to make money by flipping homes in 2021 but famously failed to turn a profit. Can You Buy a House on Craigslist? You can't buy a house directly through Craigslist, but the site still does have properties listed both for sale and for rent and remains popular in many parts of the United States. The Bottom Line Though Zillow and Trulia are popular real estate sites, excellent alternatives do exist. Buying a home is one of the biggest financial decisions you will likely make, so it’s important to pull information from a variety of reputable sources.

https://www.investopedia.com/robinhood-latest-broker-to-restrict-trading-of-gamestop-and-others-5100879

GameStop, AMC Trading Restricted by Robinhood, Interactive Brokers

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Robinhood and Interactive Brokers have become the latest platforms to restrict the trading of several highly shorted stocks following an unrelenting trading frenzy led by retail investors and day traders. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Robinhood said in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://blog.robinhood.com/news/2021/1/28/keeping-customers-informed-through-market-volatility" rel="noopener noreferrer nofollow">blog post</a> that it is restricting transactions for certain securities to position closing, including GameStop, AMC Entertainment, Blackberry, and Bed Bath and Beyond, among others. Robinhood also raised margin requirements for certain securities, it said. </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"> “We continuously monitor the markets and make changes where necessary,” Robinhood said. “Amid significant market volatility, it’s important as ever that we help customers stay informed.” </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"> Meanwhile, Interactive Brokers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://twitter.com/IBKR/status/1354792600004386818" rel="noopener noreferrer">said on Twitter</a> that it put GameStop, AMC, Blackberry, Express, and Koss Corp. option trading into liquidation due to the "extraordinary volatility in the markets." Interactive Brokers also raised margin requirements for certain stocks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The move comes one day after TD Ameritrade became the first online broker to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets-news-4427704" rel="noopener noreferrer">place restrictions</a> on the trading of these highly shorted stocks amid a multi-day rally spearheaded by retail investors and day traders.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Shares in GameStop have jumped 1,300% so far this year, while shares in AMC popped 308%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_13-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:59.1%;"> <img alt="GME_BB_AMC_BBBY" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/AF8bag2rs4_RJaJuNje1LODU_5Y=/850x0/filters:no_upscale():max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/_m99gqtGDx8cj9WLbkrFD4Ym-B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png" data-srcset="https://www.investopedia.com/thmb/1jInORY-zoOJmpl41PeaRjqvD6Q=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png 750w" data-tracking-container="true" height="503" id="mntl-sc-block-image_1-0" width="850"/> <noscript> <img alt="GME_BB_AMC_BBBY" class="img--noscript universal-image__image" height="503" sizes="750px" src="https://www.investopedia.com/thmb/_m99gqtGDx8cj9WLbkrFD4Ym-B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png" srcset="https://www.investopedia.com/thmb/1jInORY-zoOJmpl41PeaRjqvD6Q=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png 750w" width="850"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The trading frenzy has led to several broker outages Wednesday, and several of the stocks, including GameStop and AMC, experienced trading halts.<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> <span class="heading-toc" id="toc-the-world-is-watching"></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 World is Watching </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The unprecedented volume of trading was prompted by a new class of retail investors and day traders that have flooded the market since the beginning of the pandemic. Many of them were part of a buying boom last year as they chased struggling stocks they believed deserve a second chance. Online forums like Reddit's WallStreetBets have become a place for these new day traders to discuss the stocks. </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"> “Individual investors are being stripped of their ability to trade on @RobinhoodApp,” the moderators of the Reddit forum <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://twitter.com/wsbmod/status/1354783317908971520" rel="noopener noreferrer">wrote on Twitter</a>. “Meanwhile hedge funds and institutional investors can continue to trade as normal. What do you call a market that removes retail investors [sic] ability to buy to save institutional investors shorts?” </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"> Law Firm ChapmanAlbin <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://chapmanalbin.com/investor-alerts/robinhood-class-action/" rel="noopener noreferrer nofollow">filed a class action lawsuit</a> on Thursday against Robinhood on behalf of users who suffered losses as a result of investing in Gamestop or AMC. The lawsuit alleged that Robinhood recruited social media influencers to encourage individuals to sign up and purchase shares of Gamestop and AMC, only to place trading restrictions on the securities a day later. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Short sellers betting against these stocks have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/short-sellers-lose-usd5-05-billion-in-bet-against-gamestop-5097616" rel="noopener noreferrer">lost billions of dollars</a> so far. As shares of GameStop soared on retail investor-fueled euphoria, short sellers who were faced with mounting losses and high borrowing fees were forced to close their positions and buy, prompting what is known as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortsqueeze.asp" rel="noopener noreferrer">short squeeze</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The Biden administration, including Treasury Secretary Janet Yellen, is “monitoring the situation,” as are the SEC and FINRA. Market regulators typically do not favor day-trading manipulation of the stock market, and regulations are likely to follow. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> "We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only," Interactive Brokers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://twitter.com/IBKR/status/1354792848923701251" rel="noopener noreferrer">said on Twitter</a>. "We will continue to monitor market conditions and may add or remove symbols as may be warranted." </p></div>

Robinhood and Interactive Brokers have become the latest platforms to restrict the trading of several highly shorted stocks following an unrelenting trading frenzy led by retail investors and day traders. Robinhood said in a [blog post](https://blog.robinhood.com/news/2021/1/28/keeping-customers-informed-through-market-volatility) that it is restricting transactions for certain securities to position closing, including GameStop, AMC Entertainment, Blackberry, and Bed Bath and Beyond, among others. Robinhood also raised margin requirements for certain securities, it said. “We continuously monitor the markets and make changes where necessary,” Robinhood said. “Amid significant market volatility, it’s important as ever that we help customers stay informed.” Meanwhile, Interactive Brokers [said on Twitter](https://twitter.com/IBKR/status/1354792600004386818) that it put GameStop, AMC, Blackberry, Express, and Koss Corp. option trading into liquidation due to the "extraordinary volatility in the markets." Interactive Brokers also raised margin requirements for certain stocks. The move comes one day after TD Ameritrade became the first online broker to [place restrictions](https://www.investopedia.com/markets-news-4427704) on the trading of these highly shorted stocks amid a multi-day rally spearheaded by retail investors and day traders.  Shares in GameStop have jumped 1,300% so far this year, while shares in AMC popped 308%. ![GME_BB_AMC_BBBY]() :max_bytes(150000):strip_icc()/GME_AMC_BB_BBBY_chart-d8ac31caa6684914ba389ca4e12f9012.png) The trading frenzy has led to several broker outages Wednesday, and several of the stocks, including GameStop and AMC, experienced trading halts. ## The World is Watching The unprecedented volume of trading was prompted by a new class of retail investors and day traders that have flooded the market since the beginning of the pandemic. Many of them were part of a buying boom last year as they chased struggling stocks they believed deserve a second chance. Online forums like Reddit's WallStreetBets have become a place for these new day traders to discuss the stocks. “Individual investors are being stripped of their ability to trade on @RobinhoodApp,” the moderators of the Reddit forum [wrote on Twitter](https://twitter.com/wsbmod/status/1354783317908971520). “Meanwhile hedge funds and institutional investors can continue to trade as normal. What do you call a market that removes retail investors [sic] ability to buy to save institutional investors shorts?” Law Firm ChapmanAlbin [filed a class action lawsuit](https://chapmanalbin.com/investor-alerts/robinhood-class-action/) on Thursday against Robinhood on behalf of users who suffered losses as a result of investing in Gamestop or AMC. The lawsuit alleged that Robinhood recruited social media influencers to encourage individuals to sign up and purchase shares of Gamestop and AMC, only to place trading restrictions on the securities a day later. Short sellers betting against these stocks have [lost billions of dollars](https://www.investopedia.com/short-sellers-lose-usd5-05-billion-in-bet-against-gamestop-5097616) so far. As shares of GameStop soared on retail investor-fueled euphoria, short sellers who were faced with mounting losses and high borrowing fees were forced to close their positions and buy, prompting what is known as a [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp). The Biden administration, including Treasury Secretary Janet Yellen, is “monitoring the situation,” as are the SEC and FINRA. Market regulators typically do not favor day-trading manipulation of the stock market, and regulations are likely to follow. "We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only," Interactive Brokers [said on Twitter](https://twitter.com/IBKR/status/1354792848923701251). "We will continue to monitor market conditions and may add or remove symbols as may be warranted."

Robinhood and Interactive Brokers have become the latest platforms to restrict the trading of several highly shorted stocks following an unrelenting trading frenzy led by retail investors and day traders. Robinhood said in a blog post that it is restricting transactions for certain securities to position closing, including GameStop, AMC Entertainment, Blackberry, and Bed Bath and Beyond, among others. Robinhood also raised margin requirements for certain securities, it said. “We continuously monitor the markets and make changes where necessary,” Robinhood said. “Amid significant market volatility, it’s important as ever that we help customers stay informed.” Meanwhile, Interactive Brokers said on Twitter that it put GameStop, AMC, Blackberry, Express, and Koss Corp. option trading into liquidation due to the "extraordinary volatility in the markets." Interactive Brokers also raised margin requirements for certain stocks. The move comes one day after TD Ameritrade became the first online broker to place restrictions on the trading of these highly shorted stocks amid a multi-day rally spearheaded by retail investors and day traders.  Shares in GameStop have jumped 1,300% so far this year, while shares in AMC popped 308%. The trading frenzy has led to several broker outages Wednesday, and several of the stocks, including GameStop and AMC, experienced trading halts. The World is Watching The unprecedented volume of trading was prompted by a new class of retail investors and day traders that have flooded the market since the beginning of the pandemic. Many of them were part of a buying boom last year as they chased struggling stocks they believed deserve a second chance. Online forums like Reddit's WallStreetBets have become a place for these new day traders to discuss the stocks. “Individual investors are being stripped of their ability to trade on @RobinhoodApp,” the moderators of the Reddit forum wrote on Twitter. “Meanwhile hedge funds and institutional investors can continue to trade as normal. What do you call a market that removes retail investors [sic] ability to buy to save institutional investors shorts?” Law Firm ChapmanAlbin filed a class action lawsuit on Thursday against Robinhood on behalf of users who suffered losses as a result of investing in Gamestop or AMC. The lawsuit alleged that Robinhood recruited social media influencers to encourage individuals to sign up and purchase shares of Gamestop and AMC, only to place trading restrictions on the securities a day later. Short sellers betting against these stocks have lost billions of dollars so far. As shares of GameStop soared on retail investor-fueled euphoria, short sellers who were faced with mounting losses and high borrowing fees were forced to close their positions and buy, prompting what is known as a short squeeze. The Biden administration, including Treasury Secretary Janet Yellen, is “monitoring the situation,” as are the SEC and FINRA. Market regulators typically do not favor day-trading manipulation of the stock market, and regulations are likely to follow. "We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only," Interactive Brokers said on Twitter. "We will continue to monitor market conditions and may add or remove symbols as may be warranted."

https://www.investopedia.com/how-to-make-the-most-of-taxes-as-a-family-8419490

How to Make the Most of Taxes as a Family

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Filing a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax return</a> can be a real challenge even when you’re single. Add a child or two (or more), a stepparent, and/or your spouse into the mix and you might find yourself holding your head in your hands. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Fortunately, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/internal-revenue-code.asp">Internal Revenue Code</a> is replete with provisions for parents and spouses. Coming out on top at tax time begins with an understanding of these provisions, from filing statuses to the rules of claiming a dependent. When you have sorted out these critical issues, you can determine which tax-saving <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-credits-6834383">credits</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-deductions-6834385">deductions</a> you can claim. </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 Internal Revenue Code has numerous statutes that can benefit families.</li><li>The first step for the adults in a family is to figure out what their tax-filing status is, whether married filing jointly or separately, head of household, widow(er) with one or more dependents, or single.</li><li>Tax credits, which reduce your total taxes owed on a dollar-for-dollar basis, can save families money. Examples include the Earned Income Tax Credit (EITC) and the child and dependent care credit.</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 the juggle of parenting, taxes often feel like an extra ball in the mix,” says Michael Hammelburger, CEO of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://thebottomlinegroup.com/about/">The Bottom Line Group</a>, a cost segregation firm in Baltimore, Maryland. “But you can efficiently navigate the tax terrain and potentially save both money and a few extra moments of peace in the chaos with these strategies.” </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-choosing-your-filing-status"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Choosing Your Filing Status </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Your filing status is a pivotal component of your tax return, and it should be where you start. There are five to choose from, each with its own qualifying criteria and rules. Your choice can have a huge impact on how much you owe the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service</a>—or if the IRS owes you money via a tax refund. It also determines your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeduction.asp">standard deduction</a> and your eligibility for other deductions and <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>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_12-0"> <span class="mntl-sc-block-subheading__text"> Married Filing Jointly </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mfj.asp">file a joint return</a> with your spouse if you’re married and living together, but you can also qualify for this preferential filing status in other ways—for example, even if you’re not living with your spouse as of the last day of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxyear.asp">tax year</a>, but you haven’t taken certain legal steps to end your marriage. That is, there’s no divorce decree or legal separation agreement in place between you two. The IRS also makes an exception for an “interlocutory” decree—one that remains in place only while your divorce is pending and ends when it becomes final. You can still file a joint return if you one of these describes your situation.<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_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> You’ll save the most tax dollars by filing a joint return if you’re married and you qualify. This is because joint filers usually receive higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> thresholds for certain <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-break.asp">tax breaks</a>, allowing them to deduct a hefty amount of income when calculating taxable income.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> But this filing status is not without a downside. You and your spouse are each “jointly and individually liable” for any taxes due on a jointly filed return. This means you effectively become one legal entity. Even if your spouse earned all the income while you were the stay-at-home parent, you’re still legally responsible for paying the full amount of tax due on a joint 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"> Also, if your spouse owes certain other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">debts</a> that you’re not liable for, such as unpaid child support to another family or a tax debt from before you were married, the IRS can divert your joint tax refund to pay off those debts. From there, you can potentially file an injured spouse claim to try to recoup your share of the money, but it might be less frustrating and time-consuming to simply file a separate return if this is your situation.<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_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"> Married Filing Separately </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Unfortunately, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mfs.asp">married filing separately</a> status comes with quite a few drawbacks even if it protects you from tax and debt obligations that you don’t share with your spouse. </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"> Claiming it will prevent you from claiming several advantageous tax credits, many of them family-oriented. These include the adoption tax credit, educational credits, and the child and dependent care tax credit (see below for more on these). On the bright side, you’re responsible for paying taxes on only your own income if you file separately. But that tax may well be more than it has to be because you’re giving up quite a few tax perks.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <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"> Head of Household </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> “Filing status is your tactical move,” Hammelburger says. “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/head_of_household.asp">Head of household</a> status can open up some advantageous tax territory if you qualify.” </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"> But qualifying comes with a lot of interlocking rules. You must meet these qualifications: </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>You must be unmarried.</li><li>You must have paid more than 50% of the costs of maintaining your home throughout the tax year.</li><li>You must have been supporting a qualifying individual for more than half the year.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> “Unmarried” for the purposes of this status more or less means that either you’re divorced or you live apart, subject to some additional rules. The qualifying individual who lives with you can be your child or a dependent parent or relative.<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_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> The head of household filing status is meant to give single or separated individuals with dependents a financial boost. Assuming you meet all these tests, you’ll receive quite a few tax breaks. You can earn more than you could as a single individual before you move into the next-highest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxbracket.asp">tax bracket</a>, for starters. And the income limits for claiming several tax credits are more generous.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_38-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The head of household filing status is meant to give a boost to single or separated individuals who have dependents.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-subheading__text"> Qualifying Widow(er) with Dependent Child </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualifying-widow.asp">qualifying widow(er)</a> status is also pretty tax-friendly, but it’s temporary. You can only claim it if your spouse died within the past two years, and you must have a dependent child. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> In addition, you can’t have remarried and you must have paid more than half the costs of your home for yourself and your dependent child for the year, just as with the head of household status. Filing as a qualifying widow(er) allows you to claim some of the tax breaks associated with a joint return for a limited additional time.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_44-0"> <span class="mntl-sc-block-subheading__text"> Single Filer Status </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you’re not legally married, don’t have any dependents, or have a child who lives with you but you don’t pay more than half of the expenses, then you likely qualify for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/single.asp">single filer</a> status.<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_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> In the latter position, you won’t qualify for a more beneficial tax filing status if you can’t meet that head of household living expenses rule. To get a better tax break, you might want to consider paying more than half of your household’s expenses and/or having your child move in with you if the costs don’t exceed the tax savings available to you as head of household.<br> </br></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-money-saving-tax-tips-for-families"></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"> Money-Saving Tax Tips for Families </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Numerous tax credits become more significant based on your filing status, such as education-focused credits and those for people with children, and they’re almost invariably larger if you’re married and supporting a dependent. But they come with additional qualifying rules.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-subheading__text"> Earned Income Tax Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnedincomecredit.asp">Earned Income Tax Credit (EITC)</a> is designed to provide some financial assistance to lower-income taxpayers, as it reduces the amount of tax owed on a dollar-for-dollar basis. There’s an earnings limit, which is dependent upon your filing status and the number of your dependents, and the amount of the credit is also determined by how many qualifying children or relatives you support. </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"> Having a qualifying child or relative isn’t mandatory for the EITC, but you’ll be subject to more severe income restrictions if you don’t have one. </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"> Here’s the maximum income you can earn in 2023, the year for which you’ll file a tax return in 2024: </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>$17,640 (with no dependents) to $56,838 (with three or more dependents) for single, head of household, and qualifying widow(er) filers</li><li>$24,210 (with no dependents) to $63,398 (with three or more dependents) for married taxpayers filing joint returns</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The maximum credit ranges from $600 to $7,430 in tax year 2023, depending on how many dependents you claim. You must have worked and had earned income during the tax year, and you cannot have unearned investment income in excess of $11,000. But if the credit is higher than your tax liability for the year, then you may be eligible for a refund.<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_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> The EITC was more generous during the coronavirus pandemic, thanks to a temporary provision, but it returned to its pre-COVID level in 2022.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="19"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_65-0"><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_66-0"><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>For the Earned Income Tax Credit, it isn’t mandatory that you have a qualifying child or relative, but you’ll be subject to more severe income restrictions if you don’t.</p></div></div></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"> Child Tax Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/childtaxcredit.asp">Child Tax Credit</a> is tailor-made to help parents meet the expenses of raising children. You can claim a credit for each of your children, provided that they have Social Security numbers and are younger than 17 as of the last day of the tax year. They must have lived with you for more than half the year, and they cannot have paid for more than half their own support needs. You also must claim them as dependents on your tax return.<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_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> A child doesn’t necessarily have to be your natural-born offspring or legally adopted to qualify. The IRS is rather generous with this rule. Your child dependent can be your stepchild, a sibling or stepsibling, or their descendants, such as a grandchild, niece, or nephew. In some cases, foster children are even eligible.<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_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> There are income limits for this tax credit as well, but they may not prevent you from claiming it entirely. The limit—graded so that some high earners can still qualify for a partial credit—was $200,000 ($400,000 for joint filers) in the 2023 tax year, and the full credit was $2,000 per child.<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_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The Child Tax Credit also increased during the pandemic, but has since returned to its previous level.<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_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"> Child and Dependent Care Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/childanddependentcarecredit.asp">child and dependent care tax credit</a> is designed for parents who have demanding jobs, with the goal being that it would relieve some of the sting of paying for care. If you’re married and filing a joint return, your spouse must also be unavailable due to work commitments. You’re more or less prohibited from claiming this credit if you’re married and file a separate return, unless you’re living apart from your spouse. </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"> This credit works out to a percentage of what you paid a care provider so you can go to work. The exact percentage decreases as your income increases, and other limits apply as well. Your child must be younger than 13 at the end of the tax year. Otherwise, the IRS takes the position that they could probably take care of themselves while you were out. Of course, exceptions exist if they—or an adult dependent—are incapable of self-care. </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"> Your care provider can’t be your spouse, the child’s other parent, your own child if they’re younger than 19, or another dependent you can claim on your tax return. And the credit applies <em>only</em> to work-related care. It doesn’t count if you pay a babysitter a little extra so you can make a brief stop at an event on your way home from work, for example.<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_82-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> This tax credit was worth a significant $8,000 during the pandemic, but has since dropped back to $3,000 as of the 2022 tax year.<span class="ql-inline-citation" data-cite="23"></span><span class="ql-inline-citation" data-cite="22"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> And don’t overlook the possibility of setting up a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flexiblespendingaccount.asp">flexible spending account (FSA)</a> for your child and dependent care expenses, separate and apart from claiming a tax credit. </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"> “If your employer offers an FSA for child and dependent care expenses, you can use pretax dollars to pay for them, which can lower your taxable income,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.yourtaxcoach.com/" rel="nofollow">Barbara Schreihans</a>, CEO and founder of Your Tax Coach, a tax strategy firm.<span class="ql-inline-citation" data-cite="24"></span> But you’ll definitely want to speak with a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxadvisor.asp">tax professional</a> about how and if you can claim both tax breaks in a given year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-subheading__text"> Adoption Tax Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> The IRS also provides special breaks to adoptive parents. The provisions are twofold. They offer a tax credit for qualifying adoption expenses for eligible children, and they allow you to exclude from your income any financial assistance that your employer provides for adoption expenses. And here’s an extra perk: You can carry the credit forward into subsequent tax years if any of it is left over after erasing your tax debt in the current year. </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"> Your adopted child must be younger than 18 at the end of the tax year or be incapable of self-care. Adopting your stepchild won’t qualify if you’re married and adopting your spouse’s child. Provisions are made for special needs children as determined by your state. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Qualifying adoption expenses include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> <li>Adoption fees</li><li>Traveling costs, including meals and lodging if you must leave home for the purposes of arranging and finalizing the adoption</li><li>Attorney fees and court costs</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> Some associated expenses may be eligible as well, so be sure to check with an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountant.asp">accountant</a> if you think you have any that might qualify. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Again, income limits apply, but they’re generous—in the $200,000-plus range.<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_101-0"></div> <span class="heading-toc" id="toc-preparing-for-tax-season"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_102-0"> <span class="mntl-sc-block-heading__text"> Preparing for Tax Season </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> The IRS recognizes that not all parents stay married and that some never marry at all. It’s crucial that you identify which of you will be claiming your child or children if you fall into this category or if you’re married and filing separate returns. </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"> You can’t both claim the same child and the tax credits related to them without inviting a tax audit. Have a heart-to-heart with your ex or your spouse in advance of tax season, particularly if you’re a new parent, to make sure that you’re on the same page when it comes to this issue. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_107-0"> The IRS does impose “tiebreaker” rules if you and your ex can’t reach an agreement. It will award the dependent child to the parent with whom the child lived most during the tax year in the event of a dispute. In rare cases where a child spent an equal amount of time with each parent, the right is awarded to the parent with the highest <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agi.asp">adjusted gross income</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_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-how-much-can-a-family-make-before-paying-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Can a Family Make Before Paying Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The amount that can be earned before you have to pay federal income taxes depends on your filing status and whether you are under or over age 65 (unless you’re married filing separately, in which case age doesn’t make a difference, as the filing threshold is only $5). The minimum income requirements in 2023 (for tax returns filed in 2024) for a couple who are filing jointly is $27,700 if both spouses are under 65, $29,550 if one is younger than 65 and the other is 65 or older, and $31,400 if both are 65 or older. For a head of household, the threshold is $20,800 for those under 65 and $22,650 for those who are 65 and older.<span class="ql-inline-citation" data-cite="26"></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_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-what-is-the-2023-child-tax-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the 2023 Child Tax Credit?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Child Tax Credit (CTC) is a tax benefit granted to American taxpayers with one or more children under age 17 by the end of the tax year. It is worth a maximum of $2,000 per qualifying child in 2023 (for taxes paid in 2024).<span class="ql-inline-citation" data-cite="20"></span> Up to $1,600 is refundable.</p><p>To be eligible for the CTC, you must have earned more than $2,500.<span class="ql-inline-citation" data-cite="25"></span> You qualify for the full amount for each child if you earn up to $200,000 as an individual filer or $400,000 for joint filers. The benefit is phased out for parents with higher incomes.<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_112-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_113-0"><span class="heading-toc" id="toc-does-having-a-baby-increase-your-tax-refund"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Having a Baby Increase Your Tax Refund?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It could, depending on factors that include your income. The Child Tax Credit, for example, could lower your tax bill by up to $2,000 per qualifying child, as long as you don’t make too much money (see the previous question above). It’s also partially refundable, which means you may receive a refund even if you don’t owe any taxes. You could even get money back as a refund.<span class="ql-inline-citation" data-cite="6"></span></p><p>If you paid a qualified individual for baby care while you were at work, you also might be able to claim the child and dependent care credit, which could help you get or increase your refund.<span class="ql-inline-citation" data-cite="7"></span> There are rules for every <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102015/how-much-does-dependent-reduce-your-taxes.asp">credit or deduction</a> that you might want to take, so be sure to read IRS materials or consult a tax preparer for guidance.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> Family-related tax credits can be among the most generous and the most complicated provided for under the Internal Revenue Code. They can significantly ease the cost of raising a family, but the qualifying factors can be intricate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_118-0"> Consider talking with a tax professional if you think you might be able to claim any of these tax breaks. It could be worth it.<br/> </p></div>

Filing a [tax return](https://www.investopedia.com/terms/t/taxreturn.asp) can be a real challenge even when you’re single. Add a child or two (or more), a stepparent, and/or your spouse into the mix and you might find yourself holding your head in your hands. Fortunately, the [Internal Revenue Code](https://www.investopedia.com/terms/i/internal-revenue-code.asp) is replete with provisions for parents and spouses. Coming out on top at tax time begins with an understanding of these provisions, from filing statuses to the rules of claiming a dependent. When you have sorted out these critical issues, you can determine which tax-saving [credits](https://www.investopedia.com/tax-credits-6834383) and [deductions](https://www.investopedia.com/tax-deductions-6834385) you can claim. ### Key Takeaways * The Internal Revenue Code has numerous statutes that can benefit families. * The first step for the adults in a family is to figure out what their tax-filing status is, whether married filing jointly or separately, head of household, widow(er) with one or more dependents, or single. * Tax credits, which reduce your total taxes owed on a dollar-for-dollar basis, can save families money. Examples include the Earned Income Tax Credit (EITC) and the child and dependent care credit. “In the juggle of parenting, taxes often feel like an extra ball in the mix,” says Michael Hammelburger, CEO of [The Bottom Line Group](https://thebottomlinegroup.com/about/), a cost segregation firm in Baltimore, Maryland. “But you can efficiently navigate the tax terrain and potentially save both money and a few extra moments of peace in the chaos with these strategies.” ## Choosing Your Filing Status Your filing status is a pivotal component of your tax return, and it should be where you start. There are five to choose from, each with its own qualifying criteria and rules. Your choice can have a huge impact on how much you owe the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp)—or if the IRS owes you money via a tax refund. It also determines your [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp) and your eligibility for other deductions and [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp). ### Married Filing Jointly You can [file a joint return](https://www.investopedia.com/terms/m/mfj.asp) with your spouse if you’re married and living together, but you can also qualify for this preferential filing status in other ways—for example, even if you’re not living with your spouse as of the last day of the [tax year](https://www.investopedia.com/terms/t/taxyear.asp), but you haven’t taken certain legal steps to end your marriage. That is, there’s no divorce decree or legal separation agreement in place between you two. The IRS also makes an exception for an “interlocutory” decree—one that remains in place only while your divorce is pending and ends when it becomes final. You can still file a joint return if you one of these describes your situation. You’ll save the most tax dollars by filing a joint return if you’re married and you qualify. This is because joint filers usually receive higher [income](https://www.investopedia.com/terms/i/income.asp) thresholds for certain [tax breaks](https://www.investopedia.com/terms/t/tax-break.asp), allowing them to deduct a hefty amount of income when calculating taxable income. But this filing status is not without a downside. You and your spouse are each “jointly and individually liable” for any taxes due on a jointly filed return. This means you effectively become one legal entity. Even if your spouse earned all the income while you were the stay-at-home parent, you’re still legally responsible for paying the full amount of tax due on a joint return. Also, if your spouse owes certain other [debts](https://www.investopedia.com/terms/d/debt.asp) that you’re not liable for, such as unpaid child support to another family or a tax debt from before you were married, the IRS can divert your joint tax refund to pay off those debts. From there, you can potentially file an injured spouse claim to try to recoup your share of the money, but it might be less frustrating and time-consuming to simply file a separate return if this is your situation. ### Married Filing Separately Unfortunately, the [married filing separately](https://www.investopedia.com/terms/m/mfs.asp) status comes with quite a few drawbacks even if it protects you from tax and debt obligations that you don’t share with your spouse. Claiming it will prevent you from claiming several advantageous tax credits, many of them family-oriented. These include the adoption tax credit, educational credits, and the child and dependent care tax credit (see below for more on these). On the bright side, you’re responsible for paying taxes on only your own income if you file separately. But that tax may well be more than it has to be because you’re giving up quite a few tax perks. ### Head of Household “Filing status is your tactical move,” Hammelburger says. “[Head of household](https://www.investopedia.com/terms/h/head_of_household.asp) status can open up some advantageous tax territory if you qualify.” But qualifying comes with a lot of interlocking rules. You must meet these qualifications: * You must be unmarried. * You must have paid more than 50% of the costs of maintaining your home throughout the tax year. * You must have been supporting a qualifying individual for more than half the year. “Unmarried” for the purposes of this status more or less means that either you’re divorced or you live apart, subject to some additional rules. The qualifying individual who lives with you can be your child or a dependent parent or relative. The head of household filing status is meant to give single or separated individuals with dependents a financial boost. Assuming you meet all these tests, you’ll receive quite a few tax breaks. You can earn more than you could as a single individual before you move into the next-highest [tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp), for starters. And the income limits for claiming several tax credits are more generous. ### The head of household filing status is meant to give a boost to single or separated individuals who have dependents. ### Qualifying Widow(er) with Dependent Child The [qualifying widow(er)](https://www.investopedia.com/terms/q/qualifying-widow.asp) status is also pretty tax-friendly, but it’s temporary. You can only claim it if your spouse died within the past two years, and you must have a dependent child. In addition, you can’t have remarried and you must have paid more than half the costs of your home for yourself and your dependent child for the year, just as with the head of household status. Filing as a qualifying widow(er) allows you to claim some of the tax breaks associated with a joint return for a limited additional time. ### Single Filer Status If you’re not legally married, don’t have any dependents, or have a child who lives with you but you don’t pay more than half of the expenses, then you likely qualify for the [single filer](https://www.investopedia.com/terms/s/single.asp) status. In the latter position, you won’t qualify for a more beneficial tax filing status if you can’t meet that head of household living expenses rule. To get a better tax break, you might want to consider paying more than half of your household’s expenses and/or having your child move in with you if the costs don’t exceed the tax savings available to you as head of household. ## Money-Saving Tax Tips for Families Numerous tax credits become more significant based on your filing status, such as education-focused credits and those for people with children, and they’re almost invariably larger if you’re married and supporting a dependent. But they come with additional qualifying rules. ### Earned Income Tax Credit The [Earned Income Tax Credit (EITC)](https://www.investopedia.com/terms/e/earnedincomecredit.asp) is designed to provide some financial assistance to lower-income taxpayers, as it reduces the amount of tax owed on a dollar-for-dollar basis. There’s an earnings limit, which is dependent upon your filing status and the number of your dependents, and the amount of the credit is also determined by how many qualifying children or relatives you support. Having a qualifying child or relative isn’t mandatory for the EITC, but you’ll be subject to more severe income restrictions if you don’t have one. Here’s the maximum income you can earn in 2023, the year for which you’ll file a tax return in 2024: * $17,640 (with no dependents) to $56,838 (with three or more dependents) for single, head of household, and qualifying widow(er) filers * $24,210 (with no dependents) to $63,398 (with three or more dependents) for married taxpayers filing joint returns The maximum credit ranges from $600 to $7,430 in tax year 2023, depending on how many dependents you claim. You must have worked and had earned income during the tax year, and you cannot have unearned investment income in excess of $11,000. But if the credit is higher than your tax liability for the year, then you may be eligible for a refund. The EITC was more generous during the coronavirus pandemic, thanks to a temporary provision, but it returned to its pre-COVID level in 2022. ### For the Earned Income Tax Credit, it isn’t mandatory that you have a qualifying child or relative, but you’ll be subject to more severe income restrictions if you don’t. ### Child Tax Credit The [Child Tax Credit](https://www.investopedia.com/terms/c/childtaxcredit.asp) is tailor-made to help parents meet the expenses of raising children. You can claim a credit for each of your children, provided that they have Social Security numbers and are younger than 17 as of the last day of the tax year. They must have lived with you for more than half the year, and they cannot have paid for more than half their own support needs. You also must claim them as dependents on your tax return. A child doesn’t necessarily have to be your natural-born offspring or legally adopted to qualify. The IRS is rather generous with this rule. Your child dependent can be your stepchild, a sibling or stepsibling, or their descendants, such as a grandchild, niece, or nephew. In some cases, foster children are even eligible. There are income limits for this tax credit as well, but they may not prevent you from claiming it entirely. The limit—graded so that some high earners can still qualify for a partial credit—was $200,000 ($400,000 for joint filers) in the 2023 tax year, and the full credit was $2,000 per child. The Child Tax Credit also increased during the pandemic, but has since returned to its previous level. ### Child and Dependent Care Credit The [child and dependent care tax credit](https://www.investopedia.com/terms/c/childanddependentcarecredit.asp) is designed for parents who have demanding jobs, with the goal being that it would relieve some of the sting of paying for care. If you’re married and filing a joint return, your spouse must also be unavailable due to work commitments. You’re more or less prohibited from claiming this credit if you’re married and file a separate return, unless you’re living apart from your spouse. This credit works out to a percentage of what you paid a care provider so you can go to work. The exact percentage decreases as your income increases, and other limits apply as well. Your child must be younger than 13 at the end of the tax year. Otherwise, the IRS takes the position that they could probably take care of themselves while you were out. Of course, exceptions exist if they—or an adult dependent—are incapable of self-care. Your care provider can’t be your spouse, the child’s other parent, your own child if they’re younger than 19, or another dependent you can claim on your tax return. And the credit applies *only* to work-related care. It doesn’t count if you pay a babysitter a little extra so you can make a brief stop at an event on your way home from work, for example. This tax credit was worth a significant $8,000 during the pandemic, but has since dropped back to $3,000 as of the 2022 tax year. And don’t overlook the possibility of setting up a [flexible spending account (FSA)](https://www.investopedia.com/terms/f/flexiblespendingaccount.asp) for your child and dependent care expenses, separate and apart from claiming a tax credit. “If your employer offers an FSA for child and dependent care expenses, you can use pretax dollars to pay for them, which can lower your taxable income,” says [Barbara Schreihans](https://www.yourtaxcoach.com/), CEO and founder of Your Tax Coach, a tax strategy firm. But you’ll definitely want to speak with a [tax professional](https://www.investopedia.com/terms/t/taxadvisor.asp) about how and if you can claim both tax breaks in a given year. ### Adoption Tax Credit The IRS also provides special breaks to adoptive parents. The provisions are twofold. They offer a tax credit for qualifying adoption expenses for eligible children, and they allow you to exclude from your income any financial assistance that your employer provides for adoption expenses. And here’s an extra perk: You can carry the credit forward into subsequent tax years if any of it is left over after erasing your tax debt in the current year. Your adopted child must be younger than 18 at the end of the tax year or be incapable of self-care. Adopting your stepchild won’t qualify if you’re married and adopting your spouse’s child. Provisions are made for special needs children as determined by your state. Qualifying adoption expenses include: * Adoption fees * Traveling costs, including meals and lodging if you must leave home for the purposes of arranging and finalizing the adoption * Attorney fees and court costs Some associated expenses may be eligible as well, so be sure to check with an [accountant](https://www.investopedia.com/terms/a/accountant.asp) if you think you have any that might qualify. Again, income limits apply, but they’re generous—in the $200,000-plus range. ## Preparing for Tax Season The IRS recognizes that not all parents stay married and that some never marry at all. It’s crucial that you identify which of you will be claiming your child or children if you fall into this category or if you’re married and filing separate returns. You can’t both claim the same child and the tax credits related to them without inviting a tax audit. Have a heart-to-heart with your ex or your spouse in advance of tax season, particularly if you’re a new parent, to make sure that you’re on the same page when it comes to this issue. The IRS does impose “tiebreaker” rules if you and your ex can’t reach an agreement. It will award the dependent child to the parent with whom the child lived most during the tax year in the event of a dispute. In rare cases where a child spent an equal amount of time with each parent, the right is awarded to the parent with the highest [adjusted gross income](https://www.investopedia.com/terms/a/agi.asp). ## How Much Can a Family Make Before Paying Taxes? The amount that can be earned before you have to pay federal income taxes depends on your filing status and whether you are under or over age 65 (unless you’re married filing separately, in which case age doesn’t make a difference, as the filing threshold is only $5). The minimum income requirements in 2023 (for tax returns filed in 2024) for a couple who are filing jointly is $27,700 if both spouses are under 65, $29,550 if one is younger than 65 and the other is 65 or older, and $31,400 if both are 65 or older. For a head of household, the threshold is $20,800 for those under 65 and $22,650 for those who are 65 and older. ## What Is the 2023 Child Tax Credit? The Child Tax Credit (CTC) is a tax benefit granted to American taxpayers with one or more children under age 17 by the end of the tax year. It is worth a maximum of $2,000 per qualifying child in 2023 (for taxes paid in 2024). Up to $1,600 is refundable. To be eligible for the CTC, you must have earned more than $2,500. You qualify for the full amount for each child if you earn up to $200,000 as an individual filer or $400,000 for joint filers. The benefit is phased out for parents with higher incomes. ## Does Having a Baby Increase Your Tax Refund? It could, depending on factors that include your income. The Child Tax Credit, for example, could lower your tax bill by up to $2,000 per qualifying child, as long as you don’t make too much money (see the previous question above). It’s also partially refundable, which means you may receive a refund even if you don’t owe any taxes. You could even get money back as a refund. If you paid a qualified individual for baby care while you were at work, you also might be able to claim the child and dependent care credit, which could help you get or increase your refund. There are rules for every [credit or deduction](https://www.investopedia.com/ask/answers/102015/how-much-does-dependent-reduce-your-taxes.asp) that you might want to take, so be sure to read IRS materials or consult a tax preparer for guidance. ## The Bottom Line Family-related tax credits can be among the most generous and the most complicated provided for under the Internal Revenue Code. They can significantly ease the cost of raising a family, but the qualifying factors can be intricate. Consider talking with a tax professional if you think you might be able to claim any of these tax breaks. It could be worth it.

Filing a tax return can be a real challenge even when you’re single. Add a child or two (or more), a stepparent, and/or your spouse into the mix and you might find yourself holding your head in your hands. Fortunately, the Internal Revenue Code is replete with provisions for parents and spouses. Coming out on top at tax time begins with an understanding of these provisions, from filing statuses to the rules of claiming a dependent. When you have sorted out these critical issues, you can determine which tax-saving credits and deductions you can claim. Key Takeaways The Internal Revenue Code has numerous statutes that can benefit families.The first step for the adults in a family is to figure out what their tax-filing status is, whether married filing jointly or separately, head of household, widow(er) with one or more dependents, or single.Tax credits, which reduce your total taxes owed on a dollar-for-dollar basis, can save families money. Examples include the Earned Income Tax Credit (EITC) and the child and dependent care credit. “In the juggle of parenting, taxes often feel like an extra ball in the mix,” says Michael Hammelburger, CEO of The Bottom Line Group, a cost segregation firm in Baltimore, Maryland. “But you can efficiently navigate the tax terrain and potentially save both money and a few extra moments of peace in the chaos with these strategies.” Choosing Your Filing Status Your filing status is a pivotal component of your tax return, and it should be where you start. There are five to choose from, each with its own qualifying criteria and rules. Your choice can have a huge impact on how much you owe the Internal Revenue Service—or if the IRS owes you money via a tax refund. It also determines your standard deduction and your eligibility for other deductions and tax credits. Married Filing Jointly You can file a joint return with your spouse if you’re married and living together, but you can also qualify for this preferential filing status in other ways—for example, even if you’re not living with your spouse as of the last day of the tax year, but you haven’t taken certain legal steps to end your marriage. That is, there’s no divorce decree or legal separation agreement in place between you two. The IRS also makes an exception for an “interlocutory” decree—one that remains in place only while your divorce is pending and ends when it becomes final. You can still file a joint return if you one of these describes your situation. You’ll save the most tax dollars by filing a joint return if you’re married and you qualify. This is because joint filers usually receive higher income thresholds for certain tax breaks, allowing them to deduct a hefty amount of income when calculating taxable income. But this filing status is not without a downside. You and your spouse are each “jointly and individually liable” for any taxes due on a jointly filed return. This means you effectively become one legal entity. Even if your spouse earned all the income while you were the stay-at-home parent, you’re still legally responsible for paying the full amount of tax due on a joint return. Also, if your spouse owes certain other debts that you’re not liable for, such as unpaid child support to another family or a tax debt from before you were married, the IRS can divert your joint tax refund to pay off those debts. From there, you can potentially file an injured spouse claim to try to recoup your share of the money, but it might be less frustrating and time-consuming to simply file a separate return if this is your situation. Married Filing Separately Unfortunately, the married filing separately status comes with quite a few drawbacks even if it protects you from tax and debt obligations that you don’t share with your spouse. Claiming it will prevent you from claiming several advantageous tax credits, many of them family-oriented. These include the adoption tax credit, educational credits, and the child and dependent care tax credit (see below for more on these). On the bright side, you’re responsible for paying taxes on only your own income if you file separately. But that tax may well be more than it has to be because you’re giving up quite a few tax perks. Head of Household “Filing status is your tactical move,” Hammelburger says. “Head of household status can open up some advantageous tax territory if you qualify.” But qualifying comes with a lot of interlocking rules. You must meet these qualifications: You must be unmarried.You must have paid more than 50% of the costs of maintaining your home throughout the tax year.You must have been supporting a qualifying individual for more than half the year. “Unmarried” for the purposes of this status more or less means that either you’re divorced or you live apart, subject to some additional rules. The qualifying individual who lives with you can be your child or a dependent parent or relative. The head of household filing status is meant to give single or separated individuals with dependents a financial boost. Assuming you meet all these tests, you’ll receive quite a few tax breaks. You can earn more than you could as a single individual before you move into the next-highest tax bracket, for starters. And the income limits for claiming several tax credits are more generous. The head of household filing status is meant to give a boost to single or separated individuals who have dependents. Qualifying Widow(er) with Dependent Child The qualifying widow(er) status is also pretty tax-friendly, but it’s temporary. You can only claim it if your spouse died within the past two years, and you must have a dependent child. In addition, you can’t have remarried and you must have paid more than half the costs of your home for yourself and your dependent child for the year, just as with the head of household status. Filing as a qualifying widow(er) allows you to claim some of the tax breaks associated with a joint return for a limited additional time. Single Filer Status If you’re not legally married, don’t have any dependents, or have a child who lives with you but you don’t pay more than half of the expenses, then you likely qualify for the single filer status. In the latter position, you won’t qualify for a more beneficial tax filing status if you can’t meet that head of household living expenses rule. To get a better tax break, you might want to consider paying more than half of your household’s expenses and/or having your child move in with you if the costs don’t exceed the tax savings available to you as head of household. Money-Saving Tax Tips for Families Numerous tax credits become more significant based on your filing status, such as education-focused credits and those for people with children, and they’re almost invariably larger if you’re married and supporting a dependent. But they come with additional qualifying rules. Earned Income Tax Credit The Earned Income Tax Credit (EITC) is designed to provide some financial assistance to lower-income taxpayers, as it reduces the amount of tax owed on a dollar-for-dollar basis. There’s an earnings limit, which is dependent upon your filing status and the number of your dependents, and the amount of the credit is also determined by how many qualifying children or relatives you support. Having a qualifying child or relative isn’t mandatory for the EITC, but you’ll be subject to more severe income restrictions if you don’t have one. Here’s the maximum income you can earn in 2023, the year for which you’ll file a tax return in 2024: $17,640 (with no dependents) to $56,838 (with three or more dependents) for single, head of household, and qualifying widow(er) filers$24,210 (with no dependents) to $63,398 (with three or more dependents) for married taxpayers filing joint returns The maximum credit ranges from $600 to $7,430 in tax year 2023, depending on how many dependents you claim. You must have worked and had earned income during the tax year, and you cannot have unearned investment income in excess of $11,000. But if the credit is higher than your tax liability for the year, then you may be eligible for a refund. The EITC was more generous during the coronavirus pandemic, thanks to a temporary provision, but it returned to its pre-COVID level in 2022. For the Earned Income Tax Credit, it isn’t mandatory that you have a qualifying child or relative, but you’ll be subject to more severe income restrictions if you don’t. Child Tax Credit The Child Tax Credit is tailor-made to help parents meet the expenses of raising children. You can claim a credit for each of your children, provided that they have Social Security numbers and are younger than 17 as of the last day of the tax year. They must have lived with you for more than half the year, and they cannot have paid for more than half their own support needs. You also must claim them as dependents on your tax return. A child doesn’t necessarily have to be your natural-born offspring or legally adopted to qualify. The IRS is rather generous with this rule. Your child dependent can be your stepchild, a sibling or stepsibling, or their descendants, such as a grandchild, niece, or nephew. In some cases, foster children are even eligible. There are income limits for this tax credit as well, but they may not prevent you from claiming it entirely. The limit—graded so that some high earners can still qualify for a partial credit—was $200,000 ($400,000 for joint filers) in the 2023 tax year, and the full credit was $2,000 per child. The Child Tax Credit also increased during the pandemic, but has since returned to its previous level. Child and Dependent Care Credit The child and dependent care tax credit is designed for parents who have demanding jobs, with the goal being that it would relieve some of the sting of paying for care. If you’re married and filing a joint return, your spouse must also be unavailable due to work commitments. You’re more or less prohibited from claiming this credit if you’re married and file a separate return, unless you’re living apart from your spouse. This credit works out to a percentage of what you paid a care provider so you can go to work. The exact percentage decreases as your income increases, and other limits apply as well. Your child must be younger than 13 at the end of the tax year. Otherwise, the IRS takes the position that they could probably take care of themselves while you were out. Of course, exceptions exist if they—or an adult dependent—are incapable of self-care. Your care provider can’t be your spouse, the child’s other parent, your own child if they’re younger than 19, or another dependent you can claim on your tax return. And the credit applies only to work-related care. It doesn’t count if you pay a babysitter a little extra so you can make a brief stop at an event on your way home from work, for example. This tax credit was worth a significant $8,000 during the pandemic, but has since dropped back to $3,000 as of the 2022 tax year. And don’t overlook the possibility of setting up a flexible spending account (FSA) for your child and dependent care expenses, separate and apart from claiming a tax credit. “If your employer offers an FSA for child and dependent care expenses, you can use pretax dollars to pay for them, which can lower your taxable income,” says Barbara Schreihans, CEO and founder of Your Tax Coach, a tax strategy firm. But you’ll definitely want to speak with a tax professional about how and if you can claim both tax breaks in a given year. Adoption Tax Credit The IRS also provides special breaks to adoptive parents. The provisions are twofold. They offer a tax credit for qualifying adoption expenses for eligible children, and they allow you to exclude from your income any financial assistance that your employer provides for adoption expenses. And here’s an extra perk: You can carry the credit forward into subsequent tax years if any of it is left over after erasing your tax debt in the current year. Your adopted child must be younger than 18 at the end of the tax year or be incapable of self-care. Adopting your stepchild won’t qualify if you’re married and adopting your spouse’s child. Provisions are made for special needs children as determined by your state. Qualifying adoption expenses include: Adoption feesTraveling costs, including meals and lodging if you must leave home for the purposes of arranging and finalizing the adoptionAttorney fees and court costs Some associated expenses may be eligible as well, so be sure to check with an accountant if you think you have any that might qualify. Again, income limits apply, but they’re generous—in the $200,000-plus range. Preparing for Tax Season The IRS recognizes that not all parents stay married and that some never marry at all. It’s crucial that you identify which of you will be claiming your child or children if you fall into this category or if you’re married and filing separate returns. You can’t both claim the same child and the tax credits related to them without inviting a tax audit. Have a heart-to-heart with your ex or your spouse in advance of tax season, particularly if you’re a new parent, to make sure that you’re on the same page when it comes to this issue. The IRS does impose “tiebreaker” rules if you and your ex can’t reach an agreement. It will award the dependent child to the parent with whom the child lived most during the tax year in the event of a dispute. In rare cases where a child spent an equal amount of time with each parent, the right is awarded to the parent with the highest adjusted gross income. How Much Can a Family Make Before Paying Taxes? The amount that can be earned before you have to pay federal income taxes depends on your filing status and whether you are under or over age 65 (unless you’re married filing separately, in which case age doesn’t make a difference, as the filing threshold is only $5). The minimum income requirements in 2023 (for tax returns filed in 2024) for a couple who are filing jointly is $27,700 if both spouses are under 65, $29,550 if one is younger than 65 and the other is 65 or older, and $31,400 if both are 65 or older. For a head of household, the threshold is $20,800 for those under 65 and $22,650 for those who are 65 and older. What Is the 2023 Child Tax Credit? The Child Tax Credit (CTC) is a tax benefit granted to American taxpayers with one or more children under age 17 by the end of the tax year. It is worth a maximum of $2,000 per qualifying child in 2023 (for taxes paid in 2024). Up to $1,600 is refundable.To be eligible for the CTC, you must have earned more than $2,500. You qualify for the full amount for each child if you earn up to $200,000 as an individual filer or $400,000 for joint filers. The benefit is phased out for parents with higher incomes. Does Having a Baby Increase Your Tax Refund? It could, depending on factors that include your income. The Child Tax Credit, for example, could lower your tax bill by up to $2,000 per qualifying child, as long as you don’t make too much money (see the previous question above). It’s also partially refundable, which means you may receive a refund even if you don’t owe any taxes. You could even get money back as a refund.If you paid a qualified individual for baby care while you were at work, you also might be able to claim the child and dependent care credit, which could help you get or increase your refund. There are rules for every credit or deduction that you might want to take, so be sure to read IRS materials or consult a tax preparer for guidance. The Bottom Line Family-related tax credits can be among the most generous and the most complicated provided for under the Internal Revenue Code. They can significantly ease the cost of raising a family, but the qualifying factors can be intricate. Consider talking with a tax professional if you think you might be able to claim any of these tax breaks. It could be worth it.

https://www.investopedia.com/terms/i/insurance_claim.asp

Insurance Claim

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-claim"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Insurance Claim? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An insurance claim is a formal request by a policyholder to an insurance company for coverage or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-file-an-auto-insurance-claim-7486296">compensation for a covered loss</a> or policy event. The insurance company validates the claim (or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0211/what-to-do-when-insurance-companies-wont-pay.aspx">denies the claim</a>). If it is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured. </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"> Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In some cases, a third party is able to file claims on behalf of the insured person. However, in the majority of cases, only the person(s) listed on the policy is entitled to claim payments. </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 insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.</li><li>The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.</li><li>For property-casualty insurance, such as for your car or home, filing a claim can cause rate hikes to your future premiums.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Insurance Claim" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/swTgZx978MxoMwPybzEP23CcfII=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/swTgZx978MxoMwPybzEP23CcfII=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.png" data-srcset="https://www.investopedia.com/thmb/uQ5hTD7S1RZG_JVM5JV1XKDDhWY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Insurance Claim" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/swTgZx978MxoMwPybzEP23CcfII=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.png" srcset="https://www.investopedia.com/thmb/uQ5hTD7S1RZG_JVM5JV1XKDDhWY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.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 / NoNo Flores</p></span> </figcaption></figure> <span class="heading-toc" id="toc-how-an-insurance-claim-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 Insurance Claim Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A paid insurance claim serves to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indemnity.asp">indemnify</a> a policyholder against financial loss. An individual or group pays premiums as consideration for the completion of an insurance contract between the insured party and an insurance carrier. The most common insurance claims involve costs for medical goods and services, physical damage, loss of life, liability for the ownership of dwellings (homeowners, landlords, and renters), and liability resulting from the operation of automobiles. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For property and causality insurance policies, regardless of the scope of an accident or who was at fault, the number of insurance claims you file has a direct impact on the rate you pay to gain coverage (typically through installment payments called insurance premiums). The greater the number of claims that are filed by a policyholder, the greater the likelihood of a rate hike. In some cases, it's possible if you file too many claims that the insurance company may decide to deny you coverage. </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 claim is being filed based on the damage to property that you caused, your rates will almost surely rise. On the other hand, if you aren't at fault, your rates may or may not increase. For example, getting hit from behind when your car is parked or having siding blow off your house during a storm are both events that are clearly not the result of the policyholder. </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"> However, mitigating circumstances, such as the number of previous claims you have filed, the number of speeding tickets you have received, the frequency of natural disasters in your area (earthquakes, hurricanes, floods), and even a low <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> can all cause your rates to go up, even if the latest claim was made for damage you didn't cause. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> When it comes to insurance rate increases, not all claims are created equal. Dog bites, slip-and-fall personal injury claims, water damage, and mold can all act as signals of future liability for an insurer. These items tend to have a negative impact on your rates and on your insurer's willingness to continue providing coverage. Surprisingly, speeding tickets may not cause a rate hike at all. At least for your first speeding ticket, many companies will not increase your prices. The same goes for a minor automobile accident or a small claim against your homeowner's insurance policy. </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-types-of-insurance-claims"></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"> Types of Insurance Claims </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_21-0"> <span class="mntl-sc-block-subheading__text"> Health Insurance Claims </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; the majority of medical are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjudication.asp" rel="noopener noreferrer">adjudicated</a> electronically. </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"> Policyholders must file paper claims when medical providers do not participate in electronic transmittals but charges result from rendered covered services. Ultimately, an insurance claim protects an individual from the prospect of large financial burdens resulting from an accident or illness. </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"> Property and Casualty Claims </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A house is typically one of the largest assets an individual will purchase in their lifetime. A claim filed for damage from covered perils is initially routed via the Internet to a representative of an insurer, commonly referred to as an agent or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/claims-adjuster.asp">claims adjuster</a>. </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"> Unlike health insurance claims, the onus is on the policyholder to report damage to a deeded property they own. An adjuster, depending on the type of claim, inspects and assesses damage to property for payment to the insured. Upon verification of the damage, the adjuster initiates the process of compensating or reimbursing the insured. </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"> Life Insurance Claims </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Generally, the process <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp">takes approximately 30 to 60 days</a> without extenuating circumstances, affording beneficiaries the financial wherewithal to replace the income of the deceased or simply cover the burden of final expenses. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_36-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_37-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Filing an insurance claim may raise future insurance premiums.</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_38-0"> <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_39-0"> There are no hard-and-fast rules around rate hikes. What one company forgives, another won't forget. Because any claim at all may pose a risk to your rates, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/insurancecontracts.asp">understanding your policy</a> is the first step toward protecting your wallet. If you know your first accident is forgiven or a previously filed claim won't count against you after a certain number of years, the decision of whether or not to file a claim can be made with advanced knowledge of the impact it will or won't have on your rates. </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"> Talking to your agent about the insurance company's policies long before you need to file a claim is also important. Some agents are obligated to report you to the company if you even discuss a potential claim and choose not to file. For this reason, you also don't want to wait until you need to file a claim to inquire about your insurer's policy regarding consultation with your agent. </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"> Regardless of your situation, minimizing the number of claims you file is the key to protecting your insurance rates from a substantial increase. A good rule to follow is to only file a claim in the event of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/first-notice-loss-fnol.asp">catastrophic loss</a>. If your car gets a dent on the bumper or a few shingles blow off of the roof of your house, you may be better off if you take care of the expense on your own. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If your car is totaled in an accident or the entire <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance/homeowners-insurance-guide/">roof of your house caves in</a>, filing a claim becomes a more economically feasible exercise. Just keep in mind that even though you have coverage and have paid your premiums on time for years, your insurance company can still decline to renew your coverage when your policy expires. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-how-do-i-initiate-an-insurance-claim"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Initiate an Insurance Claim?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you hold an insurance policy and have experienced damages covered by it, you can initiate a claim by contacting your insurer. This can be done by phone, and increasingly online. Once the claim has been started, the insurer will collect relevant information from you and may ask for evidence (such as photos) or supporting documentation. The insurer may also send an adjuster to interview you and evaluate the merits of your claim.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-why-does-filing-a-claim-increase-insurance-premiums"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Does Filing a Claim Increase Insurance Premiums?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Sometimes, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/claim-raise-rates.asp">filing a claim can result in higher insurance premiums</a> going forward. Although this is not always the case as some insurers will forgive the first accident, for example. Rate hikes following a claim are mainly due because the insurer will see you as a greater risk than before, and adjust the cost upwards accordingly. If you can prove that a claim was made where you were not at fault, you may be able to reverse such an increase. If you file too many claims over a very short period of time, the insurance company may not renew your policy regardless of fault.</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-should-i-file-an-insurance-claim-if-the-damage-is-less-than-my-deductible"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should I File an Insurance Claim if the Damage Is Less than My Deductible?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If the damage you experience is less than your deductible, it may not make sense to file a claim with your insurance company. For instance, if you have $200 in estimated damage, but a $1,000 deductible, it wouldn't make sense. If, however, you feel that the other party is entirely at fault and want their insurance to pay for your damage, you may want to initiate a claim nonetheless. It is a good idea to always talk with your insurance agent before filing a claim.</p></div> </div></div>

## What Is an Insurance Claim? An insurance claim is a formal request by a policyholder to an insurance company for coverage or [compensation for a covered loss](https://www.investopedia.com/how-to-file-an-auto-insurance-claim-7486296) or policy event. The insurance company validates the claim (or [denies the claim](https://www.investopedia.com/financial-edge/0211/what-to-do-when-insurance-companies-wont-pay.aspx)). If it is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured. Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In some cases, a third party is able to file claims on behalf of the insured person. However, in the majority of cases, only the person(s) listed on the policy is entitled to claim payments. ### Key Takeaways * An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. * The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured. * For property-casualty insurance, such as for your car or home, filing a claim can cause rate hikes to your future premiums. ![Insurance Claim]() :max_bytes(150000):strip_icc()/insurance_claim.asp-final-ad2bc2c60d5c46e999bf064a90ff2dc6.png) Investopedia / NoNo Flores ## How an Insurance Claim Works A paid insurance claim serves to [indemnify](https://www.investopedia.com/terms/i/indemnity.asp) a policyholder against financial loss. An individual or group pays premiums as consideration for the completion of an insurance contract between the insured party and an insurance carrier. The most common insurance claims involve costs for medical goods and services, physical damage, loss of life, liability for the ownership of dwellings (homeowners, landlords, and renters), and liability resulting from the operation of automobiles. For property and causality insurance policies, regardless of the scope of an accident or who was at fault, the number of insurance claims you file has a direct impact on the rate you pay to gain coverage (typically through installment payments called insurance premiums). The greater the number of claims that are filed by a policyholder, the greater the likelihood of a rate hike. In some cases, it's possible if you file too many claims that the insurance company may decide to deny you coverage. If the claim is being filed based on the damage to property that you caused, your rates will almost surely rise. On the other hand, if you aren't at fault, your rates may or may not increase. For example, getting hit from behind when your car is parked or having siding blow off your house during a storm are both events that are clearly not the result of the policyholder. However, mitigating circumstances, such as the number of previous claims you have filed, the number of speeding tickets you have received, the frequency of natural disasters in your area (earthquakes, hurricanes, floods), and even a low [credit rating](https://www.investopedia.com/terms/c/creditrating.asp) can all cause your rates to go up, even if the latest claim was made for damage you didn't cause. When it comes to insurance rate increases, not all claims are created equal. Dog bites, slip-and-fall personal injury claims, water damage, and mold can all act as signals of future liability for an insurer. These items tend to have a negative impact on your rates and on your insurer's willingness to continue providing coverage. Surprisingly, speeding tickets may not cause a rate hike at all. At least for your first speeding ticket, many companies will not increase your prices. The same goes for a minor automobile accident or a small claim against your homeowner's insurance policy. ## Types of Insurance Claims ### Health Insurance Claims Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; the majority of medical are [adjudicated](https://www.investopedia.com/terms/a/adjudication.asp) electronically. Policyholders must file paper claims when medical providers do not participate in electronic transmittals but charges result from rendered covered services. Ultimately, an insurance claim protects an individual from the prospect of large financial burdens resulting from an accident or illness. ### Property and Casualty Claims A house is typically one of the largest assets an individual will purchase in their lifetime. A claim filed for damage from covered perils is initially routed via the Internet to a representative of an insurer, commonly referred to as an agent or [claims adjuster](https://www.investopedia.com/terms/c/claims-adjuster.asp). Unlike health insurance claims, the onus is on the policyholder to report damage to a deeded property they own. An adjuster, depending on the type of claim, inspects and assesses damage to property for payment to the insured. Upon verification of the damage, the adjuster initiates the process of compensating or reimbursing the insured. ### Life Insurance Claims Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act. Generally, the process [takes approximately 30 to 60 days](https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp) without extenuating circumstances, affording beneficiaries the financial wherewithal to replace the income of the deceased or simply cover the burden of final expenses. ### Filing an insurance claim may raise future insurance premiums. ## Special Considerations There are no hard-and-fast rules around rate hikes. What one company forgives, another won't forget. Because any claim at all may pose a risk to your rates, [understanding your policy](https://www.investopedia.com/articles/pf/06/insurancecontracts.asp) is the first step toward protecting your wallet. If you know your first accident is forgiven or a previously filed claim won't count against you after a certain number of years, the decision of whether or not to file a claim can be made with advanced knowledge of the impact it will or won't have on your rates. Talking to your agent about the insurance company's policies long before you need to file a claim is also important. Some agents are obligated to report you to the company if you even discuss a potential claim and choose not to file. For this reason, you also don't want to wait until you need to file a claim to inquire about your insurer's policy regarding consultation with your agent. Regardless of your situation, minimizing the number of claims you file is the key to protecting your insurance rates from a substantial increase. A good rule to follow is to only file a claim in the event of [catastrophic loss](https://www.investopedia.com/terms/f/first-notice-loss-fnol.asp). If your car gets a dent on the bumper or a few shingles blow off of the roof of your house, you may be better off if you take care of the expense on your own. If your car is totaled in an accident or the entire [roof of your house caves in](https://www.investopedia.com/insurance/homeowners-insurance-guide/), filing a claim becomes a more economically feasible exercise. Just keep in mind that even though you have coverage and have paid your premiums on time for years, your insurance company can still decline to renew your coverage when your policy expires. ## How Do I Initiate an Insurance Claim? If you hold an insurance policy and have experienced damages covered by it, you can initiate a claim by contacting your insurer. This can be done by phone, and increasingly online. Once the claim has been started, the insurer will collect relevant information from you and may ask for evidence (such as photos) or supporting documentation. The insurer may also send an adjuster to interview you and evaluate the merits of your claim. ## Why Does Filing a Claim Increase Insurance Premiums? Sometimes, [filing a claim can result in higher insurance premiums](https://www.investopedia.com/articles/pf/08/claim-raise-rates.asp) going forward. Although this is not always the case as some insurers will forgive the first accident, for example. Rate hikes following a claim are mainly due because the insurer will see you as a greater risk than before, and adjust the cost upwards accordingly. If you can prove that a claim was made where you were not at fault, you may be able to reverse such an increase. If you file too many claims over a very short period of time, the insurance company may not renew your policy regardless of fault. ## Should I File an Insurance Claim if the Damage Is Less than My Deductible? If the damage you experience is less than your deductible, it may not make sense to file a claim with your insurance company. For instance, if you have $200 in estimated damage, but a $1,000 deductible, it wouldn't make sense. If, however, you feel that the other party is entirely at fault and want their insurance to pay for your damage, you may want to initiate a claim nonetheless. It is a good idea to always talk with your insurance agent before filing a claim.

What Is an Insurance Claim? An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim (or denies the claim). If it is approved, the insurance company will issue payment to the insured or an approved interested party on behalf of the insured. Insurance claims cover everything from death benefits on life insurance policies to routine and comprehensive medical exams. In some cases, a third party is able to file claims on behalf of the insured person. However, in the majority of cases, only the person(s) listed on the policy is entitled to claim payments. Key Takeaways An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.For property-casualty insurance, such as for your car or home, filing a claim can cause rate hikes to your future premiums. Investopedia / NoNo Flores How an Insurance Claim Works A paid insurance claim serves to indemnify a policyholder against financial loss. An individual or group pays premiums as consideration for the completion of an insurance contract between the insured party and an insurance carrier. The most common insurance claims involve costs for medical goods and services, physical damage, loss of life, liability for the ownership of dwellings (homeowners, landlords, and renters), and liability resulting from the operation of automobiles. For property and causality insurance policies, regardless of the scope of an accident or who was at fault, the number of insurance claims you file has a direct impact on the rate you pay to gain coverage (typically through installment payments called insurance premiums). The greater the number of claims that are filed by a policyholder, the greater the likelihood of a rate hike. In some cases, it's possible if you file too many claims that the insurance company may decide to deny you coverage. If the claim is being filed based on the damage to property that you caused, your rates will almost surely rise. On the other hand, if you aren't at fault, your rates may or may not increase. For example, getting hit from behind when your car is parked or having siding blow off your house during a storm are both events that are clearly not the result of the policyholder. However, mitigating circumstances, such as the number of previous claims you have filed, the number of speeding tickets you have received, the frequency of natural disasters in your area (earthquakes, hurricanes, floods), and even a low credit rating can all cause your rates to go up, even if the latest claim was made for damage you didn't cause. When it comes to insurance rate increases, not all claims are created equal. Dog bites, slip-and-fall personal injury claims, water damage, and mold can all act as signals of future liability for an insurer. These items tend to have a negative impact on your rates and on your insurer's willingness to continue providing coverage. Surprisingly, speeding tickets may not cause a rate hike at all. At least for your first speeding ticket, many companies will not increase your prices. The same goes for a minor automobile accident or a small claim against your homeowner's insurance policy. Types of Insurance Claims Health Insurance Claims Costs for surgical procedures or inpatient hospital stays remain prohibitively expensive. Individual or group health policies indemnify patients against financial burdens that may otherwise cause crippling financial damage. Health insurance claims filed with carriers by providers on behalf of policyholders require little effort from patients; the majority of medical are adjudicated electronically. Policyholders must file paper claims when medical providers do not participate in electronic transmittals but charges result from rendered covered services. Ultimately, an insurance claim protects an individual from the prospect of large financial burdens resulting from an accident or illness. Property and Casualty Claims A house is typically one of the largest assets an individual will purchase in their lifetime. A claim filed for damage from covered perils is initially routed via the Internet to a representative of an insurer, commonly referred to as an agent or claims adjuster. Unlike health insurance claims, the onus is on the policyholder to report damage to a deeded property they own. An adjuster, depending on the type of claim, inspects and assesses damage to property for payment to the insured. Upon verification of the damage, the adjuster initiates the process of compensating or reimbursing the insured. Life Insurance Claims Life insurance claims require the submission of a claim form, a death certificate, and oftentimes the original policy. The process, especially for large face value policies, may require in-depth examination by the carrier to ensure that the death of the insured did not fall under a contract exclusion, such as suicide (usually excluded for the first few years after policy inception) or death resulting from a criminal act. Generally, the process takes approximately 30 to 60 days without extenuating circumstances, affording beneficiaries the financial wherewithal to replace the income of the deceased or simply cover the burden of final expenses. Filing an insurance claim may raise future insurance premiums. Special Considerations There are no hard-and-fast rules around rate hikes. What one company forgives, another won't forget. Because any claim at all may pose a risk to your rates, understanding your policy is the first step toward protecting your wallet. If you know your first accident is forgiven or a previously filed claim won't count against you after a certain number of years, the decision of whether or not to file a claim can be made with advanced knowledge of the impact it will or won't have on your rates. Talking to your agent about the insurance company's policies long before you need to file a claim is also important. Some agents are obligated to report you to the company if you even discuss a potential claim and choose not to file. For this reason, you also don't want to wait until you need to file a claim to inquire about your insurer's policy regarding consultation with your agent. Regardless of your situation, minimizing the number of claims you file is the key to protecting your insurance rates from a substantial increase. A good rule to follow is to only file a claim in the event of catastrophic loss. If your car gets a dent on the bumper or a few shingles blow off of the roof of your house, you may be better off if you take care of the expense on your own. If your car is totaled in an accident or the entire roof of your house caves in, filing a claim becomes a more economically feasible exercise. Just keep in mind that even though you have coverage and have paid your premiums on time for years, your insurance company can still decline to renew your coverage when your policy expires. How Do I Initiate an Insurance Claim? If you hold an insurance policy and have experienced damages covered by it, you can initiate a claim by contacting your insurer. This can be done by phone, and increasingly online. Once the claim has been started, the insurer will collect relevant information from you and may ask for evidence (such as photos) or supporting documentation. The insurer may also send an adjuster to interview you and evaluate the merits of your claim. Why Does Filing a Claim Increase Insurance Premiums? Sometimes, filing a claim can result in higher insurance premiums going forward. Although this is not always the case as some insurers will forgive the first accident, for example. Rate hikes following a claim are mainly due because the insurer will see you as a greater risk than before, and adjust the cost upwards accordingly. If you can prove that a claim was made where you were not at fault, you may be able to reverse such an increase. If you file too many claims over a very short period of time, the insurance company may not renew your policy regardless of fault. Should I File an Insurance Claim if the Damage Is Less than My Deductible? If the damage you experience is less than your deductible, it may not make sense to file a claim with your insurance company. For instance, if you have $200 in estimated damage, but a $1,000 deductible, it wouldn't make sense. If, however, you feel that the other party is entirely at fault and want their insurance to pay for your damage, you may want to initiate a claim nonetheless. It is a good idea to always talk with your insurance agent before filing a claim.

https://www.investopedia.com/managing-wealth/whats-value-blue-lobster/

What’s the Value of a Blue Lobster?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Imagine heading out for a hard day’s fishing and returning with a gem that stuns fishermen across the nation? That’s exactly what happened to Mark Rand and his son Luke, who caught a rare, bright blue lobster off the coast of Maine on Aug. 11, 2022.<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_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The father and son, who between them have at least 60 years of fishing experience, named the crustacean “Lucky Bluey” and kept it in a tank at Becky’s Dinner in Portland, a famous restaurant owned by Luke's mother, before releasing it back into the wild a week later. Mark and Luke have caught plenty of fish over the years but none as rare as this—blue lobsters, according to the New England Aquarium, are a one-in-2 million discovery.<span class="ql-inline-citation" data-cite="11"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>Blue lobsters are rare. Estimates by the New England Aquarium put the likelihood of catching a blue lobster as one in 2 million.<span class="ql-inline-citation" data-cite="3"></span></li><li>There are other more rare lobsters such as the yellow lobster and the albino or crystal lobster.<span class="ql-inline-citation" data-cite="2"></span></li><li>There really is no way to value a blue lobster—most of them are donated to aquariums, although they have been seen on menus for $500+.<span class="ql-inline-citation" data-cite="8"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-how-rare-are-blue-lobsters"></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 Rare Are Blue Lobsters? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Typically, lobsters caught off the Atlantic coast of North America tend to be an unattractive greeny-brown color. Once boiled, they turn orangey-pink. Mark and Luke Rand, like the few other catchers of blue lobsters before them, were destined for good fortune, according to fishing folklore.<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_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> So, just how rare are blue lobsters, and what are your chances of catching one for dinner? According to the University of Maine Lobster Institute, the blue color is caused by an abundance of a particular protein from a genetic defect. While the university has stated that only one blue lobster exists for every two million, research director Dr. Robert Bayer admits that that statistic is only a guess. According to him, "the chances of this happening nobody really knows."<span class="ql-inline-citation" data-cite="3"></span> And the scarcity of the animal means they are highly valuable. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_13-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The iridescent blue coloring in blue lobsters is caused by an abundance of a particular protein from a genetic defect.<span class="ql-inline-citation" data-cite="14"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Some experts have even suggested that blue lobsters are fairly easy to come by. David Spiegelhalter, a British statistician, claimed that about 200 million lobsters are caught in the North Atlantic every year, which equates to 100 blue ones turning up in a year on average—based on the popular one in 2 million ratio.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> That would help to explain the occasions when blue lobsters have been caught in quick succession, such as in 2016 when two fishermen off the coast of Nova Scotia reeled in two of these lobsters over the course of a few days.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Charlie Ellis of the UK National Lobster Hatchery in Cornwall believes the iridescent blue seen in North American species (European blue lobsters are a duller color) is even more common. According to him, the probability of a lobster being bright blue may be as low as one in a few hundred thousand.<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_19-0"></div> <span class="heading-toc" id="toc-other-rare-lobsters"></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"> Other Rare Lobsters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Most agree that blue lobsters, though rare, are not the rarest form of lobster. Yellow lobsters, for example, account for approximately one in 30 million, according to estimates from the Lobster Institute.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> White—also known as albino or “crystal”—lobsters are said to be even harder to find. The odds of spotting one of them, according to researchers, is thought to be one in 100 million.<span class="ql-inline-citation" data-cite="14"></span><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_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>There are other rare lobsters. For, example, the number of yellow lobsters is estimated as one in 30 million, and albino or crystal lobsters are estimated to be one in 100 million.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-how-much-do-blue-lobsters-cost"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> How Much Do Blue Lobsters Cost? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Blue lobsters are perfectly suitable for consumption. They have been priced as high as $500 on eBay, although the listing failed to attract a single bid, so it's safe to say the worth of blue lobsters is debatable. </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"> When restaurant Per Se featured its blue lobster and wagyu menu, it was priced at $560.<span class="ql-inline-citation" data-cite="8"></span> For the same amount that it would cost two people to dine on blue lobster, you may also be able to buy a pair of rare Nike "Blue Lobster" sneakers, which can fetch anywhere from $600 to $10,000.<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-what-is-special-about-a-blue-lobster"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Special About a Blue Lobster?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Blue lobsters are special because they are rare and beautiful to look at. The New England Aquarium predicts about one in every 2 million lobsters is blue, making them hard to find and the fisherman who catch them famous.<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_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-do-blue-lobsters-taste-like"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Do Blue Lobsters Taste Like?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The color of a lobster is unlikely to impact how it tastes. It’s very probable that a blue one would become red when cooked and taste the same as the others.<span class="ql-inline-citation" data-cite="12"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-color-lobster-is-the-rarest"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Color Lobster Is the Rarest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While blue lobsters are hard to find, they are not considered the rarest. That honor goes to the white lobster, which experts say has a one in 100 million chance of being spotted.<span class="ql-inline-citation" data-cite="2"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <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"> It’s hard to put a dollar value on a blue lobster. When they are caught, they are usually put back into the sea, which makes them even rarer and deserving of a higher price. </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"> Some restaurants have put them on their menu for hundreds of dollars. Presumably, there are people out there that are willing to fork out to say they ate this rare form of lobster, even though they are unlikely to taste much different from regular ones. There’s also likely to be a collectors market out there somewhere for this type of lobster, with prices that fluctuate depending on 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">supply and demand</a> dynamics at any given moment. </p></div>

Imagine heading out for a hard day’s fishing and returning with a gem that stuns fishermen across the nation? That’s exactly what happened to Mark Rand and his son Luke, who caught a rare, bright blue lobster off the coast of Maine on Aug. 11, 2022. The father and son, who between them have at least 60 years of fishing experience, named the crustacean “Lucky Bluey” and kept it in a tank at Becky’s Dinner in Portland, a famous restaurant owned by Luke's mother, before releasing it back into the wild a week later. Mark and Luke have caught plenty of fish over the years but none as rare as this—blue lobsters, according to the New England Aquarium, are a one-in-2 million discovery. ### Key Takeaways * Blue lobsters are rare. Estimates by the New England Aquarium put the likelihood of catching a blue lobster as one in 2 million. * There are other more rare lobsters such as the yellow lobster and the albino or crystal lobster. * There really is no way to value a blue lobster—most of them are donated to aquariums, although they have been seen on menus for $500+. ## How Rare Are Blue Lobsters? Typically, lobsters caught off the Atlantic coast of North America tend to be an unattractive greeny-brown color. Once boiled, they turn orangey-pink. Mark and Luke Rand, like the few other catchers of blue lobsters before them, were destined for good fortune, according to fishing folklore. So, just how rare are blue lobsters, and what are your chances of catching one for dinner? According to the University of Maine Lobster Institute, the blue color is caused by an abundance of a particular protein from a genetic defect. While the university has stated that only one blue lobster exists for every two million, research director Dr. Robert Bayer admits that that statistic is only a guess. According to him, "the chances of this happening nobody really knows." And the scarcity of the animal means they are highly valuable. ### The iridescent blue coloring in blue lobsters is caused by an abundance of a particular protein from a genetic defect. Some experts have even suggested that blue lobsters are fairly easy to come by. David Spiegelhalter, a British statistician, claimed that about 200 million lobsters are caught in the North Atlantic every year, which equates to 100 blue ones turning up in a year on average—based on the popular one in 2 million ratio. That would help to explain the occasions when blue lobsters have been caught in quick succession, such as in 2016 when two fishermen off the coast of Nova Scotia reeled in two of these lobsters over the course of a few days. Charlie Ellis of the UK National Lobster Hatchery in Cornwall believes the iridescent blue seen in North American species (European blue lobsters are a duller color) is even more common. According to him, the probability of a lobster being bright blue may be as low as one in a few hundred thousand. ## Other Rare Lobsters Most agree that blue lobsters, though rare, are not the rarest form of lobster. Yellow lobsters, for example, account for approximately one in 30 million, according to estimates from the Lobster Institute. White—also known as albino or “crystal”—lobsters are said to be even harder to find. The odds of spotting one of them, according to researchers, is thought to be one in 100 million. ### There are other rare lobsters. For, example, the number of yellow lobsters is estimated as one in 30 million, and albino or crystal lobsters are estimated to be one in 100 million. ## How Much Do Blue Lobsters Cost? Blue lobsters are perfectly suitable for consumption. They have been priced as high as $500 on eBay, although the listing failed to attract a single bid, so it's safe to say the worth of blue lobsters is debatable. When restaurant Per Se featured its blue lobster and wagyu menu, it was priced at $560. For the same amount that it would cost two people to dine on blue lobster, you may also be able to buy a pair of rare Nike "Blue Lobster" sneakers, which can fetch anywhere from $600 to $10,000.  ## What Is Special About a Blue Lobster? Blue lobsters are special because they are rare and beautiful to look at. The New England Aquarium predicts about one in every 2 million lobsters is blue, making them hard to find and the fisherman who catch them famous. ## What Do Blue Lobsters Taste Like? The color of a lobster is unlikely to impact how it tastes. It’s very probable that a blue one would become red when cooked and taste the same as the others. ## What Color Lobster Is the Rarest? While blue lobsters are hard to find, they are not considered the rarest. That honor goes to the white lobster, which experts say has a one in 100 million chance of being spotted. ## The Bottom Line It’s hard to put a dollar value on a blue lobster. When they are caught, they are usually put back into the sea, which makes them even rarer and deserving of a higher price. Some restaurants have put them on their menu for hundreds of dollars. Presumably, there are people out there that are willing to fork out to say they ate this rare form of lobster, even though they are unlikely to taste much different from regular ones. There’s also likely to be a collectors market out there somewhere for this type of lobster, with prices that fluctuate depending on the [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp) dynamics at any given moment.

Imagine heading out for a hard day’s fishing and returning with a gem that stuns fishermen across the nation? That’s exactly what happened to Mark Rand and his son Luke, who caught a rare, bright blue lobster off the coast of Maine on Aug. 11, 2022. The father and son, who between them have at least 60 years of fishing experience, named the crustacean “Lucky Bluey” and kept it in a tank at Becky’s Dinner in Portland, a famous restaurant owned by Luke's mother, before releasing it back into the wild a week later. Mark and Luke have caught plenty of fish over the years but none as rare as this—blue lobsters, according to the New England Aquarium, are a one-in-2 million discovery. Key Takeaways Blue lobsters are rare. Estimates by the New England Aquarium put the likelihood of catching a blue lobster as one in 2 million.There are other more rare lobsters such as the yellow lobster and the albino or crystal lobster.There really is no way to value a blue lobster—most of them are donated to aquariums, although they have been seen on menus for $500+. How Rare Are Blue Lobsters? Typically, lobsters caught off the Atlantic coast of North America tend to be an unattractive greeny-brown color. Once boiled, they turn orangey-pink. Mark and Luke Rand, like the few other catchers of blue lobsters before them, were destined for good fortune, according to fishing folklore. So, just how rare are blue lobsters, and what are your chances of catching one for dinner? According to the University of Maine Lobster Institute, the blue color is caused by an abundance of a particular protein from a genetic defect. While the university has stated that only one blue lobster exists for every two million, research director Dr. Robert Bayer admits that that statistic is only a guess. According to him, "the chances of this happening nobody really knows." And the scarcity of the animal means they are highly valuable. The iridescent blue coloring in blue lobsters is caused by an abundance of a particular protein from a genetic defect. Some experts have even suggested that blue lobsters are fairly easy to come by. David Spiegelhalter, a British statistician, claimed that about 200 million lobsters are caught in the North Atlantic every year, which equates to 100 blue ones turning up in a year on average—based on the popular one in 2 million ratio. That would help to explain the occasions when blue lobsters have been caught in quick succession, such as in 2016 when two fishermen off the coast of Nova Scotia reeled in two of these lobsters over the course of a few days. Charlie Ellis of the UK National Lobster Hatchery in Cornwall believes the iridescent blue seen in North American species (European blue lobsters are a duller color) is even more common. According to him, the probability of a lobster being bright blue may be as low as one in a few hundred thousand. Other Rare Lobsters Most agree that blue lobsters, though rare, are not the rarest form of lobster. Yellow lobsters, for example, account for approximately one in 30 million, according to estimates from the Lobster Institute. White—also known as albino or “crystal”—lobsters are said to be even harder to find. The odds of spotting one of them, according to researchers, is thought to be one in 100 million. There are other rare lobsters. For, example, the number of yellow lobsters is estimated as one in 30 million, and albino or crystal lobsters are estimated to be one in 100 million. How Much Do Blue Lobsters Cost? Blue lobsters are perfectly suitable for consumption. They have been priced as high as $500 on eBay, although the listing failed to attract a single bid, so it's safe to say the worth of blue lobsters is debatable. When restaurant Per Se featured its blue lobster and wagyu menu, it was priced at $560. For the same amount that it would cost two people to dine on blue lobster, you may also be able to buy a pair of rare Nike "Blue Lobster" sneakers, which can fetch anywhere from $600 to $10,000.  What Is Special About a Blue Lobster? Blue lobsters are special because they are rare and beautiful to look at. The New England Aquarium predicts about one in every 2 million lobsters is blue, making them hard to find and the fisherman who catch them famous. What Do Blue Lobsters Taste Like? The color of a lobster is unlikely to impact how it tastes. It’s very probable that a blue one would become red when cooked and taste the same as the others. What Color Lobster Is the Rarest? While blue lobsters are hard to find, they are not considered the rarest. That honor goes to the white lobster, which experts say has a one in 100 million chance of being spotted. The Bottom Line It’s hard to put a dollar value on a blue lobster. When they are caught, they are usually put back into the sea, which makes them even rarer and deserving of a higher price. Some restaurants have put them on their menu for hundreds of dollars. Presumably, there are people out there that are willing to fork out to say they ate this rare form of lobster, even though they are unlikely to taste much different from regular ones. There’s also likely to be a collectors market out there somewhere for this type of lobster, with prices that fluctuate depending on the supply and demand dynamics at any given moment.

https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-institutions-were-created-response-2008-financial.asp

Major Regulations Following the 2008 Financial Crisis

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><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/articles/economics/09/financial-crisis-review.asp">financial crisis of 2008</a>, often called the subprime mortgage crisis, caused a contraction of liquidity in global financial markets that originated in the United States due to the collapse of the U.S. housing market and threatened the international financial system. </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"> Several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations failed and precipitated the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp#:~:text=While%20no%20explicit%20criteria%20exist,while%20unemployment%20briefly%20reached%2010%25.">Great Recession</a>.<span class="ql-inline-citation" data-cite="32"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In response, Presidents George W. Bush and Barack Obama signed into law several legislative measures to counter the financial crisis, including the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">Dodd-Frank Wall Street Reform and Consumer Protection Act</a> and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp">Emergency Economic Stabilization Act</a> (EESA) which created the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp">Troubled Asset Relief Program</a> (TARP). </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 financial crisis of 2008 originated in the United States as a result of the collapse of the U.S. housing market.</li><li>Dodd-Frank and the Emergency Economic Stabilization Act were among the steps taken to respond to the crisis.</li><li>Dodd-Frank amended many existing rules and created many new stand-alone provisions.</li><li>The Emergency Economic Stabilization Act provided $475 billion in bailout relief through the Troubled Asset Relief Program (TARP).<span class="ql-inline-citation" data-cite="4"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-dodd-frank"></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"> Dodd-Frank  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The most influential measure was the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp">Dodd-Frank Wall Street Reform and Consumer Protection Act</a>, which introduced steps designed to regulate the financial sector's activities and protect consumers. Signed into law in July 2010, Dodd-Frank brought sweeping reforms to the U.S. financial sector.<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> <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"> CFPB </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Dodd-Frank introduced 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</a> (CFPB), which has become an important agency monitoring and protecting the financial interests of American consumers.<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_14-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-subheading__text"> FSOC </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp">Financial Stability Oversight Council</a> (FSOC) is addressed in Title I of Dodd-Frank, with its to monitor designated <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systemically-important-financial-institution-sifi.asp">systemically important financial institutions</a> (SIFIs)such as banks, insurance companies, or other financial institutions deemed “too big to fail." </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 FSOC’s voting members include the heads of departments such as the Department of the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission. The FSOC requires testing and documentation of the business operations of SIFIs. It can also decide to take action for dividing or reorganizing these institutions in such a way that reduces the overall risk to the economy.<span class="ql-inline-citation" data-cite="28"></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_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"> Volcker Rule </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> One of Dodd-Frank’s provisions, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volcker-rule.asp">Volcker Rule</a>, is designed to limit speculative investments. The Volcker Rule has enacted a de facto ban on proprietary trading by depository institutions, also decreasing the trading rights of proprietary traders at other large financial institutions.<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_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"> Amended Regulations </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Dodd-Frank enhanced existing regulations in the United States, including:<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_25-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securitiesact1933.asp">Securities Act of 1933</a>: Dodd-Frank amended Regulation D to exempt some securities from registration and also revised the definition of an accredited investor, removing the inclusion of a primary residence as part of an investor’s net worth.<span class="ql-inline-citation" data-cite="24"></span></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seact1934.asp">Securities Exchange Act of 1934</a>: Title IX of Dodd-Frank requires the creation of an Investor Advisory Committee (IAC), an Office of the Investor Advocate (OIA), and an ombudsman appointed by the OIA to target conflicts of interest within investment firms and on mutual fund advertisements and issues of accountability, executive compensation, and corporate governance. Title IX includes the establishment of the Securities Exchange Commission (SEC) Office of Credit Ratings and oversight of mortgage-backed securitization.<span class="ql-inline-citation" data-cite="25"></span></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentcompanyact.asp">Investment Company Act of 1940</a>: The Dodd-Frank Act created new oversight committees and tighter restrictions on consumer protections and disclosure policies.</li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investadvact.asp">Investment Advisers Act of 1940</a>: The Investment Advisers Act of 1940 saw changes to the registration requirements for investment advisors, affecting both independent investment advisors and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/101415/are-hedge-funds-registered-securities-and-exchange-commission-sec.asp">hedge funds</a>.<span class="ql-inline-citation" data-cite="26"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sarbanesoxleyact.asp">Sarbanes-Oxley Act of 2002</a>: Dodd-Frank added new protections for whistleblowers and financial incentives.<span class="ql-inline-citation" data-cite="27"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Future of Dodd-Frank </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> In 2018, President Donald Trump passed the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crapo-bill.asp">Economic Growth, Regulatory Relief, and Consumer Protection Act</a>. This act eased some of the regulatory burdens created for banks through Dodd-Frank, primarily by increasing the threshold at which banks are subject to greater regulatory documentation obligations. The threshold was increased, from $50 million to $250 million.<span class="ql-inline-citation" data-cite="23"></span> The Biden administration hopes to reverse these easements on the Dodd-Frank regulations.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_31-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_32-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The Dodd-Frank Wall Street Reform and Consumer Protection Act was the most influential and controversial of a raft of measures enacted by former President George W. Bush and former President Barack Obama. The measures were intended to regulate the activities of the financial sector and protect consumers.</p></div></div></div> <span class="heading-toc" id="toc-emergency-economic-stabilization-act"></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"> Emergency Economic Stabilization Act </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In October 2008, a divided Congress passed the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp#:~:text=The%20Emergency%20Economic%20Stabilization%20Act%20%28EESA%29%20was%20a%20law%20passed,originally%20proposed%20by%20Henry%20Paulson.">Emergency Economic Stabilization Act</a>, which initially provided the Treasury with approximately $700 billion to purchase "troubled assets," mostly bank shares and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp">mortgage-backed securities</a>.  </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 budget was subsequently reduced to $475 billion and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp">Troubled Asset Relief Program</a>, as the program was known, ultimately spent $426.4 billion bailing out institutions, including American International Group Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aig">AIG</a>), Bank of America (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac">BAC</a>), Citigroup (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=c">C</a>), JPMorgan (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=jpm">JPM</a>), and General Motors (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=gm">GM</a>).<span class="ql-inline-citation" data-cite="21"></span> The Treasury eventually recovered $441.7 billion from TARP recipients.<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_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_38-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_39-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">$441.7 billion</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The Treasury recovered $441.7 billion from the $426.4 billion in TARP funds it invested.<span class="ql-inline-citation" data-cite="22"></span></p></div></div></div> <span class="heading-toc" id="toc-federal-reserve"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> Federal Reserve </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The Federal Reserve took extra steps to support the economy and the financial markets during and after the 2008 financial crisis. In addition to implementing monetary policy, primarily the federal funds rate, the Fed also designed special-purpose instruments for lending to various sectors of the market, creating a new standard for the Fed in regular and emergency lending activities. </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"> Under the direction of Dodd-Frank, the Federal Reserve is required to carry out regular stress testing on banks in the banking sector, with provisions in the Dodd-Frank Act on Federal Reserve stress testing found in Title XI.<span class="ql-inline-citation" data-cite="31"></span> The Federal Reserve conducts two types of stress testing annually: Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_45-0"><span class="heading-toc" id="toc-how-has-the-dodd-frank-act-affected-smaller-banks"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Has the Dodd-Frank Act Affected Smaller Banks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>One unexpected outcome of Dodd-Frank regulations was that smaller banks were penalized by having the same burden of regulations imposed as those to which larger banks were subject. Smaller banks were hindered by the additional paperwork and additional staff necessary to comply with the regulations. Subsequently, legislation was passed to relieve community and regional banks from some of these regulations.<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_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-how-are-banks-monitored-to-ensure-compliance-to-the-dodd-frank-regulations"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Banks Monitored to Ensure Compliance to the Dodd-Frank Regulations?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Dodd-Frank Act commanded the Federal Reserve to closely oversee large banks, financial institutions, and insurance companies in the United States. Annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stresstesting.asp">stress tests </a>confirm that these companies are ready to handle future financial downturns and crises. Conjectural scenarios evaluate the results that different financial upsets may have on their strength. If it is shown that a company does not have adequate capital in reserve to overcome certain scenarios, the Fed can take various actions to safeguard the bank if a crisis occurs.<span class="ql-inline-citation" data-cite="30"></span><span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-what-rewards-can-a-whistleblower-expect-under-sarbanes-oxley"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Rewards Can a Whistleblower Expect Under Sarbanes-Oxley?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The bounty program under Sarbanes-Oxley can provide whistleblowers with 10-30% of the proceeds of a litigation settlement that succeeds after they have reported a bank's improper behavior and<span class="ql-inline-citation" data-cite="16"></span> the period in which an employee may enter a claim against their employer increased from 90 days to 180 days.<span class="ql-inline-citation" data-cite="15"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP) helped to quell the financial crisis of 2008. The creation of the CFPB and FSOC helps to monitor financial institutions and protect consumers. Key components addressed by these legislative moves include mortgage standards, investor protections, systematic risk, and bank regulation. </p></div>

The [financial crisis of 2008](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp), often called the subprime mortgage crisis, caused a contraction of liquidity in global financial markets that originated in the United States due to the collapse of the U.S. housing market and threatened the international financial system. Several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations failed and precipitated the [Great Recession](https://www.investopedia.com/terms/g/great-recession.asp#:~:text=While%20no%20explicit%20criteria%20exist,while%20unemployment%20briefly%20reached%2010%25.). In response, Presidents George W. Bush and Barack Obama signed into law several legislative measures to counter the financial crisis, including the [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp) and the [Emergency Economic Stabilization Act](https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp) (EESA) which created the [Troubled Asset Relief Program](https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp) (TARP). ### Key Takeaways * The financial crisis of 2008 originated in the United States as a result of the collapse of the U.S. housing market. * Dodd-Frank and the Emergency Economic Stabilization Act were among the steps taken to respond to the crisis. * Dodd-Frank amended many existing rules and created many new stand-alone provisions. * The Emergency Economic Stabilization Act provided $475 billion in bailout relief through the Troubled Asset Relief Program (TARP). ## Dodd-Frank The most influential measure was the [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp), which introduced steps designed to regulate the financial sector's activities and protect consumers. Signed into law in July 2010, Dodd-Frank brought sweeping reforms to the U.S. financial sector. ### CFPB Dodd-Frank introduced the [Consumer Financial Protection Bureau](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp) (CFPB), which has become an important agency monitoring and protecting the financial interests of American consumers. ### FSOC The [Financial Stability Oversight Council](https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp) (FSOC) is addressed in Title I of Dodd-Frank, with its to monitor designated [systemically important financial institutions](https://www.investopedia.com/terms/s/systemically-important-financial-institution-sifi.asp) (SIFIs)such as banks, insurance companies, or other financial institutions deemed “too big to fail." The FSOC’s voting members include the heads of departments such as the Department of the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission. The FSOC requires testing and documentation of the business operations of SIFIs. It can also decide to take action for dividing or reorganizing these institutions in such a way that reduces the overall risk to the economy. ### Volcker Rule One of Dodd-Frank’s provisions, the [Volcker Rule](https://www.investopedia.com/terms/v/volcker-rule.asp), is designed to limit speculative investments. The Volcker Rule has enacted a de facto ban on proprietary trading by depository institutions, also decreasing the trading rights of proprietary traders at other large financial institutions. ### Amended Regulations Dodd-Frank enhanced existing regulations in the United States, including: * [Securities Act of 1933](https://www.investopedia.com/terms/s/securitiesact1933.asp): Dodd-Frank amended Regulation D to exempt some securities from registration and also revised the definition of an accredited investor, removing the inclusion of a primary residence as part of an investor’s net worth. * [Securities Exchange Act of 1934](https://www.investopedia.com/terms/s/seact1934.asp): Title IX of Dodd-Frank requires the creation of an Investor Advisory Committee (IAC), an Office of the Investor Advocate (OIA), and an ombudsman appointed by the OIA to target conflicts of interest within investment firms and on mutual fund advertisements and issues of accountability, executive compensation, and corporate governance. Title IX includes the establishment of the Securities Exchange Commission (SEC) Office of Credit Ratings and oversight of mortgage-backed securitization. * [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp): The Dodd-Frank Act created new oversight committees and tighter restrictions on consumer protections and disclosure policies. * [Investment Advisers Act of 1940](https://www.investopedia.com/terms/i/investadvact.asp): The Investment Advisers Act of 1940 saw changes to the registration requirements for investment advisors, affecting both independent investment advisors and [hedge funds](https://www.investopedia.com/ask/answers/101415/are-hedge-funds-registered-securities-and-exchange-commission-sec.asp). * [Sarbanes-Oxley Act of 2002](https://www.investopedia.com/terms/s/sarbanesoxleyact.asp): Dodd-Frank added new protections for whistleblowers and financial incentives. ### Future of Dodd-Frank In 2018, President Donald Trump passed the [Economic Growth, Regulatory Relief, and Consumer Protection Act](https://www.investopedia.com/terms/c/crapo-bill.asp). This act eased some of the regulatory burdens created for banks through Dodd-Frank, primarily by increasing the threshold at which banks are subject to greater regulatory documentation obligations. The threshold was increased, from $50 million to $250 million. The Biden administration hopes to reverse these easements on the Dodd-Frank regulations. ### The Dodd-Frank Wall Street Reform and Consumer Protection Act was the most influential and controversial of a raft of measures enacted by former President George W. Bush and former President Barack Obama. The measures were intended to regulate the activities of the financial sector and protect consumers. ## Emergency Economic Stabilization Act In October 2008, a divided Congress passed the [Emergency Economic Stabilization Act](https://www.investopedia.com/terms/e/emergency-economic-stability-act.asp#:~:text=The%20Emergency%20Economic%20Stabilization%20Act%20%28EESA%29%20was%20a%20law%20passed,originally%20proposed%20by%20Henry%20Paulson.), which initially provided the Treasury with approximately $700 billion to purchase "troubled assets," mostly bank shares and [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp).  The budget was subsequently reduced to $475 billion and the [Troubled Asset Relief Program](https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp), as the program was known, ultimately spent $426.4 billion bailing out institutions, including American International Group Inc. ([AIG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aig)), Bank of America ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bac)), Citigroup ([C](https://www.investopedia.com/markets/quote?tvwidgetsymbol=c)), JPMorgan ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=jpm)), and General Motors ([GM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=gm)). The Treasury eventually recovered $441.7 billion from TARP recipients. ### $441.7 billion The Treasury recovered $441.7 billion from the $426.4 billion in TARP funds it invested. ## Federal Reserve The Federal Reserve took extra steps to support the economy and the financial markets during and after the 2008 financial crisis. In addition to implementing monetary policy, primarily the federal funds rate, the Fed also designed special-purpose instruments for lending to various sectors of the market, creating a new standard for the Fed in regular and emergency lending activities. Under the direction of Dodd-Frank, the Federal Reserve is required to carry out regular stress testing on banks in the banking sector, with provisions in the Dodd-Frank Act on Federal Reserve stress testing found in Title XI. The Federal Reserve conducts two types of stress testing annually: Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST). ## How Has the Dodd-Frank Act Affected Smaller Banks? One unexpected outcome of Dodd-Frank regulations was that smaller banks were penalized by having the same burden of regulations imposed as those to which larger banks were subject. Smaller banks were hindered by the additional paperwork and additional staff necessary to comply with the regulations. Subsequently, legislation was passed to relieve community and regional banks from some of these regulations. ## How Are Banks Monitored to Ensure Compliance to the Dodd-Frank Regulations? The Dodd-Frank Act commanded the Federal Reserve to closely oversee large banks, financial institutions, and insurance companies in the United States. Annual [stress tests](https://www.investopedia.com/terms/s/stresstesting.asp) confirm that these companies are ready to handle future financial downturns and crises. Conjectural scenarios evaluate the results that different financial upsets may have on their strength. If it is shown that a company does not have adequate capital in reserve to overcome certain scenarios, the Fed can take various actions to safeguard the bank if a crisis occurs. ## What Rewards Can a Whistleblower Expect Under Sarbanes-Oxley? The bounty program under Sarbanes-Oxley can provide whistleblowers with 10-30% of the proceeds of a litigation settlement that succeeds after they have reported a bank's improper behavior and the period in which an employee may enter a claim against their employer increased from 90 days to 180 days. ## The Bottom Line The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP) helped to quell the financial crisis of 2008. The creation of the CFPB and FSOC helps to monitor financial institutions and protect consumers. Key components addressed by these legislative moves include mortgage standards, investor protections, systematic risk, and bank regulation.

The financial crisis of 2008, often called the subprime mortgage crisis, caused a contraction of liquidity in global financial markets that originated in the United States due to the collapse of the U.S. housing market and threatened the international financial system. Several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations failed and precipitated the Great Recession. In response, Presidents George W. Bush and Barack Obama signed into law several legislative measures to counter the financial crisis, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP). Key Takeaways The financial crisis of 2008 originated in the United States as a result of the collapse of the U.S. housing market.Dodd-Frank and the Emergency Economic Stabilization Act were among the steps taken to respond to the crisis.Dodd-Frank amended many existing rules and created many new stand-alone provisions.The Emergency Economic Stabilization Act provided $475 billion in bailout relief through the Troubled Asset Relief Program (TARP). Dodd-Frank  The most influential measure was the Dodd-Frank Wall Street Reform and Consumer Protection Act, which introduced steps designed to regulate the financial sector's activities and protect consumers. Signed into law in July 2010, Dodd-Frank brought sweeping reforms to the U.S. financial sector. CFPB Dodd-Frank introduced the Consumer Financial Protection Bureau (CFPB), which has become an important agency monitoring and protecting the financial interests of American consumers. FSOC The Financial Stability Oversight Council (FSOC) is addressed in Title I of Dodd-Frank, with its to monitor designated systemically important financial institutions (SIFIs)such as banks, insurance companies, or other financial institutions deemed “too big to fail." The FSOC’s voting members include the heads of departments such as the Department of the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission. The FSOC requires testing and documentation of the business operations of SIFIs. It can also decide to take action for dividing or reorganizing these institutions in such a way that reduces the overall risk to the economy. Volcker Rule One of Dodd-Frank’s provisions, the Volcker Rule, is designed to limit speculative investments. The Volcker Rule has enacted a de facto ban on proprietary trading by depository institutions, also decreasing the trading rights of proprietary traders at other large financial institutions. Amended Regulations Dodd-Frank enhanced existing regulations in the United States, including: Securities Act of 1933: Dodd-Frank amended Regulation D to exempt some securities from registration and also revised the definition of an accredited investor, removing the inclusion of a primary residence as part of an investor’s net worth. Securities Exchange Act of 1934: Title IX of Dodd-Frank requires the creation of an Investor Advisory Committee (IAC), an Office of the Investor Advocate (OIA), and an ombudsman appointed by the OIA to target conflicts of interest within investment firms and on mutual fund advertisements and issues of accountability, executive compensation, and corporate governance. Title IX includes the establishment of the Securities Exchange Commission (SEC) Office of Credit Ratings and oversight of mortgage-backed securitization. Investment Company Act of 1940: The Dodd-Frank Act created new oversight committees and tighter restrictions on consumer protections and disclosure policies. Investment Advisers Act of 1940: The Investment Advisers Act of 1940 saw changes to the registration requirements for investment advisors, affecting both independent investment advisors and hedge funds. Sarbanes-Oxley Act of 2002: Dodd-Frank added new protections for whistleblowers and financial incentives. Future of Dodd-Frank In 2018, President Donald Trump passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. This act eased some of the regulatory burdens created for banks through Dodd-Frank, primarily by increasing the threshold at which banks are subject to greater regulatory documentation obligations. The threshold was increased, from $50 million to $250 million. The Biden administration hopes to reverse these easements on the Dodd-Frank regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act was the most influential and controversial of a raft of measures enacted by former President George W. Bush and former President Barack Obama. The measures were intended to regulate the activities of the financial sector and protect consumers. Emergency Economic Stabilization Act In October 2008, a divided Congress passed the Emergency Economic Stabilization Act, which initially provided the Treasury with approximately $700 billion to purchase "troubled assets," mostly bank shares and mortgage-backed securities.  The budget was subsequently reduced to $475 billion and the Troubled Asset Relief Program, as the program was known, ultimately spent $426.4 billion bailing out institutions, including American International Group Inc. (AIG), Bank of America (BAC), Citigroup (C), JPMorgan (JPM), and General Motors (GM). The Treasury eventually recovered $441.7 billion from TARP recipients. $441.7 billion The Treasury recovered $441.7 billion from the $426.4 billion in TARP funds it invested. Federal Reserve The Federal Reserve took extra steps to support the economy and the financial markets during and after the 2008 financial crisis. In addition to implementing monetary policy, primarily the federal funds rate, the Fed also designed special-purpose instruments for lending to various sectors of the market, creating a new standard for the Fed in regular and emergency lending activities. Under the direction of Dodd-Frank, the Federal Reserve is required to carry out regular stress testing on banks in the banking sector, with provisions in the Dodd-Frank Act on Federal Reserve stress testing found in Title XI. The Federal Reserve conducts two types of stress testing annually: Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act supervisory stress testing (DFAST). How Has the Dodd-Frank Act Affected Smaller Banks? One unexpected outcome of Dodd-Frank regulations was that smaller banks were penalized by having the same burden of regulations imposed as those to which larger banks were subject. Smaller banks were hindered by the additional paperwork and additional staff necessary to comply with the regulations. Subsequently, legislation was passed to relieve community and regional banks from some of these regulations. How Are Banks Monitored to Ensure Compliance to the Dodd-Frank Regulations? The Dodd-Frank Act commanded the Federal Reserve to closely oversee large banks, financial institutions, and insurance companies in the United States. Annual stress tests confirm that these companies are ready to handle future financial downturns and crises. Conjectural scenarios evaluate the results that different financial upsets may have on their strength. If it is shown that a company does not have adequate capital in reserve to overcome certain scenarios, the Fed can take various actions to safeguard the bank if a crisis occurs. What Rewards Can a Whistleblower Expect Under Sarbanes-Oxley? The bounty program under Sarbanes-Oxley can provide whistleblowers with 10-30% of the proceeds of a litigation settlement that succeeds after they have reported a bank's improper behavior and the period in which an employee may enter a claim against their employer increased from 90 days to 180 days. The Bottom Line The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP) helped to quell the financial crisis of 2008. The creation of the CFPB and FSOC helps to monitor financial institutions and protect consumers. Key components addressed by these legislative moves include mortgage standards, investor protections, systematic risk, and bank regulation.

https://www.investopedia.com/cds-vs-stocks-5225343

CDs vs. Stocks: What's the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-cds-vs-stocks-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> CDs vs. Stocks: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Certificates of deposit (CDs) and stocks are pretty much on opposite sides of the investing spectrum. Their levels of risk, their potential returns, and the length of the commitment involved are very different. In brief: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> <li>CDs are a safe and convenient place to stash some cash that you don't expect to need for a few months. The return on your investment is a little better than on a regular bank savings account. The risk is negligible.</li><li>Stocks are best if purchased for the long term. They are bought with the expectation that they will rise in value over time or pay substantial dividends. Their prices go up and down constantly and sometimes dramatically, making them a risky place to park cash if you need your money unexpectedly.</li> </ul> <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"> Many people invest in both, and that's not a bad idea. CDs, because they are low-risk, are a great hedge against the potential for losses in stocks.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-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>CDs are low-risk, low-return financial vehicles that are best suited for short-term savings and risk-averse investors.</li><li>Stocks have higher potential returns and higher potential losses. They are suited to long-term investors who can ride out price fluctuations.</li><li>Individual stocks vary greatly in their level of risk. Generally, the lower the risk, the lower the potential returns.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Certificates of Deposit vs. Stocks" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/gyhUBeU11cnbPON6bTCbwz7XhLg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/gyhUBeU11cnbPON6bTCbwz7XhLg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.png" data-srcset="https://www.investopedia.com/thmb/WjethWVEgQA8-Q2Bup0HY60Zj6s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Certificates of Deposit vs. Stocks" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/gyhUBeU11cnbPON6bTCbwz7XhLg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.png" srcset="https://www.investopedia.com/thmb/WjethWVEgQA8-Q2Bup0HY60Zj6s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.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 / Mira Norian</p></span> </figcaption></figure> <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_11-0"> <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_12-0"> CDs are available at most banks and credit unions as well as through brokerages. Investors interested in buying a CD can easily check the current rates available online and pick the best deal. Most change their rates at least every six months, or more often in times of inflation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> It is worth checking around rather than just opening an account at your bank. The rates can vary widely. In late 2023, a time of relatively high inflation, rates ranged from 0.03% to above 5%. </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"> CD buyers are committing their cash for a period of time, ranging from three months to 10 years. The money can be withdrawn early but there are almost always penalties and fees involved. </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"> CDs Are Insured </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> On the other hand, your principal is insured by the federal government up to a maximum of $250,000 as long as the institution is an FDIC member (if it's a bank) or an NCUA member (for credit unions). The financial institution would have to collapse into bankruptcy for that insurance to kick in. </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"> All of this makes CDs suitable for the conservative investor who wants to avoid risking principal. It also is a good choice for the person who is saving toward a specific financial goal. Someone who is saving for a downpayment on a home or a new car might invest in a CD, or even buy one monthly as they save towards an objective that is a year or two down the road. </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"> On the other hand, investors who are comfortable with a certain amount of risk may find <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a> to be considerably more rewarding. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Read the Fine Print</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokered-cd.asp">Brokered CDs</a>, sold by brokerage firms and independent salespeople, may not offer the same insurance protection as those sold by banks and credit unions. Before buying one, be sure to check.</p></div></div></div> <span class="heading-toc" id="toc-stocks"></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"> Stocks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> A person who is saving money towards a big purchase or any person who is risk-averse probably doesn't want to invest in the stock market. It's a risky business, and one of the risks is that your money won't be there when you need 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"> However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses. An investor in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bluechip.asp#:~:text=A%20blue%20chip%20stock%20refers,reliable%20growth%20and%20dividend%20payments.">blue-chip stocks</a> will probably end up with a far larger balance than an investor in CDs. An investor in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aggressiveinvestmentstrategy.asp">aggressive-growth stocks</a> could end up with a big pile of cash but also could face big losses during downtimes. </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 CD will, at best, give you a return that is close to the rate of inflation. Stocks can soar, multiplying your wealth. Or, they can plummet in value. For that matter, the companies that issue them can go out of business, making their stocks worthless. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> Flexibility </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Stocks are in some ways a more flexible investment than CDs. You can buy and sell stocks with a click when the markets are open. </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"> There's no penalty for selling, such as there is for CDs. There is a tax penalty, however, for selling too soon. The profit on the sale of stock shares owned for less than a year is taxed at your regular earned income tax rate. If the shares are owned for a year or more, the profit is taxed at the capital gains tax rate, which is lower for most taxpayers. </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"> This relative flexibility might be attractive if you are concerned about emergency access to your money. You can pull your money out of stocks at any time, but keep in mind that they may not be worth what you paid for them at that moment. </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-cds-vs-stocks-which-is-better"></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"> CDs vs. Stocks: Which Is Better? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> All investments are a tradeoff between risk and reward. </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"> CDs, like investment-grade bonds, are very low-risk investments. Their returns are modest but you can be reasonably sure you'll get your money back plus the interest you were promised. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The risks in stocks vary widely. There are thousands to choose from, and you can invest in relatively steady, stable companies and feel fairly confident that you'll earn a decent return in time. Or, you can invest in high-flying companies that might crash or might make you rich. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> There's no guarantee in stocks. Even a relatively low-risk portfolio might lose much of its value for weeks or months, and a serious economic slump could harm your portfolio for an even longer period of time. </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"> But over the course of decades, the returns provided by well-diversified stock portfolios should exceed those of CDs.<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_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-would-i-buy-cds-instead-of-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Would I Buy CDs Instead of Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>CDs can be useful for people looking to invest some money for a few months or years without the fear of investment losses. The returns are modest but they're guaranteed (as long as the institution that issues them is an FDIC or NUIC member.)</p><p>In general, well-diversified stock portfolios will offer substantially higher returns over the long term. But with a CD, you set the term: three months, a year, or longer.</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-are-cds-safer-than-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are CDs Safer Than Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>CDs are much safer than stocks.</p><p>When you purchase a CD, the bank or credit union will guarantee your interest rate and the federal government will insure your principal.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="6"></span></p><p>There is no guarantee that any individual stock, or even a diversified portfolio of stocks, will increase in value over time. In a worst-case scenario, a stock can become worthless.</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-can-cds-decrease-in-value"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can CDs Decrease in Value?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A CD cannot decrease in value, and its interest rate is fixed up front. There are, however, two scenarios in which you can lose money investing in a CD:</p><ul><li>If you withdraw your money early, you will face penalties and fees. These can be steep, wiping out your interest and even cutting into your principal.</li><li>In times of high inflation, your money can lose purchasing power. That is, the amount you deposited could be worth less than when you deposited it.</li></ul></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"> CDs are low-risk, relatively low-return investments best suited for people looking for a place to put their money for a short period of time or those who want to avoid any possibility of loss. Stocks are higher-risk investments with potentially higher returns, making them better suited for long-term investors who can ride out price fluctuations. </p></div>

## CDs vs. Stocks: An Overview Certificates of deposit (CDs) and stocks are pretty much on opposite sides of the investing spectrum. Their levels of risk, their potential returns, and the length of the commitment involved are very different. In brief: * CDs are a safe and convenient place to stash some cash that you don't expect to need for a few months. The return on your investment is a little better than on a regular bank savings account. The risk is negligible. * Stocks are best if purchased for the long term. They are bought with the expectation that they will rise in value over time or pay substantial dividends. Their prices go up and down constantly and sometimes dramatically, making them a risky place to park cash if you need your money unexpectedly. Many people invest in both, and that's not a bad idea. CDs, because they are low-risk, are a great hedge against the potential for losses in stocks. ### Key Takeaways * CDs are low-risk, low-return financial vehicles that are best suited for short-term savings and risk-averse investors. * Stocks have higher potential returns and higher potential losses. They are suited to long-term investors who can ride out price fluctuations. * Individual stocks vary greatly in their level of risk. Generally, the lower the risk, the lower the potential returns. ![Certificates of Deposit vs. Stocks]() :max_bytes(150000):strip_icc()/cds-vs-stocks-5225343-final-c6d5cb2e8b444bde85e0773c4a335e16.png) Investopedia / Mira Norian ## Certificates of Deposit (CDs) CDs are available at most banks and credit unions as well as through brokerages. Investors interested in buying a CD can easily check the current rates available online and pick the best deal. Most change their rates at least every six months, or more often in times of inflation. It is worth checking around rather than just opening an account at your bank. The rates can vary widely. In late 2023, a time of relatively high inflation, rates ranged from 0.03% to above 5%. CD buyers are committing their cash for a period of time, ranging from three months to 10 years. The money can be withdrawn early but there are almost always penalties and fees involved. ### CDs Are Insured On the other hand, your principal is insured by the federal government up to a maximum of $250,000 as long as the institution is an FDIC member (if it's a bank) or an NCUA member (for credit unions). The financial institution would have to collapse into bankruptcy for that insurance to kick in. All of this makes CDs suitable for the conservative investor who wants to avoid risking principal. It also is a good choice for the person who is saving toward a specific financial goal. Someone who is saving for a downpayment on a home or a new car might invest in a CD, or even buy one monthly as they save towards an objective that is a year or two down the road. On the other hand, investors who are comfortable with a certain amount of risk may find [stocks](https://www.investopedia.com/terms/s/stock.asp) to be considerably more rewarding. ### Read the Fine Print [Brokered CDs](https://www.investopedia.com/terms/b/brokered-cd.asp), sold by brokerage firms and independent salespeople, may not offer the same insurance protection as those sold by banks and credit unions. Before buying one, be sure to check. ## Stocks A person who is saving money towards a big purchase or any person who is risk-averse probably doesn't want to invest in the stock market. It's a risky business, and one of the risks is that your money won't be there when you need it. However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses. An investor in [blue-chip stocks](https://www.investopedia.com/terms/b/bluechip.asp#:~:text=A%20blue%20chip%20stock%20refers,reliable%20growth%20and%20dividend%20payments.) will probably end up with a far larger balance than an investor in CDs. An investor in [aggressive-growth stocks](https://www.investopedia.com/terms/a/aggressiveinvestmentstrategy.asp) could end up with a big pile of cash but also could face big losses during downtimes. A CD will, at best, give you a return that is close to the rate of inflation. Stocks can soar, multiplying your wealth. Or, they can plummet in value. For that matter, the companies that issue them can go out of business, making their stocks worthless. ### Flexibility Stocks are in some ways a more flexible investment than CDs. You can buy and sell stocks with a click when the markets are open. There's no penalty for selling, such as there is for CDs. There is a tax penalty, however, for selling too soon. The profit on the sale of stock shares owned for less than a year is taxed at your regular earned income tax rate. If the shares are owned for a year or more, the profit is taxed at the capital gains tax rate, which is lower for most taxpayers. This relative flexibility might be attractive if you are concerned about emergency access to your money. You can pull your money out of stocks at any time, but keep in mind that they may not be worth what you paid for them at that moment. ## CDs vs. Stocks: Which Is Better? All investments are a tradeoff between risk and reward. CDs, like investment-grade bonds, are very low-risk investments. Their returns are modest but you can be reasonably sure you'll get your money back plus the interest you were promised. The risks in stocks vary widely. There are thousands to choose from, and you can invest in relatively steady, stable companies and feel fairly confident that you'll earn a decent return in time. Or, you can invest in high-flying companies that might crash or might make you rich. There's no guarantee in stocks. Even a relatively low-risk portfolio might lose much of its value for weeks or months, and a serious economic slump could harm your portfolio for an even longer period of time. But over the course of decades, the returns provided by well-diversified stock portfolios should exceed those of CDs. ## Why Would I Buy CDs Instead of Stocks? CDs can be useful for people looking to invest some money for a few months or years without the fear of investment losses. The returns are modest but they're guaranteed (as long as the institution that issues them is an FDIC or NUIC member.) In general, well-diversified stock portfolios will offer substantially higher returns over the long term. But with a CD, you set the term: three months, a year, or longer. ## Are CDs Safer Than Stocks? CDs are much safer than stocks. When you purchase a CD, the bank or credit union will guarantee your interest rate and the federal government will insure your principal. There is no guarantee that any individual stock, or even a diversified portfolio of stocks, will increase in value over time. In a worst-case scenario, a stock can become worthless. ## Can CDs Decrease in Value? A CD cannot decrease in value, and its interest rate is fixed up front. There are, however, two scenarios in which you can lose money investing in a CD: * If you withdraw your money early, you will face penalties and fees. These can be steep, wiping out your interest and even cutting into your principal. * In times of high inflation, your money can lose purchasing power. That is, the amount you deposited could be worth less than when you deposited it. ## The Bottom Line CDs are low-risk, relatively low-return investments best suited for people looking for a place to put their money for a short period of time or those who want to avoid any possibility of loss. Stocks are higher-risk investments with potentially higher returns, making them better suited for long-term investors who can ride out price fluctuations.

CDs vs. Stocks: An Overview Certificates of deposit (CDs) and stocks are pretty much on opposite sides of the investing spectrum. Their levels of risk, their potential returns, and the length of the commitment involved are very different. In brief: CDs are a safe and convenient place to stash some cash that you don't expect to need for a few months. The return on your investment is a little better than on a regular bank savings account. The risk is negligible.Stocks are best if purchased for the long term. They are bought with the expectation that they will rise in value over time or pay substantial dividends. Their prices go up and down constantly and sometimes dramatically, making them a risky place to park cash if you need your money unexpectedly. Many people invest in both, and that's not a bad idea. CDs, because they are low-risk, are a great hedge against the potential for losses in stocks. Key Takeaways CDs are low-risk, low-return financial vehicles that are best suited for short-term savings and risk-averse investors.Stocks have higher potential returns and higher potential losses. They are suited to long-term investors who can ride out price fluctuations.Individual stocks vary greatly in their level of risk. Generally, the lower the risk, the lower the potential returns. Investopedia / Mira Norian Certificates of Deposit (CDs) CDs are available at most banks and credit unions as well as through brokerages. Investors interested in buying a CD can easily check the current rates available online and pick the best deal. Most change their rates at least every six months, or more often in times of inflation. It is worth checking around rather than just opening an account at your bank. The rates can vary widely. In late 2023, a time of relatively high inflation, rates ranged from 0.03% to above 5%. CD buyers are committing their cash for a period of time, ranging from three months to 10 years. The money can be withdrawn early but there are almost always penalties and fees involved. CDs Are Insured On the other hand, your principal is insured by the federal government up to a maximum of $250,000 as long as the institution is an FDIC member (if it's a bank) or an NCUA member (for credit unions). The financial institution would have to collapse into bankruptcy for that insurance to kick in. All of this makes CDs suitable for the conservative investor who wants to avoid risking principal. It also is a good choice for the person who is saving toward a specific financial goal. Someone who is saving for a downpayment on a home or a new car might invest in a CD, or even buy one monthly as they save towards an objective that is a year or two down the road. On the other hand, investors who are comfortable with a certain amount of risk may find stocks to be considerably more rewarding. Read the Fine Print Brokered CDs, sold by brokerage firms and independent salespeople, may not offer the same insurance protection as those sold by banks and credit unions. Before buying one, be sure to check. Stocks A person who is saving money towards a big purchase or any person who is risk-averse probably doesn't want to invest in the stock market. It's a risky business, and one of the risks is that your money won't be there when you need it. However, stocks are much better than CDs for long-term investors who have the time to ride out short-term losses. An investor in blue-chip stocks will probably end up with a far larger balance than an investor in CDs. An investor in aggressive-growth stocks could end up with a big pile of cash but also could face big losses during downtimes. A CD will, at best, give you a return that is close to the rate of inflation. Stocks can soar, multiplying your wealth. Or, they can plummet in value. For that matter, the companies that issue them can go out of business, making their stocks worthless. Flexibility Stocks are in some ways a more flexible investment than CDs. You can buy and sell stocks with a click when the markets are open. There's no penalty for selling, such as there is for CDs. There is a tax penalty, however, for selling too soon. The profit on the sale of stock shares owned for less than a year is taxed at your regular earned income tax rate. If the shares are owned for a year or more, the profit is taxed at the capital gains tax rate, which is lower for most taxpayers. This relative flexibility might be attractive if you are concerned about emergency access to your money. You can pull your money out of stocks at any time, but keep in mind that they may not be worth what you paid for them at that moment. CDs vs. Stocks: Which Is Better? All investments are a tradeoff between risk and reward. CDs, like investment-grade bonds, are very low-risk investments. Their returns are modest but you can be reasonably sure you'll get your money back plus the interest you were promised. The risks in stocks vary widely. There are thousands to choose from, and you can invest in relatively steady, stable companies and feel fairly confident that you'll earn a decent return in time. Or, you can invest in high-flying companies that might crash or might make you rich. There's no guarantee in stocks. Even a relatively low-risk portfolio might lose much of its value for weeks or months, and a serious economic slump could harm your portfolio for an even longer period of time. But over the course of decades, the returns provided by well-diversified stock portfolios should exceed those of CDs. Why Would I Buy CDs Instead of Stocks? CDs can be useful for people looking to invest some money for a few months or years without the fear of investment losses. The returns are modest but they're guaranteed (as long as the institution that issues them is an FDIC or NUIC member.)In general, well-diversified stock portfolios will offer substantially higher returns over the long term. But with a CD, you set the term: three months, a year, or longer. Are CDs Safer Than Stocks? CDs are much safer than stocks.When you purchase a CD, the bank or credit union will guarantee your interest rate and the federal government will insure your principal.There is no guarantee that any individual stock, or even a diversified portfolio of stocks, will increase in value over time. In a worst-case scenario, a stock can become worthless. Can CDs Decrease in Value? A CD cannot decrease in value, and its interest rate is fixed up front. There are, however, two scenarios in which you can lose money investing in a CD:If you withdraw your money early, you will face penalties and fees. These can be steep, wiping out your interest and even cutting into your principal.In times of high inflation, your money can lose purchasing power. That is, the amount you deposited could be worth less than when you deposited it. The Bottom Line CDs are low-risk, relatively low-return investments best suited for people looking for a place to put their money for a short period of time or those who want to avoid any possibility of loss. Stocks are higher-risk investments with potentially higher returns, making them better suited for long-term investors who can ride out price fluctuations.

https://www.investopedia.com/stock-analysis/cotd/answ20090105.aspx

Bullish Flag Formation Signaling a Move Higher

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-bullish-flag"></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 Bullish Flag? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Bullish <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flag.asp">flag</a> formations are found in stocks with strong uptrends and are considered good <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/continuationpattern.asp">continuation patterns</a>. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consolidation.asp">consolidation</a>. The flag can be a horizontal <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rectangle.asp">rectangle</a> but is also often angled down away from the prevailing trend. Another variant is called a bullish <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pennant.asp">pennant</a>, in which the consolidation takes the form of a <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/symmetricaltriangle.asp">symmetrical triangle</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The shape of the flag is not as important as the underlying psychology behind the pattern. Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares they can get. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breakout.asp">breakout</a> from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants. Bull flags typically begin to surface in conjunction with a new market rally. </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 flag pattern, in technical analysis, is a price chart characterized by a sharp countertrend (the flag) succeeding a short-lived trend (the flag pole).</li><li>A bullish flag appears like an upright flag on a price chart, with a rectangular price pattern marking the flag itself.</li><li>The tighter the flag, the better the signal is said to be.</li></ul><p><br/></p></div></div></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-note" 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 with-title" id="mntl-sc-block-callout-heading_2-0"> Flag patterns have five main characteristics:</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><ol><li>The preceding trend</li><li>The consolidation channel</li><li>The volume pattern</li><li>A breakout</li><li>A confirmation where price moves in the same direction as the breakout</li></ol></div></div></div> <span class="heading-toc" id="toc-examples-of-bullish-flags"></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"> Examples of Bullish Flags </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Let's look at some examples of bullish flags appearing on price charts in order to illustrate the concept and how they appear visually. </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"> Bullish Flag Emergence </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The price chart from Answers Corp. below is a nice example of a bullish flag that may be breaking out. While the flag is not a perfect rectangle, what is more important is the basic premise behind the overall pattern. Note the strong rise in the stock as it forms the flag pole, and the tight consolidation that follows. Bulls are not waiting for better prices and are buying every chance they get. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. This would yield a target price in ANSW of around $9.50. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_18-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:53.9%;"> <img alt="ANSW" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/sOkI4iDIHjG2aXw1x1YWIpIIzXQ=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/vcbOOyYzt3MvOErE2Am-jVAwf0E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg" data-srcset="https://www.investopedia.com/thmb/MlPjTeFYXPgsQ6YMWBjI9vxnKGQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg 750w" data-tracking-container="true" height="345" id="mntl-sc-block-image_1-0" width="640"/> <noscript> <img alt="ANSW" class="img--noscript universal-image__image" height="345" sizes="750px" src="https://www.investopedia.com/thmb/vcbOOyYzt3MvOErE2Am-jVAwf0E=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg" srcset="https://www.investopedia.com/thmb/MlPjTeFYXPgsQ6YMWBjI9vxnKGQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg 750w" width="640"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">Source: StockCharts.com.</span> </figcaption></figure> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Rectangular Bull Flag </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The price chart below for America Service Group Inc<strong>.</strong> is an example of a rectangular bull flag. Also, notice the long lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shadow.asp">tails</a> on the candles showing clear buying every time it dips under $10. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volume.asp">Volume</a> has also started to pick up over the past two sessions. A common characteristic of bull flags is the typical volume pattern. </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"> Usually, there is a surge in volume as the stock builds the flag pole. Volume then tapers off precipitously as the stock price consolidates. The breakout from the bull flag often sees another increase in volume, although volume may not increase dramatically. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_24-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:55.0%;"> <img alt="ASGR" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/LYLUO-40s6N_67Gexe3ymuFkgmA=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/gGmAsgrJS3zOBF62N7UkRHsz3lE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg" data-srcset="https://www.investopedia.com/thmb/wnP_5Z8v9vOBTS8hj6T5ntILsaA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg 750w" data-tracking-container="true" height="352" id="mntl-sc-block-image_2-0" width="640"/> <noscript> <img alt="ASGR" class="img--noscript universal-image__image" height="352" sizes="750px" src="https://www.investopedia.com/thmb/gGmAsgrJS3zOBF62N7UkRHsz3lE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg" srcset="https://www.investopedia.com/thmb/wnP_5Z8v9vOBTS8hj6T5ntILsaA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg 750w" width="640"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-text">Source: StockCharts.com.</span> </figcaption></figure> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-subheading__text"> Bull Flag Breakout </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Cantel Medical Corp.'s price chart is an example that appears to have broken out from a bull flag pattern. The top of the flag was clearly defined near the $15 area and CMN was able to close above that level. While CMN could enter another parabolic rise, often a stock will come back to test the breakout area a few sessions later, offering a second entry. </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 are many options for protecting this type of trade with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop loss</a>. Longer-term traders often set their stops below the entire flag, and other traders employ tighter stops such as a two-bar stop. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_30-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:55.1%;"> <img alt="CMN" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/W6jUCIwKCTQQuZ9I9M_8LWURjpQ=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/nRUBggpUjW_3BU3RFv7qYoOab8Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg" data-srcset="https://www.investopedia.com/thmb/rxr1VP-txxjcSk3nJr01-mo-t8E=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg 750w" data-tracking-container="true" height="353" id="mntl-sc-block-image_3-0" width="640"/> <noscript> <img alt="CMN" class="img--noscript universal-image__image" height="353" sizes="750px" src="https://www.investopedia.com/thmb/nRUBggpUjW_3BU3RFv7qYoOab8Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg" srcset="https://www.investopedia.com/thmb/rxr1VP-txxjcSk3nJr01-mo-t8E=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg 750w" width="640"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-text">Source: StockCharts.com.</span> </figcaption></figure> <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"> Tight Bull Flag </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> CF International Inc.'s price chart is a great example of a really tight flag. Often, the tighter flags perform best, and they also offer easier stop-loss levels. Bull flags usually resolve one way or the other in less than three weeks. Over longer periods, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/08/rectangle-formation.asp">pattern becomes a rectangle</a> or triangle. </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"> As shown in the figure below, ICFI is moving above the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/resistance.asp">resistance</a> area near $24.50 after consolidating for more than a week. This follows the typical pattern and suggests that this stock could be on its way higher. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_36-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:58.4%;"> <img alt="ICFI" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/2TH5F6SdMYyAFhvvqy2MFJC48wM=/640x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ZeTbbYUMLCdz8TiBSMGV216jPbw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg" data-srcset="https://www.investopedia.com/thmb/78uO3Ls_LGKz-BChnqFASL15mWs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg 750w" data-tracking-container="true" height="374" id="mntl-sc-block-image_4-0" width="640"/> <noscript> <img alt="ICFI" class="img--noscript universal-image__image" height="374" sizes="750px" src="https://www.investopedia.com/thmb/ZeTbbYUMLCdz8TiBSMGV216jPbw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg" srcset="https://www.investopedia.com/thmb/78uO3Ls_LGKz-BChnqFASL15mWs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg 750w" width="640"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_4-0"> <span class="figure-article-caption-text">Source: StockCharts.com.</span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_37-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_38-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Unlike a bullish flag, in a bearish flag pattern, the volume does not always decline during the consolidation. The reason for this is that bearish, downward trending price moves are usually driven by investor fear and anxiety over falling prices. The further prices fall, the greater the urgency remaining investors feel to take action.</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_39-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> While no one knows whether the market rally will continue or reverse, traders should follow price action and let the probabilities take care of the rest. While all chart patterns are susceptible to false signals and surprise moves, bullish flags are among the most reliable and effective patterns. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-frequently-asked-questions"></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"> Frequently Asked Questions </span> </h2> <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"> What is a flag pattern? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> A flag is a price pattern used in technical analysis that, over shorter time frames, moves counter to the prevailing price trend observed across a longer period on a price chart. It is named because of the way it reminds one of a flag atop a flagpole. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> What does a bull flag look like? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The bull flag has a sharp rise (the pole) followed by a rectangular price chart denoting price consolidation (the flag). Volume usually increases in the pole and then declines in the consolidation. </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"> How reliable is a bull flag pattern? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Flag patterns are considered to be among the most reliable continuation patterns that traders use because they generate a setup for entering an existing trend that is ready to continue. Flag formations are all quite similar when they appear and tend to also show up in similar situations in an existing trend. </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"> What happens after a bull flag? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> If a bull flag is accurate, it will signal the continuation of an existing bull trend and the price will rise once the pattern completes. </p></div>

## What Is a Bullish Flag? Bullish [flag](https://www.investopedia.com/terms/f/flag.asp) formations are found in stocks with strong uptrends and are considered good [continuation patterns](https://www.investopedia.com/terms/c/continuationpattern.asp). They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of [consolidation](https://www.investopedia.com/terms/c/consolidation.asp). The flag can be a horizontal [rectangle](https://www.investopedia.com/terms/r/rectangle.asp) but is also often angled down away from the prevailing trend. Another variant is called a bullish [pennant](https://www.investopedia.com/terms/p/pennant.asp), in which the consolidation takes the form of a [symmetrical triangle](https://www.investopedia.com/terms/s/symmetricaltriangle.asp). The shape of the flag is not as important as the underlying psychology behind the pattern. Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares they can get. The [breakout](https://www.investopedia.com/terms/b/breakout.asp) from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants. Bull flags typically begin to surface in conjunction with a new market rally. ### Key Takeaways * A flag pattern, in technical analysis, is a price chart characterized by a sharp countertrend (the flag) succeeding a short-lived trend (the flag pole). * A bullish flag appears like an upright flag on a price chart, with a rectangular price pattern marking the flag itself. * The tighter the flag, the better the signal is said to be. ### Flag patterns have five main characteristics: 1. The preceding trend 2. The consolidation channel 3. The volume pattern 4. A breakout 5. A confirmation where price moves in the same direction as the breakout ## Examples of Bullish Flags Let's look at some examples of bullish flags appearing on price charts in order to illustrate the concept and how they appear visually. ### Bullish Flag Emergence The price chart from Answers Corp. below is a nice example of a bullish flag that may be breaking out. While the flag is not a perfect rectangle, what is more important is the basic premise behind the overall pattern. Note the strong rise in the stock as it forms the flag pole, and the tight consolidation that follows. Bulls are not waiting for better prices and are buying every chance they get. The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. This would yield a target price in ANSW of around $9.50. ![ANSW]() :max_bytes(150000):strip_icc()/Clipboard01-5cebddd87c544f8eaa0b7b9febc0e8e6.jpg) Source: StockCharts.com. ### Rectangular Bull Flag The price chart below for America Service Group Inc**.** is an example of a rectangular bull flag. Also, notice the long lower [tails](https://www.investopedia.com/terms/s/shadow.asp) on the candles showing clear buying every time it dips under $10. [Volume](https://www.investopedia.com/terms/v/volume.asp) has also started to pick up over the past two sessions. A common characteristic of bull flags is the typical volume pattern. Usually, there is a surge in volume as the stock builds the flag pole. Volume then tapers off precipitously as the stock price consolidates. The breakout from the bull flag often sees another increase in volume, although volume may not increase dramatically. ![ASGR]() :max_bytes(150000):strip_icc()/Clipboard01-a46e5a7d83b34cf29a56ee9b4f10d0ad.jpg) Source: StockCharts.com. ### Bull Flag Breakout Cantel Medical Corp.'s price chart is an example that appears to have broken out from a bull flag pattern. The top of the flag was clearly defined near the $15 area and CMN was able to close above that level. While CMN could enter another parabolic rise, often a stock will come back to test the breakout area a few sessions later, offering a second entry. There are many options for protecting this type of trade with a [stop loss](https://www.investopedia.com/terms/s/stop-lossorder.asp). Longer-term traders often set their stops below the entire flag, and other traders employ tighter stops such as a two-bar stop. ![CMN]() :max_bytes(150000):strip_icc()/Clipboard02-b44bbb784a17494eb286aa590843d493.jpg) Source: StockCharts.com. ### Tight Bull Flag CF International Inc.'s price chart is a great example of a really tight flag. Often, the tighter flags perform best, and they also offer easier stop-loss levels. Bull flags usually resolve one way or the other in less than three weeks. Over longer periods, the [pattern becomes a rectangle](https://www.investopedia.com/articles/trading/08/rectangle-formation.asp) or triangle. As shown in the figure below, ICFI is moving above the [resistance](https://www.investopedia.com/terms/r/resistance.asp) area near $24.50 after consolidating for more than a week. This follows the typical pattern and suggests that this stock could be on its way higher. ![ICFI]() :max_bytes(150000):strip_icc()/Clipboard04-04f8217269aa464ca5694333cb77d443.jpg) Source: StockCharts.com. ### Unlike a bullish flag, in a bearish flag pattern, the volume does not always decline during the consolidation. The reason for this is that bearish, downward trending price moves are usually driven by investor fear and anxiety over falling prices. The further prices fall, the greater the urgency remaining investors feel to take action. ## The Bottom Line While no one knows whether the market rally will continue or reverse, traders should follow price action and let the probabilities take care of the rest. While all chart patterns are susceptible to false signals and surprise moves, bullish flags are among the most reliable and effective patterns. ## Frequently Asked Questions ### What is a flag pattern? A flag is a price pattern used in technical analysis that, over shorter time frames, moves counter to the prevailing price trend observed across a longer period on a price chart. It is named because of the way it reminds one of a flag atop a flagpole. ### What does a bull flag look like? The bull flag has a sharp rise (the pole) followed by a rectangular price chart denoting price consolidation (the flag). Volume usually increases in the pole and then declines in the consolidation. ### How reliable is a bull flag pattern? Flag patterns are considered to be among the most reliable continuation patterns that traders use because they generate a setup for entering an existing trend that is ready to continue. Flag formations are all quite similar when they appear and tend to also show up in similar situations in an existing trend. ### What happens after a bull flag? If a bull flag is accurate, it will signal the continuation of an existing bull trend and the price will rise once the pattern completes.

What Is a Bullish Flag? Bullish flag formations are found in stocks with strong uptrends and are considered good continuation patterns. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of consolidation. The flag can be a horizontal rectangle but is also often angled down away from the prevailing trend. Another variant is called a bullish pennant, in which the consolidation takes the form of a symmetrical triangle. The shape of the flag is not as important as the underlying psychology behind the pattern. Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares they can get. The breakout from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants. Bull flags typically begin to surface in conjunction with a new market rally. Key Takeaways A flag pattern, in technical analysis, is a price chart characterized by a sharp countertrend (the flag) succeeding a short-lived trend (the flag pole).A bullish flag appears like an upright flag on a price chart, with a rectangular price pattern marking the flag itself.The tighter the flag, the better the signal is said to be. Flag patterns have five main characteristics: The preceding trendThe consolidation channelThe volume patternA breakoutA confirmation where price moves in the same direction as the breakout Examples of Bullish Flags Let's look at some examples of bullish flags appearing on price charts in order to illustrate the concept and how they appear visually. Bullish Flag Emergence The price chart from Answers Corp. below is a nice example of a bullish flag that may be breaking out. While the flag is not a perfect rectangle, what is more important is the basic premise behind the overall pattern. Note the strong rise in the stock as it forms the flag pole, and the tight consolidation that follows. Bulls are not waiting for better prices and are buying every chance they get. The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. This would yield a target price in ANSW of around $9.50. Source: StockCharts.com. Rectangular Bull Flag The price chart below for America Service Group Inc. is an example of a rectangular bull flag. Also, notice the long lower tails on the candles showing clear buying every time it dips under $10. Volume has also started to pick up over the past two sessions. A common characteristic of bull flags is the typical volume pattern. Usually, there is a surge in volume as the stock builds the flag pole. Volume then tapers off precipitously as the stock price consolidates. The breakout from the bull flag often sees another increase in volume, although volume may not increase dramatically. Source: StockCharts.com. Bull Flag Breakout Cantel Medical Corp.'s price chart is an example that appears to have broken out from a bull flag pattern. The top of the flag was clearly defined near the $15 area and CMN was able to close above that level. While CMN could enter another parabolic rise, often a stock will come back to test the breakout area a few sessions later, offering a second entry. There are many options for protecting this type of trade with a stop loss. Longer-term traders often set their stops below the entire flag, and other traders employ tighter stops such as a two-bar stop. Source: StockCharts.com. Tight Bull Flag CF International Inc.'s price chart is a great example of a really tight flag. Often, the tighter flags perform best, and they also offer easier stop-loss levels. Bull flags usually resolve one way or the other in less than three weeks. Over longer periods, the pattern becomes a rectangle or triangle. As shown in the figure below, ICFI is moving above the resistance area near $24.50 after consolidating for more than a week. This follows the typical pattern and suggests that this stock could be on its way higher. Source: StockCharts.com. Unlike a bullish flag, in a bearish flag pattern, the volume does not always decline during the consolidation. The reason for this is that bearish, downward trending price moves are usually driven by investor fear and anxiety over falling prices. The further prices fall, the greater the urgency remaining investors feel to take action. The Bottom Line While no one knows whether the market rally will continue or reverse, traders should follow price action and let the probabilities take care of the rest. While all chart patterns are susceptible to false signals and surprise moves, bullish flags are among the most reliable and effective patterns. Frequently Asked Questions What is a flag pattern? A flag is a price pattern used in technical analysis that, over shorter time frames, moves counter to the prevailing price trend observed across a longer period on a price chart. It is named because of the way it reminds one of a flag atop a flagpole. What does a bull flag look like? The bull flag has a sharp rise (the pole) followed by a rectangular price chart denoting price consolidation (the flag). Volume usually increases in the pole and then declines in the consolidation. How reliable is a bull flag pattern? Flag patterns are considered to be among the most reliable continuation patterns that traders use because they generate a setup for entering an existing trend that is ready to continue. Flag formations are all quite similar when they appear and tend to also show up in similar situations in an existing trend. What happens after a bull flag? If a bull flag is accurate, it will signal the continuation of an existing bull trend and the price will rise once the pattern completes.

https://www.investopedia.com/markets-drop-as-debt-ceiling-talks-put-on-hold-7500667

Markets Fall as Debt Ceiling Talks Pause

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>U.S. equities dropped on Friday, May 19, 2023 as debt ceiling talks were put on pause.</li><li>Shares of Foot Locker plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts.</li><li>The Dow, S&amp;P 500, and Nasdaq posted weekly gains, despite today's losses.</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"> U.S. equities ended the week in the red after Republicans involved in talks to raise the government's debt ceiling called for a pause in the negotiations, charging the White House with being “unreasonable.” </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"> That put a damper on optimism a deal would be reached soon, which had helped fuel market gains this week. Easing concerns, however, were comments from Fed Chair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.thespruceeats.com/how-to-make-marshmallow-flowers-521057" rel="nofollow">Jerome Powell</a>, who suggested policymakers won’t have to raise interest rates as high as anticipated to get inflation under control. <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"> The Dow, S&amp;P 500, and Nasdaq posted weekly gains, despite Friday's losses. The Dow added 0.4%, the S&amp;P 500 picked up 1.6%, and the Nasdaq jumped 3% for the week.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Shares of Foot Locker (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FL">FL</a>) plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts, and slashed its outlook. That caused a ripple effect in the sector, sending shares of rivals V.F. Corporation (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=VFC">VFC</a>), Nike (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NKE">NKE</a>), and Under Armour (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=UA">UA</a>) sinking as well. <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"> 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>) shares slumped on an analyst downgrade. Shares of Digital Realty Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DLR">DLR</a>) tumbled after Citigroup cut its price target. Shares of Zions Bancorporation (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZION">ZION</a>), KeyCorp (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=KEY">KEY</a>), and other regional banks fell. </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"> Catalent (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CTLT">CTLT</a>) shares soared as the contract drug maker made positive comments about its business. Shares of oil and gas companies advanced, with Pioneer Natural Resources (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PXD">PXD</a>), EOG Resources (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=EOG">EOG</a>), APA Corporation (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=APA">APA</a>), and Devon Energy Corporation (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DVN">DVN</a>) adding 2%. </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"> 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>) shares rose as the EV maker reduced prices on some of its Model 3 cars in the U.S. Shares of DXC Technology (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DXC">DXC</a>) gained following release of the data processing services firm’s financial report.  </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"> Oil futures were little changed. Prices for gold and other precious metals gained. The yield on the 10-year Treasury note was up. The U.S. dollar slipped versus the euro, pound, and yen. Most major cryptocurrencies traded higher. </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-square figure-high-res" id="mntl-sc-block_19-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:92.2%;"> <img alt="Biggest gainers/losers May 19 2023" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/UByEM83q8hcklap-CU9wPZtgbxU=/1240x0/filters:no_upscale():max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/5tv4cTWVYJKBlujy-2bpB0nPm8Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png" data-srcset="https://www.investopedia.com/thmb/Rg1NGLZTRr_ftEOpX1m6-8vum5c=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png 750w" data-tracking-container="true" height="1144" id="mntl-sc-block-image_1-0" width="1240"/> <noscript> <img alt="Biggest gainers/losers May 19 2023" class="img--noscript universal-image__image" height="1144" sizes="750px" src="https://www.investopedia.com/thmb/5tv4cTWVYJKBlujy-2bpB0nPm8Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png" srcset="https://www.investopedia.com/thmb/Rg1NGLZTRr_ftEOpX1m6-8vum5c=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png 750w" width="1240"/> </noscript> </div> </div> </figure> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

### Key Takeaways * U.S. equities dropped on Friday, May 19, 2023 as debt ceiling talks were put on pause. * Shares of Foot Locker plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts. * The Dow, S&P 500, and Nasdaq posted weekly gains, despite today's losses. U.S. equities ended the week in the red after Republicans involved in talks to raise the government's debt ceiling called for a pause in the negotiations, charging the White House with being “unreasonable.” That put a damper on optimism a deal would be reached soon, which had helped fuel market gains this week. Easing concerns, however, were comments from Fed Chair [Jerome Powell](https://www.thespruceeats.com/how-to-make-marshmallow-flowers-521057), who suggested policymakers won’t have to raise interest rates as high as anticipated to get inflation under control.  The Dow, S&P 500, and Nasdaq posted weekly gains, despite Friday's losses. The Dow added 0.4%, the S&P 500 picked up 1.6%, and the Nasdaq jumped 3% for the week. Shares of Foot Locker ([FL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FL)) plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts, and slashed its outlook. That caused a ripple effect in the sector, sending shares of rivals V.F. Corporation ([VFC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=VFC)), Nike ([NKE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NKE)), and Under Armour ([UA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=UA)) sinking as well.  Walt Disney ([DIS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DIS)) shares slumped on an analyst downgrade. Shares of Digital Realty Trust ([DLR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DLR)) tumbled after Citigroup cut its price target. Shares of Zions Bancorporation ([ZION](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZION)), KeyCorp ([KEY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=KEY)), and other regional banks fell. Catalent ([CTLT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CTLT)) shares soared as the contract drug maker made positive comments about its business. Shares of oil and gas companies advanced, with Pioneer Natural Resources ([PXD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PXD)), EOG Resources ([EOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=EOG)), APA Corporation ([APA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=APA)), and Devon Energy Corporation ([DVN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DVN)) adding 2%. Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) shares rose as the EV maker reduced prices on some of its Model 3 cars in the U.S. Shares of DXC Technology ([DXC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DXC)) gained following release of the data processing services firm’s financial report.  Oil futures were little changed. Prices for gold and other precious metals gained. The yield on the 10-year Treasury note was up. The U.S. dollar slipped versus the euro, pound, and yen. Most major cryptocurrencies traded higher. ![Biggest gainers/losers May 19 2023]() :max_bytes(150000):strip_icc()/k53KU-s-p-500-biggest-gains-and-losses2-f7f8d70ca65d4034bcf2d9162aac68a0.png) Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways U.S. equities dropped on Friday, May 19, 2023 as debt ceiling talks were put on pause.Shares of Foot Locker plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts.The Dow, S&P 500, and Nasdaq posted weekly gains, despite today's losses. U.S. equities ended the week in the red after Republicans involved in talks to raise the government's debt ceiling called for a pause in the negotiations, charging the White House with being “unreasonable.” That put a damper on optimism a deal would be reached soon, which had helped fuel market gains this week. Easing concerns, however, were comments from Fed Chair Jerome Powell, who suggested policymakers won’t have to raise interest rates as high as anticipated to get inflation under control.  The Dow, S&P 500, and Nasdaq posted weekly gains, despite Friday's losses. The Dow added 0.4%, the S&P 500 picked up 1.6%, and the Nasdaq jumped 3% for the week. Shares of Foot Locker (FL) plummeted as the shoe retailer reported profit and sales that missed analysts’ forecasts, and slashed its outlook. That caused a ripple effect in the sector, sending shares of rivals V.F. Corporation (VFC), Nike (NKE), and Under Armour (UA) sinking as well.  Walt Disney (DIS) shares slumped on an analyst downgrade. Shares of Digital Realty Trust (DLR) tumbled after Citigroup cut its price target. Shares of Zions Bancorporation (ZION), KeyCorp (KEY), and other regional banks fell. Catalent (CTLT) shares soared as the contract drug maker made positive comments about its business. Shares of oil and gas companies advanced, with Pioneer Natural Resources (PXD), EOG Resources (EOG), APA Corporation (APA), and Devon Energy Corporation (DVN) adding 2%. Tesla (TSLA) shares rose as the EV maker reduced prices on some of its Model 3 cars in the U.S. Shares of DXC Technology (DXC) gained following release of the data processing services firm’s financial report.  Oil futures were little changed. Prices for gold and other precious metals gained. The yield on the 10-year Treasury note was up. The U.S. dollar slipped versus the euro, pound, and yen. Most major cryptocurrencies traded higher. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/is-having-a-smartphone-a-requirement-in-2021-5190186

Is Having a Smartphone a Requirement in 2024?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-is-a-smartphone-a-necessity-in-2024"></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"> Is a Smartphone a Necessity in 2024? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> There are several strong arguments to be made that a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smartphone.asp">smartphone</a> is required, though affording one may not be realistic for everyone. </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"> Smartphone ownership has grown tremendously over the past decade. According to the Pew Research Center, the number of Americans owning a smartphone rose from 35% in 2011 to 90% by 2023.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>As of September 2023, an estimated 90% of Americans use a smartphone, according to Pew Research.<span class="ql-inline-citation" data-cite="2"></span></li><li>Smartphones can be necessary for a variety of reasons, ranging from online security to gaining entry to beaches and other recreational areas to riding public transportation.</li><li>Owning a smartphone may be challenging for lower-income households, though there are programs that can provide financial assistance.</li><li>As more people live digitally, it stands to reason that smartphones will only become more important in the future.</li></ul></div></div></div> <span class="heading-toc" id="toc-smartphone-ownership-and-use"></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"> Smartphone Ownership and Use </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Men and women tend to own smartphones in equal numbers, though Americans under age 65 are more likely to have one. Ninety-seven percent of young adults ages 18 to 29 own a smartphone vs. 76% of adults ages 65 or older. Smartphone users also tend to live in urban and suburban areas (rather than rural), have a college degree, and make $30,000 a year or more.<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"> So what exactly are people using their smartphones for? Some of the most common uses include:<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_12-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <li>Checking email</li><li>Taking photos</li><li>Surfing the internet</li><li>Navigation</li><li>Social media</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"> Aside from that, people can also use smartphones to pay bills, check bank account balances, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">manage their budgets</a>, send money to friends and family, and shop online at their favorite stores. The typical person checks their phone 144 times a day, spending four hours and 25 minutes a day on their device, and 56.9% of Americans consider themselves to be addicted to their phones.<span class="ql-inline-citation" data-cite="21"></span> Still, does that mean they’re necessary? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">15%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The percentage of Americans who rely on their smartphone as their only source of internet access at home, according to the Pew Research Center.<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_19-0"> It’s easy to say that smartphones are a luxury rather than a necessity. After all, people managed to live without them for centuries. Nevertheless, that ignores a number of changes that have taken place in how people work and live. </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-smartphones-in-the-workplace"></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"> Smartphones in the Workplace </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The increasingly digital nature of the workplace presents the first example of why smartphones should be considered a requirement rather than an option. As more companies use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cloud-computing.asp">cloud technology</a> to store information and online platforms to keep workers connected, it presents a need for enhanced security protections. Innovations such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp">two-factor authentication (2FA)</a>, also known as multifactor authentication (MFA), make that possible. MFA allows employees, including remote workers, to securely access digital platforms by entering a code—and a key requirement for using it is a smartphone. </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"> Employees who are interested in remote work and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/independent-contractor.asp">independent contractors</a> who work from home will likely need smartphones. Security aside, smartphones can also be vital for staying connected with work through messaging apps or tools such as Zoom. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_26-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_27-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If your employer requires you to have a smartphone for work that you pay for, ask whether any of those expenses are reimbursable.</p></div></div></div> <span class="heading-toc" id="toc-smartphones-for-recreation-and-travel"></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"> Smartphones for Recreation and Travel </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Smartphones could also be considered a requirement if you travel or engage in recreational activities. For example, the state of New Jersey issued beach access badges through the Viply app. Until the app shut down in late 2023, this allowed allows travelers and tourists to bypass otherwise-long wait lines to get seasonal, daily, or weekly beach passes.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Disney World visitors can download an app that allows them to reserve and pay for contactless dining, navigate the park, and access MagicBand features. The app also features direct-to-room services when staying at Disney Resort Hotels.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Aside from those types of apps, other apps can make travel easier. For example, if you’re catching a flight, your airline may give you the option to download a mobile boarding pass so you can skip the check-in lines. More chain hotels are also offering mobile apps that let you check in and out via your smartphone instead of at the front desk. </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 New York City Metropolitan Transport Authority (MTA) plans to replace fare cards for subways and buses with the OMNY payment system by 2024. Using it will require either a contactless credit, debit, or prepaid card or a smartphone or smartwatch equipped with a digital wallet. If you don’t have one or the other, you won’t be able to ride public transportation in the Big Apple.<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_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 with-title" id="mntl-sc-block-callout-heading_4-0">2020</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The year Warren Buffett finally switched from using a flip phone to an iPhone.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div> <span class="heading-toc" id="toc-smartphones-for-healthcare"></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"> Smartphones for Healthcare </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Healthcare is another area where smartphones are becoming increasingly important. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/telehealth-5115239">Telehealth</a> apps, for instance, allow people to chat with a physician live without leaving home. These app types could be vital for someone who has ongoing health issues but can’t always visit a doctor in person. You can also use a laptop or desktop for telehealth, of course. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-affording-a-smartphone"></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"> Affording a Smartphone </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Although you could reasonably say that a smartphone is a necessity for many people, affording them isn’t always easy. Smartphones can bring with them a number of costs, including: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <li>The cost of purchasing the phone itself</li><li>Accessories, such as Bluetooth earpieces and car chargers</li><li>Insurance protection plans</li><li>Monthly service</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> On average in 2023, the typical cellphone plan cost $144 per month.<span class="ql-inline-citation" data-cite="22"></span> The global average smartphone price is $286 in 2024, and premium smartphone models can cost $1,000 or more (Apple’s iPhone 15 Pro Max goes for as much as $1,199).<span class="ql-inline-citation" data-cite="23"></span><span class="ql-inline-citation" data-cite="24"></span> For someone living on a tight budget, those numbers can be extremely daunting. Thus, in addition to asking whether a smartphone is a requirement in 2024, it’s also important to ask how the average person can afford to pay for it. </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"> Some of the best ways to save money on cellphone service include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> <li>Buying a used phone instead of a new one</li><li>Opting for prepaid phone service in lieu of a contract plan</li><li>Choosing the lowest smartphone service plan possible</li><li>Sharing the cost with others through a family plan</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pros-and-cons-of-smartphone-leasing-5190127">Leasing a smartphone</a> could also save money and afford another benefit: the ability to upgrade to a new phone every year or so. In that sense, leasing a phone is similar to leasing a car. When the lease term ends, you can choose a new phone, keep the one you have and sign a new lease, or buy the phone outright. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/smartphone-financing-what-you-need-to-know-5190144">Smartphone financing</a> may be an option if you want to buy a phone to own. You can find it through retailers such as Best Buy, cellphone service providers, cellphone manufacturers such as Samsung and Apple, or through <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/buy-now-pay-later-5182291">buy now, pay later (BNPL)</a> platforms. With BNPL, you’re getting a point-of-sale <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/installmentdebt.asp">installment loan</a> instead of using a traditional installment loan or credit card. Any of these options might be worth exploring if you’re looking for a way to finance a phone purchase while saving money on <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_57-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_58-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>If you’re interested in BNPL options such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-klarna-works-5184668">Klarna</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-does-affirm-work-5183684">Affirm</a>, be sure to compare financing terms and credit requirements first to find the best fit.</p></div></div></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-many-people-have-smartphones"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many People Have Smartphones?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Pew Research Center discovered that 90% of Americans owned a smartphone in 2023, up from only 35% in 2011.<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_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-where-are-smartphones-most-useful"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Are Smartphones Most Useful?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Smartphones have become integral to the workplace, especially for independent contractors and others working remotely from home; useful for gaining privileged access to travel and recreation; and helpful for accessing healthcare.</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-what-do-smartphones-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Do Smartphones Cost?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The average price of a smartphone in 2024 is $286, though premium phones can cost well over $1,000.<span class="ql-inline-citation" data-cite="23"></span> On top of that is the cost of your cellphone plan, which averaged $144 monthly in 2023.<span class="ql-inline-citation" data-cite="22"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> If you use a smartphone regularly, you may not give much thought to how central a role it plays in your day-to-day life. Whether you view smartphones as a necessity or not, it’s clear that dependence on them continues to increase at work, at home, and while traveling. Affording a smartphone is possible, though it may require some planning to find a phone and a service plan that align with your budget. </p></div>

## Is a Smartphone a Necessity in 2024? There are several strong arguments to be made that a [smartphone](https://www.investopedia.com/terms/s/smartphone.asp) is required, though affording one may not be realistic for everyone. Smartphone ownership has grown tremendously over the past decade. According to the Pew Research Center, the number of Americans owning a smartphone rose from 35% in 2011 to 90% by 2023. ### Key Takeaways * As of September 2023, an estimated 90% of Americans use a smartphone, according to Pew Research. * Smartphones can be necessary for a variety of reasons, ranging from online security to gaining entry to beaches and other recreational areas to riding public transportation. * Owning a smartphone may be challenging for lower-income households, though there are programs that can provide financial assistance. * As more people live digitally, it stands to reason that smartphones will only become more important in the future. ## Smartphone Ownership and Use Men and women tend to own smartphones in equal numbers, though Americans under age 65 are more likely to have one. Ninety-seven percent of young adults ages 18 to 29 own a smartphone vs. 76% of adults ages 65 or older. Smartphone users also tend to live in urban and suburban areas (rather than rural), have a college degree, and make $30,000 a year or more. So what exactly are people using their smartphones for? Some of the most common uses include: * Checking email * Taking photos * Surfing the internet * Navigation * Social media Aside from that, people can also use smartphones to pay bills, check bank account balances, [manage their budgets](https://www.investopedia.com/best-budgeting-apps-5085405), send money to friends and family, and shop online at their favorite stores. The typical person checks their phone 144 times a day, spending four hours and 25 minutes a day on their device, and 56.9% of Americans consider themselves to be addicted to their phones. Still, does that mean they’re necessary? ### 15% The percentage of Americans who rely on their smartphone as their only source of internet access at home, according to the Pew Research Center. It’s easy to say that smartphones are a luxury rather than a necessity. After all, people managed to live without them for centuries. Nevertheless, that ignores a number of changes that have taken place in how people work and live. ## Smartphones in the Workplace The increasingly digital nature of the workplace presents the first example of why smartphones should be considered a requirement rather than an option. As more companies use [cloud technology](https://www.investopedia.com/terms/c/cloud-computing.asp) to store information and online platforms to keep workers connected, it presents a need for enhanced security protections. Innovations such as [two-factor authentication (2FA)](https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp), also known as multifactor authentication (MFA), make that possible. MFA allows employees, including remote workers, to securely access digital platforms by entering a code—and a key requirement for using it is a smartphone. Employees who are interested in remote work and [independent contractors](https://www.investopedia.com/terms/i/independent-contractor.asp) who work from home will likely need smartphones. Security aside, smartphones can also be vital for staying connected with work through messaging apps or tools such as Zoom. ### If your employer requires you to have a smartphone for work that you pay for, ask whether any of those expenses are reimbursable. ## Smartphones for Recreation and Travel Smartphones could also be considered a requirement if you travel or engage in recreational activities. For example, the state of New Jersey issued beach access badges through the Viply app. Until the app shut down in late 2023, this allowed allows travelers and tourists to bypass otherwise-long wait lines to get seasonal, daily, or weekly beach passes. Disney World visitors can download an app that allows them to reserve and pay for contactless dining, navigate the park, and access MagicBand features. The app also features direct-to-room services when staying at Disney Resort Hotels. Aside from those types of apps, other apps can make travel easier. For example, if you’re catching a flight, your airline may give you the option to download a mobile boarding pass so you can skip the check-in lines. More chain hotels are also offering mobile apps that let you check in and out via your smartphone instead of at the front desk. The New York City Metropolitan Transport Authority (MTA) plans to replace fare cards for subways and buses with the OMNY payment system by 2024. Using it will require either a contactless credit, debit, or prepaid card or a smartphone or smartwatch equipped with a digital wallet. If you don’t have one or the other, you won’t be able to ride public transportation in the Big Apple. ### 2020 The year Warren Buffett finally switched from using a flip phone to an iPhone. ## Smartphones for Healthcare Healthcare is another area where smartphones are becoming increasingly important. [Telehealth](https://www.investopedia.com/telehealth-5115239) apps, for instance, allow people to chat with a physician live without leaving home. These app types could be vital for someone who has ongoing health issues but can’t always visit a doctor in person. You can also use a laptop or desktop for telehealth, of course. ## Affording a Smartphone Although you could reasonably say that a smartphone is a necessity for many people, affording them isn’t always easy. Smartphones can bring with them a number of costs, including: * The cost of purchasing the phone itself * Accessories, such as Bluetooth earpieces and car chargers * Insurance protection plans * Monthly service On average in 2023, the typical cellphone plan cost $144 per month. The global average smartphone price is $286 in 2024, and premium smartphone models can cost $1,000 or more (Apple’s iPhone 15 Pro Max goes for as much as $1,199). For someone living on a tight budget, those numbers can be extremely daunting. Thus, in addition to asking whether a smartphone is a requirement in 2024, it’s also important to ask how the average person can afford to pay for it. Some of the best ways to save money on cellphone service include: * Buying a used phone instead of a new one * Opting for prepaid phone service in lieu of a contract plan * Choosing the lowest smartphone service plan possible * Sharing the cost with others through a family plan [Leasing a smartphone](https://www.investopedia.com/pros-and-cons-of-smartphone-leasing-5190127) could also save money and afford another benefit: the ability to upgrade to a new phone every year or so. In that sense, leasing a phone is similar to leasing a car. When the lease term ends, you can choose a new phone, keep the one you have and sign a new lease, or buy the phone outright. [Smartphone financing](https://www.investopedia.com/smartphone-financing-what-you-need-to-know-5190144) may be an option if you want to buy a phone to own. You can find it through retailers such as Best Buy, cellphone service providers, cellphone manufacturers such as Samsung and Apple, or through [buy now, pay later (BNPL)](https://www.investopedia.com/buy-now-pay-later-5182291) platforms. With BNPL, you’re getting a point-of-sale [installment loan](https://www.investopedia.com/terms/i/installmentdebt.asp) instead of using a traditional installment loan or credit card. Any of these options might be worth exploring if you’re looking for a way to finance a phone purchase while saving money on [interest](https://www.investopedia.com/terms/i/interest.asp). ### If you’re interested in BNPL options such as [Klarna](https://www.investopedia.com/how-klarna-works-5184668) or [Affirm](https://www.investopedia.com/how-does-affirm-work-5183684), be sure to compare financing terms and credit requirements first to find the best fit. ## How Many People Have Smartphones? The Pew Research Center discovered that 90% of Americans owned a smartphone in 2023, up from only 35% in 2011. ## Where Are Smartphones Most Useful? Smartphones have become integral to the workplace, especially for independent contractors and others working remotely from home; useful for gaining privileged access to travel and recreation; and helpful for accessing healthcare. ## What Do Smartphones Cost? The average price of a smartphone in 2024 is $286, though premium phones can cost well over $1,000. On top of that is the cost of your cellphone plan, which averaged $144 monthly in 2023. ## The Bottom Line If you use a smartphone regularly, you may not give much thought to how central a role it plays in your day-to-day life. Whether you view smartphones as a necessity or not, it’s clear that dependence on them continues to increase at work, at home, and while traveling. Affording a smartphone is possible, though it may require some planning to find a phone and a service plan that align with your budget.

Is a Smartphone a Necessity in 2024? There are several strong arguments to be made that a smartphone is required, though affording one may not be realistic for everyone. Smartphone ownership has grown tremendously over the past decade. According to the Pew Research Center, the number of Americans owning a smartphone rose from 35% in 2011 to 90% by 2023. Key Takeaways As of September 2023, an estimated 90% of Americans use a smartphone, according to Pew Research.Smartphones can be necessary for a variety of reasons, ranging from online security to gaining entry to beaches and other recreational areas to riding public transportation.Owning a smartphone may be challenging for lower-income households, though there are programs that can provide financial assistance.As more people live digitally, it stands to reason that smartphones will only become more important in the future. Smartphone Ownership and Use Men and women tend to own smartphones in equal numbers, though Americans under age 65 are more likely to have one. Ninety-seven percent of young adults ages 18 to 29 own a smartphone vs. 76% of adults ages 65 or older. Smartphone users also tend to live in urban and suburban areas (rather than rural), have a college degree, and make $30,000 a year or more. So what exactly are people using their smartphones for? Some of the most common uses include: Checking emailTaking photosSurfing the internetNavigationSocial media Aside from that, people can also use smartphones to pay bills, check bank account balances, manage their budgets, send money to friends and family, and shop online at their favorite stores. The typical person checks their phone 144 times a day, spending four hours and 25 minutes a day on their device, and 56.9% of Americans consider themselves to be addicted to their phones. Still, does that mean they’re necessary? 15% The percentage of Americans who rely on their smartphone as their only source of internet access at home, according to the Pew Research Center. It’s easy to say that smartphones are a luxury rather than a necessity. After all, people managed to live without them for centuries. Nevertheless, that ignores a number of changes that have taken place in how people work and live. Smartphones in the Workplace The increasingly digital nature of the workplace presents the first example of why smartphones should be considered a requirement rather than an option. As more companies use cloud technology to store information and online platforms to keep workers connected, it presents a need for enhanced security protections. Innovations such as two-factor authentication (2FA), also known as multifactor authentication (MFA), make that possible. MFA allows employees, including remote workers, to securely access digital platforms by entering a code—and a key requirement for using it is a smartphone. Employees who are interested in remote work and independent contractors who work from home will likely need smartphones. Security aside, smartphones can also be vital for staying connected with work through messaging apps or tools such as Zoom. If your employer requires you to have a smartphone for work that you pay for, ask whether any of those expenses are reimbursable. Smartphones for Recreation and Travel Smartphones could also be considered a requirement if you travel or engage in recreational activities. For example, the state of New Jersey issued beach access badges through the Viply app. Until the app shut down in late 2023, this allowed allows travelers and tourists to bypass otherwise-long wait lines to get seasonal, daily, or weekly beach passes. Disney World visitors can download an app that allows them to reserve and pay for contactless dining, navigate the park, and access MagicBand features. The app also features direct-to-room services when staying at Disney Resort Hotels. Aside from those types of apps, other apps can make travel easier. For example, if you’re catching a flight, your airline may give you the option to download a mobile boarding pass so you can skip the check-in lines. More chain hotels are also offering mobile apps that let you check in and out via your smartphone instead of at the front desk. The New York City Metropolitan Transport Authority (MTA) plans to replace fare cards for subways and buses with the OMNY payment system by 2024. Using it will require either a contactless credit, debit, or prepaid card or a smartphone or smartwatch equipped with a digital wallet. If you don’t have one or the other, you won’t be able to ride public transportation in the Big Apple. 2020 The year Warren Buffett finally switched from using a flip phone to an iPhone. Smartphones for Healthcare Healthcare is another area where smartphones are becoming increasingly important. Telehealth apps, for instance, allow people to chat with a physician live without leaving home. These app types could be vital for someone who has ongoing health issues but can’t always visit a doctor in person. You can also use a laptop or desktop for telehealth, of course. Affording a Smartphone Although you could reasonably say that a smartphone is a necessity for many people, affording them isn’t always easy. Smartphones can bring with them a number of costs, including: The cost of purchasing the phone itselfAccessories, such as Bluetooth earpieces and car chargersInsurance protection plansMonthly service On average in 2023, the typical cellphone plan cost $144 per month. The global average smartphone price is $286 in 2024, and premium smartphone models can cost $1,000 or more (Apple’s iPhone 15 Pro Max goes for as much as $1,199). For someone living on a tight budget, those numbers can be extremely daunting. Thus, in addition to asking whether a smartphone is a requirement in 2024, it’s also important to ask how the average person can afford to pay for it. Some of the best ways to save money on cellphone service include: Buying a used phone instead of a new oneOpting for prepaid phone service in lieu of a contract planChoosing the lowest smartphone service plan possibleSharing the cost with others through a family plan Leasing a smartphone could also save money and afford another benefit: the ability to upgrade to a new phone every year or so. In that sense, leasing a phone is similar to leasing a car. When the lease term ends, you can choose a new phone, keep the one you have and sign a new lease, or buy the phone outright. Smartphone financing may be an option if you want to buy a phone to own. You can find it through retailers such as Best Buy, cellphone service providers, cellphone manufacturers such as Samsung and Apple, or through buy now, pay later (BNPL) platforms. With BNPL, you’re getting a point-of-sale installment loan instead of using a traditional installment loan or credit card. Any of these options might be worth exploring if you’re looking for a way to finance a phone purchase while saving money on interest. If you’re interested in BNPL options such as Klarna or Affirm, be sure to compare financing terms and credit requirements first to find the best fit. How Many People Have Smartphones? The Pew Research Center discovered that 90% of Americans owned a smartphone in 2023, up from only 35% in 2011. Where Are Smartphones Most Useful? Smartphones have become integral to the workplace, especially for independent contractors and others working remotely from home; useful for gaining privileged access to travel and recreation; and helpful for accessing healthcare. What Do Smartphones Cost? The average price of a smartphone in 2024 is $286, though premium phones can cost well over $1,000. On top of that is the cost of your cellphone plan, which averaged $144 monthly in 2023. The Bottom Line If you use a smartphone regularly, you may not give much thought to how central a role it plays in your day-to-day life. Whether you view smartphones as a necessity or not, it’s clear that dependence on them continues to increase at work, at home, and while traveling. Affording a smartphone is possible, though it may require some planning to find a phone and a service plan that align with your budget.

https://www.investopedia.com/terms/s/shariah-compliant-funds.asp

Shariah-Compliant Funds: Definition and Examples

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-are-shariah-compliant-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What are Shariah-Compliant Funds? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Shariah-compliant funds are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-fund.asp" rel="noopener noreferrer">investment funds</a> governed by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are considered to be a type of socially responsible investing.  </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-shariah-compliant-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 Shariah-Compliant Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Shariah-compliant funds are one of many categories found in socially responsible investing. Similar to other socially responsible funds within the <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" rel="noopener noreferrer">environmental, social and governance (ESG)</a> universe, the funds screen potential portfolio investments for specific requirements desired by followers of the Islamic religion. </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"> Shariah-compliant funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. According to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.pwc.com/gx/en/financial-services/islamic-finance-programme/assets/shariah-compliant-funds.pdf" rel="noopener noreferrer">a 2011 report </a>by consulting firm PricewaterhouseCoopers (PwC), Shariah-compliant funds grew at an annualized rate of 26% in the first ten years of this century. The report further states that "an inflection point" in their growth occurred between 2002 and 2003, when <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/petrodollars.asp" rel="noopener noreferrer">petrodollar</a> liquidity multiplied and capital markets in the Gulf Cooperation Council (GCC) countries matured to enable investment. </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"> According to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.gulf-times.com/story/573720/Islamic-funds-asset-management-sector-poised-for-g" rel="noopener noreferrer">a report </a>by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion at the end of the first quarter of 2017.The corresponding figure in 2008 was $47 billion. However, it is difficult to accurately estimate the industry's size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents. </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 concept requires considerable effort to implement, since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles. </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"> Shariah-compliant funds have many requirements that must be adhered to. Some of the requirements for a Shariah-compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah-compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> These rules can add complexity and costs to the management of a Shariah-compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund. The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action. </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"> Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a good investment but <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/carriedinterest.asp" rel="noopener noreferrer">carried interest</a> is considered a problem within Shariah law. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Shariah-compliant funds are investment funds that comply with Islamic law.</li><li>They are different from conventional investment funds because they have many requirements, such as appointment of a Shariah board and prohibition from investing in companies that derive a majority of their income from sale of alcohol, pork products, gambling etc.</li><li>While Shariah-compliant funds have grown at a respectable clip, it is difficult to accurately estimate the industry's size or valuation.</li></ul></div></div></div> <span class="heading-toc" id="toc-examples-of-shariah-compliant-investments"></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"> Examples of Shariah-Compliant Investments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A number of products and indexes exist to accommodate Shariah-compliant investing. Saturna Capital provides several Shariah-compliant investment funds through its Amana series. Its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.saturna.com/amana/growth-fund#/overview" rel="noopener noreferrer">Amana Growth Fund (AMAGX)</a> seeks long-term capital growth through investments adhering to Islamic principles. The Fund was launched on February 3, 1994. The Amana Growth Fund is a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp" rel="noopener noreferrer">mutual fund</a> investing at least 80% of its assets in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commonstock.asp" rel="noopener noreferrer">common stocks</a>. As of November 2017 it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a minimum investment of $250. Technology investments account for a significant portion of the Fund’s assets at 48%. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical. </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"> S&amp;P Dow Jones Indices has created many Shariah-compliant indexes for Muslim investors. The S&amp;P 500 Shariah was launched in December 2006. The S&amp;P 500 Shariah Index is comprised of all of the Shariah-compliant constituents in the S&amp;P 500. As of October 2017, it had 235 constituents with information technology accounting for the largest portion of the Index at 38%. </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"> Other Shariah-compliant indexes maintained by S&amp;P Dow Jones include: S&amp;P Global Healthcare Shariah, S&amp;P Global Infrastructure Shariah, S&amp;P Developed Large and Mid Cap Shariah, S&amp;P Developed Small Cap Shariah and the S&amp;P Developed BMI Shariah Index. </p></div>

## What are Shariah-Compliant Funds? Shariah-compliant funds are [investment funds](https://www.investopedia.com/terms/i/investment-fund.asp) governed by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are considered to be a type of socially responsible investing.  ## Understanding Shariah-Compliant Funds Shariah-compliant funds are one of many categories found in socially responsible investing. Similar to other socially responsible funds within the [environmental, social and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) universe, the funds screen potential portfolio investments for specific requirements desired by followers of the Islamic religion. Shariah-compliant funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. According to [a 2011 report](https://www.pwc.com/gx/en/financial-services/islamic-finance-programme/assets/shariah-compliant-funds.pdf) by consulting firm PricewaterhouseCoopers (PwC), Shariah-compliant funds grew at an annualized rate of 26% in the first ten years of this century. The report further states that "an inflection point" in their growth occurred between 2002 and 2003, when [petrodollar](https://www.investopedia.com/terms/p/petrodollars.asp) liquidity multiplied and capital markets in the Gulf Cooperation Council (GCC) countries matured to enable investment. According to [a report](https://www.gulf-times.com/story/573720/Islamic-funds-asset-management-sector-poised-for-g) by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion at the end of the first quarter of 2017.The corresponding figure in 2008 was $47 billion. However, it is difficult to accurately estimate the industry's size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents. The concept requires considerable effort to implement, since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles. Shariah-compliant funds have many requirements that must be adhered to. Some of the requirements for a Shariah-compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah-compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity. These rules can add complexity and costs to the management of a Shariah-compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund. The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action. Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a good investment but [carried interest](https://www.investopedia.com/terms/c/carriedinterest.asp) is considered a problem within Shariah law. ### Key Takeaways * Shariah-compliant funds are investment funds that comply with Islamic law. * They are different from conventional investment funds because they have many requirements, such as appointment of a Shariah board and prohibition from investing in companies that derive a majority of their income from sale of alcohol, pork products, gambling etc. * While Shariah-compliant funds have grown at a respectable clip, it is difficult to accurately estimate the industry's size or valuation. ## Examples of Shariah-Compliant Investments A number of products and indexes exist to accommodate Shariah-compliant investing. Saturna Capital provides several Shariah-compliant investment funds through its Amana series. Its [Amana Growth Fund (AMAGX)](https://www.saturna.com/amana/growth-fund#/overview) seeks long-term capital growth through investments adhering to Islamic principles. The Fund was launched on February 3, 1994. The Amana Growth Fund is a [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) investing at least 80% of its assets in [common stocks](https://www.investopedia.com/terms/c/commonstock.asp). As of November 2017 it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a minimum investment of $250. Technology investments account for a significant portion of the Fund’s assets at 48%. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical. S&P Dow Jones Indices has created many Shariah-compliant indexes for Muslim investors. The S&P 500 Shariah was launched in December 2006. The S&P 500 Shariah Index is comprised of all of the Shariah-compliant constituents in the S&P 500. As of October 2017, it had 235 constituents with information technology accounting for the largest portion of the Index at 38%. Other Shariah-compliant indexes maintained by S&P Dow Jones include: S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, S&P Developed Large and Mid Cap Shariah, S&P Developed Small Cap Shariah and the S&P Developed BMI Shariah Index.

What are Shariah-Compliant Funds? Shariah-compliant funds are investment funds governed by the requirements of Shariah law and the principles of the Islamic religion. Shariah-compliant funds are considered to be a type of socially responsible investing.  Understanding Shariah-Compliant Funds Shariah-compliant funds are one of many categories found in socially responsible investing. Similar to other socially responsible funds within the environmental, social and governance (ESG) universe, the funds screen potential portfolio investments for specific requirements desired by followers of the Islamic religion. Shariah-compliant funds have expanded in popularity only recently, even though the concept was first developed in the late 1960s. According to a 2011 report by consulting firm PricewaterhouseCoopers (PwC), Shariah-compliant funds grew at an annualized rate of 26% in the first ten years of this century. The report further states that "an inflection point" in their growth occurred between 2002 and 2003, when petrodollar liquidity multiplied and capital markets in the Gulf Cooperation Council (GCC) countries matured to enable investment. According to a report by the Malaysia Islamic International Financial Center, total global Islamic assets under management (AUM) were $70.8 billion at the end of the first quarter of 2017.The corresponding figure in 2008 was $47 billion. However, it is difficult to accurately estimate the industry's size or valuation because much of the investment occurs through private placement. The funds are also not traded in secondary markets, thereby providing less of a window into their constituents. The concept requires considerable effort to implement, since much attention must be paid to compliance with a comprehensive set of rules and requirements guided by the Shariah principles. Shariah-compliant funds have many requirements that must be adhered to. Some of the requirements for a Shariah-compliant fund include the exclusion of investments which derive a majority of their income from the sale of alcohol, pork products, pornography, gambling, military equipment or weapons. Other characteristics of a Shariah-compliant fund include an appointed Shariah board, an annual Shariah audit and purifying certain prohibited types of income, such as interest, by donating them to a charity. These rules can add complexity and costs to the management of a Shariah-compliant fund. For example, Shariah boards are constituted of Islamic scholars whose fees can run into millions of dollars per year, adding to the overall cost of managing the fund. The scholars have varying interpretations of Islamic law, making it difficult and time-consuming for them to arrive at a consensus for analysis and implementation regarding a particular course of action. Popular categories of investment for Shariah-compliant funds include real estate and exchange-traded funds. Private equity is also considered a good investment but carried interest is considered a problem within Shariah law. Key Takeaways Shariah-compliant funds are investment funds that comply with Islamic law.They are different from conventional investment funds because they have many requirements, such as appointment of a Shariah board and prohibition from investing in companies that derive a majority of their income from sale of alcohol, pork products, gambling etc.While Shariah-compliant funds have grown at a respectable clip, it is difficult to accurately estimate the industry's size or valuation. Examples of Shariah-Compliant Investments A number of products and indexes exist to accommodate Shariah-compliant investing. Saturna Capital provides several Shariah-compliant investment funds through its Amana series. Its Amana Growth Fund (AMAGX) seeks long-term capital growth through investments adhering to Islamic principles. The Fund was launched on February 3, 1994. The Amana Growth Fund is a mutual fund investing at least 80% of its assets in common stocks. As of November 2017 it had $1.7 billion in total assets under management. It has an expense ratio of 1.10%. It requires a minimum investment of $250. Technology investments account for a significant portion of the Fund’s assets at 48%. Other sectors include healthcare, industrials, consumer defensive and consumer cyclical. S&P Dow Jones Indices has created many Shariah-compliant indexes for Muslim investors. The S&P 500 Shariah was launched in December 2006. The S&P 500 Shariah Index is comprised of all of the Shariah-compliant constituents in the S&P 500. As of October 2017, it had 235 constituents with information technology accounting for the largest portion of the Index at 38%. Other Shariah-compliant indexes maintained by S&P Dow Jones include: S&P Global Healthcare Shariah, S&P Global Infrastructure Shariah, S&P Developed Large and Mid Cap Shariah, S&P Developed Small Cap Shariah and the S&P Developed BMI Shariah Index.

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

Jumbo Certificate of Deposit (CD): What It Is, 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-jumbo-certificate-of-deposit-cd"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Jumbo Certificate of Deposit (CD)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A jumbo <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 requires a higher minimum balance obligation <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/jumbo-cds-vs-regular-cds-5248343">than that required by traditional CDs</a>. In return, the jumbo CD pays a higher interest 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"> A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified maturity date. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>A jumbo CD usually has a minimum balance requirement of $100,000.</li> <li>Although jumbo CDs have higher minimum balance requirements than traditional CDs, they pay a higher interest rate in return.</li> <li>Jumbo CDs pay investors a fixed interest rate, helping to stabilize returns in an investment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> by partly offsetting market risk.</li> </ul></div></div></div> <span class="heading-toc" id="toc-understanding-jumbo-cds"></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 Jumbo CDs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">Traditional CDs typically offer a higher rate of return</a> than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than traditional CDs offer. </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"> Jumbos receive a higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rateofreturn.asp">rate</a> because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points. </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"> Jumbo CDs are considered risk-free investments, as they’re insured up to $250,000 by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a>.<span class="ql-inline-citation" data-cite="4"></span> Credit unions also market jumbo CDs, and these funds find protection under 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="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Investors receive the premium—based on the fixed interest rate—as compensation for not having access to their money over the life of the account. A one-year jumbo CD that pays 1.5% interest, for example, may require that the funds remain locked up in the account for one year. </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"> Jumbo CDs can have term lengths as short as a few days or as long as a decade. However, the standard range is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288">three months</a> to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473">five years</a>. And the longer the term, the higher the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rate</a> returned on the funds invested. </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"> Upon <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a> of the CD, the financial institution returns the investor’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>. Early withdrawals may be possible, depending on the terms of the product purchased. However, the investor will pay a penalty for early termination of the contract. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$250,000</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The amount up to which the FDIC insures CDs.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div> <span class="heading-toc" id="toc-advantages-of-jumbo-cds"></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"> Advantages of Jumbo CDs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Large <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a> are the typical customers for jumbo CDs. These large institutions include banks, some large corporations, and pension funds. Primarily, this is due to the high minimum balance requirements. These customers use jumbo CDs as a temporary investment vehicle, as some issuers have tenures for as little as seven days. </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 short-term maturities allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures. These jumbo CDs are instruments for treasury management of large corporations and money market instruments for large investors. </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"> Other than being paid to park their funds in these products, large investors use them as instruments to reduce their portfolio’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketrisk.asp">market risk</a> exposure. Market risk arises when prices in the stock market fluctuate over time. As a result, stock portfolios can earn high returns, but they can also incur large losses. The steady interest paid on jumbo CDs helps offset and reduce the risk of negative returns that can happen from holding stocks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A business seeking a loan or other type of financing from a bank can pledge its <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">jumbo CD as collateral</a>, which is an asset held by a lender as security for a loan in case the borrower falls behind or defaults on the loan payments. If the borrower defaults on timely payments, the lender can seize the collateral to recoup any losses. However, CDs held in retirement accounts cannot be pledged as collateral for loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_32-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_33-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Jumbo CDs can be used as collateral for loans.</p></div></div></div> <span class="heading-toc" id="toc-disadvantages-of-jumbo-cds"></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"> Disadvantages of Jumbo CDs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Although jumbo CDs have positive aspects of higher rates and FDIC or NCUA protection, there are disadvantages to investing in them. Historically, jumbo CDs have paid a much higher rate than traditional CDs and savings accounts. Nevertheless, the differences between those returns have narrowed in recent years, making a jumbo CD a less compelling investment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> Inflation Risk </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Jumbo CDs don’t typically <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/122215/cds-vs-inflation-are-they-keeping.asp">keep up with inflation</a>. If the inflation rate in the economy is 2%, for example, and the interest rate on the CD is 2.5%, then the investor is only earning 0.5% in real terms. To make an investment in a jumbo CD worthwhile, investors would need to lock in their funds for longer terms, resulting in a higher rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-subheading__text"> Early Withdrawal Penalties </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Should the holder need these funds before the jumbo CD matures, withdrawing them would result in a financial penalty, which could be a fee assessed by the bank for the loss of interest earned to date. Each bank will have specific rules and guidelines for early withdrawals. If the funds likely might be needed before the CD’s maturity, then investors might be better off investing the funds in an account that doesn’t have withdrawal restrictions, such as a high-interest savings account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-subheading__text"> Interest Rate Risk </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Another worry for jumbo CD investors is <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>. This comes when current market interest rates rise above the rate offered by the jumbo CD. If interest rates rise while investors are holding a jumbo CD, they miss out on the higher rates they could have had if these funds had been available to invest elsewhere. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Reinvestment Rate Risk </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Conversely, if interest rates fall during the holding period, the investor may not be able to reinvest the funds at maturity at a rate comparable to the CD. This hazard is known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reinvestmentrisk.asp">reinvestment risk</a>. Although jumbo CDs pay a higher rate at the onset than other products, investors must weigh the pros and cons to ensure they don’t have a lower return in the long term. </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-comparisonlist mntl-block" id="mntl-sc-block_49-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_50-0"> <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>Jumbo CDs offer a steady rate of interest for the length of the holding term.</p></li> <li><p>Jumbo CDs typically pay a higher interest rate than traditional CDs or savings accounts do.</p></li> <li><p>The steady interest paid on jumbo CDs can partly offset the portfolio’s market risk of negative returns from holding stocks.</p></li> <li><p>Jumbo CDs carry a guarantee of up to $250,000 per account by the FDIC or the NCUA.</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>Jumbo CDs pay a lower return than many other fixed-rate investments, such as bonds.</p></li> <li><p>In a rising interest rate environment, jumbo CDs face interest rate risk, as investors might hold a CD paying a lower rate.</p></li> <li><p>Jumbo CDs don’t typically keep up with inflation, meaning prices could rise faster than the CD’s rate of return.</p></li> <li><p>Investors cannot access their funds in jumbo CDs before maturity without incurring an early withdrawal penalty.</p></li> <li><p>Jumbo CDs can have high minimum balance requirements.</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-examples-of-jumbo-cds"></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"> Examples of Jumbo CDs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Veridian Credit Union, founded in Waterloo, Iowa, in 1934, offers many types of CDs, including jumbo CDs. Examples of the jumbo rate as of May 21, 2024, include: </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>A nine-month jumbo CD with a minimum $100,000 deposit pays 0.40%.</li><li>A 15-month jumbo CD with a minimum $100,000 deposit pays 0.40%.<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_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Please note: The interest rates being offered can change anytime for new CDs and might be different depending on the state where the depositor is located.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-what-is-the-shortest-term-for-a-jumbo-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Shortest Term for a Jumbo CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Jumbo CD terms can be as short as a few days, but these extremely short terms are hard to find. More commonly, the minimum term for a jumbo CD is three months.</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-do-jumbo-cds-earn-a-higher-interest-rate-than-a-normal-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Jumbo CDs Earn a Higher Interest Rate than a Normal CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Since jumbo CDs require a much higher minimum deposit, banks and credit unions typically reward savers with higher interest rates than for smaller accounts. Longer terms also earn higher interest rates. Those higher rates are an incentive to reduce the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> of your savings.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_63-0"><span class="heading-toc" id="toc-how-much-of-my-jumbo-cd-is-fdic-or-ncua-insured"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much of my Jumbo CD Is FDIC- or NCUA-insured?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The FDIC or NCUA insures up to the first $250,000 in each account at an affiliated bank or credit union.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="5"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Jumbo CDs are a very safe place to hold money. Banks are willing to offer attractive interest rates for savers in exchange for fixed terms. </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"> While jumbo CDs are safe, they may not be the best place to earn money in a volatile interest environment. If interest rates are rising and you’re locked into a long-term CD, you may miss out on the opportunity to invest at a higher rate. Consider your term length carefully before deciding.<br/> </p></div>

## What Is a Jumbo Certificate of Deposit (CD)? A jumbo [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) is a CD that requires a higher minimum balance obligation [than that required by traditional CDs](https://www.investopedia.com/jumbo-cds-vs-regular-cds-5248343). In return, the jumbo CD pays a higher interest rate. A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified maturity date. ### Key Takeaways * A jumbo CD usually has a minimum balance requirement of $100,000. * Although jumbo CDs have higher minimum balance requirements than traditional CDs, they pay a higher interest rate in return. * Jumbo CDs pay investors a fixed interest rate, helping to stabilize returns in an investment [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) by partly offsetting market risk. ## Understanding Jumbo CDs [Traditional CDs typically offer a higher rate of return](https://www.investopedia.com/best-cd-rates-4770214) than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than traditional CDs offer. Jumbos receive a higher [rate](https://www.investopedia.com/terms/r/rateofreturn.asp) because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points. Jumbo CDs are considered risk-free investments, as they’re insured up to $250,000 by the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). Credit unions also market jumbo CDs, and these funds find protection under the [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp). Investors receive the premium—based on the fixed interest rate—as compensation for not having access to their money over the life of the account. A one-year jumbo CD that pays 1.5% interest, for example, may require that the funds remain locked up in the account for one year. Jumbo CDs can have term lengths as short as a few days or as long as a decade. However, the standard range is [three months](https://www.investopedia.com/best-3-month-cd-rates-5272288) to [five years](https://www.investopedia.com/best-5-year-cd-rates-4801473). And the longer the term, the higher the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) returned on the funds invested. Upon [maturity](https://www.investopedia.com/terms/m/maturity.asp) of the CD, the financial institution returns the investor’s [principal](https://www.investopedia.com/terms/p/principal.asp). Early withdrawals may be possible, depending on the terms of the product purchased. However, the investor will pay a penalty for early termination of the contract. ### $250,000 The amount up to which the FDIC insures CDs. ## Advantages of Jumbo CDs Large [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) are the typical customers for jumbo CDs. These large institutions include banks, some large corporations, and pension funds. Primarily, this is due to the high minimum balance requirements. These customers use jumbo CDs as a temporary investment vehicle, as some issuers have tenures for as little as seven days. The short-term maturities allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures. These jumbo CDs are instruments for treasury management of large corporations and money market instruments for large investors. Other than being paid to park their funds in these products, large investors use them as instruments to reduce their portfolio’s [market risk](https://www.investopedia.com/terms/m/marketrisk.asp) exposure. Market risk arises when prices in the stock market fluctuate over time. As a result, stock portfolios can earn high returns, but they can also incur large losses. The steady interest paid on jumbo CDs helps offset and reduce the risk of negative returns that can happen from holding stocks. A business seeking a loan or other type of financing from a bank can pledge its [jumbo CD as collateral](https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646), which is an asset held by a lender as security for a loan in case the borrower falls behind or defaults on the loan payments. If the borrower defaults on timely payments, the lender can seize the collateral to recoup any losses. However, CDs held in retirement accounts cannot be pledged as collateral for loans. ### Jumbo CDs can be used as collateral for loans. ## Disadvantages of Jumbo CDs Although jumbo CDs have positive aspects of higher rates and FDIC or NCUA protection, there are disadvantages to investing in them. Historically, jumbo CDs have paid a much higher rate than traditional CDs and savings accounts. Nevertheless, the differences between those returns have narrowed in recent years, making a jumbo CD a less compelling investment. ### Inflation Risk Jumbo CDs don’t typically [keep up with inflation](https://www.investopedia.com/articles/investing/122215/cds-vs-inflation-are-they-keeping.asp). If the inflation rate in the economy is 2%, for example, and the interest rate on the CD is 2.5%, then the investor is only earning 0.5% in real terms. To make an investment in a jumbo CD worthwhile, investors would need to lock in their funds for longer terms, resulting in a higher rate. ### Early Withdrawal Penalties Should the holder need these funds before the jumbo CD matures, withdrawing them would result in a financial penalty, which could be a fee assessed by the bank for the loss of interest earned to date. Each bank will have specific rules and guidelines for early withdrawals. If the funds likely might be needed before the CD’s maturity, then investors might be better off investing the funds in an account that doesn’t have withdrawal restrictions, such as a high-interest savings account. ### Interest Rate Risk Another worry for jumbo CD investors is [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp). This comes when current market interest rates rise above the rate offered by the jumbo CD. If interest rates rise while investors are holding a jumbo CD, they miss out on the higher rates they could have had if these funds had been available to invest elsewhere. ### Reinvestment Rate Risk Conversely, if interest rates fall during the holding period, the investor may not be able to reinvest the funds at maturity at a rate comparable to the CD. This hazard is known as [reinvestment risk](https://www.investopedia.com/terms/r/reinvestmentrisk.asp). Although jumbo CDs pay a higher rate at the onset than other products, investors must weigh the pros and cons to ensure they don’t have a lower return in the long term. Pros * Jumbo CDs offer a steady rate of interest for the length of the holding term. * Jumbo CDs typically pay a higher interest rate than traditional CDs or savings accounts do. * The steady interest paid on jumbo CDs can partly offset the portfolio’s market risk of negative returns from holding stocks. * Jumbo CDs carry a guarantee of up to $250,000 per account by the FDIC or the NCUA. Cons * Jumbo CDs pay a lower return than many other fixed-rate investments, such as bonds. * In a rising interest rate environment, jumbo CDs face interest rate risk, as investors might hold a CD paying a lower rate. * Jumbo CDs don’t typically keep up with inflation, meaning prices could rise faster than the CD’s rate of return. * Investors cannot access their funds in jumbo CDs before maturity without incurring an early withdrawal penalty. * Jumbo CDs can have high minimum balance requirements. ## Examples of Jumbo CDs Veridian Credit Union, founded in Waterloo, Iowa, in 1934, offers many types of CDs, including jumbo CDs. Examples of the jumbo rate as of May 21, 2024, include: * A nine-month jumbo CD with a minimum $100,000 deposit pays 0.40%. * A 15-month jumbo CD with a minimum $100,000 deposit pays 0.40%. Please note: The interest rates being offered can change anytime for new CDs and might be different depending on the state where the depositor is located. ## What Is the Shortest Term for a Jumbo CD? Jumbo CD terms can be as short as a few days, but these extremely short terms are hard to find. More commonly, the minimum term for a jumbo CD is three months. ## Do Jumbo CDs Earn a Higher Interest Rate than a Normal CD? Since jumbo CDs require a much higher minimum deposit, banks and credit unions typically reward savers with higher interest rates than for smaller accounts. Longer terms also earn higher interest rates. Those higher rates are an incentive to reduce the [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) of your savings. ## How Much of my Jumbo CD Is FDIC- or NCUA-insured? The FDIC or NCUA insures up to the first $250,000 in each account at an affiliated bank or credit union. ## The Bottom Line Jumbo CDs are a very safe place to hold money. Banks are willing to offer attractive interest rates for savers in exchange for fixed terms. While jumbo CDs are safe, they may not be the best place to earn money in a volatile interest environment. If interest rates are rising and you’re locked into a long-term CD, you may miss out on the opportunity to invest at a higher rate. Consider your term length carefully before deciding.

What Is a Jumbo Certificate of Deposit (CD)? A jumbo certificate of deposit is a CD that requires a higher minimum balance obligation than that required by traditional CDs. In return, the jumbo CD pays a higher interest rate. A CD is a type of savings account that pays fixed or variable interest in exchange for depositors leaving their funds in the account until a specified maturity date. Key Takeaways A jumbo CD usually has a minimum balance requirement of $100,000. Although jumbo CDs have higher minimum balance requirements than traditional CDs, they pay a higher interest rate in return. Jumbo CDs pay investors a fixed interest rate, helping to stabilize returns in an investment portfolio by partly offsetting market risk. Understanding Jumbo CDs Traditional CDs typically offer a higher rate of return than do standard savings accounts or interest-bearing checking accounts. In this same vein, the jumbo CD will pay an even higher rate than traditional CDs offer. Jumbos receive a higher rate because they require a larger minimum investment than the standard CD. Most jumbo CDs start at $100,000, but some financial institutions offering them may have a few products with lower entry points. Jumbo CDs are considered risk-free investments, as they’re insured up to $250,000 by the Federal Deposit Insurance Corp. (FDIC). Credit unions also market jumbo CDs, and these funds find protection under the National Credit Union Administration (NCUA). Investors receive the premium—based on the fixed interest rate—as compensation for not having access to their money over the life of the account. A one-year jumbo CD that pays 1.5% interest, for example, may require that the funds remain locked up in the account for one year. Jumbo CDs can have term lengths as short as a few days or as long as a decade. However, the standard range is three months to five years. And the longer the term, the higher the interest rate returned on the funds invested. Upon maturity of the CD, the financial institution returns the investor’s principal. Early withdrawals may be possible, depending on the terms of the product purchased. However, the investor will pay a penalty for early termination of the contract. $250,000 The amount up to which the FDIC insures CDs. Advantages of Jumbo CDs Large institutional investors are the typical customers for jumbo CDs. These large institutions include banks, some large corporations, and pension funds. Primarily, this is due to the high minimum balance requirements. These customers use jumbo CDs as a temporary investment vehicle, as some issuers have tenures for as little as seven days. The short-term maturities allow institutional investors and companies to earn interest on idle money for short periods before rolling the funds into other ventures. These jumbo CDs are instruments for treasury management of large corporations and money market instruments for large investors. Other than being paid to park their funds in these products, large investors use them as instruments to reduce their portfolio’s market risk exposure. Market risk arises when prices in the stock market fluctuate over time. As a result, stock portfolios can earn high returns, but they can also incur large losses. The steady interest paid on jumbo CDs helps offset and reduce the risk of negative returns that can happen from holding stocks. A business seeking a loan or other type of financing from a bank can pledge its jumbo CD as collateral, which is an asset held by a lender as security for a loan in case the borrower falls behind or defaults on the loan payments. If the borrower defaults on timely payments, the lender can seize the collateral to recoup any losses. However, CDs held in retirement accounts cannot be pledged as collateral for loans. Jumbo CDs can be used as collateral for loans. Disadvantages of Jumbo CDs Although jumbo CDs have positive aspects of higher rates and FDIC or NCUA protection, there are disadvantages to investing in them. Historically, jumbo CDs have paid a much higher rate than traditional CDs and savings accounts. Nevertheless, the differences between those returns have narrowed in recent years, making a jumbo CD a less compelling investment. Inflation Risk Jumbo CDs don’t typically keep up with inflation. If the inflation rate in the economy is 2%, for example, and the interest rate on the CD is 2.5%, then the investor is only earning 0.5% in real terms. To make an investment in a jumbo CD worthwhile, investors would need to lock in their funds for longer terms, resulting in a higher rate. Early Withdrawal Penalties Should the holder need these funds before the jumbo CD matures, withdrawing them would result in a financial penalty, which could be a fee assessed by the bank for the loss of interest earned to date. Each bank will have specific rules and guidelines for early withdrawals. If the funds likely might be needed before the CD’s maturity, then investors might be better off investing the funds in an account that doesn’t have withdrawal restrictions, such as a high-interest savings account. Interest Rate Risk Another worry for jumbo CD investors is interest rate risk. This comes when current market interest rates rise above the rate offered by the jumbo CD. If interest rates rise while investors are holding a jumbo CD, they miss out on the higher rates they could have had if these funds had been available to invest elsewhere. Reinvestment Rate Risk Conversely, if interest rates fall during the holding period, the investor may not be able to reinvest the funds at maturity at a rate comparable to the CD. This hazard is known as reinvestment risk. Although jumbo CDs pay a higher rate at the onset than other products, investors must weigh the pros and cons to ensure they don’t have a lower return in the long term. Pros Jumbo CDs offer a steady rate of interest for the length of the holding term. Jumbo CDs typically pay a higher interest rate than traditional CDs or savings accounts do. The steady interest paid on jumbo CDs can partly offset the portfolio’s market risk of negative returns from holding stocks. Jumbo CDs carry a guarantee of up to $250,000 per account by the FDIC or the NCUA. Cons Jumbo CDs pay a lower return than many other fixed-rate investments, such as bonds. In a rising interest rate environment, jumbo CDs face interest rate risk, as investors might hold a CD paying a lower rate. Jumbo CDs don’t typically keep up with inflation, meaning prices could rise faster than the CD’s rate of return. Investors cannot access their funds in jumbo CDs before maturity without incurring an early withdrawal penalty. Jumbo CDs can have high minimum balance requirements. Examples of Jumbo CDs Veridian Credit Union, founded in Waterloo, Iowa, in 1934, offers many types of CDs, including jumbo CDs. Examples of the jumbo rate as of May 21, 2024, include: A nine-month jumbo CD with a minimum $100,000 deposit pays 0.40%.A 15-month jumbo CD with a minimum $100,000 deposit pays 0.40%. Please note: The interest rates being offered can change anytime for new CDs and might be different depending on the state where the depositor is located. What Is the Shortest Term for a Jumbo CD? Jumbo CD terms can be as short as a few days, but these extremely short terms are hard to find. More commonly, the minimum term for a jumbo CD is three months. Do Jumbo CDs Earn a Higher Interest Rate than a Normal CD? Since jumbo CDs require a much higher minimum deposit, banks and credit unions typically reward savers with higher interest rates than for smaller accounts. Longer terms also earn higher interest rates. Those higher rates are an incentive to reduce the liquidity of your savings. How Much of my Jumbo CD Is FDIC- or NCUA-insured? The FDIC or NCUA insures up to the first $250,000 in each account at an affiliated bank or credit union. The Bottom Line Jumbo CDs are a very safe place to hold money. Banks are willing to offer attractive interest rates for savers in exchange for fixed terms. While jumbo CDs are safe, they may not be the best place to earn money in a volatile interest environment. If interest rates are rising and you’re locked into a long-term CD, you may miss out on the opportunity to invest at a higher rate. Consider your term length carefully before deciding.

https://www.investopedia.com/racial-justice-investing-5111992

Racial Justice Investing: 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-racial-justice-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 Racial Justice Investing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Racial justice investing is a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sri.asp">socially responsible</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/impact-investing.asp">impact investing</a> aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Among the motivations behind racial justice investing is to recognize institutional investors’ influence and power in the markets, and that the investor community has contributed to and benefited from structurally racist systems and the entrenchment of White dominance among investors and financial sector employees. </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>Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity.</li> <li>Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color.</li> <li>In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): the Impact Shares NAACP Minority Empowerment ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NACP">NACP</a>).</li> </ul></div></div></div> <span class="heading-toc" id="toc-understanding-racial-justice-investing"></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 Racial Justice Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Impact investing, which aims to generate specific benefits that promote social gains, has grown in prominence over the past several years. The point of impact investing is to put money and investment capital to work for the good of society, often targeting traditionally underserved communities or sectors. This can be done by investing, for example, in nonprofits that benefit the community or in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cleantech.asp">clean-technology</a> enterprises that benefit the environment.<span class="ql-inline-citation" data-cite="5"></span> Impact investing attracts individuals as well as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional investors</a>, including <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp">hedge funds</a>, <a class="pseudoStyle" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privatefoundation.asp">private foundations</a>, banks, <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp">pension funds</a>, and other fund managers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> One form of impact investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this cause and other anti-racist ones. Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Financial firms and institutional investors are also increasingly looking to their own internal practices and employee demographics, signing racial justice pledges, and issuing statements to publicize their positions. Others are actively fostering racial diversity and inclusion, while also favoring vendors and suppliers that have made similar pledges. According to Forbes, “Within their portfolios, institutional investor actions span from promoting board diversity to making investments that support job and wealth creation for underrepresented minorities.”<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_14-0"></div> <span class="heading-toc" id="toc-public-pledges"></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"> Public Pledges </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In 2020, and especially following the social movements that responded to police brutality and the killings of unarmed Black men in particular, several financial firms signed on to public pledges admonishing persistent racism in America and seeking to use their influence as institutional investors to instead promote diversity, inclusion, and justice.  </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 2020 Belonging Pledge, put forth by the group Confluence Philanthropy, seeks the following call to action among its signatories: “We commit to discussing racial equity at our next investment committee meeting. We will move our agenda forward on this. We will share our next steps and results (perhaps privately), so that we can help to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens.” As of March 2022, 187 institutional investors, ranging from hedge funds to pensions, had signed on to the Belonging Pledge, representing $1.88 trillion in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management (AUM)</a>.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> A second pledge was issued by Racial Justice Investing (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states, “As investors, we stand in solidarity with protesters and call for the dismantling of systemic racism and recognize our responsibility to act. We recognize that the investor community has contributed to and benefited from racist systems and the entrenchment of white supremacy […] We acknowledge the deep roots of structural racial inequity. Since its founding, the United States’ society and economy have been rooted in racist beliefs and systems designed to extract wealth and maintain the power of a white elite…” This pledge has been endorsed by 188 institutional investors as of March 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_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small. </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-investor-direct-action"></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"> Investor Direct Action </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In addition to signing public pledges and making efforts to diversify and address racial issues internally, institutional investors are also putting their money where their mouths are. This starts by investing in firms owned and operated by people of color, as well as investing with subadvisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but doesn't undermine—and can enhance—returns. A recent research paper authored by Harvard Business School’s Josh Lerner found no statistically significant difference between the performance of portfolios managed by more diverse firms and that of non-diverse peers.<span class="ql-inline-citation" data-cite="3"></span> And the National Association of Investment Companies (NAIC) found that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateequity.asp">private equity</a> funds with greater diversity outperformed in nearly 80% of vintage years.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Investing in companies with more diverse corporate boards of directors also seems to be a social strategy that yields above-average returns. The Carlyle Group has found that after controlling for industry, fund, and vintage year, companies with more diverse boards generate earnings growth that is five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth.<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_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Other direct actions investors can take to promote racial justice include putting capital into real estate investments, such as <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>, which promote affordable housing or invest in underserved residential communities, making improvements, offering fair terms and rent for their tenants. At the same time, investors may seek to negatively screen out investments that could prove detrimental to the cause of racial justice—for instance, in banks known for predatory lending practices or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redlining.asp">redlining</a>, or that engage in activities that overburden communities of color, such as private prisons. </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-investing-in-racial-justice-investments"></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"> Investing in Racial Justice Investments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Though much of racial justice investing involves actions taken by large institutional investors, individual retail investors can also get involved. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused <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>: The Impact Shares NAACP Minority Empowerment ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NACP">NACP</a>), which is, to date, the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups, the National Association for the Advancement of Colored People (NAACP).<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The top 10 holdings of NACP, as of March 2022, are: </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>Apple</li><li>Microsoft</li><li>Amazon</li><li>Meta Platforms</li><li>Tesla</li><li>NVIDIA</li><li>Alphabet (Google) A</li><li>Cisco</li><li>Alphabet (Google) C</li><li>Salesforce<span class="ql-inline-citation" data-cite="9"></span></li> </ol> <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-racial-justice-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Racial Justice Investing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Racial justice investing is a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sri.asp">socially responsible</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/impact-investing.asp">impact investing</a> aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates, and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators.</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-is-an-etf"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an ETF?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An ETF, an exchange-traded fund, is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp">mutual funds</a>, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-is-cleantech"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Cleantech?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In finance, the term cleantech—short for clean technology—is used to refer to various companies and technologies that aim to improve environmental sustainability. Usage of the term has varied over the years, with some users treating it synonymously with terms such as “green technology” to refer to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sustainable-investing-4427774">renewable energy sources</a>, new methods of recycling, and other environmentally-friendly practices.</p><p><br/></p><p>In other cases, the term refers to methods of reducing the negative environmental impact of otherwise conventional technologies such as coal power or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental-analysis/12/natural-gas-primer.asp">natural gas</a>. In this context, terms such as “clean coal” or “clean energy” are commonly used, although many environmentalists question the validity of this usage.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-are-assets-under-management-aum"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Assets Under Management (AUM)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Assets under management (AUM) are the total <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a> of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.</p><p><br/></p><p>In the calculation of AUM, some financial institutions include bank deposits, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/062113/mutual-funds-management-fees-vs-mer.asp">mutual funds</a>, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf.</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-an-institutional-investor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Institutional Investor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pensions-4427728">pensions</a>, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.</p><p><br/></p><p>The group is also viewed as more sophisticated than the average <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp">retail investor</a> and, in some instances, they are subject to less restrictive regulations.</p></div> </div></div>

## What Is Racial Justice Investing? Racial justice investing is a form of [socially responsible](https://www.investopedia.com/terms/s/sri.asp) or [impact investing](https://www.investopedia.com/terms/i/impact-investing.asp) aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators. Among the motivations behind racial justice investing is to recognize institutional investors’ influence and power in the markets, and that the investor community has contributed to and benefited from structurally racist systems and the entrenchment of White dominance among investors and financial sector employees. ### Key Takeaways * Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. * Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color. * In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): the Impact Shares NAACP Minority Empowerment ETF ([NACP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NACP)). ## Understanding Racial Justice Investing Impact investing, which aims to generate specific benefits that promote social gains, has grown in prominence over the past several years. The point of impact investing is to put money and investment capital to work for the good of society, often targeting traditionally underserved communities or sectors. This can be done by investing, for example, in nonprofits that benefit the community or in [clean-technology](https://www.investopedia.com/terms/c/cleantech.asp) enterprises that benefit the environment. Impact investing attracts individuals as well as [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp), including [hedge funds](https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp), [private foundations](https://www.investopedia.com/terms/p/privatefoundation.asp), banks, [pension funds](https://www.investopedia.com/articles/investing-strategy/090916/how-do-pension-funds-work.asp), and other fund managers. One form of impact investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this cause and other anti-racist ones. Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color. Financial firms and institutional investors are also increasingly looking to their own internal practices and employee demographics, signing racial justice pledges, and issuing statements to publicize their positions. Others are actively fostering racial diversity and inclusion, while also favoring vendors and suppliers that have made similar pledges. According to Forbes, “Within their portfolios, institutional investor actions span from promoting board diversity to making investments that support job and wealth creation for underrepresented minorities.” ## Public Pledges In 2020, and especially following the social movements that responded to police brutality and the killings of unarmed Black men in particular, several financial firms signed on to public pledges admonishing persistent racism in America and seeking to use their influence as institutional investors to instead promote diversity, inclusion, and justice.  The 2020 Belonging Pledge, put forth by the group Confluence Philanthropy, seeks the following call to action among its signatories: “We commit to discussing racial equity at our next investment committee meeting. We will move our agenda forward on this. We will share our next steps and results (perhaps privately), so that we can help to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens.” As of March 2022, 187 institutional investors, ranging from hedge funds to pensions, had signed on to the Belonging Pledge, representing $1.88 trillion in [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp). A second pledge was issued by Racial Justice Investing (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states, “As investors, we stand in solidarity with protesters and call for the dismantling of systemic racism and recognize our responsibility to act. We recognize that the investor community has contributed to and benefited from racist systems and the entrenchment of white supremacy […] We acknowledge the deep roots of structural racial inequity. Since its founding, the United States’ society and economy have been rooted in racist beliefs and systems designed to extract wealth and maintain the power of a white elite…” This pledge has been endorsed by 188 institutional investors as of March 2022. Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small. ## Investor Direct Action In addition to signing public pledges and making efforts to diversify and address racial issues internally, institutional investors are also putting their money where their mouths are. This starts by investing in firms owned and operated by people of color, as well as investing with subadvisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but doesn't undermine—and can enhance—returns. A recent research paper authored by Harvard Business School’s Josh Lerner found no statistically significant difference between the performance of portfolios managed by more diverse firms and that of non-diverse peers. And the National Association of Investment Companies (NAIC) found that [private equity](https://www.investopedia.com/terms/p/privateequity.asp) funds with greater diversity outperformed in nearly 80% of vintage years. Investing in companies with more diverse corporate boards of directors also seems to be a social strategy that yields above-average returns. The Carlyle Group has found that after controlling for industry, fund, and vintage year, companies with more diverse boards generate earnings growth that is five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth. Other direct actions investors can take to promote racial justice include putting capital into real estate investments, such as [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp), which promote affordable housing or invest in underserved residential communities, making improvements, offering fair terms and rent for their tenants. At the same time, investors may seek to negatively screen out investments that could prove detrimental to the cause of racial justice—for instance, in banks known for predatory lending practices or [redlining](https://www.investopedia.com/terms/r/redlining.asp), or that engage in activities that overburden communities of color, such as private prisons. ## Investing in Racial Justice Investments Though much of racial justice investing involves actions taken by large institutional investors, individual retail investors can also get involved. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused [exchange-traded fund (ETF)](https://www.investopedia.com/terms/e/etf.asp): The Impact Shares NAACP Minority Empowerment ETF ([NACP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NACP)), which is, to date, the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups, the National Association for the Advancement of Colored People (NAACP). The top 10 holdings of NACP, as of March 2022, are: 1. Apple 2. Microsoft 3. Amazon 4. Meta Platforms 5. Tesla 6. NVIDIA 7. Alphabet (Google) A 8. Cisco 9. Alphabet (Google) C 10. Salesforce ## What Is Racial Justice Investing? Racial justice investing is a form of [socially responsible](https://www.investopedia.com/terms/s/sri.asp) or [impact investing](https://www.investopedia.com/terms/i/impact-investing.asp) aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates, and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators. ## What Is an ETF? An ETF, an exchange-traded fund, is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. ## What Is Cleantech? In finance, the term cleantech—short for clean technology—is used to refer to various companies and technologies that aim to improve environmental sustainability. Usage of the term has varied over the years, with some users treating it synonymously with terms such as “green technology” to refer to [renewable energy sources](https://www.investopedia.com/sustainable-investing-4427774), new methods of recycling, and other environmentally-friendly practices. In other cases, the term refers to methods of reducing the negative environmental impact of otherwise conventional technologies such as coal power or [natural gas](https://www.investopedia.com/articles/fundamental-analysis/12/natural-gas-primer.asp). In this context, terms such as “clean coal” or “clean energy” are commonly used, although many environmentalists question the validity of this usage. ## What Are Assets Under Management (AUM)? Assets under management (AUM) are the total [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company. In the calculation of AUM, some financial institutions include bank deposits, [mutual funds](https://www.investopedia.com/articles/investing/062113/mutual-funds-management-fees-vs-mer.asp), and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf. ## What Is an Institutional Investor? An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, [pensions](https://www.investopedia.com/pensions-4427728), and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street. The group is also viewed as more sophisticated than the average [retail investor](https://www.investopedia.com/terms/r/retailinvestor.asp) and, in some instances, they are subject to less restrictive regulations.

What Is Racial Justice Investing? Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators. Among the motivations behind racial justice investing is to recognize institutional investors’ influence and power in the markets, and that the investor community has contributed to and benefited from structurally racist systems and the entrenchment of White dominance among investors and financial sector employees. Key Takeaways Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): the Impact Shares NAACP Minority Empowerment ETF (NACP). Understanding Racial Justice Investing Impact investing, which aims to generate specific benefits that promote social gains, has grown in prominence over the past several years. The point of impact investing is to put money and investment capital to work for the good of society, often targeting traditionally underserved communities or sectors. This can be done by investing, for example, in nonprofits that benefit the community or in clean-technology enterprises that benefit the environment. Impact investing attracts individuals as well as institutional investors, including hedge funds, private foundations, banks, pension funds, and other fund managers. One form of impact investing involves promoting racial justice, equality, and inclusion. Known as racial justice investing, the purpose is to leverage both institutional and retail dollars to invest in ways that advance this cause and other anti-racist ones. Racial justice investing can take on many forms, including seeking investment in Black-owned businesses or startups with founders who are people of color. Financial firms and institutional investors are also increasingly looking to their own internal practices and employee demographics, signing racial justice pledges, and issuing statements to publicize their positions. Others are actively fostering racial diversity and inclusion, while also favoring vendors and suppliers that have made similar pledges. According to Forbes, “Within their portfolios, institutional investor actions span from promoting board diversity to making investments that support job and wealth creation for underrepresented minorities.” Public Pledges In 2020, and especially following the social movements that responded to police brutality and the killings of unarmed Black men in particular, several financial firms signed on to public pledges admonishing persistent racism in America and seeking to use their influence as institutional investors to instead promote diversity, inclusion, and justice.  The 2020 Belonging Pledge, put forth by the group Confluence Philanthropy, seeks the following call to action among its signatories: “We commit to discussing racial equity at our next investment committee meeting. We will move our agenda forward on this. We will share our next steps and results (perhaps privately), so that we can help to identify industry-wide barriers and the technical resources required to advance the practice of investing with a racial equity lens.” As of March 2022, 187 institutional investors, ranging from hedge funds to pensions, had signed on to the Belonging Pledge, representing $1.88 trillion in assets under management (AUM). A second pledge was issued by Racial Justice Investing (RJI). Its Investor Statement of Solidarity to Address Systemic Racism and Call to Action states, “As investors, we stand in solidarity with protesters and call for the dismantling of systemic racism and recognize our responsibility to act. We recognize that the investor community has contributed to and benefited from racist systems and the entrenchment of white supremacy […] We acknowledge the deep roots of structural racial inequity. Since its founding, the United States’ society and economy have been rooted in racist beliefs and systems designed to extract wealth and maintain the power of a white elite…” This pledge has been endorsed by 188 institutional investors as of March 2022. Several other pledges that have similar mission statements are also available and gaining signatures from investors large and small. Investor Direct Action In addition to signing public pledges and making efforts to diversify and address racial issues internally, institutional investors are also putting their money where their mouths are. This starts by investing in firms owned and operated by people of color, as well as investing with subadvisors and portfolio managers that have diverse teams. Doing so not only promotes racial justice but doesn't undermine—and can enhance—returns. A recent research paper authored by Harvard Business School’s Josh Lerner found no statistically significant difference between the performance of portfolios managed by more diverse firms and that of non-diverse peers. And the National Association of Investment Companies (NAIC) found that private equity funds with greater diversity outperformed in nearly 80% of vintage years. Investing in companies with more diverse corporate boards of directors also seems to be a social strategy that yields above-average returns. The Carlyle Group has found that after controlling for industry, fund, and vintage year, companies with more diverse boards generate earnings growth that is five times faster, on average, with each diverse board member associated with a 5% increase in annualized earnings growth. Other direct actions investors can take to promote racial justice include putting capital into real estate investments, such as real estate investment trusts (REITs), which promote affordable housing or invest in underserved residential communities, making improvements, offering fair terms and rent for their tenants. At the same time, investors may seek to negatively screen out investments that could prove detrimental to the cause of racial justice—for instance, in banks known for predatory lending practices or redlining, or that engage in activities that overburden communities of color, such as private prisons. Investing in Racial Justice Investments Though much of racial justice investing involves actions taken by large institutional investors, individual retail investors can also get involved. In addition to researching and investing in stocks that align with these causes, there is now a racial justice-focused exchange-traded fund (ETF): The Impact Shares NAACP Minority Empowerment ETF (NACP), which is, to date, the only financial product that explicitly addresses issues of racial inequality, doing so with the backing of one of America’s oldest and most prestigious civil rights groups, the National Association for the Advancement of Colored People (NAACP). The top 10 holdings of NACP, as of March 2022, are: AppleMicrosoftAmazonMeta PlatformsTeslaNVIDIAAlphabet (Google) ACiscoAlphabet (Google) CSalesforce What Is Racial Justice Investing? Racial justice investing is a form of socially responsible or impact investing aimed at adding investments that promote racial justice, inclusion, and diversity. The idea is to screen for investments in companies that promote these social goals, which can be accomplished in several ways. These may include, among other tactics, owning shares of Black-owned businesses or companies with diversity-hiring mandates, and avoiding investments in companies that disproportionately impact communities of color in negative ways, such as gun manufacturers or private prison operators. What Is an ETF? An ETF, an exchange-traded fund, is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. What Is Cleantech? In finance, the term cleantech—short for clean technology—is used to refer to various companies and technologies that aim to improve environmental sustainability. Usage of the term has varied over the years, with some users treating it synonymously with terms such as “green technology” to refer to renewable energy sources, new methods of recycling, and other environmentally-friendly practices.In other cases, the term refers to methods of reducing the negative environmental impact of otherwise conventional technologies such as coal power or natural gas. In this context, terms such as “clean coal” or “clean energy” are commonly used, although many environmentalists question the validity of this usage. What Are Assets Under Management (AUM)? Assets under management (AUM) are the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.In the calculation of AUM, some financial institutions include bank deposits, mutual funds, and cash in their calculations. Others limit it to funds under discretionary management, where the investor assigns authority to the company to trade on their behalf. What Is an Institutional Investor? An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities and, for that reason, are considered to be the whales on Wall Street.The group is also viewed as more sophisticated than the average retail investor and, in some instances, they are subject to less restrictive regulations.

https://www.investopedia.com/terms/u/ung.asp

United States Natural Gas Fund (UNG): Meaning, How it Works

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-united-states-natural-gas-fund-ung"></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 United States Natural Gas Fund (UNG)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The United States Natural Gas Fund (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ung">UNG</a>) is an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded fund</a> (ETF) with the stated goal of following the movement of natural gas prices. It is the largest natural gas ETF with shares available on the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse-arca.asp">NYSE Arca</a>. The fund provides access to investing in natural gas without having to invest in the futures market, which is a complicated and risky route for the regular investor. </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 United States Natural Gas Fund (UNG) is a natural gas ETF whose goal is to track the percentage movements of the natural gas futures contract on the NYMEX.</li><li>The NYMEX natural gas contract is the Henry Hub Natural Gas futures, the primary U.S. benchmark for natural gas.</li><li>The ETF is listed on the NYSE Arca and invests in natural gas futures, swaps, and forwards. It is the largest natural gas ETF.</li><li>The performance of the ETF has been poor, given the consistent drop in prices of Henry Hub, as the U.S. shale industry grows and adversely impacts Henry Hub prices.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-united-states-natural-gas-fund-ung"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding the United States Natural Gas Fund (UNG) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Before ETFs became widespread, investors had to invest in futures to gain exposure to natural gas, which is much more complicated than buying or selling stock on an exchange. With the advent of ETFs, investors became able to easily invest in natural gas without the risk of having to buy or sell futures. It is having commodity-like exposure without directly investing in the commodity. </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"> UNG is the largest natural gas ETF with a futures base. Its investment goal aims for the daily percentage changes of its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset value</a> (NAV) to mirror the daily percentage changes of the price of natural gas delivered to Henry Hub, Louisiana. This is measured with the Henry Hub/natural gas futures contract on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nymex.asp">NYMEX</a>. Henry Hub is the largest gas hub in terms of trading volumes and the benchmark for U.S. gas futures. </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"> Falling Prices </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Henry Hub gas prices have been falling with the U.S. shale boom, which has been reflected in the performance of UNG. The U.S. Energy Information Administration (EIA) believes that prices will increase in the second quarter of 2020 as gas production will slow down and demand for gas will increase for power generation needs. </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"> UNG invests primarily in natural gas <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a> contracts but also in natural gas-related futures as well as forwards and swaps. The investments are "collateralized by cash, cash equivalents, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federally-guaranteed-obligation.asp">US government obligations</a> with remaining maturities of two years or less." </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The United States Natural Gas Fund (UNG) was introduced in April 2007 by Victoria Bay Asset Management (now known as United States Commodity Funds, LLC) and the American Stock Exchange. It is managed by United States Commodity Funds. </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-snapshot-of-the-united-states-natural-gas-fund-ung"></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"> Snapshot of the United States Natural Gas Fund (UNG) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> As of Feb. 12, 2020, UNG has the following profile: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li><strong>Net assets</strong>:<strong> </strong>$530.8 million</li><li><strong>Average volume</strong>:<strong> </strong>4,667,496</li><li><strong>Expense ratio</strong>: 1.28%</li><li><strong>One year performance</strong>: -40%</li><li><strong>Previous close</strong>:<strong> </strong>14.03</li><li><strong>Top holdings</strong>:<strong> </strong>Futures contract on Natural Gas Futures Jan 20 (48.5%); United States Treasury Bills (1.5%)</li> </ul></div>

## What Is the United States Natural Gas Fund (UNG)? The United States Natural Gas Fund ([UNG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ung)) is an [exchange traded fund](https://www.investopedia.com/terms/e/etf.asp) (ETF) with the stated goal of following the movement of natural gas prices. It is the largest natural gas ETF with shares available on the [NYSE Arca](https://www.investopedia.com/terms/n/nyse-arca.asp). The fund provides access to investing in natural gas without having to invest in the futures market, which is a complicated and risky route for the regular investor. ### Key Takeaways * The United States Natural Gas Fund (UNG) is a natural gas ETF whose goal is to track the percentage movements of the natural gas futures contract on the NYMEX. * The NYMEX natural gas contract is the Henry Hub Natural Gas futures, the primary U.S. benchmark for natural gas. * The ETF is listed on the NYSE Arca and invests in natural gas futures, swaps, and forwards. It is the largest natural gas ETF. * The performance of the ETF has been poor, given the consistent drop in prices of Henry Hub, as the U.S. shale industry grows and adversely impacts Henry Hub prices. ## Understanding the United States Natural Gas Fund (UNG) Before ETFs became widespread, investors had to invest in futures to gain exposure to natural gas, which is much more complicated than buying or selling stock on an exchange. With the advent of ETFs, investors became able to easily invest in natural gas without the risk of having to buy or sell futures. It is having commodity-like exposure without directly investing in the commodity. UNG is the largest natural gas ETF with a futures base. Its investment goal aims for the daily percentage changes of its [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) to mirror the daily percentage changes of the price of natural gas delivered to Henry Hub, Louisiana. This is measured with the Henry Hub/natural gas futures contract on the [NYMEX](https://www.investopedia.com/terms/n/nymex.asp). Henry Hub is the largest gas hub in terms of trading volumes and the benchmark for U.S. gas futures. ### Falling Prices Henry Hub gas prices have been falling with the U.S. shale boom, which has been reflected in the performance of UNG. The U.S. Energy Information Administration (EIA) believes that prices will increase in the second quarter of 2020 as gas production will slow down and demand for gas will increase for power generation needs. UNG invests primarily in natural gas [futures](https://www.investopedia.com/terms/f/futures.asp) contracts but also in natural gas-related futures as well as forwards and swaps. The investments are "collateralized by cash, cash equivalents, and [US government obligations](https://www.investopedia.com/terms/f/federally-guaranteed-obligation.asp) with remaining maturities of two years or less." The United States Natural Gas Fund (UNG) was introduced in April 2007 by Victoria Bay Asset Management (now known as United States Commodity Funds, LLC) and the American Stock Exchange. It is managed by United States Commodity Funds. ## Snapshot of the United States Natural Gas Fund (UNG) As of Feb. 12, 2020, UNG has the following profile: * **Net assets**:$530.8 million * **Average volume**:4,667,496 * **Expense ratio**: 1.28% * **One year performance**: -40% * **Previous close**:14.03 * **Top holdings**:Futures contract on Natural Gas Futures Jan 20 (48.5%); United States Treasury Bills (1.5%)

What Is the United States Natural Gas Fund (UNG)? The United States Natural Gas Fund (UNG) is an exchange traded fund (ETF) with the stated goal of following the movement of natural gas prices. It is the largest natural gas ETF with shares available on the NYSE Arca. The fund provides access to investing in natural gas without having to invest in the futures market, which is a complicated and risky route for the regular investor. Key Takeaways The United States Natural Gas Fund (UNG) is a natural gas ETF whose goal is to track the percentage movements of the natural gas futures contract on the NYMEX.The NYMEX natural gas contract is the Henry Hub Natural Gas futures, the primary U.S. benchmark for natural gas.The ETF is listed on the NYSE Arca and invests in natural gas futures, swaps, and forwards. It is the largest natural gas ETF.The performance of the ETF has been poor, given the consistent drop in prices of Henry Hub, as the U.S. shale industry grows and adversely impacts Henry Hub prices. Understanding the United States Natural Gas Fund (UNG) Before ETFs became widespread, investors had to invest in futures to gain exposure to natural gas, which is much more complicated than buying or selling stock on an exchange. With the advent of ETFs, investors became able to easily invest in natural gas without the risk of having to buy or sell futures. It is having commodity-like exposure without directly investing in the commodity. UNG is the largest natural gas ETF with a futures base. Its investment goal aims for the daily percentage changes of its net asset value (NAV) to mirror the daily percentage changes of the price of natural gas delivered to Henry Hub, Louisiana. This is measured with the Henry Hub/natural gas futures contract on the NYMEX. Henry Hub is the largest gas hub in terms of trading volumes and the benchmark for U.S. gas futures. Falling Prices Henry Hub gas prices have been falling with the U.S. shale boom, which has been reflected in the performance of UNG. The U.S. Energy Information Administration (EIA) believes that prices will increase in the second quarter of 2020 as gas production will slow down and demand for gas will increase for power generation needs. UNG invests primarily in natural gas futures contracts but also in natural gas-related futures as well as forwards and swaps. The investments are "collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less." The United States Natural Gas Fund (UNG) was introduced in April 2007 by Victoria Bay Asset Management (now known as United States Commodity Funds, LLC) and the American Stock Exchange. It is managed by United States Commodity Funds. Snapshot of the United States Natural Gas Fund (UNG) As of Feb. 12, 2020, UNG has the following profile: Net assets: $530.8 millionAverage volume: 4,667,496Expense ratio: 1.28%One year performance: -40%Previous close: 14.03Top holdings: Futures contract on Natural Gas Futures Jan 20 (48.5%); United States Treasury Bills (1.5%)

https://www.investopedia.com/terms/b/beta.asp

What Beta Means for Investors

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-beta"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is Beta? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Beta (β) is the second letter of the Greek alphabet used in finance to denote the volatility or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systematicrisk.asp">systematic risk</a> of a security or portfolio compared to the market, usually the S&amp;P 500 which has a beta of 1.0. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&amp;P 500. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Beta (β) compares a stock or portfolio's volatility or systematic risk to the market.</li><li>Beta provides an investor with an approximation of how much risk a stock will add to a portfolio.</li><li>The S&amp;P 500 has a beta of 1.0.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_6-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Beta" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/EuoiCsbidRDdGqTnLps5ycTsNVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/EuoiCsbidRDdGqTnLps5ycTsNVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg" data-srcset="https://www.investopedia.com/thmb/F0BV9U31w6Ga4fJp3_EATDxyQww=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Beta" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/EuoiCsbidRDdGqTnLps5ycTsNVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg" srcset="https://www.investopedia.com/thmb/F0BV9U31w6Ga4fJp3_EATDxyQww=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Yurle Villegas</p></span> </figcaption></figure> <span class="heading-toc" id="toc-how-beta-works"></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 Beta Works </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/b/beta.asp">beta</a> coefficient shows the volatility of an individual stock compared to the systematic risk of the entire market. Beta represents the slope of the line through a regression of data points. In finance, each point represents an individual stock's returns against the market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Beta effectively describes the activity of a security's returns as it responds to swings in the market. It is used in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM), which describes the relationship between systematic risk and expected return for assets. CAPM is used to price risky securities and to estimate the expected returns of assets, considering the risk of those assets and the cost of capital. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-calculating-beta"></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"> Calculating Beta </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> A security's beta is calculated by dividing the product of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/covariance.asp">covariance</a> of the security's returns and the market's returns by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variance.asp">variance</a> of the market's returns over a specified period. The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102115/what-beta-and-how-calculate-beta-excel.asp">calculation</a> helps investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights into how volatile–or how risky–a stock is relative to the rest of the market.</p> <p>For beta to provide useful insight, the market used as a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102714/how-do-you-calculate-beta-excel.asp">benchmark should be related</a> to the stock. For example, a bond ETF's beta with the S&amp;P 500 as the benchmark would not be helpful to an investor because bonds and stocks are too dissimilar.<br/></p> <p><span data-value="\begin{aligned} &amp;\text{Beta coefficient}(\beta) = \frac{\text{Covariance}(R_e, R_m)}{\text{Variance}(R_m)} \\ &amp;\textbf{where:}\\ &amp;R_e=\text{the return on an individual stock}\\ &amp;R_m=\text{the return on the overall market}\\ &amp;\text{Covariance}=\text{how changes in a stock's returns are} \\ &amp;\text{related to changes in the market's returns}\\ &amp;\text{Variance}=\text{how far the market's data points spread} \\ &amp;\text{out from their average value} \\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Beta coefficient </mtext> <mo> ( </mo> <mi> β </mi> <mo> ) </mo> <mo> = </mo> <mfrac> <mrow> <mtext> Covariance </mtext> <mo> ( </mo> <msub> <mi> R </mi> <mi> e </mi> </msub> <mo> , </mo> <msub> <mi> R </mi> <mi> m </mi> </msub> <mo> ) </mo> </mrow> <mrow> <mtext> Variance </mtext> <mo> ( </mo> <msub> <mi> R </mi> <mi> m </mi> </msub> <mo> ) </mo> </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> <mi> R </mi> <mi> e </mi> </msub> <mo> = </mo> <mtext> the return on an individual stock </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mi> R </mi> <mi> m </mi> </msub> <mo> = </mo> <mtext> the return on the overall market </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Covariance </mtext> <mo> = </mo> <mtext> how changes in a stock’s returns are </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> related to changes in the market’s returns </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Variance </mtext> <mo> = </mo> <mtext> how far the market’s data points spread </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> out from their average value </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\text{Beta coefficient}(\beta) = \frac{\text{Covariance}(R_e, R_m)}{\text{Variance}(R_m)} \\ &amp;\textbf{where:}\\ &amp;R_e=\text{the return on an individual stock}\\ &amp;R_m=\text{the return on the overall market}\\ &amp;\text{Covariance}=\text{how changes in a stock's returns are} \\ &amp;\text{related to changes in the market's returns}\\ &amp;\text{Variance}=\text{how far the market's data points spread} \\ &amp;\text{out from their average value} \\ \end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Beta coefficient</span></span><span class="mopen">(</span><span class="mord mathnormal">β</span><span class="mclose">)</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">Variance</span></span><span class="mopen">(</span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">m</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mclose">)</span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">Covariance</span></span><span class="mopen">(</span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">e</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="mpunct">,</span><span class="mspace"></span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">m</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mclose">)</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 mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">e</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">the return on an individual stock</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">m</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">the return on the overall market</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Covariance</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">how changes in a stock’s returns are</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">related to changes in the market’s returns</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Variance</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">how far the market’s data points spread</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">out from their average value</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-beta-values"></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"> Beta Values </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <li><strong>Beta Equal to 1:</strong> A stock with a beta of 1.0 means its price activity correlates with the market. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the portfolio, but doesn’t increase the likelihood that the portfolio will provide an excess return.</li> <li><strong>Beta Less than 1:</strong> A beta value less than 1.0 means the security is less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Utility stocks often have low betas because they move more slowly than market averages.</li> <li><strong>Beta Greater than 1:</strong> A beta greater than 1.0 indicates that the security's price is theoretically more volatile than the market. If a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks tend to have higher betas than the market benchmark. Adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its return.</li> <li><strong>Negative Beta:</strong> A beta of -1.0 means that the stock is inversely correlated to the market benchmark on a 1:1 basis. <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> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inverse-etf.asp">inverse ETFs</a> are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is common.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-how-investors-use-beta"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> How Investors Use Beta </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> An investor uses beta to gauge how much risk a stock adds to a portfolio. While a stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, it also doesn’t increase the potential for greater returns. </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"> Investors must ensure a specific stock is compared to the right benchmark and review the R-squared value to the benchmark. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/r-squared.asp">R-squared</a> is a statistical measure that compares the security's historical price movements to the benchmark index. A security with a high R-squared value indicates a relevant benchmark. A gold <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), such as the SPDR Gold Shares (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=gld">GLD</a>), is tied to the performance of gold bullion.<span class="ql-inline-citation" data-cite="1"></span> Consequently, a gold ETF would have a low beta and R-squared relationship with the S&amp;P 500. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Investors commonly evaluate two categories of risk. Systematic risk is the risk of the entire market declining, called un-diversifiable. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsystematicrisk.asp">Unsystematic</a>, or diversifiable risk, is the uncertainty associated with an individual stock or industry. It is risk related to a company or sector and can be mitigated through diversification. </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"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A stock's beta will change over time as it relates a stock's performance to the returns of the overall market.</p></div></div></div> <span class="heading-toc" id="toc-theory-vs-practice"></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"> Theory vs. Practice </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The beta coefficient <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/080916/capm-vs-arbitrage-pricing-theory-how-they-differ.asp">theory</a> assumes that stock returns are normally distributed from a statistical perspective. In reality, returns aren’t always normally distributed. Therefore, what a stock's beta might predict about a stock’s future movement may prove untrue. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A stock with a very <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/082515/how-aqr-places-bets-against-beta.asp">low beta could have smaller price swings</a>, yet still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases the risk in a portfolio only if the investor defines risk strictly in terms of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> and not potential losses. </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"> Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may increase gains. Investors who beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio. </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-is-beta-a-helpful-measure-for-long-term-investments"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Beta a Helpful Measure for Long Term Investments?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While beta can offer useful information when evaluating a stock, it does have some limitations. Beta can determine a security's short-term risk and analyze volatility. However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock's future movements for long-term investments. A stock's volatility can change significantly over time, depending on a company's growth stage and other factors.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-is-beta-a-good-measure-of-risk"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Beta a Good Measure of Risk?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Beta can provide some risk information, but it is not an effective measure of risk. Beta only looks at a stock's past performance relative to the S&amp;P 500 and does not predict future moves. It also does not consider the fundamentals of a company or its earnings and growth potential.</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-how-do-investors-interpret-a-stocks-beta"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Investors Interpret a Stock's Beta?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A Beta of 1.0 for a stock means it has been as volatile as the broader market. If the index moves up or down 1%, so too would the stock, on average. Betas larger than 1.0 indicate greater volatility - so if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility: if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Beta (β) is the second letter of the Greek alphabet used to measure the volatility of a security or portfolio compared to the S&amp;P 500 which has a beta of 1.0. A Beta of 1.0 shows that a stock has been as volatile as the broader market. Betas larger than 1.0 indicate greater volatility and betas less than 1.0 indicate less volatility.<br> </br></p></div>

## What Is Beta? Beta (β) is the second letter of the Greek alphabet used in finance to denote the volatility or [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp) of a security or portfolio compared to the market, usually the S&P 500 which has a beta of 1.0. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&P 500. ### Key Takeaways * Beta (β) compares a stock or portfolio's volatility or systematic risk to the market. * Beta provides an investor with an approximation of how much risk a stock will add to a portfolio. * The S&P 500 has a beta of 1.0. ![Beta]() :max_bytes(150000):strip_icc()/BETA-FINAL-9a06ac0fc2d84589aded1475150869c2.jpg) Investopedia / Yurle Villegas ## How Beta Works A [beta](https://www.investopedia.com/terms/b/beta.asp) coefficient shows the volatility of an individual stock compared to the systematic risk of the entire market. Beta represents the slope of the line through a regression of data points. In finance, each point represents an individual stock's returns against the market. Beta effectively describes the activity of a security's returns as it responds to swings in the market. It is used in the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM), which describes the relationship between systematic risk and expected return for assets. CAPM is used to price risky securities and to estimate the expected returns of assets, considering the risk of those assets and the cost of capital. ## Calculating Beta A security's beta is calculated by dividing the product of the [covariance](https://www.investopedia.com/terms/c/covariance.asp) of the security's returns and the market's returns by the [variance](https://www.investopedia.com/terms/v/variance.asp) of the market's returns over a specified period. The [calculation](https://www.investopedia.com/articles/investing/102115/what-beta-and-how-calculate-beta-excel.asp) helps investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights into how volatile–or how risky–a stock is relative to the rest of the market. For beta to provide useful insight, the market used as a [benchmark should be related](https://www.investopedia.com/ask/answers/102714/how-do-you-calculate-beta-excel.asp) to the stock. For example, a bond ETF's beta with the S&P 500 as the benchmark would not be helpful to an investor because bonds and stocks are too dissimilar. Beta coefficient ( β ) = Covariance ( R e , R m ) Variance ( R m ) where: R e = the return on an individual stock R m = the return on the overall market Covariance = how changes in a stock’s returns are related to changes in the market’s returns Variance = how far the market’s data points spread out from their average value \begin{aligned} &\text{Beta coefficient}(\beta) = \frac{\text{Covariance}(R\_e, R\_m)}{\text{Variance}(R\_m)} \\ &\textbf{where:}\\ &R\_e=\text{the return on an individual stock}\\ &R\_m=\text{the return on the overall market}\\ &\text{Covariance}=\text{how changes in a stock's returns are} \\ &\text{related to changes in the market's returns}\\ &\text{Variance}=\text{how far the market's data points spread} \\ &\text{out from their average value} \\ \end{aligned} ​Beta coefficient(β)=Variance(Rm​)Covariance(Re​,Rm​)​where:Re​=the return on an individual stockRm​=the return on the overall marketCovariance=how changes in a stock’s returns arerelated to changes in the market’s returnsVariance=how far the market’s data points spreadout from their average value​ ## Beta Values * **Beta Equal to 1:** A stock with a beta of 1.0 means its price activity correlates with the market. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the portfolio, but doesn’t increase the likelihood that the portfolio will provide an excess return. * **Beta Less than 1:** A beta value less than 1.0 means the security is less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Utility stocks often have low betas because they move more slowly than market averages. * **Beta Greater than 1:** A beta greater than 1.0 indicates that the security's price is theoretically more volatile than the market. If a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks tend to have higher betas than the market benchmark. Adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its return. * **Negative Beta:** A beta of -1.0 means that the stock is inversely correlated to the market benchmark on a 1:1 basis. [Put options](https://www.investopedia.com/terms/p/putoption.asp) and [inverse ETFs](https://www.investopedia.com/terms/i/inverse-etf.asp) are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is common. ## How Investors Use Beta An investor uses beta to gauge how much risk a stock adds to a portfolio. While a stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, it also doesn’t increase the potential for greater returns. Investors must ensure a specific stock is compared to the right benchmark and review the R-squared value to the benchmark. [R-squared](https://www.investopedia.com/terms/r/r-squared.asp) is a statistical measure that compares the security's historical price movements to the benchmark index. A security with a high R-squared value indicates a relevant benchmark. A gold [exchange-traded fund](https://www.investopedia.com/terms/e/etf.asp) (ETF), such as the SPDR Gold Shares ([GLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=gld)), is tied to the performance of gold bullion. Consequently, a gold ETF would have a low beta and R-squared relationship with the S&P 500. Investors commonly evaluate two categories of risk. Systematic risk is the risk of the entire market declining, called un-diversifiable. [Unsystematic](https://www.investopedia.com/terms/u/unsystematicrisk.asp), or diversifiable risk, is the uncertainty associated with an individual stock or industry. It is risk related to a company or sector and can be mitigated through diversification. ### A stock's beta will change over time as it relates a stock's performance to the returns of the overall market. ## Theory vs. Practice The beta coefficient [theory](https://www.investopedia.com/articles/markets/080916/capm-vs-arbitrage-pricing-theory-how-they-differ.asp) assumes that stock returns are normally distributed from a statistical perspective. In reality, returns aren’t always normally distributed. Therefore, what a stock's beta might predict about a stock’s future movement may prove untrue. A stock with a very [low beta could have smaller price swings](https://www.investopedia.com/articles/investing/082515/how-aqr-places-bets-against-beta.asp), yet still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases the risk in a portfolio only if the investor defines risk strictly in terms of [volatility](https://www.investopedia.com/terms/v/volatility.asp) and not potential losses. Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may increase gains. Investors who beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio. ## Is Beta a Helpful Measure for Long Term Investments? While beta can offer useful information when evaluating a stock, it does have some limitations. Beta can determine a security's short-term risk and analyze volatility. However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock's future movements for long-term investments. A stock's volatility can change significantly over time, depending on a company's growth stage and other factors. ## Is Beta a Good Measure of Risk? Beta can provide some risk information, but it is not an effective measure of risk. Beta only looks at a stock's past performance relative to the S&P 500 and does not predict future moves. It also does not consider the fundamentals of a company or its earnings and growth potential. ## How Do Investors Interpret a Stock's Beta? A Beta of 1.0 for a stock means it has been as volatile as the broader market. If the index moves up or down 1%, so too would the stock, on average. Betas larger than 1.0 indicate greater volatility - so if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility: if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%. ## The Bottom Line Beta (β) is the second letter of the Greek alphabet used to measure the volatility of a security or portfolio compared to the S&P 500 which has a beta of 1.0. A Beta of 1.0 shows that a stock has been as volatile as the broader market. Betas larger than 1.0 indicate greater volatility and betas less than 1.0 indicate less volatility.

What Is Beta? Beta (β) is the second letter of the Greek alphabet used in finance to denote the volatility or systematic risk of a security or portfolio compared to the market, usually the S&P 500 which has a beta of 1.0. Stocks with betas higher than 1.0 are interpreted as more volatile than the S&P 500. Key Takeaways Beta (β) compares a stock or portfolio's volatility or systematic risk to the market.Beta provides an investor with an approximation of how much risk a stock will add to a portfolio.The S&P 500 has a beta of 1.0. Investopedia / Yurle Villegas How Beta Works A beta coefficient shows the volatility of an individual stock compared to the systematic risk of the entire market. Beta represents the slope of the line through a regression of data points. In finance, each point represents an individual stock's returns against the market. Beta effectively describes the activity of a security's returns as it responds to swings in the market. It is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets. CAPM is used to price risky securities and to estimate the expected returns of assets, considering the risk of those assets and the cost of capital. Calculating Beta A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The calculation helps investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights into how volatile–or how risky–a stock is relative to the rest of the market. For beta to provide useful insight, the market used as a benchmark should be related to the stock. For example, a bond ETF's beta with the S&P 500 as the benchmark would not be helpful to an investor because bonds and stocks are too dissimilar. Beta coefficient ( β ) = Covariance ( R e , R m ) Variance ( R m ) where: R e = the return on an individual stock R m = the return on the overall market Covariance = how changes in a stock’s returns are related to changes in the market’s returns Variance = how far the market’s data points spread out from their average value \begin{aligned} &\text{Beta coefficient}(\beta) = \frac{\text{Covariance}(R_e, R_m)}{\text{Variance}(R_m)} \\ &\textbf{where:}\\ &R_e=\text{the return on an individual stock}\\ &R_m=\text{the return on the overall market}\\ &\text{Covariance}=\text{how changes in a stock's returns are} \\ &\text{related to changes in the market's returns}\\ &\text{Variance}=\text{how far the market's data points spread} \\ &\text{out from their average value} \\ \end{aligned} ​Beta coefficient(β)=Variance(Rm​)Covariance(Re​,Rm​)​where:Re​=the return on an individual stockRm​=the return on the overall marketCovariance=how changes in a stock’s returns arerelated to changes in the market’s returnsVariance=how far the market’s data points spreadout from their average value​ Beta Values Beta Equal to 1: A stock with a beta of 1.0 means its price activity correlates with the market. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the portfolio, but doesn’t increase the likelihood that the portfolio will provide an excess return. Beta Less than 1: A beta value less than 1.0 means the security is less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Utility stocks often have low betas because they move more slowly than market averages. Beta Greater than 1: A beta greater than 1.0 indicates that the security's price is theoretically more volatile than the market. If a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks tend to have higher betas than the market benchmark. Adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its return. Negative Beta: A beta of -1.0 means that the stock is inversely correlated to the market benchmark on a 1:1 basis. Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is common. How Investors Use Beta An investor uses beta to gauge how much risk a stock adds to a portfolio. While a stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, it also doesn’t increase the potential for greater returns. Investors must ensure a specific stock is compared to the right benchmark and review the R-squared value to the benchmark. R-squared is a statistical measure that compares the security's historical price movements to the benchmark index. A security with a high R-squared value indicates a relevant benchmark. A gold exchange-traded fund (ETF), such as the SPDR Gold Shares (GLD), is tied to the performance of gold bullion. Consequently, a gold ETF would have a low beta and R-squared relationship with the S&P 500. Investors commonly evaluate two categories of risk. Systematic risk is the risk of the entire market declining, called un-diversifiable. Unsystematic, or diversifiable risk, is the uncertainty associated with an individual stock or industry. It is risk related to a company or sector and can be mitigated through diversification. A stock's beta will change over time as it relates a stock's performance to the returns of the overall market. Theory vs. Practice The beta coefficient theory assumes that stock returns are normally distributed from a statistical perspective. In reality, returns aren’t always normally distributed. Therefore, what a stock's beta might predict about a stock’s future movement may prove untrue. A stock with a very low beta could have smaller price swings, yet still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases the risk in a portfolio only if the investor defines risk strictly in terms of volatility and not potential losses. Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may increase gains. Investors who beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio. Is Beta a Helpful Measure for Long Term Investments? While beta can offer useful information when evaluating a stock, it does have some limitations. Beta can determine a security's short-term risk and analyze volatility. However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock's future movements for long-term investments. A stock's volatility can change significantly over time, depending on a company's growth stage and other factors. Is Beta a Good Measure of Risk? Beta can provide some risk information, but it is not an effective measure of risk. Beta only looks at a stock's past performance relative to the S&P 500 and does not predict future moves. It also does not consider the fundamentals of a company or its earnings and growth potential. How Do Investors Interpret a Stock's Beta? A Beta of 1.0 for a stock means it has been as volatile as the broader market. If the index moves up or down 1%, so too would the stock, on average. Betas larger than 1.0 indicate greater volatility - so if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility: if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%. The Bottom Line Beta (β) is the second letter of the Greek alphabet used to measure the volatility of a security or portfolio compared to the S&P 500 which has a beta of 1.0. A Beta of 1.0 shows that a stock has been as volatile as the broader market. Betas larger than 1.0 indicate greater volatility and betas less than 1.0 indicate less volatility.

https://www.investopedia.com/benefits-people-with-disabilities-parents-5217847

Benefits for People With Disabilities and Their Parents

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you are caring for a disabled child, you have a wide range of federal and state benefits available to you. These benefits change (but do not necessarily stop) when a child with disabilities turns 18. </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 are looking for an extensive list of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.usa.gov/disability-services">benefits</a> available to you or your family as a result of a disability, a great place to start is with the U.S. government website on disability services. Here, you will find plenty of information on all the help you can access. </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 look at a specific situation: a family caring for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/specialneedschild.asp">child with a disability</a>. We’ll look at the help available to such a family and how it changes when the child reaches adulthood. </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>If you are caring for a child with disabilities, you have a wide range of federal and state benefits available to you. One of the most important is Supplemental Security Income (SSI).</li><li>When a child with disabilities turns 18, they are considered an adult, and their disability benefits will change.</li><li>If an adult's disability was diagnosed before age 22, they may be eligible for Social Security Disability Insurance (SSDI). This is still considered a "child's" benefit to the SSA, though, because it is paid on a parent's Social Security earnings record.</li></ul></div></div></div> <span class="heading-toc" id="toc-family-benefits-for-children-with-disabilities"></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"> Family Benefits for Children With Disabilities </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> One important benefit for families affected by disability is <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>. This program provides monthly payments to people with limited income and resources. Children younger than age 18 can qualify if they have a medical condition (or a combination of conditions) that meets Social Security’s definition of disability. A young person’s income and resources must fall within the eligibility limits to qualify for this program.<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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The amount of the SSI payment for children is different from state to state because some states add to the federal SSI payment. There are about 19 states plus Washington D.C. that do not supplement SSI.<span class="ql-inline-citation" data-cite="29"></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"> Your local Social Security office can tell you more about your state’s total SSI payments, and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssa.asp">Social Security Administration (SSA)</a> provides <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html">an online calculator</a> that can help you work out how much SSI could be worth. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In addition to SSI, the families of children with a disability might be able to access a range of other benefits: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/social-security-survivor-benefits-work/">Social Security survivor benefits/Social Security disability benefits</a>: If the parent of a child with disabilities retires, dies, or is diagnosed with a disability themselves, their child can receive support via their Social Security benefits.<span class="ql-inline-citation" data-cite="11"></span></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/government-assistance-programs-4845368">Temporary Assistance for Needy Families (TANF)</a>: TANF is designed to help low-income earners take care of their children. The programs provide financial help for parents.<span class="ql-inline-citation" data-cite="12"></span></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/supplemental-nutrition-assistance-program-snap-5187718">Supplemental Nutrition Assistance Program (SNAP)</a>: SNAP is the previously named food stamps program. The objective of the program is to assist low-income earners afford food. It used to be done with food stamps but now enrollees in the program use an electronic debit card. There are household eligibility requirements to qualify for the program. Though the program is offered to all qualifying low-income earners, those with disabilities can receive special provisions if they meet the requirements.<span class="ql-inline-citation" data-cite="30"></span><span class="ql-inline-citation" data-cite="13"></span></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/va-benefits-for-older-veterans-5194139">VA Pensions</a>: Veterans who are both low-income earners and have disabilities receive monetary assistance through Veterans Aid and Attendance benefits. If the veteran has dependant children, then the monetary amount they receive is higher.<span class="ql-inline-citation" data-cite="14"></span><span class="ql-inline-citation" data-cite="27"></span></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/m/medicaid.asp">Medicaid</a>: Depending on the state, if disability SSI benefits are being provided to a child, that child will automatically be eligible for Medicaid. In the states where this rule does not apply, the child will be eligible if they meet specific requirements, such as income thresholds.<span class="ql-inline-citation" data-cite="29"></span></li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/medicaid-waiver-5217848">Medicaid Waiver</a>: The waiver allows states to provide services to individuals who under ordinary circumstances would not be eligible for Medicaid. With a waiver, people can qualify for <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/katie-beckett-waiver-5217851">in-home care</a> instead of going to a long-term care facility.<span class="ql-inline-citation" data-cite="16"></span></li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/childrens-health-insurance-program-chip.asp">Children’s Health Insurance Program (CHIP)</a>: CHIP benefits are different in every state and so is the name the program goes by; however, the goal of the program in each state is to make sure all children under the age of 19 whose families have incomes over the Medicaid threshold but still can't afford private insurance, are able to receive healthcare, including dental.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="24"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>You can use the SSA's online calculator that can help you work out what SSI payments you are entitled to as a family, and then apply for them online.</p></div></div></div> <span class="heading-toc" id="toc-family-benefits-for-disabled-adults"></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"> Family Benefits for Disabled Adults </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> When a child with disabilities reaches 18, they are considered an adult. As a result, your family’s entitlement to disability benefits will change. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Some adults can continue to receive SSI. However, the amount they receive may change. This is because when they reach 18, the SSA no longer counts the income and resources of family members (except their spouse) when deciding if they meet the financial limits for SSI.<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_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> They also apply the disability rules for adults, which are slightly different. In all cases, the SSA will review a person’s medical condition, normally within a year of them turning 18. In some cases, a person who didn’t qualify for SSI before they were 18 will qualify for it afterward.<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_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> An adult may also be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-adult-child-collect-parent-social-security-benefits-5221671">eligible for Social Security Disability Insurance</a> (SSDI) if their disability occurred before the age of 22 and their parents are deceased or receiving retirement or disability benefits. The benefits are paid through their parent's Social Security earnings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_31-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_32-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">$1,350</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The average monthly Social Security benefit that disabled workers, spouses of disabled workers, and children of disabled workers received in Sept. 2023.<span class="ql-inline-citation" data-cite="33"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The individual does not need to be the offspring of the parents but can be adopted, a stepchild, a grandchild, or a step-grandchild. To qualify, the child must be 18 or older, have a disability that qualifies under SS law and occurred before age 22, be unmarried, and fall under the qualifications of a disabled adult. Collectively, this is known as a Disabled Adult Child (DAC).<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_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Though SSDI payments are linked to their parent’s Social Security eligibility, it is not necessary for a DAC to have worked to receive these benefits. SSDI benefits will continue for as long as the individual has a disability, although getting married might affect their entitlement. However, some marriages (for example, to another DAC) are considered protected and don’t affect eligibility.<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_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> SSA disability work supports, such as the Ticket to Work program, can be valuable to adults living (and working) with a disability. These resources are designed to help people work to their fullest ability and retain access to SSI, SSDI, Medicaid, and Medicare for a period of time—sometimes indefinitely, based upon the beneficiary's countable income and cost of medical care.<span class="ql-inline-citation" data-cite="32"></span><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_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_39-0"><span class="heading-toc" id="toc-can-i-get-paid-to-care-for-my-child"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Get Paid to Care for My Child?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In some cases, yes. However, the situation is highly variable by state. The U.S. government provides a list of resources for careers where you can check if you are eligible for payments as a caregiver.<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_40-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_41-0"><span class="heading-toc" id="toc-how-much-is-ssi-for-a-child-with-disabilities"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Is SSI for a Child With Disabilities?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Unfortunately, there is no straightforward answer here because everyone’s situation is different. The SSA provides a detailed breakdown of the factors they take into account on their website.<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_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-you-work-while-receiving-ssdi-benefits"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Work While Receiving SSDI Benefits?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It depends on how much you earn. SSDI recipients can't do what's considered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/substantialgainfulactivity.asp">substantial gainful activity (SGA)</a> and continue to receive disability benefits. In a nutshell, doing SGA means you're working and making more than $1,470 per month in 2023 (or $2,460 if you're blind). However, participants in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ticket-to-work-program-5218409">Ticket to Work program</a> can earn money without losing eligibility for benefits.<span class="ql-inline-citation" data-cite="22"></span><span class="ql-inline-citation" data-cite="26"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/finances-for-people-with-disabilities-and-families-5217854">Families with children with disabilities</a> are entitled to a wide range of benefits, including SSI. When a child with a disability turns 18, this will affect their entitlement to benefits, and it’s important to be prepared for this. The amount your family receives in benefits may increase or decrease. </p></div>

If you are caring for a disabled child, you have a wide range of federal and state benefits available to you. These benefits change (but do not necessarily stop) when a child with disabilities turns 18. If you are looking for an extensive list of [benefits](https://www.usa.gov/disability-services) available to you or your family as a result of a disability, a great place to start is with the U.S. government website on disability services. Here, you will find plenty of information on all the help you can access. In this guide, we’ll look at a specific situation: a family caring for a [child with a disability](https://www.investopedia.com/terms/s/specialneedschild.asp). We’ll look at the help available to such a family and how it changes when the child reaches adulthood. ### Key Takeaways * If you are caring for a child with disabilities, you have a wide range of federal and state benefits available to you. One of the most important is Supplemental Security Income (SSI). * When a child with disabilities turns 18, they are considered an adult, and their disability benefits will change. * If an adult's disability was diagnosed before age 22, they may be eligible for Social Security Disability Insurance (SSDI). This is still considered a "child's" benefit to the SSA, though, because it is paid on a parent's Social Security earnings record. ## Family Benefits for Children With Disabilities One important benefit for families affected by disability is [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp). This program provides monthly payments to people with limited income and resources. Children younger than age 18 can qualify if they have a medical condition (or a combination of conditions) that meets Social Security’s definition of disability. A young person’s income and resources must fall within the eligibility limits to qualify for this program. The amount of the SSI payment for children is different from state to state because some states add to the federal SSI payment. There are about 19 states plus Washington D.C. that do not supplement SSI. Your local Social Security office can tell you more about your state’s total SSI payments, and the [Social Security Administration (SSA)](https://www.investopedia.com/terms/s/ssa.asp) provides [an online calculator](https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html) that can help you work out how much SSI could be worth. In addition to SSI, the families of children with a disability might be able to access a range of other benefits: * [Social Security survivor benefits/Social Security disability benefits](https://www.investopedia.com/personal-finance/social-security-survivor-benefits-work/): If the parent of a child with disabilities retires, dies, or is diagnosed with a disability themselves, their child can receive support via their Social Security benefits. * [Temporary Assistance for Needy Families (TANF)](https://www.investopedia.com/government-assistance-programs-4845368): TANF is designed to help low-income earners take care of their children. The programs provide financial help for parents. * [Supplemental Nutrition Assistance Program (SNAP)](https://www.investopedia.com/supplemental-nutrition-assistance-program-snap-5187718): SNAP is the previously named food stamps program. The objective of the program is to assist low-income earners afford food. It used to be done with food stamps but now enrollees in the program use an electronic debit card. There are household eligibility requirements to qualify for the program. Though the program is offered to all qualifying low-income earners, those with disabilities can receive special provisions if they meet the requirements. * [VA Pensions](https://www.investopedia.com/va-benefits-for-older-veterans-5194139): Veterans who are both low-income earners and have disabilities receive monetary assistance through Veterans Aid and Attendance benefits. If the veteran has dependant children, then the monetary amount they receive is higher. * [Medicaid](https://www.investopedia.com/terms/m/medicaid.asp): Depending on the state, if disability SSI benefits are being provided to a child, that child will automatically be eligible for Medicaid. In the states where this rule does not apply, the child will be eligible if they meet specific requirements, such as income thresholds. * [Medicaid Waiver](https://www.investopedia.com/medicaid-waiver-5217848): The waiver allows states to provide services to individuals who under ordinary circumstances would not be eligible for Medicaid. With a waiver, people can qualify for [in-home care](https://www.investopedia.com/katie-beckett-waiver-5217851) instead of going to a long-term care facility. * [Children’s Health Insurance Program (CHIP)](https://www.investopedia.com/terms/c/childrens-health-insurance-program-chip.asp): CHIP benefits are different in every state and so is the name the program goes by; however, the goal of the program in each state is to make sure all children under the age of 19 whose families have incomes over the Medicaid threshold but still can't afford private insurance, are able to receive healthcare, including dental. ### You can use the SSA's online calculator that can help you work out what SSI payments you are entitled to as a family, and then apply for them online. ## Family Benefits for Disabled Adults When a child with disabilities reaches 18, they are considered an adult. As a result, your family’s entitlement to disability benefits will change. Some adults can continue to receive SSI. However, the amount they receive may change. This is because when they reach 18, the SSA no longer counts the income and resources of family members (except their spouse) when deciding if they meet the financial limits for SSI. They also apply the disability rules for adults, which are slightly different. In all cases, the SSA will review a person’s medical condition, normally within a year of them turning 18. In some cases, a person who didn’t qualify for SSI before they were 18 will qualify for it afterward. An adult may also be [eligible for Social Security Disability Insurance](https://www.investopedia.com/can-adult-child-collect-parent-social-security-benefits-5221671) (SSDI) if their disability occurred before the age of 22 and their parents are deceased or receiving retirement or disability benefits. The benefits are paid through their parent's Social Security earnings. ### $1,350 The average monthly Social Security benefit that disabled workers, spouses of disabled workers, and children of disabled workers received in Sept. 2023. The individual does not need to be the offspring of the parents but can be adopted, a stepchild, a grandchild, or a step-grandchild. To qualify, the child must be 18 or older, have a disability that qualifies under SS law and occurred before age 22, be unmarried, and fall under the qualifications of a disabled adult. Collectively, this is known as a Disabled Adult Child (DAC). Though SSDI payments are linked to their parent’s Social Security eligibility, it is not necessary for a DAC to have worked to receive these benefits. SSDI benefits will continue for as long as the individual has a disability, although getting married might affect their entitlement. However, some marriages (for example, to another DAC) are considered protected and don’t affect eligibility. SSA disability work supports, such as the Ticket to Work program, can be valuable to adults living (and working) with a disability. These resources are designed to help people work to their fullest ability and retain access to SSI, SSDI, Medicaid, and Medicare for a period of time—sometimes indefinitely, based upon the beneficiary's countable income and cost of medical care. ## Can I Get Paid to Care for My Child? In some cases, yes. However, the situation is highly variable by state. The U.S. government provides a list of resources for careers where you can check if you are eligible for payments as a caregiver. ## How Much Is SSI for a Child With Disabilities? Unfortunately, there is no straightforward answer here because everyone’s situation is different. The SSA provides a detailed breakdown of the factors they take into account on their website. ## Can You Work While Receiving SSDI Benefits? It depends on how much you earn. SSDI recipients can't do what's considered [substantial gainful activity (SGA)](https://www.investopedia.com/terms/s/substantialgainfulactivity.asp) and continue to receive disability benefits. In a nutshell, doing SGA means you're working and making more than $1,470 per month in 2023 (or $2,460 if you're blind). However, participants in the [Ticket to Work program](https://www.investopedia.com/ticket-to-work-program-5218409) can earn money without losing eligibility for benefits. ## The Bottom Line [Families with children with disabilities](https://www.investopedia.com/finances-for-people-with-disabilities-and-families-5217854) are entitled to a wide range of benefits, including SSI. When a child with a disability turns 18, this will affect their entitlement to benefits, and it’s important to be prepared for this. The amount your family receives in benefits may increase or decrease.

If you are caring for a disabled child, you have a wide range of federal and state benefits available to you. These benefits change (but do not necessarily stop) when a child with disabilities turns 18. If you are looking for an extensive list of benefits available to you or your family as a result of a disability, a great place to start is with the U.S. government website on disability services. Here, you will find plenty of information on all the help you can access. In this guide, we’ll look at a specific situation: a family caring for a child with a disability. We’ll look at the help available to such a family and how it changes when the child reaches adulthood. Key Takeaways If you are caring for a child with disabilities, you have a wide range of federal and state benefits available to you. One of the most important is Supplemental Security Income (SSI).When a child with disabilities turns 18, they are considered an adult, and their disability benefits will change.If an adult's disability was diagnosed before age 22, they may be eligible for Social Security Disability Insurance (SSDI). This is still considered a "child's" benefit to the SSA, though, because it is paid on a parent's Social Security earnings record. Family Benefits for Children With Disabilities One important benefit for families affected by disability is Supplemental Security Income (SSI). This program provides monthly payments to people with limited income and resources. Children younger than age 18 can qualify if they have a medical condition (or a combination of conditions) that meets Social Security’s definition of disability. A young person’s income and resources must fall within the eligibility limits to qualify for this program. The amount of the SSI payment for children is different from state to state because some states add to the federal SSI payment. There are about 19 states plus Washington D.C. that do not supplement SSI. Your local Social Security office can tell you more about your state’s total SSI payments, and the Social Security Administration (SSA) provides an online calculator that can help you work out how much SSI could be worth. In addition to SSI, the families of children with a disability might be able to access a range of other benefits: Social Security survivor benefits/Social Security disability benefits: If the parent of a child with disabilities retires, dies, or is diagnosed with a disability themselves, their child can receive support via their Social Security benefits. Temporary Assistance for Needy Families (TANF): TANF is designed to help low-income earners take care of their children. The programs provide financial help for parents. Supplemental Nutrition Assistance Program (SNAP): SNAP is the previously named food stamps program. The objective of the program is to assist low-income earners afford food. It used to be done with food stamps but now enrollees in the program use an electronic debit card. There are household eligibility requirements to qualify for the program. Though the program is offered to all qualifying low-income earners, those with disabilities can receive special provisions if they meet the requirements. VA Pensions: Veterans who are both low-income earners and have disabilities receive monetary assistance through Veterans Aid and Attendance benefits. If the veteran has dependant children, then the monetary amount they receive is higher. Medicaid: Depending on the state, if disability SSI benefits are being provided to a child, that child will automatically be eligible for Medicaid. In the states where this rule does not apply, the child will be eligible if they meet specific requirements, such as income thresholds. Medicaid Waiver: The waiver allows states to provide services to individuals who under ordinary circumstances would not be eligible for Medicaid. With a waiver, people can qualify for in-home care instead of going to a long-term care facility. Children’s Health Insurance Program (CHIP): CHIP benefits are different in every state and so is the name the program goes by; however, the goal of the program in each state is to make sure all children under the age of 19 whose families have incomes over the Medicaid threshold but still can't afford private insurance, are able to receive healthcare, including dental. You can use the SSA's online calculator that can help you work out what SSI payments you are entitled to as a family, and then apply for them online. Family Benefits for Disabled Adults When a child with disabilities reaches 18, they are considered an adult. As a result, your family’s entitlement to disability benefits will change. Some adults can continue to receive SSI. However, the amount they receive may change. This is because when they reach 18, the SSA no longer counts the income and resources of family members (except their spouse) when deciding if they meet the financial limits for SSI. They also apply the disability rules for adults, which are slightly different. In all cases, the SSA will review a person’s medical condition, normally within a year of them turning 18. In some cases, a person who didn’t qualify for SSI before they were 18 will qualify for it afterward. An adult may also be eligible for Social Security Disability Insurance (SSDI) if their disability occurred before the age of 22 and their parents are deceased or receiving retirement or disability benefits. The benefits are paid through their parent's Social Security earnings. $1,350 The average monthly Social Security benefit that disabled workers, spouses of disabled workers, and children of disabled workers received in Sept. 2023. The individual does not need to be the offspring of the parents but can be adopted, a stepchild, a grandchild, or a step-grandchild. To qualify, the child must be 18 or older, have a disability that qualifies under SS law and occurred before age 22, be unmarried, and fall under the qualifications of a disabled adult. Collectively, this is known as a Disabled Adult Child (DAC). Though SSDI payments are linked to their parent’s Social Security eligibility, it is not necessary for a DAC to have worked to receive these benefits. SSDI benefits will continue for as long as the individual has a disability, although getting married might affect their entitlement. However, some marriages (for example, to another DAC) are considered protected and don’t affect eligibility. SSA disability work supports, such as the Ticket to Work program, can be valuable to adults living (and working) with a disability. These resources are designed to help people work to their fullest ability and retain access to SSI, SSDI, Medicaid, and Medicare for a period of time—sometimes indefinitely, based upon the beneficiary's countable income and cost of medical care. Can I Get Paid to Care for My Child? In some cases, yes. However, the situation is highly variable by state. The U.S. government provides a list of resources for careers where you can check if you are eligible for payments as a caregiver. How Much Is SSI for a Child With Disabilities? Unfortunately, there is no straightforward answer here because everyone’s situation is different. The SSA provides a detailed breakdown of the factors they take into account on their website. Can You Work While Receiving SSDI Benefits? It depends on how much you earn. SSDI recipients can't do what's considered substantial gainful activity (SGA) and continue to receive disability benefits. In a nutshell, doing SGA means you're working and making more than $1,470 per month in 2023 (or $2,460 if you're blind). However, participants in the Ticket to Work program can earn money without losing eligibility for benefits. The Bottom Line Families with children with disabilities are entitled to a wide range of benefits, including SSI. When a child with a disability turns 18, this will affect their entitlement to benefits, and it’s important to be prepared for this. The amount your family receives in benefits may increase or decrease.

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

Open-Market Transactions: Meaning, Process, Why They Happen

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-open-market-transaction"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Open-Market Transaction? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An open-market transaction is an order placed by an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insider.asp" rel="noopener noreferrer">insider</a>, after all of the appropriate documentation has been filed with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp" rel="noopener noreferrer">Securities and Exchange Commission</a> (SEC), to buy or sell restricted securities openly on an exchange. </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"> An open-market transaction is a legal way for an individual with insider information of their company to trade securities without violating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insidertrading.asp" rel="noopener noreferrer">insider trading</a> laws. </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 open-market transaction refers to the buying or selling of shares in a company by insiders of that company.</li><li>When enacting an open-market transaction, an insider has to fill out the appropriate paperwork with the SEC to avoid violating any insider trading laws.</li><li>When open-market transactions occur, outside investors pay attention as the purchase or sale of securities by insiders can indicate the outlook of the company.</li><li>More interest is placed on the buying of shares by insiders than the selling of shares.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-an-open-market-transaction"></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 an Open-Market Transaction </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The SEC defines an insider as "an officer or director of a <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> or an individual or entity owning more than 10% of a company's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stock</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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> When insiders are buying or selling their own company's stock, investors pay attention as it provides insight into what is occurring within the confines of the company that outsiders are not privy to. </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"> Are insiders selling their shares because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings.asp">earnings</a> were drastically below estimates and they expect the share price to fall? Are insiders buying shares because they created a successful new product that will send the share price skyrocketing? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/insidertrading.asp">The trading actions of insiders</a> is an indicator of how the stock will perform in the future. But before they can buy or sell their shares, known as open-market transactions, they must file the correct paperwork and follow all procedures. </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-process-of-an-open-market-transaction"></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 Process of an Open-Market Transaction </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> An open-market transaction is simply an order placed by an insider to buy or sell shares according to the rules and regulations set out by the SEC. The importance of an open <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketorder.asp" rel="noopener noreferrer">market order</a> is that the insider is voluntarily buying or selling shares at or close to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-price.asp" rel="noopener noreferrer">market price</a>. There is no special pricing involved in open-market transactions. </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"> Insiders must report open-market transactions with the SEC and include relevant details about the sale or purchase of the shares. Because the reason for the transaction is given, the filings of open-market transactions might be used by other investors to gain some perspective on what insiders may believe about 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"> For example, if an insider sells a considerable portion of their shares through an open-market transaction, the reasons listed with the filing could cause other investors to change their portfolios in response. If the reason was simply to take advantage of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockoption.asp" rel="noopener noreferrer">stock options</a> provided to a high-level officer, outsider investors will most likely not react. </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 fact, more importance is given to the purchase of shares rather than to the sale of shares as a sale could be done for many reasons. </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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/form4.asp" rel="noopener noreferrer">SEC Form 4</a> needs to be filed by an insider before buying or selling shares. Form 4 lists information such as "the name of the insider, their relationship to the company, how many shares were traded, and at what price."<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-why-open-market-transactions-are-made-by-insiders"></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"> Why Open-Market Transactions Are Made by Insiders </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> There are many reasons that insiders would buy more shares or sell their current shares. As stated above, buying shares is more insightful as it indicates a belief in the success of a company. </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 selling of shares can be done for many reasons, as simple as that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp" rel="noopener noreferrer">shareholder</a> needs cash and the insider wants to take advantage of profits their investment has accrued. </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"> Conversely, the insider may have weighed long-term considerations about the company or industry that prompted the sale of those shares. The same could be said about the purchase of more shares in the company. </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"> When certain open market transactions occur, companies might issue press statements about the open-market transactions that involve prominent insiders buying shares. For example, if a chair buys one million shares in their own company, an accompanying statement could declare this is an affirmation of faith in the management. </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 purchase price of those shares will also be listed. There might also be a reference to how many shares in the company the insider will own after the transaction is complete. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-open-market-operations"></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"> Open Market Operations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> It is important to note that open-market transactions differ from central banking programs known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/openmarketoperations.asp" rel="noopener noreferrer">open market operations</a>. Under such programs, the Federal Reserve purchases or sells government securities, like bonds, in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/open-market.asp" rel="noopener noreferrer">open market</a> alongside investors. </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"> Open market operations are used as a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetarypolicy.asp" rel="noopener noreferrer">monetary policy</a> to control the money supply by impacting interest rates and liquidity in the economy. This action is typically used during or after a financial crisis. </p></div>

## What Is an Open-Market Transaction? An open-market transaction is an order placed by an [insider](https://www.investopedia.com/terms/i/insider.asp), after all of the appropriate documentation has been filed with the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC), to buy or sell restricted securities openly on an exchange. An open-market transaction is a legal way for an individual with insider information of their company to trade securities without violating [insider trading](https://www.investopedia.com/terms/i/insidertrading.asp) laws. ### Key Takeaways * An open-market transaction refers to the buying or selling of shares in a company by insiders of that company. * When enacting an open-market transaction, an insider has to fill out the appropriate paperwork with the SEC to avoid violating any insider trading laws. * When open-market transactions occur, outside investors pay attention as the purchase or sale of securities by insiders can indicate the outlook of the company. * More interest is placed on the buying of shares by insiders than the selling of shares. ## Understanding an Open-Market Transaction The SEC defines an insider as "an officer or director of a [public company](https://www.investopedia.com/terms/p/publiccompany.asp) or an individual or entity owning more than 10% of a company's [stock](https://www.investopedia.com/terms/s/stock.asp)." When insiders are buying or selling their own company's stock, investors pay attention as it provides insight into what is occurring within the confines of the company that outsiders are not privy to. Are insiders selling their shares because [earnings](https://www.investopedia.com/terms/e/earnings.asp) were drastically below estimates and they expect the share price to fall? Are insiders buying shares because they created a successful new product that will send the share price skyrocketing? [The trading actions of insiders](https://www.investopedia.com/ask/answers/06/insidertrading.asp) is an indicator of how the stock will perform in the future. But before they can buy or sell their shares, known as open-market transactions, they must file the correct paperwork and follow all procedures. ## The Process of an Open-Market Transaction An open-market transaction is simply an order placed by an insider to buy or sell shares according to the rules and regulations set out by the SEC. The importance of an open [market order](https://www.investopedia.com/terms/m/marketorder.asp) is that the insider is voluntarily buying or selling shares at or close to the [market price](https://www.investopedia.com/terms/m/market-price.asp). There is no special pricing involved in open-market transactions. Insiders must report open-market transactions with the SEC and include relevant details about the sale or purchase of the shares. Because the reason for the transaction is given, the filings of open-market transactions might be used by other investors to gain some perspective on what insiders may believe about the company. For example, if an insider sells a considerable portion of their shares through an open-market transaction, the reasons listed with the filing could cause other investors to change their portfolios in response. If the reason was simply to take advantage of [stock options](https://www.investopedia.com/terms/s/stockoption.asp) provided to a high-level officer, outsider investors will most likely not react. In fact, more importance is given to the purchase of shares rather than to the sale of shares as a sale could be done for many reasons. [SEC Form 4](https://www.investopedia.com/terms/f/form4.asp) needs to be filed by an insider before buying or selling shares. Form 4 lists information such as "the name of the insider, their relationship to the company, how many shares were traded, and at what price." ## Why Open-Market Transactions Are Made by Insiders There are many reasons that insiders would buy more shares or sell their current shares. As stated above, buying shares is more insightful as it indicates a belief in the success of a company. The selling of shares can be done for many reasons, as simple as that the [shareholder](https://www.investopedia.com/terms/s/shareholder.asp) needs cash and the insider wants to take advantage of profits their investment has accrued. Conversely, the insider may have weighed long-term considerations about the company or industry that prompted the sale of those shares. The same could be said about the purchase of more shares in the company. When certain open market transactions occur, companies might issue press statements about the open-market transactions that involve prominent insiders buying shares. For example, if a chair buys one million shares in their own company, an accompanying statement could declare this is an affirmation of faith in the management. The purchase price of those shares will also be listed. There might also be a reference to how many shares in the company the insider will own after the transaction is complete. ## Open Market Operations It is important to note that open-market transactions differ from central banking programs known as [open market operations](https://www.investopedia.com/terms/o/openmarketoperations.asp). Under such programs, the Federal Reserve purchases or sells government securities, like bonds, in the [open market](https://www.investopedia.com/terms/o/open-market.asp) alongside investors. Open market operations are used as a form of [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) to control the money supply by impacting interest rates and liquidity in the economy. This action is typically used during or after a financial crisis.

What Is an Open-Market Transaction? An open-market transaction is an order placed by an insider, after all of the appropriate documentation has been filed with the Securities and Exchange Commission (SEC), to buy or sell restricted securities openly on an exchange. An open-market transaction is a legal way for an individual with insider information of their company to trade securities without violating insider trading laws. Key Takeaways An open-market transaction refers to the buying or selling of shares in a company by insiders of that company.When enacting an open-market transaction, an insider has to fill out the appropriate paperwork with the SEC to avoid violating any insider trading laws.When open-market transactions occur, outside investors pay attention as the purchase or sale of securities by insiders can indicate the outlook of the company.More interest is placed on the buying of shares by insiders than the selling of shares. Understanding an Open-Market Transaction The SEC defines an insider as "an officer or director of a public company or an individual or entity owning more than 10% of a company's stock." When insiders are buying or selling their own company's stock, investors pay attention as it provides insight into what is occurring within the confines of the company that outsiders are not privy to. Are insiders selling their shares because earnings were drastically below estimates and they expect the share price to fall? Are insiders buying shares because they created a successful new product that will send the share price skyrocketing? The trading actions of insiders is an indicator of how the stock will perform in the future. But before they can buy or sell their shares, known as open-market transactions, they must file the correct paperwork and follow all procedures. The Process of an Open-Market Transaction An open-market transaction is simply an order placed by an insider to buy or sell shares according to the rules and regulations set out by the SEC. The importance of an open market order is that the insider is voluntarily buying or selling shares at or close to the market price. There is no special pricing involved in open-market transactions. Insiders must report open-market transactions with the SEC and include relevant details about the sale or purchase of the shares. Because the reason for the transaction is given, the filings of open-market transactions might be used by other investors to gain some perspective on what insiders may believe about the company. For example, if an insider sells a considerable portion of their shares through an open-market transaction, the reasons listed with the filing could cause other investors to change their portfolios in response. If the reason was simply to take advantage of stock options provided to a high-level officer, outsider investors will most likely not react. In fact, more importance is given to the purchase of shares rather than to the sale of shares as a sale could be done for many reasons. SEC Form 4 needs to be filed by an insider before buying or selling shares. Form 4 lists information such as "the name of the insider, their relationship to the company, how many shares were traded, and at what price." Why Open-Market Transactions Are Made by Insiders There are many reasons that insiders would buy more shares or sell their current shares. As stated above, buying shares is more insightful as it indicates a belief in the success of a company. The selling of shares can be done for many reasons, as simple as that the shareholder needs cash and the insider wants to take advantage of profits their investment has accrued. Conversely, the insider may have weighed long-term considerations about the company or industry that prompted the sale of those shares. The same could be said about the purchase of more shares in the company. When certain open market transactions occur, companies might issue press statements about the open-market transactions that involve prominent insiders buying shares. For example, if a chair buys one million shares in their own company, an accompanying statement could declare this is an affirmation of faith in the management. The purchase price of those shares will also be listed. There might also be a reference to how many shares in the company the insider will own after the transaction is complete. Open Market Operations It is important to note that open-market transactions differ from central banking programs known as open market operations. Under such programs, the Federal Reserve purchases or sells government securities, like bonds, in the open market alongside investors. Open market operations are used as a form of monetary policy to control the money supply by impacting interest rates and liquidity in the economy. This action is typically used during or after a financial crisis.

https://www.investopedia.com/terms/b/businessjudgmentrule.asp

What Is the Business Judgment Rule? With Exemptions & 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-the-business-judgment-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the Business Judgment Rule? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Business Judgment Rule is a legal doctrine that helps to guard a corporation's board of directors (B of D) against frivolous legal allegations about the way it conducts business. A legal staple in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/common-law.asp">common law</a> countries, the rule states that boards are presumed to act in "good faith"—that is, within the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiduciary.asp">fiduciary</a> standards of loyalty, prudence, and care directors owe to stakeholders. Absent evidence that the board has blatantly violated some rule of conduct, the courts will not review or question its decisions. </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"> Fiduciary standards include the "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duty-care.asp">duty of care</a>" and the "<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duty-loyalty.asp">duty of loyalty</a>." The first is an obligation to act on an informed basis. The second requires directors to put the interests of the corporation and over their own self-interest or the interests of others. </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 business judgment rule protects companies from frivolous lawsuits by assuming that, unless proved otherwise, management is acting in the interests of the corporation and its stakeholders.</li><li>The rule assumes that managers will not make optimal decisions all the time.</li><li>Unless it's clear that directors have violated the law or acted against the interests of the firm and its stakeholders, courts will not question their decisions.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-business-judgment-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding the Business Judgment Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The business judgment rule acknowledges that the daily operation of a business, as well as its long-term strategy, requires making controversial decisions or taking actions that put the company at risk. All business decisions are to some extent risky, whether they involve starting a new line of business or buying another company. Generally speaking, higher profits require taking greater risks. </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 principle underlying the rule is that the B of D should be allowed to make such decisions without fear of prosecution by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">shareholders</a> who might object. The rule assumes that it is unreasonable to expect managers to make optimal decisions all the time. As long as a court believes that directors are acting rationally and in good faith, it will take no action against 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"> The Business Judgment Rule is a judicial doctrine arising from United States Courts' respect for corporate self-governance. This doctrine creates a presumption of good faith business judgments of corporate management, and shifts the burden to the accuser to demonstrate that a decision at issue falls into any of the below limits and exceptions. </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-exemptions-to-the-business-judgment-rule"></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"> Exemptions to the Business Judgment Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There are certain instances in which director decisions can end up in the courts. For example, a director sells a company <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">asset</a> to a family member for an unjustifiably low price. This would be an example of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/self-dealing.asp">self-dealing</a> that the rule would not insulate from prosecution. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In order to challenge the presumption that is the heart of the rule, plaintiffs must show evidence that directors have acted in bad faith. This might include engaging in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fraud.asp">fraud</a>, committing a breach of trust or creating a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conflict-of-interest.asp">conflict of interest</a>, abdicating corporate responsibility, or failing to investigate unethical corporate behavior that is obvious when committed. </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 Rule thus does not apply in cases where the board of directors: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li>Committed fraud</li><li>Corporate waste</li><li>Engaged in self dealing</li><li>Made decisions affected by a conflict of interest</li><li>Acted in bad faith or with a corrupt motive</li><li>Breached their duty of care by a grossly negligent process that includes the failure to consider all material facts reasonably available</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"> The sixth is the most common form of attack under the Rule, as shareholders can argue that the board has made a decision where they remained uninformed. </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-example-of-the-business-judgment-rule"></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"> Example of the Business Judgment Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Say that XYZ Company's board is considering shutting down a particular product line. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">Profit margins</a> on the product have been shrinking and the product is becoming extremely costly and eating into revenues from other business lines. </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 board decides that discontinuing the product would free up resources necessary to focus on more profitable areas. In this case, the business judgment rule protects directors from prosecution by shareholders who disagree with their decision or who are adversely affected by it. </p></div>

## What Is the Business Judgment Rule? The Business Judgment Rule is a legal doctrine that helps to guard a corporation's board of directors (B of D) against frivolous legal allegations about the way it conducts business. A legal staple in [common law](https://www.investopedia.com/terms/c/common-law.asp) countries, the rule states that boards are presumed to act in "good faith"—that is, within the [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) standards of loyalty, prudence, and care directors owe to stakeholders. Absent evidence that the board has blatantly violated some rule of conduct, the courts will not review or question its decisions. Fiduciary standards include the "[duty of care](https://www.investopedia.com/terms/d/duty-care.asp)" and the "[duty of loyalty](https://www.investopedia.com/terms/d/duty-loyalty.asp)." The first is an obligation to act on an informed basis. The second requires directors to put the interests of the corporation and over their own self-interest or the interests of others. ### Key Takeaways * The business judgment rule protects companies from frivolous lawsuits by assuming that, unless proved otherwise, management is acting in the interests of the corporation and its stakeholders. * The rule assumes that managers will not make optimal decisions all the time. * Unless it's clear that directors have violated the law or acted against the interests of the firm and its stakeholders, courts will not question their decisions. ## Understanding the Business Judgment Rule The business judgment rule acknowledges that the daily operation of a business, as well as its long-term strategy, requires making controversial decisions or taking actions that put the company at risk. All business decisions are to some extent risky, whether they involve starting a new line of business or buying another company. Generally speaking, higher profits require taking greater risks. The principle underlying the rule is that the B of D should be allowed to make such decisions without fear of prosecution by [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) who might object. The rule assumes that it is unreasonable to expect managers to make optimal decisions all the time. As long as a court believes that directors are acting rationally and in good faith, it will take no action against them. The Business Judgment Rule is a judicial doctrine arising from United States Courts' respect for corporate self-governance. This doctrine creates a presumption of good faith business judgments of corporate management, and shifts the burden to the accuser to demonstrate that a decision at issue falls into any of the below limits and exceptions. ## Exemptions to the Business Judgment Rule There are certain instances in which director decisions can end up in the courts. For example, a director sells a company [asset](https://www.investopedia.com/terms/a/asset.asp) to a family member for an unjustifiably low price. This would be an example of [self-dealing](https://www.investopedia.com/terms/s/self-dealing.asp) that the rule would not insulate from prosecution. In order to challenge the presumption that is the heart of the rule, plaintiffs must show evidence that directors have acted in bad faith. This might include engaging in [fraud](https://www.investopedia.com/terms/f/fraud.asp), committing a breach of trust or creating a [conflict of interest](https://www.investopedia.com/terms/c/conflict-of-interest.asp), abdicating corporate responsibility, or failing to investigate unethical corporate behavior that is obvious when committed. The Rule thus does not apply in cases where the board of directors: 1. Committed fraud 2. Corporate waste 3. Engaged in self dealing 4. Made decisions affected by a conflict of interest 5. Acted in bad faith or with a corrupt motive 6. Breached their duty of care by a grossly negligent process that includes the failure to consider all material facts reasonably available The sixth is the most common form of attack under the Rule, as shareholders can argue that the board has made a decision where they remained uninformed. ## Example of the Business Judgment Rule Say that XYZ Company's board is considering shutting down a particular product line. [Profit margins](https://www.investopedia.com/terms/p/profitmargin.asp) on the product have been shrinking and the product is becoming extremely costly and eating into revenues from other business lines. The board decides that discontinuing the product would free up resources necessary to focus on more profitable areas. In this case, the business judgment rule protects directors from prosecution by shareholders who disagree with their decision or who are adversely affected by it.

What Is the Business Judgment Rule? The Business Judgment Rule is a legal doctrine that helps to guard a corporation's board of directors (B of D) against frivolous legal allegations about the way it conducts business. A legal staple in common law countries, the rule states that boards are presumed to act in "good faith"—that is, within the fiduciary standards of loyalty, prudence, and care directors owe to stakeholders. Absent evidence that the board has blatantly violated some rule of conduct, the courts will not review or question its decisions. Fiduciary standards include the "duty of care" and the "duty of loyalty." The first is an obligation to act on an informed basis. The second requires directors to put the interests of the corporation and over their own self-interest or the interests of others. Key Takeaways The business judgment rule protects companies from frivolous lawsuits by assuming that, unless proved otherwise, management is acting in the interests of the corporation and its stakeholders.The rule assumes that managers will not make optimal decisions all the time.Unless it's clear that directors have violated the law or acted against the interests of the firm and its stakeholders, courts will not question their decisions. Understanding the Business Judgment Rule The business judgment rule acknowledges that the daily operation of a business, as well as its long-term strategy, requires making controversial decisions or taking actions that put the company at risk. All business decisions are to some extent risky, whether they involve starting a new line of business or buying another company. Generally speaking, higher profits require taking greater risks. The principle underlying the rule is that the B of D should be allowed to make such decisions without fear of prosecution by shareholders who might object. The rule assumes that it is unreasonable to expect managers to make optimal decisions all the time. As long as a court believes that directors are acting rationally and in good faith, it will take no action against them. The Business Judgment Rule is a judicial doctrine arising from United States Courts' respect for corporate self-governance. This doctrine creates a presumption of good faith business judgments of corporate management, and shifts the burden to the accuser to demonstrate that a decision at issue falls into any of the below limits and exceptions. Exemptions to the Business Judgment Rule There are certain instances in which director decisions can end up in the courts. For example, a director sells a company asset to a family member for an unjustifiably low price. This would be an example of self-dealing that the rule would not insulate from prosecution. In order to challenge the presumption that is the heart of the rule, plaintiffs must show evidence that directors have acted in bad faith. This might include engaging in fraud, committing a breach of trust or creating a conflict of interest, abdicating corporate responsibility, or failing to investigate unethical corporate behavior that is obvious when committed. The Rule thus does not apply in cases where the board of directors: Committed fraudCorporate wasteEngaged in self dealingMade decisions affected by a conflict of interestActed in bad faith or with a corrupt motiveBreached their duty of care by a grossly negligent process that includes the failure to consider all material facts reasonably available The sixth is the most common form of attack under the Rule, as shareholders can argue that the board has made a decision where they remained uninformed. Example of the Business Judgment Rule Say that XYZ Company's board is considering shutting down a particular product line. Profit margins on the product have been shrinking and the product is becoming extremely costly and eating into revenues from other business lines. The board decides that discontinuing the product would free up resources necessary to focus on more profitable areas. In this case, the business judgment rule protects directors from prosecution by shareholders who disagree with their decision or who are adversely affected by it.

https://www.investopedia.com/where-to-buy-the-new-spot-bitcoin-etfs-8557203

Where to Buy the New Spot Bitcoin ETFs in 2024

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Following the SEC's recent approval of spot bitcoin ETFs, investing in Bitcoin is now more accessible to average investors eager to get into the cryptocurrency space.<span class="ql-inline-citation" data-cite="1"></span> For investors and traders, buying a spot bitcoin ETF is like buying shares in any other ETF or security. Spot bitcoin ETFs are available on a variety of traditional platforms that offer popular services, like stock and options trading, retirement planning, advisory services, and automated investing. Tradeable on traditional exchanges like the New York Stock Exchange and Nasdaq, these ETFs allow investors to enjoy the leverage of investing in bitcoin without a need to hold it or understand how crypto platforms work. Before investing, you should be aware of how these ETFs work and the risks involved.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <span class="heading-toc" id="toc-where-to-buy-spot-bitcoin-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> Where to Buy Spot Bitcoin ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Spot bitcoin ETFs are now available to trade on several online brokerage and robo-advisor platforms. These new ETFs are also eligible for use in many retirement accounts, like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bitcoin-ira-companies-5115296">Bitcoin IRAs</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-iras-4587879">traditional IRAs</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-roth-iras-4587878">Roth IRA accounts</a>, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-solo-401k-companies-5089155">solo 401(k) plans</a>.  </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"> When picking spot bitcoin ETFs, it is critical for investors to analyze the fees involved. For now, many issuers are offering fee waivers to encourage investments. For example, Bitwise has decided to waive some fees, including the sponsor's fee for the first six months, while Ark Funds is waiving all its fees for now.<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><span class="ql-inline-citation" data-cite="2"></span> It’s important to note that these platforms offering fee waivers for bitcoin ETFs are competing for investors, and these fee waivers are temporary.  </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"> Another thing to consider are the management fees. High management fees, like the one charged by Grayscale (1.50%), can cut into your ETF profits.<span class="ql-inline-citation" data-cite="6"></span> Investors should aim for funds with annual management fees between 0.2% and 0.5%. </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-compare-platforms-for-investing-in-spot-bitcoin-etfs"></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"> Compare Platforms for Investing in Spot Bitcoin ETFs </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>Self-Directed Brokerages</b></td> <td><b>Account Minimum</b></td> <td><b>Available Crypto Assets</b></td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=1500096.1073&amp;type=3&amp;subid=0" rel="noopener noreferrer sponsored nofollow">Fidelity</a></td> <td>$0</td> <td>Coins, ETFs</td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="subid1=${DOC_ID}&amp;subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://robinhood.c3me6x.net/c/328256/1149283/10402?subid1=4587919&amp;subid2=n3637da787727470691044a337655dfa316" rel="noopener noreferrer sponsored nofollow">Robinhood </a></td> <td>$0</td> <td>Coins, ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/charles-schwab-review-4587888" rel="noopener noreferrer">Charles Schwab</a></td> <td>$0</td> <td>ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://us.etrade.com/" rel="noopener noreferrer sponsored nofollow">E*TRADE</a></td> <td>$0</td> <td>ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&amp;url=%2Fen%2Fwhyib%2Foverview.php" rel="noopener noreferrer sponsored nofollow">Interactive Brokers</a></td> <td>$0</td> <td>Coins, ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://med.etoro.com/B12690_A113056_TClick.aspx" rel="noopener noreferrer sponsored nofollow">eToro</a></td> <td>$10 for stocks and ETFs, $200 for CopyTrader</td> <td>Coins, ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1" rel="noopener noreferrer sponsored nofollow">tastytrade</a></td> <td>$0</td> <td>Coins, ETFs</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lightspeed.com/?dd_pm=none&amp;dd_pm_cat=brokerage&amp;dd_pm_company=lightspeed" rel="noopener noreferrer sponsored nofollow">Lightspeed</a></td> <td>$10,000 (web and mobile), $25,000 (software)</td> <td>Coins, ETFs</td> </tr> <tr> <td><b>Robo-Advisors</b></td> <td><b>Account Minimum</b></td> <td><b>Available Crypto Assets</b></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.sofi.com/invest/automated/" rel="noopener noreferrer sponsored nofollow">Sofi Automated Investing</a></td> <td>$1</td> <td>ETFs</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-steps-to-investing-in-spot-bitcoin-etfs"></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"> Steps to Investing in Spot Bitcoin ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Investing in bitcoin ETFs requires a suitable account such as those listed above, most of which you can open in 30 minutes or less. Creating an account is easy and can typically be done online.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <li><strong>Open a brokerage account</strong>: Select a company that offers spot bitcoin ETFs and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-an-online-brokerage-account-7973796">open an online brokerage account</a>. </li> <li><strong>Fund the account</strong>: Many brokerage platforms allow you to fund your account from other brokerage platforms or a regular bank account. Ensure that you fund the account with adequate money to cover the cost of your ETF shares, additional fees, and commissions. </li> <li><strong>Research available bitcoin ETFs</strong>:<strong> </strong>There are currently 11 bitcoin ETFs approved by the SEC.<span class="ql-inline-citation" data-cite="7"></span> During your research, look for ETFs with a high trading volume and high assets under management (AUM). Also, look into what other assets comprise the ETF and check if the issuer behind it is reputable.</li> <li><strong>Select preferred bitcoin ETFs</strong>: Many brokerages give you at least two or three options, displaying the difference in fees for each offer. Choose a bitcoin ETF that aligns with your budget and investment goals. </li> <li><strong>Place an order</strong>: Place a buy order for your select bitcoin ETF, as you would for stocks. You can choose between a market order, which buys the ETF in minutes, or a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitorder.asp">limit order</a>, which will execute at your pre-set price. </li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Monitor your investments regularly</strong>: Keep an eye on your investment, observe bitcoin charts, and watch out for any <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-news-5114163">bitcoin-related news</a>, as this can often affect the volatility of your spot bitcoin ETF. </li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-pros-of-trading-spot-bitcoin-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Pros of Trading Spot Bitcoin ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The launch of spot bitcoin ETFs fulfills a need for individuals and institutions to invest in bitcoin in a regulated, convenient manner without the need to hold it.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> These are the benefits investors can enjoy from spot bitcoin ETFs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <li><strong>Convenience</strong>: Since spot bitcoin ETFs are tradeable on traditional exchanges, investors can easily explore them. There is no need to sign up with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-crypto-exchanges-5071855">crypto exchanges</a> or worry about wallet safety and other custody issues.</li> <li><strong>Liquidity</strong>: Bitcoin ETFs bring <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp">liquidity</a> into bitcoin, which can be beneficial to investors. The companies that issue spot bitcoin ETF provide the liquidity required for trading and implement smaller spreads, encouraging monetary inflows. </li> <li><strong>Regulatory oversight</strong>: Spot bitcoin ETFs are a more regulated asset class than cryptocurrencies. This regulatory oversight provides a greater protective barrier for spot bitcoin ETF investors over what is usually obtainable on many <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-crypto-exchanges-5071855">crypto exchanges</a> where regulation is not far-reaching. </li> <li><strong>Tax implications</strong>: Tax laws on bitcoin ETFs will differ from country to country. In many countries, they will be treated like other assets. For example, you could pay less in taxes holding a spot bitcoin ETF than you would typically spend on cryptocurrency since you will likely hold the ETF for much longer. The IRS tax laws on capital gains and losses indicate you pay less for properties, including bitcoin spot ETFs, when you keep them for more than a year.<span class="ql-inline-citation" data-cite="9"></span> </li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-cons-of-trading-spot-bitcoin-etfs"></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"> Cons of Trading Spot Bitcoin ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Investing in spot bitcoin ETFs poses some risks. Bitcoin ETFs are still subject to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">market manipulation common with digital assets</a> (especially cryptocurrencies).  </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"> Other risks to consider include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li><strong>Crypto volatility</strong>: In recent years, the cryptocurrency market has experienced <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/are-bitcoin-price-and-equity-markets-returns-correlated/">heightened volatility when measured against the U.S. equity market</a>. Holding a bitcoin ETF does not insulate you from this volatility. News like the upcoming <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-4843769">2024 bitcoin halving</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/deal-with-crypto-fomo-6455103">fear, uncertainty, and doubt (FUD)</a> can cause fluctuations in the value of your investment over short periods. On Jan. 10, 2024, the eve of the SEC's spot bitcoin ETF approval, a fake tweet by the commission caused Bitcoin to surge from $46,800 to $47,860 in minutes before it crashed to $45,400 when it became apparent the SEC's X account was compromised.<span class="ql-inline-citation" data-cite="10"></span></li> <li><strong>Regulatory uncertainty</strong>: Spot bitcoin ETFs are regulated investment vehicles that are subject to government bodies' control and scrutiny. The SEC is still reluctant about crypto investing and might change its stance on this asset class.<span class="ql-inline-citation" data-cite="1"></span> Also, new regulations could spring up that limit your investments in these ETFs. </li> <li><strong>Security risks</strong>: The underlying bitcoin in your ETF is in the custody of at least one <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/counterparty.asp">counterparty</a>. If the counterparty gets hacked, it could adversely affect your investment’s safety. For example, BlackRock's bitcoin ETF, iShares Bitcoin Trust (IBIT), is being issued by BlackRock, but Coinbase holds the bitcoins.<span class="ql-inline-citation" data-cite="12"></span> If either BlackRock or Coinbase experiences a security breach, your bitcoin shares might be at risk.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-alternatives-to-spot-bitcoin-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> Alternatives to Spot Bitcoin ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Spot bitcoin ETFs are a new asset class. While exciting, there are other ways of investing for anyone looking to get into bitcoin. Bitcoin ETFs are subject to far more volatility than regular ETFs and could be caught in regulatory crossfires. Here are ways to invest in bitcoin directly or indirectly without buying a spot bitcoin ETF.  </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><strong>Buy bitcoin directly</strong>: Buying bitcoin directly is the most straightforward way to crypto ownership, which a bitcoin ETF does not give you. However, to buy bitcoin directly, you must understand how bitcoin works, decide on what kind of custody to use for your assets and choose an exchange or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bitcoin-wallets-5070283">wallet</a> to make a purchase. Owning bitcoin gives you more usage flexibility but opens you up to more government control. </li> <li><strong>Invest in cryptocurrency company stocks</strong>: Another way to gain exposure to cryptocurrencies is by buying shares in cryptocurrency companies. Popular companies include Riot, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/">Coinbase</a>, and MicroStrategy. Crypto-linked shares usually correlate with market movements and could provide some volatility for investors.<span class="ql-inline-citation" data-cite="13"></span></li> <li><strong>Buy cryptocurrency company or index-based ETFs</strong>: Alternatively, investors could consider investing in legacy ETFs. Bitcoin ETFs like the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/">Grayscale Bitcoin Trust (GBTC)</a> have been available for trading since 2013. Such ETFs have a longer track record and are more suitable for investors who need something with proven performance.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <span class="heading-toc" id="toc-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"> Spot bitcoin ETFs are a new class of investments that allows investors to invest in bitcoin at their convenience with far less risk. They are available through retirement accounts, and on automated investing platforms (robo-advisors), and online brokerages during open market hours, but not on crypto exchanges. To get started with spot bitcoin ETFs, open and fund an account with a brokerage platform, continuously monitor the ETF, and be mindful of fees and commissions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-what-is-bitcoin"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> What Is Bitcoin? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Bitcoin is the first virtual, decentralized cryptocurrency traded over a peer-to-peer network. Transactions on this network are recorded on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>, a distributed ledger, to promote transparency and reduce intermediaries. Bitcoin is used for payments, investing, and speculation, and was created by a pseudonymous entity known as Satoshi Nakamoto in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">January 2009</a>. The smallest unit of a bitcoin is a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">satoshi</a> (100 millionths of a bitcoin). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-what-is-a-spot-bitcoin-etf"></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"> What Is a Spot Bitcoin ETF? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> A spot bitcoin ETF invests directly in bitcoins as the underlying asset. This differs from bitcoin futures ETFs, which are based on derivatives contracts of their prices. Spot bitcoin ETFs comprise underlying bitcoins that are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-8358373">securely stored in a vault</a> by the company offering the ETFs.  </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-what-does-btc-mean"></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"> What Does BTC Mean? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> BTC is the ticker symbol for Bitcoin, and it’s how the cryptocurrency is abbreviated and represented in the financial markets. Investors can search the price of Bitcoin and find Bitcoin-related news by using the ticker symbol BTC with their preferred platform or investment research site.  </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-should-you-buy-a-spot-bitcoin-right-now"></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"> Should You Buy a Spot Bitcoin Right Now? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Buying a spot bitcoin ETF is a good idea for anyone who wants to gain exposure to cryptocurrencies without the hassle of owning and storing them. Like any investment, however, the potential for bitcoin to deliver positive returns varies depending on the time period under consideration. Bitcoin's price is volatile, influenced by market sentiment and external factors. If you believe in its long-term potential as a decentralized digital currency and store of value, now might be a suitable time to buy, considering its historical growth. However, be cautious of short-term fluctuations, as the volatility can be unsettling for risk-averse investors. </p></div>

Following the SEC's recent approval of spot bitcoin ETFs, investing in Bitcoin is now more accessible to average investors eager to get into the cryptocurrency space. For investors and traders, buying a spot bitcoin ETF is like buying shares in any other ETF or security. Spot bitcoin ETFs are available on a variety of traditional platforms that offer popular services, like stock and options trading, retirement planning, advisory services, and automated investing. Tradeable on traditional exchanges like the New York Stock Exchange and Nasdaq, these ETFs allow investors to enjoy the leverage of investing in bitcoin without a need to hold it or understand how crypto platforms work. Before investing, you should be aware of how these ETFs work and the risks involved.  ## Where to Buy Spot Bitcoin ETFs Spot bitcoin ETFs are now available to trade on several online brokerage and robo-advisor platforms. These new ETFs are also eligible for use in many retirement accounts, like [Bitcoin IRAs](https://www.investopedia.com/best-bitcoin-ira-companies-5115296), [traditional IRAs](https://www.investopedia.com/best-brokers-for-iras-4587879) and [Roth IRA accounts](https://www.investopedia.com/best-brokers-for-roth-iras-4587878), and [solo 401(k) plans](https://www.investopedia.com/best-solo-401k-companies-5089155).  When picking spot bitcoin ETFs, it is critical for investors to analyze the fees involved. For now, many issuers are offering fee waivers to encourage investments. For example, Bitwise has decided to waive some fees, including the sponsor's fee for the first six months, while Ark Funds is waiving all its fees for now. It’s important to note that these platforms offering fee waivers for bitcoin ETFs are competing for investors, and these fee waivers are temporary.  Another thing to consider are the management fees. High management fees, like the one charged by Grayscale (1.50%), can cut into your ETF profits. Investors should aim for funds with annual management fees between 0.2% and 0.5%. ## Compare Platforms for Investing in Spot Bitcoin ETFs | **Self-Directed Brokerages** | **Account Minimum** | **Available Crypto Assets** | | --- | --- | --- | | [Fidelity](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=1500096.1073&type=3&subid=0) | $0 | Coins, ETFs | | [Robinhood](https://robinhood.c3me6x.net/c/328256/1149283/10402?subid1=4587919&subid2=n3637da787727470691044a337655dfa316) | $0 | Coins, ETFs | | [Charles Schwab](https://www.investopedia.com/charles-schwab-review-4587888) | $0 | ETFs | | [E\*TRADE](https://us.etrade.com/) | $0 | ETFs | | [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) | $0 | Coins, ETFs | | [eToro](https://med.etoro.com/B12690_A113056_TClick.aspx) | $10 for stocks and ETFs, $200 for CopyTrader | Coins, ETFs | | [tastytrade](https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1) | $0 | Coins, ETFs | | [Lightspeed](https://www.lightspeed.com/?dd_pm=none&dd_pm_cat=brokerage&dd_pm_company=lightspeed) | $10,000 (web and mobile), $25,000 (software) | Coins, ETFs | | **Robo-Advisors** | **Account Minimum** | **Available Crypto Assets** | | [Sofi Automated Investing](https://www.sofi.com/invest/automated/) | $1 | ETFs | ## Steps to Investing in Spot Bitcoin ETFs Investing in bitcoin ETFs requires a suitable account such as those listed above, most of which you can open in 30 minutes or less. Creating an account is easy and can typically be done online.  1. **Open a brokerage account**: Select a company that offers spot bitcoin ETFs and [open an online brokerage account](https://www.investopedia.com/how-to-open-an-online-brokerage-account-7973796). 2. **Fund the account**: Many brokerage platforms allow you to fund your account from other brokerage platforms or a regular bank account. Ensure that you fund the account with adequate money to cover the cost of your ETF shares, additional fees, and commissions. 3. **Research available bitcoin ETFs**:There are currently 11 bitcoin ETFs approved by the SEC. During your research, look for ETFs with a high trading volume and high assets under management (AUM). Also, look into what other assets comprise the ETF and check if the issuer behind it is reputable. 4. **Select preferred bitcoin ETFs**: Many brokerages give you at least two or three options, displaying the difference in fees for each offer. Choose a bitcoin ETF that aligns with your budget and investment goals. 5. **Place an order**: Place a buy order for your select bitcoin ETF, as you would for stocks. You can choose between a market order, which buys the ETF in minutes, or a [limit order](https://www.investopedia.com/terms/l/limitorder.asp), which will execute at your pre-set price. 7. **Monitor your investments regularly**: Keep an eye on your investment, observe bitcoin charts, and watch out for any [bitcoin-related news](https://www.investopedia.com/cryptocurrency-news-5114163), as this can often affect the volatility of your spot bitcoin ETF. ## Pros of Trading Spot Bitcoin ETFs The launch of spot bitcoin ETFs fulfills a need for individuals and institutions to invest in bitcoin in a regulated, convenient manner without the need to hold it.  These are the benefits investors can enjoy from spot bitcoin ETFs. * **Convenience**: Since spot bitcoin ETFs are tradeable on traditional exchanges, investors can easily explore them. There is no need to sign up with [crypto exchanges](https://www.investopedia.com/best-crypto-exchanges-5071855) or worry about wallet safety and other custody issues. * **Liquidity**: Bitcoin ETFs bring [liquidity](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp) into bitcoin, which can be beneficial to investors. The companies that issue spot bitcoin ETF provide the liquidity required for trading and implement smaller spreads, encouraging monetary inflows. * **Regulatory oversight**: Spot bitcoin ETFs are a more regulated asset class than cryptocurrencies. This regulatory oversight provides a greater protective barrier for spot bitcoin ETF investors over what is usually obtainable on many [crypto exchanges](https://www.investopedia.com/best-crypto-exchanges-5071855) where regulation is not far-reaching. * **Tax implications**: Tax laws on bitcoin ETFs will differ from country to country. In many countries, they will be treated like other assets. For example, you could pay less in taxes holding a spot bitcoin ETF than you would typically spend on cryptocurrency since you will likely hold the ETF for much longer. The IRS tax laws on capital gains and losses indicate you pay less for properties, including bitcoin spot ETFs, when you keep them for more than a year. ## Cons of Trading Spot Bitcoin ETFs Investing in spot bitcoin ETFs poses some risks. Bitcoin ETFs are still subject to [market manipulation common with digital assets](https://www.investopedia.com/terms/c/cryptocurrency.asp) (especially cryptocurrencies).  Other risks to consider include: * **Crypto volatility**: In recent years, the cryptocurrency market has experienced [heightened volatility when measured against the U.S. equity market](https://www.investopedia.com/news/are-bitcoin-price-and-equity-markets-returns-correlated/). Holding a bitcoin ETF does not insulate you from this volatility. News like the upcoming [2024 bitcoin halving](https://www.investopedia.com/bitcoin-halving-4843769) and [fear, uncertainty, and doubt (FUD)](https://www.investopedia.com/deal-with-crypto-fomo-6455103) can cause fluctuations in the value of your investment over short periods. On Jan. 10, 2024, the eve of the SEC's spot bitcoin ETF approval, a fake tweet by the commission caused Bitcoin to surge from $46,800 to $47,860 in minutes before it crashed to $45,400 when it became apparent the SEC's X account was compromised. * **Regulatory uncertainty**: Spot bitcoin ETFs are regulated investment vehicles that are subject to government bodies' control and scrutiny. The SEC is still reluctant about crypto investing and might change its stance on this asset class. Also, new regulations could spring up that limit your investments in these ETFs. * **Security risks**: The underlying bitcoin in your ETF is in the custody of at least one [counterparty](https://www.investopedia.com/terms/c/counterparty.asp). If the counterparty gets hacked, it could adversely affect your investment’s safety. For example, BlackRock's bitcoin ETF, iShares Bitcoin Trust (IBIT), is being issued by BlackRock, but Coinbase holds the bitcoins. If either BlackRock or Coinbase experiences a security breach, your bitcoin shares might be at risk. ## Alternatives to Spot Bitcoin ETFs Spot bitcoin ETFs are a new asset class. While exciting, there are other ways of investing for anyone looking to get into bitcoin. Bitcoin ETFs are subject to far more volatility than regular ETFs and could be caught in regulatory crossfires. Here are ways to invest in bitcoin directly or indirectly without buying a spot bitcoin ETF.  * **Buy bitcoin directly**: Buying bitcoin directly is the most straightforward way to crypto ownership, which a bitcoin ETF does not give you. However, to buy bitcoin directly, you must understand how bitcoin works, decide on what kind of custody to use for your assets and choose an exchange or [wallet](https://www.investopedia.com/best-bitcoin-wallets-5070283) to make a purchase. Owning bitcoin gives you more usage flexibility but opens you up to more government control. * **Invest in cryptocurrency company stocks**: Another way to gain exposure to cryptocurrencies is by buying shares in cryptocurrency companies. Popular companies include Riot, [Coinbase](https://www.investopedia.com/tech/coinbase-what-it-and-how-do-you-use-it/), and MicroStrategy. Crypto-linked shares usually correlate with market movements and could provide some volatility for investors. * **Buy cryptocurrency company or index-based ETFs**: Alternatively, investors could consider investing in legacy ETFs. Bitcoin ETFs like the [Grayscale Bitcoin Trust (GBTC)](https://www.investopedia.com/news/why-buy-expensive-bitcoin-etf-instead-actual-bitcoin/) have been available for trading since 2013. Such ETFs have a longer track record and are more suitable for investors who need something with proven performance. ## The Bottom Line Spot bitcoin ETFs are a new class of investments that allows investors to invest in bitcoin at their convenience with far less risk. They are available through retirement accounts, and on automated investing platforms (robo-advisors), and online brokerages during open market hours, but not on crypto exchanges. To get started with spot bitcoin ETFs, open and fund an account with a brokerage platform, continuously monitor the ETF, and be mindful of fees and commissions. ## What Is Bitcoin? Bitcoin is the first virtual, decentralized cryptocurrency traded over a peer-to-peer network. Transactions on this network are recorded on the [blockchain](https://www.investopedia.com/terms/b/blockchain.asp), a distributed ledger, to promote transparency and reduce intermediaries. Bitcoin is used for payments, investing, and speculation, and was created by a pseudonymous entity known as Satoshi Nakamoto in [January 2009](https://www.investopedia.com/terms/b/bitcoin.asp). The smallest unit of a bitcoin is a [satoshi](https://www.investopedia.com/terms/b/bitcoin.asp) (100 millionths of a bitcoin). ## What Is a Spot Bitcoin ETF? A spot bitcoin ETF invests directly in bitcoins as the underlying asset. This differs from bitcoin futures ETFs, which are based on derivatives contracts of their prices. Spot bitcoin ETFs comprise underlying bitcoins that are [securely stored in a vault](https://www.investopedia.com/spot-bitcoin-etfs-8358373) by the company offering the ETFs.  ## What Does BTC Mean? BTC is the ticker symbol for Bitcoin, and it’s how the cryptocurrency is abbreviated and represented in the financial markets. Investors can search the price of Bitcoin and find Bitcoin-related news by using the ticker symbol BTC with their preferred platform or investment research site.  ## Should You Buy a Spot Bitcoin Right Now? Buying a spot bitcoin ETF is a good idea for anyone who wants to gain exposure to cryptocurrencies without the hassle of owning and storing them. Like any investment, however, the potential for bitcoin to deliver positive returns varies depending on the time period under consideration. Bitcoin's price is volatile, influenced by market sentiment and external factors. If you believe in its long-term potential as a decentralized digital currency and store of value, now might be a suitable time to buy, considering its historical growth. However, be cautious of short-term fluctuations, as the volatility can be unsettling for risk-averse investors.

Following the SEC's recent approval of spot bitcoin ETFs, investing in Bitcoin is now more accessible to average investors eager to get into the cryptocurrency space. For investors and traders, buying a spot bitcoin ETF is like buying shares in any other ETF or security. Spot bitcoin ETFs are available on a variety of traditional platforms that offer popular services, like stock and options trading, retirement planning, advisory services, and automated investing. Tradeable on traditional exchanges like the New York Stock Exchange and Nasdaq, these ETFs allow investors to enjoy the leverage of investing in bitcoin without a need to hold it or understand how crypto platforms work. Before investing, you should be aware of how these ETFs work and the risks involved.  Where to Buy Spot Bitcoin ETFs Spot bitcoin ETFs are now available to trade on several online brokerage and robo-advisor platforms. These new ETFs are also eligible for use in many retirement accounts, like Bitcoin IRAs, traditional IRAs and Roth IRA accounts, and solo 401(k) plans.  When picking spot bitcoin ETFs, it is critical for investors to analyze the fees involved. For now, many issuers are offering fee waivers to encourage investments. For example, Bitwise has decided to waive some fees, including the sponsor's fee for the first six months, while Ark Funds is waiving all its fees for now. It’s important to note that these platforms offering fee waivers for bitcoin ETFs are competing for investors, and these fee waivers are temporary.  Another thing to consider are the management fees. High management fees, like the one charged by Grayscale (1.50%), can cut into your ETF profits. Investors should aim for funds with annual management fees between 0.2% and 0.5%. Compare Platforms for Investing in Spot Bitcoin ETFs Self-Directed Brokerages Account Minimum Available Crypto Assets Fidelity $0 Coins, ETFs Robinhood  $0 Coins, ETFs Charles Schwab $0 ETFs E*TRADE $0 ETFs Interactive Brokers $0 Coins, ETFs eToro $10 for stocks and ETFs, $200 for CopyTrader Coins, ETFs tastytrade $0 Coins, ETFs Lightspeed $10,000 (web and mobile), $25,000 (software) Coins, ETFs Robo-Advisors Account Minimum Available Crypto Assets Sofi Automated Investing $1 ETFs Steps to Investing in Spot Bitcoin ETFs Investing in bitcoin ETFs requires a suitable account such as those listed above, most of which you can open in 30 minutes or less. Creating an account is easy and can typically be done online.  Open a brokerage account: Select a company that offers spot bitcoin ETFs and open an online brokerage account.  Fund the account: Many brokerage platforms allow you to fund your account from other brokerage platforms or a regular bank account. Ensure that you fund the account with adequate money to cover the cost of your ETF shares, additional fees, and commissions.  Research available bitcoin ETFs: There are currently 11 bitcoin ETFs approved by the SEC. During your research, look for ETFs with a high trading volume and high assets under management (AUM). Also, look into what other assets comprise the ETF and check if the issuer behind it is reputable. Select preferred bitcoin ETFs: Many brokerages give you at least two or three options, displaying the difference in fees for each offer. Choose a bitcoin ETF that aligns with your budget and investment goals. Place an order: Place a buy order for your select bitcoin ETF, as you would for stocks. You can choose between a market order, which buys the ETF in minutes, or a limit order, which will execute at your pre-set price. Monitor your investments regularly: Keep an eye on your investment, observe bitcoin charts, and watch out for any bitcoin-related news, as this can often affect the volatility of your spot bitcoin ETF.  Pros of Trading Spot Bitcoin ETFs The launch of spot bitcoin ETFs fulfills a need for individuals and institutions to invest in bitcoin in a regulated, convenient manner without the need to hold it.  These are the benefits investors can enjoy from spot bitcoin ETFs. Convenience: Since spot bitcoin ETFs are tradeable on traditional exchanges, investors can easily explore them. There is no need to sign up with crypto exchanges or worry about wallet safety and other custody issues. Liquidity: Bitcoin ETFs bring liquidity into bitcoin, which can be beneficial to investors. The companies that issue spot bitcoin ETF provide the liquidity required for trading and implement smaller spreads, encouraging monetary inflows.  Regulatory oversight: Spot bitcoin ETFs are a more regulated asset class than cryptocurrencies. This regulatory oversight provides a greater protective barrier for spot bitcoin ETF investors over what is usually obtainable on many crypto exchanges where regulation is not far-reaching.  Tax implications: Tax laws on bitcoin ETFs will differ from country to country. In many countries, they will be treated like other assets. For example, you could pay less in taxes holding a spot bitcoin ETF than you would typically spend on cryptocurrency since you will likely hold the ETF for much longer. The IRS tax laws on capital gains and losses indicate you pay less for properties, including bitcoin spot ETFs, when you keep them for more than a year.  Cons of Trading Spot Bitcoin ETFs Investing in spot bitcoin ETFs poses some risks. Bitcoin ETFs are still subject to market manipulation common with digital assets (especially cryptocurrencies).  Other risks to consider include: Crypto volatility: In recent years, the cryptocurrency market has experienced heightened volatility when measured against the U.S. equity market. Holding a bitcoin ETF does not insulate you from this volatility. News like the upcoming 2024 bitcoin halving and fear, uncertainty, and doubt (FUD) can cause fluctuations in the value of your investment over short periods. On Jan. 10, 2024, the eve of the SEC's spot bitcoin ETF approval, a fake tweet by the commission caused Bitcoin to surge from $46,800 to $47,860 in minutes before it crashed to $45,400 when it became apparent the SEC's X account was compromised. Regulatory uncertainty: Spot bitcoin ETFs are regulated investment vehicles that are subject to government bodies' control and scrutiny. The SEC is still reluctant about crypto investing and might change its stance on this asset class. Also, new regulations could spring up that limit your investments in these ETFs.  Security risks: The underlying bitcoin in your ETF is in the custody of at least one counterparty. If the counterparty gets hacked, it could adversely affect your investment’s safety. For example, BlackRock's bitcoin ETF, iShares Bitcoin Trust (IBIT), is being issued by BlackRock, but Coinbase holds the bitcoins. If either BlackRock or Coinbase experiences a security breach, your bitcoin shares might be at risk. Alternatives to Spot Bitcoin ETFs Spot bitcoin ETFs are a new asset class. While exciting, there are other ways of investing for anyone looking to get into bitcoin. Bitcoin ETFs are subject to far more volatility than regular ETFs and could be caught in regulatory crossfires. Here are ways to invest in bitcoin directly or indirectly without buying a spot bitcoin ETF.  Buy bitcoin directly: Buying bitcoin directly is the most straightforward way to crypto ownership, which a bitcoin ETF does not give you. However, to buy bitcoin directly, you must understand how bitcoin works, decide on what kind of custody to use for your assets and choose an exchange or wallet to make a purchase. Owning bitcoin gives you more usage flexibility but opens you up to more government control.  Invest in cryptocurrency company stocks: Another way to gain exposure to cryptocurrencies is by buying shares in cryptocurrency companies. Popular companies include Riot, Coinbase, and MicroStrategy. Crypto-linked shares usually correlate with market movements and could provide some volatility for investors. Buy cryptocurrency company or index-based ETFs: Alternatively, investors could consider investing in legacy ETFs. Bitcoin ETFs like the Grayscale Bitcoin Trust (GBTC) have been available for trading since 2013. Such ETFs have a longer track record and are more suitable for investors who need something with proven performance. The Bottom Line Spot bitcoin ETFs are a new class of investments that allows investors to invest in bitcoin at their convenience with far less risk. They are available through retirement accounts, and on automated investing platforms (robo-advisors), and online brokerages during open market hours, but not on crypto exchanges. To get started with spot bitcoin ETFs, open and fund an account with a brokerage platform, continuously monitor the ETF, and be mindful of fees and commissions. What Is Bitcoin? Bitcoin is the first virtual, decentralized cryptocurrency traded over a peer-to-peer network. Transactions on this network are recorded on the blockchain, a distributed ledger, to promote transparency and reduce intermediaries. Bitcoin is used for payments, investing, and speculation, and was created by a pseudonymous entity known as Satoshi Nakamoto in January 2009. The smallest unit of a bitcoin is a satoshi (100 millionths of a bitcoin). What Is a Spot Bitcoin ETF? A spot bitcoin ETF invests directly in bitcoins as the underlying asset. This differs from bitcoin futures ETFs, which are based on derivatives contracts of their prices. Spot bitcoin ETFs comprise underlying bitcoins that are securely stored in a vault by the company offering the ETFs.  What Does BTC Mean? BTC is the ticker symbol for Bitcoin, and it’s how the cryptocurrency is abbreviated and represented in the financial markets. Investors can search the price of Bitcoin and find Bitcoin-related news by using the ticker symbol BTC with their preferred platform or investment research site.  Should You Buy a Spot Bitcoin Right Now? Buying a spot bitcoin ETF is a good idea for anyone who wants to gain exposure to cryptocurrencies without the hassle of owning and storing them. Like any investment, however, the potential for bitcoin to deliver positive returns varies depending on the time period under consideration. Bitcoin's price is volatile, influenced by market sentiment and external factors. If you believe in its long-term potential as a decentralized digital currency and store of value, now might be a suitable time to buy, considering its historical growth. However, be cautious of short-term fluctuations, as the volatility can be unsettling for risk-averse investors.

https://www.investopedia.com/articles/fundamental/04/042804.asp

How to Analyze Corporate Profit Margins

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Let's face it, a company's most important goal is to make money and keep it, which depends on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp" rel="noopener noreferrer">liquidity</a> and efficiency. Because these characteristics determine a company's ability to pay investors a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp" rel="noopener noreferrer">dividend</a>, profitability is reflected in share price. </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"> That's why investors should know how to analyze various facets of profitability, including how efficiently a company uses its resources and how much income it generates from operations. Knowing how to calculate and analyze a corporate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp" rel="noopener noreferrer">profit margin</a> is a great way to gain insight into how well a company generates and retains money. </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>Investors who know how to calculate and analyze a corporate profit margin gain insight into a company's current effectiveness in generating profits and its potential to generate future profits.</li><li>The three key profit-margin ratios investors should analyze when evaluating a company are gross profit margins, operating profit margins, and net profit margins.</li><li>Companies with large profit margins frequently have a competitive advantage over other companies in their industry.</li><li>Understanding a company's margin ratios can be a starting point for further analysis to decide if a company would be a good investment option.</li><li>Profit margins also hold strong value when compared against competitor values or tracked over time for a single company.</li></ul></div></div></div> <span class="heading-toc" id="toc-analyzing-corporate-profit-margins-using-profit-margin-ratios"></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"> Analyzing Corporate Profit Margins Using Profit-Margin Ratios </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> It's tempting to rely on net <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings.asp">earnings</a> alone to gauge profitability, but it doesn't always provide a clear picture of a company. Using it as the sole measure of profitability can be a bad idea. </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"> Profit-margin ratios, on the other hand, can give investors deeper insight into management efficiency. But instead of measuring how much a company earns from assets, equity, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/invested-capital.asp">invested capital</a>, these ratios measure how much money a company squeezes from its total <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a> or total sales. </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"> Margins are earnings expressed as a ratio or a percentage of sales. A percentage allows investors to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/032315/how-does-ratio-analysis-make-it-easier-compare-different-companies.asp">compare the profitability of different companies</a>, while net earnings, which are presented as an absolute number, don't. </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>Financial ratios rarely hold value by themselves. You can get the most benefit from using financial ratios by comparing them over time, comparing them across companies, or by comparing them against industry benchmarks.</p></div></div></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"> Example of a Profit-Margin Ratio </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Suppose that Company A had an annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netincome.asp" rel="noopener noreferrer">net income</a> of $749 million on sales of about $11.5 billion last year. Its biggest competitor, Company B, earned about $990 million for the year on sales of about $19.9 billion. Comparing Company B's net earnings of $990 million to Company A's $749 million shows that Company B earned more than Company A, but it doesn't tell you very much about profitability. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> However, if you look at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/net_margin.asp" rel="noopener noreferrer">net profit margin</a> or the earnings generated from each dollar of sales, you'll see that Company A produced 6.5 cents on every dollar of sales, while Company B returned less than 5 cents. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> There are three key profit-margin ratios: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossprofit.asp" rel="noopener noreferrer">gross profit</a> margins, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating_profit.asp" rel="noopener noreferrer">operating profit</a> margins, and net profit margins. </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-gross-profit-margin"></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"> Gross Profit Margin  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The gross profit margin tells us how much profit a company makes on its cost of sales, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cogs.asp">cost of goods sold (COGS)</a>. In other words, it indicates how efficiently management uses labor and supplies in the production process. This is the formula: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales </blockquote> <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"> Suppose that a company has $1 million in sales and the cost of its labor and materials amounts to $600,000. Its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossmargin.asp">gross margin</a> rate would be 40% (($1 million - $600,000)/$1 million). </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"> Companies with high gross margins will have money left over to spend on other business operations, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/randd.asp">research and development</a> or marketing. When analyzing corporate profit margins, look for downward trends in the gross margin rate over time. This is a telltale sign the company may have future problems with its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bottomline.asp">bottom line</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"> For example, companies frequently are faced with rapidly increasing labor and materials costs. Unless the company can pass these costs onto customers in the form of higher prices, these costs could lower the company's gross profit margins. </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"> It's important to remember that gross profit margins can vary drastically from business to business and from industry to industry. For example, the software industry has a gross margin of about 90%, while the airline industry only has a gross margin of about 5%.<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_35-0"></div> <span class="heading-toc" id="toc-operating-profit-margin"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-heading__text"> Operating Profit Margin </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> By comparing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ebit.asp">earnings before interest and taxes (EBIT)</a> to sales, operating profit margins show how successful a company's management has been at generating income from the operation of the business. This is the calculation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Operating Profit Margin = EBIT/Sales </blockquote> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin would be 20%. </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"> This ratio is a rough measure of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operatingleverage.asp">operating leverage</a> a company can achieve in the operational part of its business. It indicates how much EBIT is generated per dollar of sales. High operating profits can mean the company has effective control of costs, or that sales are increasing faster than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating-cost.asp">operating costs</a>. </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"> Knowing operating profit also allows an investor to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures. </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"> Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. </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"> Naturally, because the operating profit margin accounts for administration and selling costs as well as materials and labor, it should be a much smaller figure than the gross margin. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_51-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" 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_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Margins often get smaller as you work your way down a company's income statement. That is because the further down you go, the more expenses get added into the calculation (which reduces profits).</p></div></div></div> <span class="heading-toc" id="toc-net-profit-margin"></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"> Net Profit Margin  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Net profit margins are those generated from all phases of a business, including taxes. In other words, this ratio compares net income with sales. It comes as close as possible to summing up in a single figure how effectively the managers are running a business: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Net Profit Margins = Net Profits After Taxes/Sales </blockquote> <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"> If a company generates after-tax earnings of $100,000 on $1 million of sales, then its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-net-margin.asp" rel="noopener noreferrer">net margin</a> amounts to 10%. </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"> To be comparable from company to company and from year to year, net profits after tax must be shown before <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minorityinterest.asp" rel="noopener noreferrer">minority interests</a> have been deducted and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityincome.asp" rel="noopener noreferrer">equity income</a> added. Not all companies have these items. Also, investment income, which is wholly dependent upon the whims of management, can change dramatically from year to year. </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"> Just like gross and operating profit margins, net margins vary between industries. By comparing a company's gross and net margins, we can get a good sense of its non-production and non-direct costs like administration, finance, and marketing costs. </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-examples-of-corporate-margin-analysis"></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"> Examples of Corporate Margin Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> As part of its annual financial statement reporting, Microsoft reported financial information for the year ending June 30, 2022. These comparative income statements also communicated historical results for the same period ending in 2021 and 2020.<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_66-0"></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_67-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:38.4%;"> <img alt="Microsoft, 2022 Gross Profit" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Vg32jevbWz2CxQJTo2LSEpV0xVA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Vg32jevbWz2CxQJTo2LSEpV0xVA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG" data-srcset="https://www.investopedia.com/thmb/WJsxiTAIcFPuY_R97ucYflQo6OQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG 750w" data-tracking-container="true" height="604" id="mntl-sc-block-image_1-0" width="1571"/> <noscript> <img alt="Microsoft, 2022 Gross Profit" class="img--noscript universal-image__image" height="604" sizes="750px" src="https://www.investopedia.com/thmb/Vg32jevbWz2CxQJTo2LSEpV0xVA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG" srcset="https://www.investopedia.com/thmb/WJsxiTAIcFPuY_R97ucYflQo6OQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG 750w" width="1571"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Based on the section above, Microsoft generated $198.27 billion of revenue in 2022. Looking further down its income statement, it also generated $135.6 billion of gross margin. Dividing Microsoft's gross margin by its total revenue yields roughly 68%; this means that for every dollar Microsoft generated in income, it paid roughly $0.32 for cost of goods sold and kept $0.68 to pay for broader operations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_70-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:50.2%;"> <img alt="Microsoft, 2022 Operating Profit" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/VeXPcI-VpOvGQpsjzDYzAIFH64A=/1433x0/filters:no_upscale():max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/mZojRH2oYEfpl-9rv76tYuNkpDE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG" data-srcset="https://www.investopedia.com/thmb/cySaL6jpla8h3p-E5piy0CwrvFw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG 750w" data-tracking-container="true" height="720" id="mntl-sc-block-image_2-0" width="1433"/> <noscript> <img alt="Microsoft, 2022 Operating Profit" class="img--noscript universal-image__image" height="720" sizes="750px" src="https://www.investopedia.com/thmb/mZojRH2oYEfpl-9rv76tYuNkpDE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG" srcset="https://www.investopedia.com/thmb/cySaL6jpla8h3p-E5piy0CwrvFw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG 750w" width="1433"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Looking further down the income statement, Microsoft also reported operating income of $83,383. This equals roughly 42% of net total sales. This means that after Microsoft paid for both its cost of goods sold and operating costs, it still kept $0.42 from every dollar it earned. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></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_73-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:28.1%;"> <img alt="Microsoft, 2022 Net Profit" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/gjr0cShHSCmcoUobjx4IRyBV42Y=/1361x0/filters:no_upscale():max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/TjnQnPJKWckfBB6F4DdBLy8dALM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG" data-srcset="https://www.investopedia.com/thmb/RPgTmOR3Vg0-FyjXRveRXBG8CuU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG 750w" data-tracking-container="true" height="383" id="mntl-sc-block-image_3-0" width="1361"/> <noscript> <img alt="Microsoft, 2022 Net Profit" class="img--noscript universal-image__image" height="383" sizes="750px" src="https://www.investopedia.com/thmb/TjnQnPJKWckfBB6F4DdBLy8dALM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG" srcset="https://www.investopedia.com/thmb/RPgTmOR3Vg0-FyjXRveRXBG8CuU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG 750w" width="1361"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Last, Microsoft paid income taxes and had several income statement lines that further reduced the amount of net income it earned. Rounding up, this left Microsoft with roughly 37% of its total gross revenue. This means that for every dollar that Microsoft sold, it ultimately kept $0.37 after factoring in costs. </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"> Consider that by itself, these margin ratios may not mean much. After all, you may not know if a 37% net income margin is good, especially considering Microsoft's size, industry, and competitive advantages. Therefore, margin ratios are a tremendous way to compare information across companies to see how one entity may be performing against its competitors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Last, consider the value profit margins may offer by comparing them over time. Looking at Microsoft's financial information above, the company posted a 45.6% net income margin in 2020 and 52.8% net income margin in 2021. Therefore, though 37% may sound high, performing comparative margin analysis may reveal potential trends or downturns. </p> <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-why-are-corporate-profits-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Corporate Profits Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Corporate profits are important as they indicate a company's financial success, ability to reinvest, attract investors, and provide returns to shareholders. When a company has residual profit, it is more likely to be able to grow as it can use that capital to scale its business or perform research.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_82-0"><span class="heading-toc" id="toc-how-do-taxes-impact-corporate-profits"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Taxes Impact Corporate Profits?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Taxes can affect corporate profits by reducing the amount of income available for reinvestment or distribution to shareholders, depending on the tax rate and applicable deductions. Be aware that taxes are included at the bottom of a company's income statement, so taxes are excluded when calculating gross profit or operating profit.</p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_84-0"><span class="heading-toc" id="toc-how-do-companies-distribute-their-profits"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Companies Distribute Their Profits?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Companies can distribute their profits through dividends to shareholders, reinvestment in the business, share buybacks, or debt reduction. Companies can also hold onto profits for use in future years; this balance of equity is reported on a company's financial statements as the total amount of retained earnings.</p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_86-0"><span class="heading-toc" id="toc-what-is-a-good-profit-margin-for-a-company"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Profit Margin for a Company?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A good profit margin for a company depends on the industry, but generally, higher profit margins indicate better profitability and efficiency. In addition, the benchmark for larger companies should be higher than that of small companies because of the economies of scale that can be achieved through more efficient manufacturing processes and stronger purchasing power.</p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Margin analysis is a great tool to understand the profitability of companies. It tells us how effective management can wring profits from sales, and how much room a company has to withstand a downturn, fend off competition, and make mistakes. But, like all ratios, margin ratios never offer perfect information. They are only as good as the timeliness and accuracy of the financial data that is fed into them. Correct analysis also depends on a consideration of the company's industry and its position in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businesscycle.asp" rel="noopener noreferrer">business cycle</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Margin ratios highlight companies that are worth further examination. Knowing that a company has a gross margin of 25% or a net profit margin of 5% tells us very little. As with any ratio used on its own, margins tell us a lot, but not the whole story, about a company's prospects. </p></div>

Let's face it, a company's most important goal is to make money and keep it, which depends on [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) and efficiency. Because these characteristics determine a company's ability to pay investors a [dividend](https://www.investopedia.com/terms/d/dividend.asp), profitability is reflected in share price. That's why investors should know how to analyze various facets of profitability, including how efficiently a company uses its resources and how much income it generates from operations. Knowing how to calculate and analyze a corporate [profit margin](https://www.investopedia.com/terms/p/profitmargin.asp) is a great way to gain insight into how well a company generates and retains money. ### Key Takeaways * Investors who know how to calculate and analyze a corporate profit margin gain insight into a company's current effectiveness in generating profits and its potential to generate future profits. * The three key profit-margin ratios investors should analyze when evaluating a company are gross profit margins, operating profit margins, and net profit margins. * Companies with large profit margins frequently have a competitive advantage over other companies in their industry. * Understanding a company's margin ratios can be a starting point for further analysis to decide if a company would be a good investment option. * Profit margins also hold strong value when compared against competitor values or tracked over time for a single company. ## Analyzing Corporate Profit Margins Using Profit-Margin Ratios It's tempting to rely on net [earnings](https://www.investopedia.com/terms/e/earnings.asp) alone to gauge profitability, but it doesn't always provide a clear picture of a company. Using it as the sole measure of profitability can be a bad idea. Profit-margin ratios, on the other hand, can give investors deeper insight into management efficiency. But instead of measuring how much a company earns from assets, equity, or [invested capital](https://www.investopedia.com/terms/i/invested-capital.asp), these ratios measure how much money a company squeezes from its total [revenue](https://www.investopedia.com/terms/r/revenue.asp) or total sales. Margins are earnings expressed as a ratio or a percentage of sales. A percentage allows investors to [compare the profitability of different companies](https://www.investopedia.com/ask/answers/032315/how-does-ratio-analysis-make-it-easier-compare-different-companies.asp), while net earnings, which are presented as an absolute number, don't. ### Financial ratios rarely hold value by themselves. You can get the most benefit from using financial ratios by comparing them over time, comparing them across companies, or by comparing them against industry benchmarks. ### Example of a Profit-Margin Ratio Suppose that Company A had an annual [net income](https://www.investopedia.com/terms/n/netincome.asp) of $749 million on sales of about $11.5 billion last year. Its biggest competitor, Company B, earned about $990 million for the year on sales of about $19.9 billion. Comparing Company B's net earnings of $990 million to Company A's $749 million shows that Company B earned more than Company A, but it doesn't tell you very much about profitability. However, if you look at the [net profit margin](https://www.investopedia.com/terms/n/net_margin.asp) or the earnings generated from each dollar of sales, you'll see that Company A produced 6.5 cents on every dollar of sales, while Company B returned less than 5 cents. There are three key profit-margin ratios: [gross profit](https://www.investopedia.com/terms/g/grossprofit.asp) margins, [operating profit](https://www.investopedia.com/terms/o/operating_profit.asp) margins, and net profit margins. ## Gross Profit Margin The gross profit margin tells us how much profit a company makes on its cost of sales, or [cost of goods sold (COGS)](https://www.investopedia.com/terms/c/cogs.asp). In other words, it indicates how efficiently management uses labor and supplies in the production process. This is the formula: > Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales Suppose that a company has $1 million in sales and the cost of its labor and materials amounts to $600,000. Its [gross margin](https://www.investopedia.com/terms/g/grossmargin.asp) rate would be 40% (($1 million - $600,000)/$1 million). Companies with high gross margins will have money left over to spend on other business operations, such as [research and development](https://www.investopedia.com/terms/r/randd.asp) or marketing. When analyzing corporate profit margins, look for downward trends in the gross margin rate over time. This is a telltale sign the company may have future problems with its [bottom line](https://www.investopedia.com/terms/b/bottomline.asp). For example, companies frequently are faced with rapidly increasing labor and materials costs. Unless the company can pass these costs onto customers in the form of higher prices, these costs could lower the company's gross profit margins. It's important to remember that gross profit margins can vary drastically from business to business and from industry to industry. For example, the software industry has a gross margin of about 90%, while the airline industry only has a gross margin of about 5%. ## Operating Profit Margin By comparing [earnings before interest and taxes (EBIT)](https://www.investopedia.com/terms/e/ebit.asp) to sales, operating profit margins show how successful a company's management has been at generating income from the operation of the business. This is the calculation: > Operating Profit Margin = EBIT/Sales If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin would be 20%. This ratio is a rough measure of the [operating leverage](https://www.investopedia.com/terms/o/operatingleverage.asp) a company can achieve in the operational part of its business. It indicates how much EBIT is generated per dollar of sales. High operating profits can mean the company has effective control of costs, or that sales are increasing faster than [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp). Knowing operating profit also allows an investor to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures. Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. Naturally, because the operating profit margin accounts for administration and selling costs as well as materials and labor, it should be a much smaller figure than the gross margin. ### Margins often get smaller as you work your way down a company's income statement. That is because the further down you go, the more expenses get added into the calculation (which reduces profits). ## Net Profit Margin Net profit margins are those generated from all phases of a business, including taxes. In other words, this ratio compares net income with sales. It comes as close as possible to summing up in a single figure how effectively the managers are running a business: > Net Profit Margins = Net Profits After Taxes/Sales If a company generates after-tax earnings of $100,000 on $1 million of sales, then its [net margin](https://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-net-margin.asp) amounts to 10%. To be comparable from company to company and from year to year, net profits after tax must be shown before [minority interests](https://www.investopedia.com/terms/m/minorityinterest.asp) have been deducted and [equity income](https://www.investopedia.com/terms/e/equityincome.asp) added. Not all companies have these items. Also, investment income, which is wholly dependent upon the whims of management, can change dramatically from year to year. Just like gross and operating profit margins, net margins vary between industries. By comparing a company's gross and net margins, we can get a good sense of its non-production and non-direct costs like administration, finance, and marketing costs. ## Examples of Corporate Margin Analysis As part of its annual financial statement reporting, Microsoft reported financial information for the year ending June 30, 2022. These comparative income statements also communicated historical results for the same period ending in 2021 and 2020. ![Microsoft, 2022 Gross Profit]() :max_bytes(150000):strip_icc()/GrossMargin-acc5cb375bc841baabe4e71f96dbf964.PNG) Based on the section above, Microsoft generated $198.27 billion of revenue in 2022. Looking further down its income statement, it also generated $135.6 billion of gross margin. Dividing Microsoft's gross margin by its total revenue yields roughly 68%; this means that for every dollar Microsoft generated in income, it paid roughly $0.32 for cost of goods sold and kept $0.68 to pay for broader operations. ![Microsoft, 2022 Operating Profit]() :max_bytes(150000):strip_icc()/OperatingMargin-72b207dee3d64a7fb4f34b5f2f71eda5.PNG) Looking further down the income statement, Microsoft also reported operating income of $83,383. This equals roughly 42% of net total sales. This means that after Microsoft paid for both its cost of goods sold and operating costs, it still kept $0.42 from every dollar it earned. ![Microsoft, 2022 Net Profit]() :max_bytes(150000):strip_icc()/NetMargin-9ce43f2a7132468c95566dfd457cfec3.PNG) Last, Microsoft paid income taxes and had several income statement lines that further reduced the amount of net income it earned. Rounding up, this left Microsoft with roughly 37% of its total gross revenue. This means that for every dollar that Microsoft sold, it ultimately kept $0.37 after factoring in costs. Consider that by itself, these margin ratios may not mean much. After all, you may not know if a 37% net income margin is good, especially considering Microsoft's size, industry, and competitive advantages. Therefore, margin ratios are a tremendous way to compare information across companies to see how one entity may be performing against its competitors. Last, consider the value profit margins may offer by comparing them over time. Looking at Microsoft's financial information above, the company posted a 45.6% net income margin in 2020 and 52.8% net income margin in 2021. Therefore, though 37% may sound high, performing comparative margin analysis may reveal potential trends or downturns. ## Why Are Corporate Profits Important? Corporate profits are important as they indicate a company's financial success, ability to reinvest, attract investors, and provide returns to shareholders. When a company has residual profit, it is more likely to be able to grow as it can use that capital to scale its business or perform research. ## How Do Taxes Impact Corporate Profits? Taxes can affect corporate profits by reducing the amount of income available for reinvestment or distribution to shareholders, depending on the tax rate and applicable deductions. Be aware that taxes are included at the bottom of a company's income statement, so taxes are excluded when calculating gross profit or operating profit. ## How Do Companies Distribute Their Profits? Companies can distribute their profits through dividends to shareholders, reinvestment in the business, share buybacks, or debt reduction. Companies can also hold onto profits for use in future years; this balance of equity is reported on a company's financial statements as the total amount of retained earnings. ## What Is a Good Profit Margin for a Company? A good profit margin for a company depends on the industry, but generally, higher profit margins indicate better profitability and efficiency. In addition, the benchmark for larger companies should be higher than that of small companies because of the economies of scale that can be achieved through more efficient manufacturing processes and stronger purchasing power. ## The Bottom Line Margin analysis is a great tool to understand the profitability of companies. It tells us how effective management can wring profits from sales, and how much room a company has to withstand a downturn, fend off competition, and make mistakes. But, like all ratios, margin ratios never offer perfect information. They are only as good as the timeliness and accuracy of the financial data that is fed into them. Correct analysis also depends on a consideration of the company's industry and its position in the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp). Margin ratios highlight companies that are worth further examination. Knowing that a company has a gross margin of 25% or a net profit margin of 5% tells us very little. As with any ratio used on its own, margins tell us a lot, but not the whole story, about a company's prospects.

Let's face it, a company's most important goal is to make money and keep it, which depends on liquidity and efficiency. Because these characteristics determine a company's ability to pay investors a dividend, profitability is reflected in share price. That's why investors should know how to analyze various facets of profitability, including how efficiently a company uses its resources and how much income it generates from operations. Knowing how to calculate and analyze a corporate profit margin is a great way to gain insight into how well a company generates and retains money. Key Takeaways Investors who know how to calculate and analyze a corporate profit margin gain insight into a company's current effectiveness in generating profits and its potential to generate future profits.The three key profit-margin ratios investors should analyze when evaluating a company are gross profit margins, operating profit margins, and net profit margins.Companies with large profit margins frequently have a competitive advantage over other companies in their industry.Understanding a company's margin ratios can be a starting point for further analysis to decide if a company would be a good investment option.Profit margins also hold strong value when compared against competitor values or tracked over time for a single company. Analyzing Corporate Profit Margins Using Profit-Margin Ratios It's tempting to rely on net earnings alone to gauge profitability, but it doesn't always provide a clear picture of a company. Using it as the sole measure of profitability can be a bad idea. Profit-margin ratios, on the other hand, can give investors deeper insight into management efficiency. But instead of measuring how much a company earns from assets, equity, or invested capital, these ratios measure how much money a company squeezes from its total revenue or total sales. Margins are earnings expressed as a ratio or a percentage of sales. A percentage allows investors to compare the profitability of different companies, while net earnings, which are presented as an absolute number, don't. Financial ratios rarely hold value by themselves. You can get the most benefit from using financial ratios by comparing them over time, comparing them across companies, or by comparing them against industry benchmarks. Example of a Profit-Margin Ratio Suppose that Company A had an annual net income of $749 million on sales of about $11.5 billion last year. Its biggest competitor, Company B, earned about $990 million for the year on sales of about $19.9 billion. Comparing Company B's net earnings of $990 million to Company A's $749 million shows that Company B earned more than Company A, but it doesn't tell you very much about profitability. However, if you look at the net profit margin or the earnings generated from each dollar of sales, you'll see that Company A produced 6.5 cents on every dollar of sales, while Company B returned less than 5 cents. There are three key profit-margin ratios: gross profit margins, operating profit margins, and net profit margins. Gross Profit Margin  The gross profit margin tells us how much profit a company makes on its cost of sales, or cost of goods sold (COGS). In other words, it indicates how efficiently management uses labor and supplies in the production process. This is the formula: Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales Suppose that a company has $1 million in sales and the cost of its labor and materials amounts to $600,000. Its gross margin rate would be 40% (($1 million - $600,000)/$1 million). Companies with high gross margins will have money left over to spend on other business operations, such as research and development or marketing. When analyzing corporate profit margins, look for downward trends in the gross margin rate over time. This is a telltale sign the company may have future problems with its bottom line. For example, companies frequently are faced with rapidly increasing labor and materials costs. Unless the company can pass these costs onto customers in the form of higher prices, these costs could lower the company's gross profit margins. It's important to remember that gross profit margins can vary drastically from business to business and from industry to industry. For example, the software industry has a gross margin of about 90%, while the airline industry only has a gross margin of about 5%. Operating Profit Margin By comparing earnings before interest and taxes (EBIT) to sales, operating profit margins show how successful a company's management has been at generating income from the operation of the business. This is the calculation: Operating Profit Margin = EBIT/Sales If EBIT amounted to $200,000 and sales equaled $1 million, the operating profit margin would be 20%. This ratio is a rough measure of the operating leverage a company can achieve in the operational part of its business. It indicates how much EBIT is generated per dollar of sales. High operating profits can mean the company has effective control of costs, or that sales are increasing faster than operating costs. Knowing operating profit also allows an investor to do profit-margin comparisons between companies that do not issue a separate disclosure of their cost of goods sold figures. Operating profit measures how much cash the business throws off, and some consider it a more reliable measure of profitability since it is harder to manipulate with accounting tricks than net earnings. Naturally, because the operating profit margin accounts for administration and selling costs as well as materials and labor, it should be a much smaller figure than the gross margin. Margins often get smaller as you work your way down a company's income statement. That is because the further down you go, the more expenses get added into the calculation (which reduces profits). Net Profit Margin  Net profit margins are those generated from all phases of a business, including taxes. In other words, this ratio compares net income with sales. It comes as close as possible to summing up in a single figure how effectively the managers are running a business: Net Profit Margins = Net Profits After Taxes/Sales If a company generates after-tax earnings of $100,000 on $1 million of sales, then its net margin amounts to 10%. To be comparable from company to company and from year to year, net profits after tax must be shown before minority interests have been deducted and equity income added. Not all companies have these items. Also, investment income, which is wholly dependent upon the whims of management, can change dramatically from year to year. Just like gross and operating profit margins, net margins vary between industries. By comparing a company's gross and net margins, we can get a good sense of its non-production and non-direct costs like administration, finance, and marketing costs. Examples of Corporate Margin Analysis As part of its annual financial statement reporting, Microsoft reported financial information for the year ending June 30, 2022. These comparative income statements also communicated historical results for the same period ending in 2021 and 2020. Based on the section above, Microsoft generated $198.27 billion of revenue in 2022. Looking further down its income statement, it also generated $135.6 billion of gross margin. Dividing Microsoft's gross margin by its total revenue yields roughly 68%; this means that for every dollar Microsoft generated in income, it paid roughly $0.32 for cost of goods sold and kept $0.68 to pay for broader operations. Looking further down the income statement, Microsoft also reported operating income of $83,383. This equals roughly 42% of net total sales. This means that after Microsoft paid for both its cost of goods sold and operating costs, it still kept $0.42 from every dollar it earned. Last, Microsoft paid income taxes and had several income statement lines that further reduced the amount of net income it earned. Rounding up, this left Microsoft with roughly 37% of its total gross revenue. This means that for every dollar that Microsoft sold, it ultimately kept $0.37 after factoring in costs. Consider that by itself, these margin ratios may not mean much. After all, you may not know if a 37% net income margin is good, especially considering Microsoft's size, industry, and competitive advantages. Therefore, margin ratios are a tremendous way to compare information across companies to see how one entity may be performing against its competitors. Last, consider the value profit margins may offer by comparing them over time. Looking at Microsoft's financial information above, the company posted a 45.6% net income margin in 2020 and 52.8% net income margin in 2021. Therefore, though 37% may sound high, performing comparative margin analysis may reveal potential trends or downturns. Why Are Corporate Profits Important? Corporate profits are important as they indicate a company's financial success, ability to reinvest, attract investors, and provide returns to shareholders. When a company has residual profit, it is more likely to be able to grow as it can use that capital to scale its business or perform research. How Do Taxes Impact Corporate Profits? Taxes can affect corporate profits by reducing the amount of income available for reinvestment or distribution to shareholders, depending on the tax rate and applicable deductions. Be aware that taxes are included at the bottom of a company's income statement, so taxes are excluded when calculating gross profit or operating profit. How Do Companies Distribute Their Profits? Companies can distribute their profits through dividends to shareholders, reinvestment in the business, share buybacks, or debt reduction. Companies can also hold onto profits for use in future years; this balance of equity is reported on a company's financial statements as the total amount of retained earnings. What Is a Good Profit Margin for a Company? A good profit margin for a company depends on the industry, but generally, higher profit margins indicate better profitability and efficiency. In addition, the benchmark for larger companies should be higher than that of small companies because of the economies of scale that can be achieved through more efficient manufacturing processes and stronger purchasing power. The Bottom Line Margin analysis is a great tool to understand the profitability of companies. It tells us how effective management can wring profits from sales, and how much room a company has to withstand a downturn, fend off competition, and make mistakes. But, like all ratios, margin ratios never offer perfect information. They are only as good as the timeliness and accuracy of the financial data that is fed into them. Correct analysis also depends on a consideration of the company's industry and its position in the business cycle. Margin ratios highlight companies that are worth further examination. Knowing that a company has a gross margin of 25% or a net profit margin of 5% tells us very little. As with any ratio used on its own, margins tell us a lot, but not the whole story, about a company's prospects.

https://www.investopedia.com/how-to-give-bonds-as-a-gift-5205206

How to Give Bonds as a Gift

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you are wracking your brain trying to figure out what to get your loved ones as a holiday or other type of gift, consider adding <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a> to your short list. These investments aren’t particularly flashy, so don’t expect such a gift to be met with extreme initial excitement. Hugs and high fives are usually spurred by instant gratification, not a piece of paper that could be potentially worth something more over the years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Still, that’s not to say that giving a bond as a gift is a bad idea. These investments can provide the start of a nice <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nestegg.asp">nest egg</a> for the recipient’s future as well as offer a useful lesson in saving and managing money. </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 best gifts often are those that are may appreciate well into the future. Based on that logic, you can’t really go wrong with buying your loved ones a potentially lucrative bond investment. </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>Gifting a bond could boost the future finances of the recipient and, in the meantime, teach them a useful lesson about managing money.</li><li>There are plenty of kinds of bonds in which to invest, although savings bonds often work best for the majority of people’s gifting needs.</li><li>These instruments can be bought for as little as $25 from the TreasuryDirect website, with either a fixed interest rate or a variable interest rate that keeps up with inflation.</li><li>Savings bonds must be held for at least 12 months, they usually stop paying interest after 30 years, and are only taxable at the federal level.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-are-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"> What Are Bonds? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> When you take out a loan, you are expected to pay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a><strong> </strong>to the lender and eventually pay back the money, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>. Bonds work in the same way—only this time, you, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investor</a>, become the lender. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> There are several different categories of bonds, with each type named after the entity to which the money is being lent. In other words, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/government-bond.asp">government bond</a> involves lending money to a government entity, while a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corporatebond.asp">corporate bond</a> essentially involves lending money to corporations. </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-which-bond-should-i-buy-as-a-gift"></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"> Which Bond Should I Buy as a Gift? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> When you lend money to a government, company, or another entity, the amount of interest that you are paid as compensation for your investment usually depends on the health of the borrower. As a general rule of thumb, the higher the risk that the borrower may <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> on the loan and may be unable to pay it back, the greater the <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> payment you’ll receive for the additional risk. </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"> Many U.S.-based gift givers will find that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ussavingsbonds.asp">savings bonds</a> check most of their desired boxes. These securities essentially offer citizens the opportunity to lend money to the U.S. government to help fund federal spending. In exchange, the people putting up the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a> are rewarded with interest payments until the loan is eventually repaid.<span class="ql-inline-citation" data-cite="11"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The beauty of savings bonds is that because they are backed by the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ustreasury.asp">Treasury</a>, they are guaranteed by the full faith and credit of the U.S. government. They’re also really easy to gift and can be affordable. With corporate bonds, you typically need to cough up at least $1,000 for a minimum purchase. Savings bonds, on the other hand, can be bought for as little as $25.<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_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Interest on U.S. savings bonds is paid only after they mature and are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redemption.asp">redeemed</a>.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-types-of-savings-bonds"></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"> Types of Savings Bonds  </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> There are two common types of savings bonds: Series EE Bonds and Series I Bonds. Both are sold at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/facevalue.asp">face value</a>,<strong> </strong>have an annual purchase limit of $10,000, and pay interest, which <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accruedinterest.asp">accrues</a> monthly and is <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounded</a><strong> </strong>semiannually, until the 30th year. The key distinctions that separate the two are the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">rate of interest</a> that they pay out and also that Series I Bonds can be purchased in paper format with an <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service (IRS)</a> tax refund.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Before deciding which savings bond to opt for as a gift, it would be wise to consider the outlook for interest rates and inflation, as well as how long you expect the recipient to hold it. If the gift isn’t going to be cashed in for at least 20 years, and if inflation and interest rates are likely to fall in that period, then the Series EE Bond probably makes more sense. Conversely, the prospect of rising <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cost-of-living.asp">living costs</a>, rate hikes, and an earlier withdrawal would make the Series I Bond a better option. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_29-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">EE Bonds vs. I Bonds</h3> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">EE Bonds</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Fixed rate for 20 years. Rate may change for the last ten years of the bond's maturity.</p></li> <li><p>Guaranteed to double in value after 20 years.</p></li> <li><p>Earns interest monthly, compounded semiannually.</p></li> <li><p>Exempt from state and local income tax.</p></li> <li><p>Only available as electronic bonds.</p></li> <li><p>Limited to buying $10,000 in bonds per year.</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">I Bonds</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Interest rate that is a composite of a fixed rate and an inflation-based rate calculated twice per year.</p></li> <li><p>Earns interest monthly, compounded semiannually.</p></li> <li><p>Exempt from state and local income tax.</p></li> <li><p>Available as paper bonds and electronically. Paper bonds are only available when buying bonds with your tax refund.</p></li> <li><p>Limited to buying $10,000 in electronic, $5,000 in paper bonds per year.</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <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"> Series EE Bonds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Series EE Bonds issued after May 2005 pay a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed interest rate</a> that’s determined at the time of purchase and guaranteed for the first 20 years, making them ideal when rates are higher than normal and likely to fall. They also come with a promise of doubling in value if kept for 20 years.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-subheading__text"> Series I Bonds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Series I Bonds (aka <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tips.asp">TIPS, or Treasury Inflation-Protected Securities</a>) don’t make such promises but instead deliver another benefit: protection against <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>. These bonds provide a semiannually adjustable <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableinterestrate.asp">variable rate</a> on top of a fixed rate, giving the owner peace of mind that they won’t erode in value due to inflation.<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_36-0"></div> <span class="heading-toc" id="toc-where-and-how-can-i-buy-savings-bonds"></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"> Where and How Can I Buy Savings Bonds? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The main place that you can buy savings bonds is through the U.S. government site <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurydirect.asp">TreasuryDirect</a>. The government sells bonds directly to people through this site. </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"> EE Bonds are only available for purchase through TreasuryDirect. You can no longer purchase paper EE Bonds. I Bonds are available as both electronic and paper bonds, but you can only purchase I Bonds using any money the IRS owes you when you file your tax return and the annual limit on paper I Bonds is lower than the annual limit on electronic I Bonds.<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_41-0"></div> <span class="heading-toc" id="toc-how-to-keep-track-of-your-savings-bond-over-time"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> How to Keep Track of Your Savings Bond Over Time </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> If you have electronic bonds in your TreasuryDirect account, you can check the balance and current interest rate of the bond by signing into your account. You'll also be able to view information such as the final maturity date and the next date on which interest will accrue. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you have paper bonds, TreasuryDirect has a calculator that you can use to check its value and other details. By entering the bond series, denomination, serial number, and issue date, the calculator can provide you the bond's value from January 1996 to the present.<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_46-0"></div> <span class="heading-toc" id="toc-value-of-a-savings-bond-over-time"></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"> Value of a Savings Bond Over Time </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Over time, savings bonds gain value due to the interest that the government pays. Both EE and I bonds earn interest monthly, with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">interest compounding</a> semiannually. That means that twice each year, the bond's principal value increases and the added interest will start earning interest. </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"> Series EE Bonds offer a unique feature where they are guaranteed to double in value when held for twenty years. If the bond doubles in value in fewer than twenty years, this feature has no effect. This means that if you hold an EE Bond for twenty years, it will offer a return equivalent to it having a 3.496% interest rate at worst.<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_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Determining the value of an EE Bond over time is relatively easy given its fixed rate and automatic doubling after twenty years. Using a compound interest calculator can let you determine its future value. Finding the value of an I Bond in the future is more difficult because its interest rate will adjust every six months based on inflation.<br> </br></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-maximizing-your-savings-bond-returns"></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"> Maximizing Your Savings Bond Returns </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Maximizng your return on savings bonds requires a few different things. </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"> First is timing the purchase of your bonds properly. EE Bonds offer a fixed interest rate and a portion of the interest paid by I Bonds is also fixed. Buying bonds when rates are high will offer greater returns than buying bonds when their returns are low.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> For EE Bonds in particular, holding them for at least twenty years ensures they will double in value. Ensuring you hold them for a long enough period will increase your potential returns. </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"> Finally, you need to avoid penalties. With both EE and I Bonds, you must hold the bond for at least twelve months before cashing it in. However, if you cash in a bond within five years of buying it, you'll pay a penalty equal to three months' interest. Holding a bond for at least five years will let you avoid this penalty.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <span class="heading-toc" id="toc-yearly-cap-on-savings-bonds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-heading__text"> Yearly Cap on Savings Bonds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> There are limits on buying savings bonds. Each year, you can purchase a total of: </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>$10,000 in electronic EE bonds</li><li>$10,000 in electronic I bonds</li><li>$5,000 in paper I bonds that you can only buy when you file federal tax forms, with your tax refund.<span class="ql-inline-citation" data-cite="17"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> It's important to note that these limits apply per Social Security number. That means that you and a spouse can buy up to these limits each, even if you file joint tax returns. It also means that bonds that are given as a gift count toward the limit of the recipient rather than the person giving the bond.<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_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> If you have reached your annual savings bond limit, you might consider having your spouse purchase bonds or buying gift bonds for a dependent or friend. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <span class="heading-toc" id="toc-cant-decide-which-bond-to-buy-consider-etfs"></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"> Can’t Decide Which Bond to Buy? Consider ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> If government savings bonds aren’t your style, bond <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-give-an-exchange-traded-fund-etf-gift-6740462">exchange-traded funds (ETFs)</a> are a great way to gift multiple bonds in one transaction. Broad-based bond ETFs typically contain a mix of government, agency, corporate, and municipal debt issues. You can choose index-based ETFs (which usually have the Standard &amp; Poor’s 500 or the Bloomberg Aggregate ETF Tracker as their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a>) such as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BND">BND</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AGG">AGG</a>, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BNDX">BNDX</a> (includes foreign bonds), among many others. Or you can opt for more specific types of bonds, such as bank loans, or Chinese-issued bonds. Most bond ETFs only hold <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/">investment-grade</a> bonds (&gt;BBB), to be attractive to conservative-minded investors. </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"> There is virtually <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">an ETF</a> for most any country or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duration.asp">duration</a>, or holding period, which should make your decision a lot easier. You can search the web for the specific bond (or fixed-income) ETF that covers the sector, region, or index to which you’re attracted, and you’re likely to get many selections back from which to choose. Also, to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp">make ETFs even more attractive</a>, they function like regular shares and can be bought and sold on a fractional basis. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <span class="heading-toc" id="toc-fractional-shares"></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"> Fractional Shares </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> If buying a corporate bond ($1,000 face value) is beyond your gifting budget, a bond ETF may be the answer you’re looking for. As with most other securities today, you can buy a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fractionalshare.asp">fractional amount</a>, or dollar-based amount, that fits your gift-giving generosity. </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"> In this case, you’re interested in gifting a corporate bond to your recipient. For example, let’s say BND is trading at $71.30, but you’re only thinking of gifting $50 for your present. With fractional shares, you can buy exactly $50 of BND for your gift and thereby stick to your gift-giving budget. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <span class="heading-toc" id="toc-how-to-gift-savings-bonds"></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"> How to Gift Savings Bonds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Savings bonds can be purchased from the U.S. Treasury Department, banks, and credit unions. Often, the simplest way to buy them as a gift is through the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://treasurydirect.gov/" rel="sponsored nofollow">TreasuryDirect website</a>. The process is fairly straightforward, and there are plenty of useful guides and tutorials available on the site to help guide you through it. </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"> In short, you’ll need to take the following steps: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> <li>Enter the TreasuryDirect website.</li> <li>Create a TreasuryDirect account and then log in.</li> <li>Purchase the savings bond you want in the desired <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/denomination.asp">denomination</a> ($25 to $10,000).</li> <li>After the mandatory five-business-day holding period ends, deliver the gift to the recipient’s TreasuryDirect account. To do this, you’ll need to know the recipient’s account number and legal name, as well as their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security number</a>. For children under age 18, a minor linked account can be created by a parent or guardian.<span class="ql-inline-citation" data-cite="13"></span></li> <li>Print out a gift certificate and give it to the chosen recipient.<span class="ql-inline-citation" data-cite="5"></span></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <span class="heading-toc" id="toc-how-to-cash-in-a-savings-bond"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-heading__text"> How to Cash in a Savings Bond </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> Once the savings bond has been gifted, the recipient can withdraw the proceeds at any point after 12 months. However, it’s generally advisable to leave the bond alone for at least five years—or 20 years, in the case of the Series EE version.<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_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Actually <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/060614/time-cash-your-us-savings-bonds.asp">cashing in</a> is simple. All the recipient needs to do is log in to their TreasuryDirect account and follow the instructions to redeem the bond. Once this task has been completed satisfactorily, the cash value should be credited to the designated bank account within two business days.<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_93-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> Before collecting the proceeds from their gift, the recipient should check what the bond is worth. For paper bonds, this can be achieved by logging in to your account and using the TreasuryDirect savings bond calculator.<span class="ql-inline-citation" data-cite="7"></span> Remember, most savings bonds stop earning interest after 30 years, and those sold within five years are subject to a penalty—if the recipient sells before then, they’ll lose three months’ worth of interest.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_96-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_97-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>A U.S. savings bond will earn interest monthly and compound semiannually until it is either redeemed or has reached its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a> of 30 years.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div> <span class="heading-toc" id="toc-gifted-bond-tax-considerations"></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"> Gifted Bond Tax Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> U.S. government bonds, unlike corporate bonds, are not subject to <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/state-income-tax.asp">state income tax</a>. The owner of a savings bond is only taxed at the federal level, and because interest payments are not distributed until the investment matures or is redeemed, paying any taxes on them is not necessary until later.<span class="ql-inline-citation" data-cite="8"></span><br/><strong><br/></strong>Most people will take advantage of this option and defer reporting interest on these bonds until they actually receive the money. In this case, they would declare the total amount that they received from their investment on their federal income <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax return</a> in the year when it matured or was sold.<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_100-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> The option of reporting interest accrued every year to the IRS shouldn’t always be completely written off, though. For example, this might make sense if the savings bond is registered in a child’s name. The logic here is that the child will likely be earning little to no income and thus be in a lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxbracket.asp">tax bracket</a> than they presumably will be in later years, when the bond matures. </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"> It’s also worth bearing in mind that interest from U.S. savings bonds may be excluded from federal income tax if the proceeds are used to pay higher education expenses.<span class="ql-inline-citation" data-cite="9"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_105-0"><span class="heading-toc" id="toc-what-is-the-difference-between-ee-and-i-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the difference between EE and I Bonds?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>EE and I Bonds are two types of U.S. saving bonds. What distinguishes them mainly is the returns that they offer.</p><p>With an EE Bond, the interest rate is fixed and there’s a guarantee that it will double in value if held onto for 20 years.</p><p>I Bonds function differently. What they offer is a rate that moves with inflation, ensuring that payouts are protected from rising living costs.<span class="ql-inline-citation" data-cite="3"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_107-0"><span class="heading-toc" id="toc-is-there-a-deadline-for-gifting-a-savings-bond"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is there a deadline for gifting a savings bond?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Not according to TreasuryDirect. Once purchased, it’s necessary to wait five business days to deliver the savings bond gift. However, it’s also possible to hold onto the bond for much longer before giving it away. Should the bond mature before it has been delivered to the beneficiary, its monetary value will be held in a gift box within the owner’s TreasuryDirect account for them to collect and present to the recipient.<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_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-do-you-pay-taxes-on-savings-bonds-when-cashed"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do you pay taxes on savings bonds when cashed?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. When you receive money from an investment, the Internal Revenue Service (IRS) must be notified. Fortunately, savings bonds aren’t taxed at the state and local levels, meaning any interest earned is only subject to federal income tax. In addition, because interest isn’t distributed until the bond matures or is redeemed, it’s not necessary to keep the IRS informed about how much the bond is generating in income every <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxyear.asp">tax year</a>. If you wish, you don’t need to declare anything until the bond eventually pays out.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></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_111-0"> <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_112-0"> Rather than a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/07/giftofstock.asp">gift of stock</a>, which could drop in value over time, gift-givers may want to look at giving bonds as a financial present. Highly rated bonds (&gt;BBB) represent a lower-risk investment and are most likely to meet all of their financial obligations, such as paying interest and paying back the principal. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121313/great-financial-gifts-kids-christmas.asp">The gift of a bond</a> is also a great way to get the recipient more involved in savings and investing by teaching lifelong money management skills. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> Government savings bonds (EE and I) are among the simplest and most convenient ways to give a bond investment. Investors can transact saving bonds easily through the U.S. government’s TreasuryDirect website, where various savings bonds can be purchased. Alternatively, you can seek out an appropriate bond ETF and purchase it on a fractional basis, or for a fixed U.S. dollar amount. </p></div>

If you are wracking your brain trying to figure out what to get your loved ones as a holiday or other type of gift, consider adding [bonds](https://www.investopedia.com/terms/b/bond.asp) to your short list. These investments aren’t particularly flashy, so don’t expect such a gift to be met with extreme initial excitement. Hugs and high fives are usually spurred by instant gratification, not a piece of paper that could be potentially worth something more over the years. Still, that’s not to say that giving a bond as a gift is a bad idea. These investments can provide the start of a nice [nest egg](https://www.investopedia.com/terms/n/nestegg.asp) for the recipient’s future as well as offer a useful lesson in saving and managing money. The best gifts often are those that are may appreciate well into the future. Based on that logic, you can’t really go wrong with buying your loved ones a potentially lucrative bond investment. ### Key Takeaways * Gifting a bond could boost the future finances of the recipient and, in the meantime, teach them a useful lesson about managing money. * There are plenty of kinds of bonds in which to invest, although savings bonds often work best for the majority of people’s gifting needs. * These instruments can be bought for as little as $25 from the TreasuryDirect website, with either a fixed interest rate or a variable interest rate that keeps up with inflation. * Savings bonds must be held for at least 12 months, they usually stop paying interest after 30 years, and are only taxable at the federal level. ## What Are Bonds? When you take out a loan, you are expected to pay [interest](https://www.investopedia.com/terms/i/interest.asp)to the lender and eventually pay back the money, or [principal](https://www.investopedia.com/terms/p/principal.asp). Bonds work in the same way—only this time, you, the [investor](https://www.investopedia.com/terms/i/investor.asp), become the lender. There are several different categories of bonds, with each type named after the entity to which the money is being lent. In other words, a [government bond](https://www.investopedia.com/terms/g/government-bond.asp) involves lending money to a government entity, while a [corporate bond](https://www.investopedia.com/terms/c/corporatebond.asp) essentially involves lending money to corporations. ## Which Bond Should I Buy as a Gift? When you lend money to a government, company, or another entity, the amount of interest that you are paid as compensation for your investment usually depends on the health of the borrower. As a general rule of thumb, the higher the risk that the borrower may [default](https://www.investopedia.com/terms/d/default2.asp) on the loan and may be unable to pay it back, the greater the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) payment you’ll receive for the additional risk. Many U.S.-based gift givers will find that [savings bonds](https://www.investopedia.com/terms/u/ussavingsbonds.asp) check most of their desired boxes. These securities essentially offer citizens the opportunity to lend money to the U.S. government to help fund federal spending. In exchange, the people putting up the [capital](https://www.investopedia.com/terms/c/capital.asp) are rewarded with interest payments until the loan is eventually repaid. The beauty of savings bonds is that because they are backed by the U.S. [Treasury](https://www.investopedia.com/terms/u/ustreasury.asp), they are guaranteed by the full faith and credit of the U.S. government. They’re also really easy to gift and can be affordable. With corporate bonds, you typically need to cough up at least $1,000 for a minimum purchase. Savings bonds, on the other hand, can be bought for as little as $25. ### Interest on U.S. savings bonds is paid only after they mature and are [redeemed](https://www.investopedia.com/terms/r/redemption.asp). ## Types of Savings Bonds There are two common types of savings bonds: Series EE Bonds and Series I Bonds. Both are sold at [face value](https://www.investopedia.com/terms/f/facevalue.asp),have an annual purchase limit of $10,000, and pay interest, which [accrues](https://www.investopedia.com/terms/a/accruedinterest.asp) monthly and is [compounded](https://www.investopedia.com/terms/c/compounding.asp)semiannually, until the 30th year. The key distinctions that separate the two are the [rate of interest](https://www.investopedia.com/terms/i/interestrate.asp) that they pay out and also that Series I Bonds can be purchased in paper format with an [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) tax refund. Before deciding which savings bond to opt for as a gift, it would be wise to consider the outlook for interest rates and inflation, as well as how long you expect the recipient to hold it. If the gift isn’t going to be cashed in for at least 20 years, and if inflation and interest rates are likely to fall in that period, then the Series EE Bond probably makes more sense. Conversely, the prospect of rising [living costs](https://www.investopedia.com/terms/c/cost-of-living.asp), rate hikes, and an earlier withdrawal would make the Series I Bond a better option. ### EE Bonds vs. I Bonds EE Bonds * Fixed rate for 20 years. Rate may change for the last ten years of the bond's maturity. * Guaranteed to double in value after 20 years. * Earns interest monthly, compounded semiannually. * Exempt from state and local income tax. * Only available as electronic bonds. * Limited to buying $10,000 in bonds per year. I Bonds * Interest rate that is a composite of a fixed rate and an inflation-based rate calculated twice per year. * Earns interest monthly, compounded semiannually. * Exempt from state and local income tax. * Available as paper bonds and electronically. Paper bonds are only available when buying bonds with your tax refund. * Limited to buying $10,000 in electronic, $5,000 in paper bonds per year. ### Series EE Bonds Series EE Bonds issued after May 2005 pay a [fixed interest rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp) that’s determined at the time of purchase and guaranteed for the first 20 years, making them ideal when rates are higher than normal and likely to fall. They also come with a promise of doubling in value if kept for 20 years. ### Series I Bonds Series I Bonds (aka [TIPS, or Treasury Inflation-Protected Securities](https://www.investopedia.com/terms/t/tips.asp)) don’t make such promises but instead deliver another benefit: protection against [inflation](https://www.investopedia.com/terms/i/inflation.asp). These bonds provide a semiannually adjustable [variable rate](https://www.investopedia.com/terms/v/variableinterestrate.asp) on top of a fixed rate, giving the owner peace of mind that they won’t erode in value due to inflation. ## Where and How Can I Buy Savings Bonds? The main place that you can buy savings bonds is through the U.S. government site [TreasuryDirect](https://www.investopedia.com/terms/t/treasurydirect.asp). The government sells bonds directly to people through this site. EE Bonds are only available for purchase through TreasuryDirect. You can no longer purchase paper EE Bonds. I Bonds are available as both electronic and paper bonds, but you can only purchase I Bonds using any money the IRS owes you when you file your tax return and the annual limit on paper I Bonds is lower than the annual limit on electronic I Bonds. ## How to Keep Track of Your Savings Bond Over Time If you have electronic bonds in your TreasuryDirect account, you can check the balance and current interest rate of the bond by signing into your account. You'll also be able to view information such as the final maturity date and the next date on which interest will accrue. If you have paper bonds, TreasuryDirect has a calculator that you can use to check its value and other details. By entering the bond series, denomination, serial number, and issue date, the calculator can provide you the bond's value from January 1996 to the present. ## Value of a Savings Bond Over Time Over time, savings bonds gain value due to the interest that the government pays. Both EE and I bonds earn interest monthly, with [interest compounding](https://www.investopedia.com/terms/c/compoundinterest.asp) semiannually. That means that twice each year, the bond's principal value increases and the added interest will start earning interest. Series EE Bonds offer a unique feature where they are guaranteed to double in value when held for twenty years. If the bond doubles in value in fewer than twenty years, this feature has no effect. This means that if you hold an EE Bond for twenty years, it will offer a return equivalent to it having a 3.496% interest rate at worst. Determining the value of an EE Bond over time is relatively easy given its fixed rate and automatic doubling after twenty years. Using a compound interest calculator can let you determine its future value. Finding the value of an I Bond in the future is more difficult because its interest rate will adjust every six months based on inflation. ## Maximizing Your Savings Bond Returns Maximizng your return on savings bonds requires a few different things. First is timing the purchase of your bonds properly. EE Bonds offer a fixed interest rate and a portion of the interest paid by I Bonds is also fixed. Buying bonds when rates are high will offer greater returns than buying bonds when their returns are low. For EE Bonds in particular, holding them for at least twenty years ensures they will double in value. Ensuring you hold them for a long enough period will increase your potential returns. Finally, you need to avoid penalties. With both EE and I Bonds, you must hold the bond for at least twelve months before cashing it in. However, if you cash in a bond within five years of buying it, you'll pay a penalty equal to three months' interest. Holding a bond for at least five years will let you avoid this penalty. ## Yearly Cap on Savings Bonds There are limits on buying savings bonds. Each year, you can purchase a total of: * $10,000 in electronic EE bonds * $10,000 in electronic I bonds * $5,000 in paper I bonds that you can only buy when you file federal tax forms, with your tax refund. It's important to note that these limits apply per Social Security number. That means that you and a spouse can buy up to these limits each, even if you file joint tax returns. It also means that bonds that are given as a gift count toward the limit of the recipient rather than the person giving the bond. If you have reached your annual savings bond limit, you might consider having your spouse purchase bonds or buying gift bonds for a dependent or friend. ## Can’t Decide Which Bond to Buy? Consider ETFs If government savings bonds aren’t your style, bond [exchange-traded funds (ETFs)](https://www.investopedia.com/how-to-give-an-exchange-traded-fund-etf-gift-6740462) are a great way to gift multiple bonds in one transaction. Broad-based bond ETFs typically contain a mix of government, agency, corporate, and municipal debt issues. You can choose index-based ETFs (which usually have the Standard & Poor’s 500 or the Bloomberg Aggregate ETF Tracker as their [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp)) such as [BND](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BND), [AGG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AGG), and [BNDX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BNDX) (includes foreign bonds), among many others. Or you can opt for more specific types of bonds, such as bank loans, or Chinese-issued bonds. Most bond ETFs only hold [investment-grade](https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/) bonds (>BBB), to be attractive to conservative-minded investors. There is virtually [an ETF](https://www.investopedia.com/terms/e/etf.asp) for most any country or [duration](https://www.investopedia.com/terms/d/duration.asp), or holding period, which should make your decision a lot easier. You can search the web for the specific bond (or fixed-income) ETF that covers the sector, region, or index to which you’re attracted, and you’re likely to get many selections back from which to choose. Also, to [make ETFs even more attractive](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp), they function like regular shares and can be bought and sold on a fractional basis. ## Fractional Shares If buying a corporate bond ($1,000 face value) is beyond your gifting budget, a bond ETF may be the answer you’re looking for. As with most other securities today, you can buy a [fractional amount](https://www.investopedia.com/terms/f/fractionalshare.asp), or dollar-based amount, that fits your gift-giving generosity. In this case, you’re interested in gifting a corporate bond to your recipient. For example, let’s say BND is trading at $71.30, but you’re only thinking of gifting $50 for your present. With fractional shares, you can buy exactly $50 of BND for your gift and thereby stick to your gift-giving budget. ## How to Gift Savings Bonds Savings bonds can be purchased from the U.S. Treasury Department, banks, and credit unions. Often, the simplest way to buy them as a gift is through the [TreasuryDirect website](https://treasurydirect.gov/). The process is fairly straightforward, and there are plenty of useful guides and tutorials available on the site to help guide you through it. In short, you’ll need to take the following steps: 1. Enter the TreasuryDirect website. 2. Create a TreasuryDirect account and then log in. 3. Purchase the savings bond you want in the desired [denomination](https://www.investopedia.com/terms/d/denomination.asp) ($25 to $10,000). 4. After the mandatory five-business-day holding period ends, deliver the gift to the recipient’s TreasuryDirect account. To do this, you’ll need to know the recipient’s account number and legal name, as well as their [Social Security number](https://www.investopedia.com/terms/s/ssn.asp). For children under age 18, a minor linked account can be created by a parent or guardian. 5. Print out a gift certificate and give it to the chosen recipient. ## How to Cash in a Savings Bond Once the savings bond has been gifted, the recipient can withdraw the proceeds at any point after 12 months. However, it’s generally advisable to leave the bond alone for at least five years—or 20 years, in the case of the Series EE version. Actually [cashing in](https://www.investopedia.com/articles/personal-finance/060614/time-cash-your-us-savings-bonds.asp) is simple. All the recipient needs to do is log in to their TreasuryDirect account and follow the instructions to redeem the bond. Once this task has been completed satisfactorily, the cash value should be credited to the designated bank account within two business days. Before collecting the proceeds from their gift, the recipient should check what the bond is worth. For paper bonds, this can be achieved by logging in to your account and using the TreasuryDirect savings bond calculator. Remember, most savings bonds stop earning interest after 30 years, and those sold within five years are subject to a penalty—if the recipient sells before then, they’ll lose three months’ worth of interest. ### A U.S. savings bond will earn interest monthly and compound semiannually until it is either redeemed or has reached its [maturity](https://www.investopedia.com/terms/m/maturity.asp) of 30 years. ## Gifted Bond Tax Considerations U.S. government bonds, unlike corporate bonds, are not subject to [state income tax](https://www.investopedia.com/terms/state-income-tax.asp). The owner of a savings bond is only taxed at the federal level, and because interest payments are not distributed until the investment matures or is redeemed, paying any taxes on them is not necessary until later. Most people will take advantage of this option and defer reporting interest on these bonds until they actually receive the money. In this case, they would declare the total amount that they received from their investment on their federal income [tax return](https://www.investopedia.com/terms/t/taxreturn.asp) in the year when it matured or was sold. The option of reporting interest accrued every year to the IRS shouldn’t always be completely written off, though. For example, this might make sense if the savings bond is registered in a child’s name. The logic here is that the child will likely be earning little to no income and thus be in a lower [tax bracket](https://www.investopedia.com/terms/t/taxbracket.asp) than they presumably will be in later years, when the bond matures. It’s also worth bearing in mind that interest from U.S. savings bonds may be excluded from federal income tax if the proceeds are used to pay higher education expenses. ## What is the difference between EE and I Bonds? EE and I Bonds are two types of U.S. saving bonds. What distinguishes them mainly is the returns that they offer. With an EE Bond, the interest rate is fixed and there’s a guarantee that it will double in value if held onto for 20 years. I Bonds function differently. What they offer is a rate that moves with inflation, ensuring that payouts are protected from rising living costs. ## Is there a deadline for gifting a savings bond? Not according to TreasuryDirect. Once purchased, it’s necessary to wait five business days to deliver the savings bond gift. However, it’s also possible to hold onto the bond for much longer before giving it away. Should the bond mature before it has been delivered to the beneficiary, its monetary value will be held in a gift box within the owner’s TreasuryDirect account for them to collect and present to the recipient. ## Do you pay taxes on savings bonds when cashed? Yes. When you receive money from an investment, the Internal Revenue Service (IRS) must be notified. Fortunately, savings bonds aren’t taxed at the state and local levels, meaning any interest earned is only subject to federal income tax. In addition, because interest isn’t distributed until the bond matures or is redeemed, it’s not necessary to keep the IRS informed about how much the bond is generating in income every [tax year](https://www.investopedia.com/terms/t/taxyear.asp). If you wish, you don’t need to declare anything until the bond eventually pays out. ## The Bottom Line Rather than a [gift of stock](https://www.investopedia.com/ask/answers/07/giftofstock.asp), which could drop in value over time, gift-givers may want to look at giving bonds as a financial present. Highly rated bonds (>BBB) represent a lower-risk investment and are most likely to meet all of their financial obligations, such as paying interest and paying back the principal. [The gift of a bond](https://www.investopedia.com/articles/personal-finance/121313/great-financial-gifts-kids-christmas.asp) is also a great way to get the recipient more involved in savings and investing by teaching lifelong money management skills. Government savings bonds (EE and I) are among the simplest and most convenient ways to give a bond investment. Investors can transact saving bonds easily through the U.S. government’s TreasuryDirect website, where various savings bonds can be purchased. Alternatively, you can seek out an appropriate bond ETF and purchase it on a fractional basis, or for a fixed U.S. dollar amount.

If you are wracking your brain trying to figure out what to get your loved ones as a holiday or other type of gift, consider adding bonds to your short list. These investments aren’t particularly flashy, so don’t expect such a gift to be met with extreme initial excitement. Hugs and high fives are usually spurred by instant gratification, not a piece of paper that could be potentially worth something more over the years. Still, that’s not to say that giving a bond as a gift is a bad idea. These investments can provide the start of a nice nest egg for the recipient’s future as well as offer a useful lesson in saving and managing money. The best gifts often are those that are may appreciate well into the future. Based on that logic, you can’t really go wrong with buying your loved ones a potentially lucrative bond investment. Key Takeaways Gifting a bond could boost the future finances of the recipient and, in the meantime, teach them a useful lesson about managing money.There are plenty of kinds of bonds in which to invest, although savings bonds often work best for the majority of people’s gifting needs.These instruments can be bought for as little as $25 from the TreasuryDirect website, with either a fixed interest rate or a variable interest rate that keeps up with inflation.Savings bonds must be held for at least 12 months, they usually stop paying interest after 30 years, and are only taxable at the federal level. What Are Bonds? When you take out a loan, you are expected to pay interest to the lender and eventually pay back the money, or principal. Bonds work in the same way—only this time, you, the investor, become the lender. There are several different categories of bonds, with each type named after the entity to which the money is being lent. In other words, a government bond involves lending money to a government entity, while a corporate bond essentially involves lending money to corporations. Which Bond Should I Buy as a Gift? When you lend money to a government, company, or another entity, the amount of interest that you are paid as compensation for your investment usually depends on the health of the borrower. As a general rule of thumb, the higher the risk that the borrower may default on the loan and may be unable to pay it back, the greater the interest rate payment you’ll receive for the additional risk. Many U.S.-based gift givers will find that savings bonds check most of their desired boxes. These securities essentially offer citizens the opportunity to lend money to the U.S. government to help fund federal spending. In exchange, the people putting up the capital are rewarded with interest payments until the loan is eventually repaid. The beauty of savings bonds is that because they are backed by the U.S. Treasury, they are guaranteed by the full faith and credit of the U.S. government. They’re also really easy to gift and can be affordable. With corporate bonds, you typically need to cough up at least $1,000 for a minimum purchase. Savings bonds, on the other hand, can be bought for as little as $25. Interest on U.S. savings bonds is paid only after they mature and are redeemed. Types of Savings Bonds  There are two common types of savings bonds: Series EE Bonds and Series I Bonds. Both are sold at face value, have an annual purchase limit of $10,000, and pay interest, which accrues monthly and is compounded semiannually, until the 30th year. The key distinctions that separate the two are the rate of interest that they pay out and also that Series I Bonds can be purchased in paper format with an Internal Revenue Service (IRS) tax refund. Before deciding which savings bond to opt for as a gift, it would be wise to consider the outlook for interest rates and inflation, as well as how long you expect the recipient to hold it. If the gift isn’t going to be cashed in for at least 20 years, and if inflation and interest rates are likely to fall in that period, then the Series EE Bond probably makes more sense. Conversely, the prospect of rising living costs, rate hikes, and an earlier withdrawal would make the Series I Bond a better option. EE Bonds vs. I Bonds EE Bonds Fixed rate for 20 years. Rate may change for the last ten years of the bond's maturity. Guaranteed to double in value after 20 years. Earns interest monthly, compounded semiannually. Exempt from state and local income tax. Only available as electronic bonds. Limited to buying $10,000 in bonds per year. I Bonds Interest rate that is a composite of a fixed rate and an inflation-based rate calculated twice per year. Earns interest monthly, compounded semiannually. Exempt from state and local income tax. Available as paper bonds and electronically. Paper bonds are only available when buying bonds with your tax refund. Limited to buying $10,000 in electronic, $5,000 in paper bonds per year. Series EE Bonds Series EE Bonds issued after May 2005 pay a fixed interest rate that’s determined at the time of purchase and guaranteed for the first 20 years, making them ideal when rates are higher than normal and likely to fall. They also come with a promise of doubling in value if kept for 20 years. Series I Bonds Series I Bonds (aka TIPS, or Treasury Inflation-Protected Securities) don’t make such promises but instead deliver another benefit: protection against inflation. These bonds provide a semiannually adjustable variable rate on top of a fixed rate, giving the owner peace of mind that they won’t erode in value due to inflation. Where and How Can I Buy Savings Bonds? The main place that you can buy savings bonds is through the U.S. government site TreasuryDirect. The government sells bonds directly to people through this site. EE Bonds are only available for purchase through TreasuryDirect. You can no longer purchase paper EE Bonds. I Bonds are available as both electronic and paper bonds, but you can only purchase I Bonds using any money the IRS owes you when you file your tax return and the annual limit on paper I Bonds is lower than the annual limit on electronic I Bonds. How to Keep Track of Your Savings Bond Over Time If you have electronic bonds in your TreasuryDirect account, you can check the balance and current interest rate of the bond by signing into your account. You'll also be able to view information such as the final maturity date and the next date on which interest will accrue. If you have paper bonds, TreasuryDirect has a calculator that you can use to check its value and other details. By entering the bond series, denomination, serial number, and issue date, the calculator can provide you the bond's value from January 1996 to the present. Value of a Savings Bond Over Time Over time, savings bonds gain value due to the interest that the government pays. Both EE and I bonds earn interest monthly, with interest compounding semiannually. That means that twice each year, the bond's principal value increases and the added interest will start earning interest. Series EE Bonds offer a unique feature where they are guaranteed to double in value when held for twenty years. If the bond doubles in value in fewer than twenty years, this feature has no effect. This means that if you hold an EE Bond for twenty years, it will offer a return equivalent to it having a 3.496% interest rate at worst. Determining the value of an EE Bond over time is relatively easy given its fixed rate and automatic doubling after twenty years. Using a compound interest calculator can let you determine its future value. Finding the value of an I Bond in the future is more difficult because its interest rate will adjust every six months based on inflation. Maximizing Your Savings Bond Returns Maximizng your return on savings bonds requires a few different things. First is timing the purchase of your bonds properly. EE Bonds offer a fixed interest rate and a portion of the interest paid by I Bonds is also fixed. Buying bonds when rates are high will offer greater returns than buying bonds when their returns are low. For EE Bonds in particular, holding them for at least twenty years ensures they will double in value. Ensuring you hold them for a long enough period will increase your potential returns. Finally, you need to avoid penalties. With both EE and I Bonds, you must hold the bond for at least twelve months before cashing it in. However, if you cash in a bond within five years of buying it, you'll pay a penalty equal to three months' interest. Holding a bond for at least five years will let you avoid this penalty. Yearly Cap on Savings Bonds There are limits on buying savings bonds. Each year, you can purchase a total of: $10,000 in electronic EE bonds$10,000 in electronic I bonds$5,000 in paper I bonds that you can only buy when you file federal tax forms, with your tax refund. It's important to note that these limits apply per Social Security number. That means that you and a spouse can buy up to these limits each, even if you file joint tax returns. It also means that bonds that are given as a gift count toward the limit of the recipient rather than the person giving the bond. If you have reached your annual savings bond limit, you might consider having your spouse purchase bonds or buying gift bonds for a dependent or friend. Can’t Decide Which Bond to Buy? Consider ETFs If government savings bonds aren’t your style, bond exchange-traded funds (ETFs) are a great way to gift multiple bonds in one transaction. Broad-based bond ETFs typically contain a mix of government, agency, corporate, and municipal debt issues. You can choose index-based ETFs (which usually have the Standard & Poor’s 500 or the Bloomberg Aggregate ETF Tracker as their benchmarks) such as BND, AGG, and BNDX (includes foreign bonds), among many others. Or you can opt for more specific types of bonds, such as bank loans, or Chinese-issued bonds. Most bond ETFs only hold investment-grade bonds (>BBB), to be attractive to conservative-minded investors. There is virtually an ETF for most any country or duration, or holding period, which should make your decision a lot easier. You can search the web for the specific bond (or fixed-income) ETF that covers the sector, region, or index to which you’re attracted, and you’re likely to get many selections back from which to choose. Also, to make ETFs even more attractive, they function like regular shares and can be bought and sold on a fractional basis. Fractional Shares If buying a corporate bond ($1,000 face value) is beyond your gifting budget, a bond ETF may be the answer you’re looking for. As with most other securities today, you can buy a fractional amount, or dollar-based amount, that fits your gift-giving generosity. In this case, you’re interested in gifting a corporate bond to your recipient. For example, let’s say BND is trading at $71.30, but you’re only thinking of gifting $50 for your present. With fractional shares, you can buy exactly $50 of BND for your gift and thereby stick to your gift-giving budget. How to Gift Savings Bonds Savings bonds can be purchased from the U.S. Treasury Department, banks, and credit unions. Often, the simplest way to buy them as a gift is through the TreasuryDirect website. The process is fairly straightforward, and there are plenty of useful guides and tutorials available on the site to help guide you through it. In short, you’ll need to take the following steps: Enter the TreasuryDirect website. Create a TreasuryDirect account and then log in. Purchase the savings bond you want in the desired denomination ($25 to $10,000). After the mandatory five-business-day holding period ends, deliver the gift to the recipient’s TreasuryDirect account. To do this, you’ll need to know the recipient’s account number and legal name, as well as their Social Security number. For children under age 18, a minor linked account can be created by a parent or guardian. Print out a gift certificate and give it to the chosen recipient. How to Cash in a Savings Bond Once the savings bond has been gifted, the recipient can withdraw the proceeds at any point after 12 months. However, it’s generally advisable to leave the bond alone for at least five years—or 20 years, in the case of the Series EE version. Actually cashing in is simple. All the recipient needs to do is log in to their TreasuryDirect account and follow the instructions to redeem the bond. Once this task has been completed satisfactorily, the cash value should be credited to the designated bank account within two business days. Before collecting the proceeds from their gift, the recipient should check what the bond is worth. For paper bonds, this can be achieved by logging in to your account and using the TreasuryDirect savings bond calculator. Remember, most savings bonds stop earning interest after 30 years, and those sold within five years are subject to a penalty—if the recipient sells before then, they’ll lose three months’ worth of interest. A U.S. savings bond will earn interest monthly and compound semiannually until it is either redeemed or has reached its maturity of 30 years. Gifted Bond Tax Considerations U.S. government bonds, unlike corporate bonds, are not subject to state income tax. The owner of a savings bond is only taxed at the federal level, and because interest payments are not distributed until the investment matures or is redeemed, paying any taxes on them is not necessary until later.Most people will take advantage of this option and defer reporting interest on these bonds until they actually receive the money. In this case, they would declare the total amount that they received from their investment on their federal income tax return in the year when it matured or was sold. The option of reporting interest accrued every year to the IRS shouldn’t always be completely written off, though. For example, this might make sense if the savings bond is registered in a child’s name. The logic here is that the child will likely be earning little to no income and thus be in a lower tax bracket than they presumably will be in later years, when the bond matures. It’s also worth bearing in mind that interest from U.S. savings bonds may be excluded from federal income tax if the proceeds are used to pay higher education expenses. What is the difference between EE and I Bonds? EE and I Bonds are two types of U.S. saving bonds. What distinguishes them mainly is the returns that they offer.With an EE Bond, the interest rate is fixed and there’s a guarantee that it will double in value if held onto for 20 years.I Bonds function differently. What they offer is a rate that moves with inflation, ensuring that payouts are protected from rising living costs. Is there a deadline for gifting a savings bond? Not according to TreasuryDirect. Once purchased, it’s necessary to wait five business days to deliver the savings bond gift. However, it’s also possible to hold onto the bond for much longer before giving it away. Should the bond mature before it has been delivered to the beneficiary, its monetary value will be held in a gift box within the owner’s TreasuryDirect account for them to collect and present to the recipient. Do you pay taxes on savings bonds when cashed? Yes. When you receive money from an investment, the Internal Revenue Service (IRS) must be notified. Fortunately, savings bonds aren’t taxed at the state and local levels, meaning any interest earned is only subject to federal income tax. In addition, because interest isn’t distributed until the bond matures or is redeemed, it’s not necessary to keep the IRS informed about how much the bond is generating in income every tax year. If you wish, you don’t need to declare anything until the bond eventually pays out. The Bottom Line Rather than a gift of stock, which could drop in value over time, gift-givers may want to look at giving bonds as a financial present. Highly rated bonds (>BBB) represent a lower-risk investment and are most likely to meet all of their financial obligations, such as paying interest and paying back the principal. The gift of a bond is also a great way to get the recipient more involved in savings and investing by teaching lifelong money management skills. Government savings bonds (EE and I) are among the simplest and most convenient ways to give a bond investment. Investors can transact saving bonds easily through the U.S. government’s TreasuryDirect website, where various savings bonds can be purchased. Alternatively, you can seek out an appropriate bond ETF and purchase it on a fractional basis, or for a fixed U.S. dollar amount.

https://www.investopedia.com/articles/general/071213/retail-banking-vs-commercial-banking.asp

Retail Banking vs. Corporate Banking: What's the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-retail-banking-vs-corporate-banking-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Retail Banking vs. Corporate Banking: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Retail banking is a bank's services that deal directly with consumers, while corporate banking is the part of the banking industry that serves business or corporate customers. </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"> Retail banking is the face of banking to the general public via the many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/branch-banking.asp">bank branches</a> located in most cities, mobile apps, and banking websites. Corporate banking, on the other hand, works directly with businesses of various sizes to provide them loans, credit, savings accounts, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/6-different-types-checking-accounts/">checking accounts</a> that are specifically designed for companies rather than for individuals. </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>Retail banking is the division of a bank that deals directly with individual, non-business customers.</li><li>Retail banks bring in customer deposits that largely enable banks to make loans to their retail and business customers.</li><li>Corporate banking refers to the aspect of banking that deals with corporate and other business customers.</li><li>Commercial banks make loans that enable businesses to grow and hire people, contributing to the expansion of the economy.</li><li>Both types of banks offer various products and services.</li></ul></div></div></div> <span class="heading-toc" id="toc-retail-banking"></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"> Retail Banking </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailbanking.asp">Retail banking</a> provides financial services to the general public. Also referred to as consumer or personal banking, this side of the industry allows consumers to manage their money by giving them access to basic banking services, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit.asp">credit</a>, and financial advice.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Retail banking encompasses a wide variety of products and services, 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>Checking and savings accounts</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">Certificates of deposit (CDs)</a></li> <li>Mortgages </li> <li>Automobile financing</li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">Credit cards</a></li> <li>Lines of credit such as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/">home equity lines of credit (HELOCs)</a> and other personal credit products</li> <li>Foreign currency and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/remittance.asp">remittance</a> services</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"> Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank: </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>Stockbrokerage (discount and full-service)</li> <li>Insurance</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wealthmanagement.asp">Wealth management</a></li> <li>Private banking</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The level of personalized retail banking services offered to a client depends on their income level and the extent of their relationship with the bank. While a teller or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/customer-service.asp">customer service</a> representative would generally serve a client of modest means, an account manager or private banker would handle the banking requirements of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp">high-net-worth individual (HNWI)</a> who has a wide-ranging relationship with the bank. </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"> Retail banks still have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brickandmortar.asp">brick-and-mortar</a> branches, but retail banking is perhaps an area of banking that has been most affected by technology, thanks to the proliferation of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">automated teller machines (ATMs)</a> and the popularity of online and telephone banking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_23-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Retail Banking vs. Corporate Banking" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/fRrWfuLs-_uaeqv2tJ-GsU3iSQI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/fRrWfuLs-_uaeqv2tJ-GsU3iSQI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg" data-srcset="https://www.investopedia.com/thmb/fq_hm2kQ6hJykWPXwtcvilx0MTo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Retail Banking vs. Corporate Banking" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/fRrWfuLs-_uaeqv2tJ-GsU3iSQI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg" srcset="https://www.investopedia.com/thmb/fq_hm2kQ6hJykWPXwtcvilx0MTo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jake Shi</p></span> </figcaption></figure> <span class="heading-toc" id="toc-corporate-banking"></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"> Corporate Banking </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Corporate banking, also known as business banking, typically serves a diverse clientele, ranging from small- to midsized local businesses with a few million dollars in revenue to large conglomerates with billions in sales and offices across the country. The term was originally used in the U.S. to distinguish this line of business from investment banking after the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/071603.asp">Glass-Steagall Act of 1933</a> separated the two activities.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> After that law was repealed in the late 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the U.S. and elsewhere.<span class="ql-inline-citation" data-cite="2"></span> Corporate banking is a key profit center for most banks. But as the largest category of customer loans, it also is the source of regular <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/writedown.asp">writedowns</a> for loans that have soured.  </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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialbank.asp">Commercial banks</a> offer more than just deposit and withdrawal of business funds. The following products and services, among others, to corporations and other financial institutions: </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>Loans and other credit products</li><li>Treasury and cash management services</li><li>Equipment lending</li><li>Commercial real estate</li><li>Trade finance</li><li>Employer services</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Some banks will allow businesses to have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/warm-card.asp">warm card</a> to allow employees to deposit into the business accounts. Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters. </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-special-considerations"></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"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The financial sector is one of the most important parts of 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>—both domestic and global. In the first place, consumers—both personal and commercial—deposit their money into savings accounts, which banks use to lend to others. Banks also help create credit, facilitate trade, and help in the formation of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital.asp">capital</a>.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_38-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_39-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The financial sector, which includes both the retail and commercial banking industries, is one of the most important facets of any economy.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> When banks have problems, the economy can suffer. Take the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp">2007-2008 financial crisis</a> as an example. The crisis had its roots in the U.S. housing bubble and the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices. Banks grew increasingly reluctant to lend money, either to their counterparts or to companies. </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"> This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severe recession worldwide since the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great_depression.asp">Great Depression</a>. This near-death experience for the global economy led to a renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-are-some-benefits-of-corporate-banking"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Benefits of Corporate Banking?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Having a corporate account improves a business' credibility. Maintaining<strong> </strong>separate bank accounts for personal and business uses can make the business appear more professional. Having this type of account also opens the business to greater investment opportunities, may offer liability protection, can improve financial management, and make financial transactions easier.</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-are-the-main-types-of-retail-banks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Types of Retail Banks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In general, commercial banks, <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>, and some investment banks offer retail banking services for individual and family consumers.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-how-does-a-corporate-bank-make-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Corporate Bank Make Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>All banks usually make money from what they call the spread, or the difference between the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableinterestrate.asp">interest rate</a> they pay for deposits and the interest rate they receive on the loans they make. They also earn interest on the securities they hold. They also earn fees for customer services they provide, such as checking accounts, financial counseling, loan servicing, selling other financial products (such as insurance and mutual funds).<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_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"> Retail banking is the part of a bank that deals directly with individual, non-business customers. This operation brings in customer deposits that largely enable banks to make loans to their retail and business customers. Corporate, or business, banking deals with corporate and other business customers of varying sizes. Among a range of services, this type of bank lends to enable businesses to grow and hire people, contributing to the expansion of the economy. </p></div>

## Retail Banking vs. Corporate Banking: An Overview Retail banking is a bank's services that deal directly with consumers, while corporate banking is the part of the banking industry that serves business or corporate customers. Retail banking is the face of banking to the general public via the many [bank branches](https://www.investopedia.com/terms/b/branch-banking.asp) located in most cities, mobile apps, and banking websites. Corporate banking, on the other hand, works directly with businesses of various sizes to provide them loans, credit, savings accounts, and [checking accounts](https://www.investopedia.com/personal-finance/6-different-types-checking-accounts/) that are specifically designed for companies rather than for individuals. ### Key Takeaways * Retail banking is the division of a bank that deals directly with individual, non-business customers. * Retail banks bring in customer deposits that largely enable banks to make loans to their retail and business customers. * Corporate banking refers to the aspect of banking that deals with corporate and other business customers. * Commercial banks make loans that enable businesses to grow and hire people, contributing to the expansion of the economy. * Both types of banks offer various products and services. ## Retail Banking [Retail banking](https://www.investopedia.com/terms/r/retailbanking.asp) provides financial services to the general public. Also referred to as consumer or personal banking, this side of the industry allows consumers to manage their money by giving them access to basic banking services, [credit](https://www.investopedia.com/terms/c/credit.asp), and financial advice. Retail banking encompasses a wide variety of products and services, including: * Checking and savings accounts * [Certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) * Mortgages * Automobile financing * [Credit cards](https://www.investopedia.com/terms/c/creditcard.asp) * Lines of credit such as [home equity lines of credit (HELOCs)](https://www.investopedia.com/mortgage/heloc/) and other personal credit products * Foreign currency and [remittance](https://www.investopedia.com/terms/r/remittance.asp) services Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank: * Stockbrokerage (discount and full-service) * Insurance * [Wealth management](https://www.investopedia.com/terms/w/wealthmanagement.asp) * Private banking The level of personalized retail banking services offered to a client depends on their income level and the extent of their relationship with the bank. While a teller or [customer service](https://www.investopedia.com/terms/c/customer-service.asp) representative would generally serve a client of modest means, an account manager or private banker would handle the banking requirements of a [high-net-worth individual (HNWI)](https://www.investopedia.com/terms/h/hnwi.asp) who has a wide-ranging relationship with the bank. Retail banks still have [brick-and-mortar](https://www.investopedia.com/terms/b/brickandmortar.asp) branches, but retail banking is perhaps an area of banking that has been most affected by technology, thanks to the proliferation of [automated teller machines (ATMs)](https://www.investopedia.com/terms/a/atm.asp) and the popularity of online and telephone banking. ![Retail Banking vs. Corporate Banking]() :max_bytes(150000):strip_icc()/retail-banking-vs-commercial-banking.asp-Final-04a06544385c400b91e0343415a8f57e.jpg) Investopedia / Jake Shi ## Corporate Banking Corporate banking, also known as business banking, typically serves a diverse clientele, ranging from small- to midsized local businesses with a few million dollars in revenue to large conglomerates with billions in sales and offices across the country. The term was originally used in the U.S. to distinguish this line of business from investment banking after the [Glass-Steagall Act of 1933](https://www.investopedia.com/articles/03/071603.asp) separated the two activities. After that law was repealed in the late 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the U.S. and elsewhere. Corporate banking is a key profit center for most banks. But as the largest category of customer loans, it also is the source of regular [writedowns](https://www.investopedia.com/terms/w/writedown.asp) for loans that have soured.  [Commercial banks](https://www.investopedia.com/terms/c/commercialbank.asp) offer more than just deposit and withdrawal of business funds. The following products and services, among others, to corporations and other financial institutions: * Loans and other credit products * Treasury and cash management services * Equipment lending * Commercial real estate * Trade finance * Employer services Some banks will allow businesses to have a [warm card](https://www.investopedia.com/terms/w/warm-card.asp) to allow employees to deposit into the business accounts. Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters. ## Special Considerations The financial sector is one of the most important parts of the [economy](https://www.investopedia.com/terms/e/economy.asp)—both domestic and global. In the first place, consumers—both personal and commercial—deposit their money into savings accounts, which banks use to lend to others. Banks also help create credit, facilitate trade, and help in the formation of [capital](https://www.investopedia.com/terms/c/capital.asp). ### The financial sector, which includes both the retail and commercial banking industries, is one of the most important facets of any economy. When banks have problems, the economy can suffer. Take the [2007-2008 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp) as an example. The crisis had its roots in the U.S. housing bubble and the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices. Banks grew increasingly reluctant to lend money, either to their counterparts or to companies. This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severe recession worldwide since the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp). This near-death experience for the global economy led to a renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system. ## What Are Some Benefits of Corporate Banking? Having a corporate account improves a business' credibility. Maintainingseparate bank accounts for personal and business uses can make the business appear more professional. Having this type of account also opens the business to greater investment opportunities, may offer liability protection, can improve financial management, and make financial transactions easier. ## What Are the Main Types of Retail Banks? In general, commercial banks, [credit unions](https://www.investopedia.com/terms/c/creditunion.asp), and some investment banks offer retail banking services for individual and family consumers. ## How Does a Corporate Bank Make Money? All banks usually make money from what they call the spread, or the difference between the [interest rate](https://www.investopedia.com/terms/v/variableinterestrate.asp) they pay for deposits and the interest rate they receive on the loans they make. They also earn interest on the securities they hold. They also earn fees for customer services they provide, such as checking accounts, financial counseling, loan servicing, selling other financial products (such as insurance and mutual funds). ## The Bottom Line Retail banking is the part of a bank that deals directly with individual, non-business customers. This operation brings in customer deposits that largely enable banks to make loans to their retail and business customers. Corporate, or business, banking deals with corporate and other business customers of varying sizes. Among a range of services, this type of bank lends to enable businesses to grow and hire people, contributing to the expansion of the economy.

Retail Banking vs. Corporate Banking: An Overview Retail banking is a bank's services that deal directly with consumers, while corporate banking is the part of the banking industry that serves business or corporate customers. Retail banking is the face of banking to the general public via the many bank branches located in most cities, mobile apps, and banking websites. Corporate banking, on the other hand, works directly with businesses of various sizes to provide them loans, credit, savings accounts, and checking accounts that are specifically designed for companies rather than for individuals. Key Takeaways Retail banking is the division of a bank that deals directly with individual, non-business customers.Retail banks bring in customer deposits that largely enable banks to make loans to their retail and business customers.Corporate banking refers to the aspect of banking that deals with corporate and other business customers.Commercial banks make loans that enable businesses to grow and hire people, contributing to the expansion of the economy.Both types of banks offer various products and services. Retail Banking Retail banking provides financial services to the general public. Also referred to as consumer or personal banking, this side of the industry allows consumers to manage their money by giving them access to basic banking services, credit, and financial advice. Retail banking encompasses a wide variety of products and services, including: Checking and savings accounts Certificates of deposit (CDs) Mortgages  Automobile financing Credit cards Lines of credit such as home equity lines of credit (HELOCs) and other personal credit products Foreign currency and remittance services Retail banking clients may also be offered the following services, generally through another division or affiliate of the bank: Stockbrokerage (discount and full-service) Insurance Wealth management Private banking The level of personalized retail banking services offered to a client depends on their income level and the extent of their relationship with the bank. While a teller or customer service representative would generally serve a client of modest means, an account manager or private banker would handle the banking requirements of a high-net-worth individual (HNWI) who has a wide-ranging relationship with the bank. Retail banks still have brick-and-mortar branches, but retail banking is perhaps an area of banking that has been most affected by technology, thanks to the proliferation of automated teller machines (ATMs) and the popularity of online and telephone banking. Investopedia / Jake Shi Corporate Banking Corporate banking, also known as business banking, typically serves a diverse clientele, ranging from small- to midsized local businesses with a few million dollars in revenue to large conglomerates with billions in sales and offices across the country. The term was originally used in the U.S. to distinguish this line of business from investment banking after the Glass-Steagall Act of 1933 separated the two activities. After that law was repealed in the late 1990s, corporate banking and investment banking services have been offered for many years under the same umbrella by most banks in the U.S. and elsewhere. Corporate banking is a key profit center for most banks. But as the largest category of customer loans, it also is the source of regular writedowns for loans that have soured.  Commercial banks offer more than just deposit and withdrawal of business funds. The following products and services, among others, to corporations and other financial institutions: Loans and other credit productsTreasury and cash management servicesEquipment lendingCommercial real estateTrade financeEmployer services Some banks will allow businesses to have a warm card to allow employees to deposit into the business accounts. Through their investment banking arms, commercial banks also offer related services to their corporate clients, such as asset management and securities underwriters. Special Considerations The financial sector is one of the most important parts of the economy—both domestic and global. In the first place, consumers—both personal and commercial—deposit their money into savings accounts, which banks use to lend to others. Banks also help create credit, facilitate trade, and help in the formation of capital. The financial sector, which includes both the retail and commercial banking industries, is one of the most important facets of any economy. When banks have problems, the economy can suffer. Take the 2007-2008 financial crisis as an example. The crisis had its roots in the U.S. housing bubble and the excessive exposure of banks and financial institutions around the world to derivatives and securities based on U.S. home prices. Banks grew increasingly reluctant to lend money, either to their counterparts or to companies. This resulted in a near-total freeze in the global banking and lending mechanism, causing the most severe recession worldwide since the Great Depression. This near-death experience for the global economy led to a renewed regulatory focus on the largest banks that are deemed “too big to fail” because of their importance to the worldwide financial system. What Are Some Benefits of Corporate Banking? Having a corporate account improves a business' credibility. Maintaining separate bank accounts for personal and business uses can make the business appear more professional. Having this type of account also opens the business to greater investment opportunities, may offer liability protection, can improve financial management, and make financial transactions easier. What Are the Main Types of Retail Banks? In general, commercial banks, credit unions, and some investment banks offer retail banking services for individual and family consumers. How Does a Corporate Bank Make Money? All banks usually make money from what they call the spread, or the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They also earn interest on the securities they hold. They also earn fees for customer services they provide, such as checking accounts, financial counseling, loan servicing, selling other financial products (such as insurance and mutual funds). The Bottom Line Retail banking is the part of a bank that deals directly with individual, non-business customers. This operation brings in customer deposits that largely enable banks to make loans to their retail and business customers. Corporate, or business, banking deals with corporate and other business customers of varying sizes. Among a range of services, this type of bank lends to enable businesses to grow and hire people, contributing to the expansion of the economy.

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

Private Letter Ruling (PLR): 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-private-letter-ruling-plr"></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 Private Letter Ruling (PLR)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A private letter ruling (PLR) is a written decision by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp#axzz1uByCE3mB">Internal Revenue Service (IRS)</a> that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation. For certain transactions involving large amounts of money, the tax law may be unclear. The purpose of the private letter ruling is to remove any uncertainty and to advise the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxpayer.asp">taxpayer</a>, usually a business, regarding the tax treatment they can expect from the IRS given the circumstances specified by their ruling. A private letter ruling can also help a taxpayer confirm whether or not a potential action will result in a tax violation. </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 private letter ruling is also sometimes called a letter ruling (LTR). A private letter ruling is issued by the IRS Office of Chief Counsel; the Large Business and International Division; Small Business/Self Employed Division, Wage and Investment Division; and the Tax Exempt and Government Entities Division. </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 private letter ruling (PLR) is a written decision by the Internal Revenue Service (IRS) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation.</li><li>The purpose of the private letter ruling is to remove any uncertainty and to advise the taxpayer, usually a business, regarding the tax treatment they can expect from the IRS.</li><li>Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-private-letter-ruling-plr-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 Private Letter Ruling (PLR) Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A private letter ruling is specific and applicable only to an individual taxpayer and their tax situation at the time of the request. Private letter rulings on behalf of other taxpayers cannot be used as precedent by a person requesting a ruling regarding their own issue, and in no way binds the IRS to take a similar position when dealing with other taxpayers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> However, the IRS can redact the personal content of a private letter ruling and issue it as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue-ruling.asp">revenue ruling</a>, which becomes binding on all taxpayers. Even with a favorable ruling, a taxpayer has no absolute guarantee of the tax consequences, since the IRS can modify or revoke a previously issued private letter ruling if it is later determined that the ruling was incorrect or inconsistent with the current position of the IRS. </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"> Private letter rulings are generally made public after all identifiable information about the taxpayer in question has been removed, and they can be accessed through the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/privacy-disclosure/foia-library">IRS FOIA Library</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-how-to-request-a-private-letter-ruling"></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 to Request a Private Letter Ruling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates and a checklist of over 50 questions that must be answered. Taxpayers planning to request a private letter ruling should also consider consulting with an IRS employee or another tax expert for help with the process. The filing procedure is extremely technical and exact compliance is required for a successful filing. </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"> One of the burdens of requesting a private letter ruling is the cost, which has steadily risen in recent years. Fees incurred by the taxpayer can range from $150 for simple requests to $50,000 for pre-filing agreements. For a specific transaction, a ruling can cost as much as $30,000, in addition to the professional fees that a taxpayer may incur. The IRS generally completes ruling requests within 60-90 days, although the process can take significantly longer if multiple branches of the IRS need to review the ruling or if there are other extenuating circumstances. </p></div>

## What Is a Private Letter Ruling (PLR)? A private letter ruling (PLR) is a written decision by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp#axzz1uByCE3mB) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation. For certain transactions involving large amounts of money, the tax law may be unclear. The purpose of the private letter ruling is to remove any uncertainty and to advise the [taxpayer](https://www.investopedia.com/terms/t/taxpayer.asp), usually a business, regarding the tax treatment they can expect from the IRS given the circumstances specified by their ruling. A private letter ruling can also help a taxpayer confirm whether or not a potential action will result in a tax violation. A private letter ruling is also sometimes called a letter ruling (LTR). A private letter ruling is issued by the IRS Office of Chief Counsel; the Large Business and International Division; Small Business/Self Employed Division, Wage and Investment Division; and the Tax Exempt and Government Entities Division. ### Key Takeaways * A private letter ruling (PLR) is a written decision by the Internal Revenue Service (IRS) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation. * The purpose of the private letter ruling is to remove any uncertainty and to advise the taxpayer, usually a business, regarding the tax treatment they can expect from the IRS. * Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates. ## How a Private Letter Ruling (PLR) Works A private letter ruling is specific and applicable only to an individual taxpayer and their tax situation at the time of the request. Private letter rulings on behalf of other taxpayers cannot be used as precedent by a person requesting a ruling regarding their own issue, and in no way binds the IRS to take a similar position when dealing with other taxpayers. However, the IRS can redact the personal content of a private letter ruling and issue it as a [revenue ruling](https://www.investopedia.com/terms/r/revenue-ruling.asp), which becomes binding on all taxpayers. Even with a favorable ruling, a taxpayer has no absolute guarantee of the tax consequences, since the IRS can modify or revoke a previously issued private letter ruling if it is later determined that the ruling was incorrect or inconsistent with the current position of the IRS. Private letter rulings are generally made public after all identifiable information about the taxpayer in question has been removed, and they can be accessed through the [IRS FOIA Library](https://www.irs.gov/privacy-disclosure/foia-library). ## How to Request a Private Letter Ruling Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates and a checklist of over 50 questions that must be answered. Taxpayers planning to request a private letter ruling should also consider consulting with an IRS employee or another tax expert for help with the process. The filing procedure is extremely technical and exact compliance is required for a successful filing. One of the burdens of requesting a private letter ruling is the cost, which has steadily risen in recent years. Fees incurred by the taxpayer can range from $150 for simple requests to $50,000 for pre-filing agreements. For a specific transaction, a ruling can cost as much as $30,000, in addition to the professional fees that a taxpayer may incur. The IRS generally completes ruling requests within 60-90 days, although the process can take significantly longer if multiple branches of the IRS need to review the ruling or if there are other extenuating circumstances.

What Is a Private Letter Ruling (PLR)? A private letter ruling (PLR) is a written decision by the Internal Revenue Service (IRS) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation. For certain transactions involving large amounts of money, the tax law may be unclear. The purpose of the private letter ruling is to remove any uncertainty and to advise the taxpayer, usually a business, regarding the tax treatment they can expect from the IRS given the circumstances specified by their ruling. A private letter ruling can also help a taxpayer confirm whether or not a potential action will result in a tax violation. A private letter ruling is also sometimes called a letter ruling (LTR). A private letter ruling is issued by the IRS Office of Chief Counsel; the Large Business and International Division; Small Business/Self Employed Division, Wage and Investment Division; and the Tax Exempt and Government Entities Division. Key Takeaways A private letter ruling (PLR) is a written decision by the Internal Revenue Service (IRS) that is sent in response to a taxpayer’s request for guidance on unusual circumstances or complex questions about their specific tax situation.The purpose of the private letter ruling is to remove any uncertainty and to advise the taxpayer, usually a business, regarding the tax treatment they can expect from the IRS.Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates. How a Private Letter Ruling (PLR) Works A private letter ruling is specific and applicable only to an individual taxpayer and their tax situation at the time of the request. Private letter rulings on behalf of other taxpayers cannot be used as precedent by a person requesting a ruling regarding their own issue, and in no way binds the IRS to take a similar position when dealing with other taxpayers. However, the IRS can redact the personal content of a private letter ruling and issue it as a revenue ruling, which becomes binding on all taxpayers. Even with a favorable ruling, a taxpayer has no absolute guarantee of the tax consequences, since the IRS can modify or revoke a previously issued private letter ruling if it is later determined that the ruling was incorrect or inconsistent with the current position of the IRS. Private letter rulings are generally made public after all identifiable information about the taxpayer in question has been removed, and they can be accessed through the IRS FOIA Library. How to Request a Private Letter Ruling Taxpayers requesting a private letter ruling should consult the Revenue Procedure published by the IRS at the start of each calendar year, which describes guidelines and updates for the process and includes sample request letter templates and a checklist of over 50 questions that must be answered. Taxpayers planning to request a private letter ruling should also consider consulting with an IRS employee or another tax expert for help with the process. The filing procedure is extremely technical and exact compliance is required for a successful filing. One of the burdens of requesting a private letter ruling is the cost, which has steadily risen in recent years. Fees incurred by the taxpayer can range from $150 for simple requests to $50,000 for pre-filing agreements. For a specific transaction, a ruling can cost as much as $30,000, in addition to the professional fees that a taxpayer may incur. The IRS generally completes ruling requests within 60-90 days, although the process can take significantly longer if multiple branches of the IRS need to review the ruling or if there are other extenuating circumstances.

https://www.investopedia.com/could-citis-latest-restructuring-turn-the-stocks-fortunes-around-7969156

Could Citi's Latest Restructuring Turn the Stock's Fortunes Around?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Citigroup (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=C">C</a>) on Wednesday launched a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/restructuring.asp">restructuring</a> effort, changing its organizational structure and cutting jobs as part of CEO Jane Fraser's effort to simplify the banking giant, in a move intended to provide a much-needed boost to shareholders.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <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>Citigroup CEO Jane Fraser launched a restructuring effort Wednesday, aimed at simplifying the bank's organizational structure and transforming it into a leaner company.</li><li>The bank has struggled with declining financial performance and profitability, with shares down almost a third since CEO Jane Fraser took over in February 2021.</li><li>Citigroup shares shed 98% of their value during the 2008 financial crisis, and as of Sept. 2023 were still more than 90% below all-time highs set in 2000.</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"> It's an effort motivated by the bank's declining financial performance and profitability. The bank's profit for the quarter ended in June tumbled 36% from a year ago, driven by higher expenses and credit costs.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Shares have lost almost a third of their value since CEO Jane Fraser took over in February 2021. They have been the worst performers—by a wide margin—among the four biggest U.S. banks over this period, a group that also includes JPMorgan Chase (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM">JPM</a>), Bank of America (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BAC">BAC</a>) and Wells Fargo (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WFC">WFC</a>). </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:67.7%;"> <img alt="C, BAC, JPM, WFC Performance (Feb 2021 - Present)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/fwoFpCZJttq3Ip2K3qz_fjweXL8=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/YibnH7ZlXd282RDUWnrPIry7WLA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png" data-srcset="https://www.investopedia.com/thmb/3zVNDekmadVfYBqwKIKUOpgIKyA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png 750w" data-tracking-container="true" height="813" id="mntl-sc-block-image_1-0" width="1200"/> <noscript> <img alt="C, BAC, JPM, WFC Performance (Feb 2021 - Present)" class="img--noscript universal-image__image" height="813" sizes="750px" src="https://www.investopedia.com/thmb/YibnH7ZlXd282RDUWnrPIry7WLA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png" srcset="https://www.investopedia.com/thmb/3zVNDekmadVfYBqwKIKUOpgIKyA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png 750w" width="1200"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>YCharts</p></span> </figcaption></figure> <span class="heading-toc" id="toc-whats-in-the-restructuring"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> What's In the Restructuring? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Fraser's effort is aimed at simplifying Citibank's organizational structure and transforming it into a leaner company. The leaders of its five business units—corporate and investment banking, wealth management, transaction services, markets, and U.S. consumer banking—will report directly to the CEO, resulting in fewer management layers. </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 restructuring effort could provide a much-needed boost to shareholders. Citigroup shares jumped about 2% on Wednesday. They remain down roughly 6% so far this year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-can-a-leaner-citi-boost-its-stock"></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"> Can A Leaner Citi Boost Its Stock? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Citigroup shares were once one of the most expensive on the market, peaking at just under $600 in 2000. The company helped pioneer the modern banking industry in the late 20th century with its wealth management services, automatic teller machines (ATMs), and credit card offerings.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> However, the bank's fortunes turned shortly after that. The company spun off its insurance business in 2002 after an unsuccessful merger with The Travelers' Companies (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TRV">TRV</a>) four years earlier.<span class="ql-inline-citation" data-cite="3"></span> Years later, it took the full brunt of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime_mortgage.asp">subprime mortgage</a> crisis of 2007 and 2008, and was forced to write off billions of dollars in bad loans and accept a government bailout.<span class="ql-inline-citation" data-cite="5"></span> Shares of Citigroup fell a stunning 98% between May 2007 and March 2009, and as of September 2023 were still more than 90% off their all-time highs.<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_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Citigroup has been the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/monster-beverage-tops-s-and-p-500-for-25-years-7480124">second-worst performing stock</a> in the S&amp;P 500 Index over the past 25 years as of April, faring only slightly better than insurance giant AIG (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AIG">AIG</a>), another financial institution whose shares were heavily battered during the 2008 financial crisis.<br/> </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-landscape figure-high-res" id="mntl-sc-block_22-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:62.0%;"> <img alt="Citigroup (C) Price History 1995-Present" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/42gjYYlrK6P2AshbiFsCeNTIXo0=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/YNVm-rmqjuI6J10q-lS9AAS3DU4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png" data-srcset="https://www.investopedia.com/thmb/6lTCZd1QftZr792-m6fq8GNV-pI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png 750w" data-tracking-container="true" height="745" id="mntl-sc-block-image_2-0" width="1200"/> <noscript> <img alt="Citigroup (C) Price History 1995-Present" class="img--noscript universal-image__image" height="745" sizes="750px" src="https://www.investopedia.com/thmb/YNVm-rmqjuI6J10q-lS9AAS3DU4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png" srcset="https://www.investopedia.com/thmb/6lTCZd1QftZr792-m6fq8GNV-pI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png 750w" width="1200"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>YCharts</p></span> </figcaption></figure> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

Citigroup ([C](https://www.investopedia.com/markets/quote?tvwidgetsymbol=C)) on Wednesday launched a [restructuring](https://www.investopedia.com/terms/r/restructuring.asp) effort, changing its organizational structure and cutting jobs as part of CEO Jane Fraser's effort to simplify the banking giant, in a move intended to provide a much-needed boost to shareholders. ### Key Takeaways * Citigroup CEO Jane Fraser launched a restructuring effort Wednesday, aimed at simplifying the bank's organizational structure and transforming it into a leaner company. * The bank has struggled with declining financial performance and profitability, with shares down almost a third since CEO Jane Fraser took over in February 2021. * Citigroup shares shed 98% of their value during the 2008 financial crisis, and as of Sept. 2023 were still more than 90% below all-time highs set in 2000. It's an effort motivated by the bank's declining financial performance and profitability. The bank's profit for the quarter ended in June tumbled 36% from a year ago, driven by higher expenses and credit costs. Shares have lost almost a third of their value since CEO Jane Fraser took over in February 2021. They have been the worst performers—by a wide margin—among the four biggest U.S. banks over this period, a group that also includes JPMorgan Chase ([JPM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=JPM)), Bank of America ([BAC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BAC)) and Wells Fargo ([WFC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WFC)). ![C, BAC, JPM, WFC Performance (Feb 2021 - Present)]() :max_bytes(150000):strip_icc()/C_JPM_BAC_WFC_chart-a03e8269fa0e4db7bf250a51ac2787b3.png) YCharts ## What's In the Restructuring? Fraser's effort is aimed at simplifying Citibank's organizational structure and transforming it into a leaner company. The leaders of its five business units—corporate and investment banking, wealth management, transaction services, markets, and U.S. consumer banking—will report directly to the CEO, resulting in fewer management layers. The restructuring effort could provide a much-needed boost to shareholders. Citigroup shares jumped about 2% on Wednesday. They remain down roughly 6% so far this year. ## Can A Leaner Citi Boost Its Stock? Citigroup shares were once one of the most expensive on the market, peaking at just under $600 in 2000. The company helped pioneer the modern banking industry in the late 20th century with its wealth management services, automatic teller machines (ATMs), and credit card offerings. However, the bank's fortunes turned shortly after that. The company spun off its insurance business in 2002 after an unsuccessful merger with The Travelers' Companies ([TRV](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TRV)) four years earlier. Years later, it took the full brunt of the [subprime mortgage](https://www.investopedia.com/terms/s/subprime_mortgage.asp) crisis of 2007 and 2008, and was forced to write off billions of dollars in bad loans and accept a government bailout. Shares of Citigroup fell a stunning 98% between May 2007 and March 2009, and as of September 2023 were still more than 90% off their all-time highs. Citigroup has been the [second-worst performing stock](https://www.investopedia.com/monster-beverage-tops-s-and-p-500-for-25-years-7480124) in the S&P 500 Index over the past 25 years as of April, faring only slightly better than insurance giant AIG ([AIG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AIG)), another financial institution whose shares were heavily battered during the 2008 financial crisis. ![Citigroup (C) Price History 1995-Present]() :max_bytes(150000):strip_icc()/C_chart-b0f45e7cf2364121958384839377a8de.png) YCharts Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Citigroup (C) on Wednesday launched a restructuring effort, changing its organizational structure and cutting jobs as part of CEO Jane Fraser's effort to simplify the banking giant, in a move intended to provide a much-needed boost to shareholders. Key Takeaways Citigroup CEO Jane Fraser launched a restructuring effort Wednesday, aimed at simplifying the bank's organizational structure and transforming it into a leaner company.The bank has struggled with declining financial performance and profitability, with shares down almost a third since CEO Jane Fraser took over in February 2021.Citigroup shares shed 98% of their value during the 2008 financial crisis, and as of Sept. 2023 were still more than 90% below all-time highs set in 2000. It's an effort motivated by the bank's declining financial performance and profitability. The bank's profit for the quarter ended in June tumbled 36% from a year ago, driven by higher expenses and credit costs. Shares have lost almost a third of their value since CEO Jane Fraser took over in February 2021. They have been the worst performers—by a wide margin—among the four biggest U.S. banks over this period, a group that also includes JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC). YCharts What's In the Restructuring? Fraser's effort is aimed at simplifying Citibank's organizational structure and transforming it into a leaner company. The leaders of its five business units—corporate and investment banking, wealth management, transaction services, markets, and U.S. consumer banking—will report directly to the CEO, resulting in fewer management layers. The restructuring effort could provide a much-needed boost to shareholders. Citigroup shares jumped about 2% on Wednesday. They remain down roughly 6% so far this year. Can A Leaner Citi Boost Its Stock? Citigroup shares were once one of the most expensive on the market, peaking at just under $600 in 2000. The company helped pioneer the modern banking industry in the late 20th century with its wealth management services, automatic teller machines (ATMs), and credit card offerings. However, the bank's fortunes turned shortly after that. The company spun off its insurance business in 2002 after an unsuccessful merger with The Travelers' Companies (TRV) four years earlier. Years later, it took the full brunt of the subprime mortgage crisis of 2007 and 2008, and was forced to write off billions of dollars in bad loans and accept a government bailout. Shares of Citigroup fell a stunning 98% between May 2007 and March 2009, and as of September 2023 were still more than 90% off their all-time highs. Citigroup has been the second-worst performing stock in the S&P 500 Index over the past 25 years as of April, faring only slightly better than insurance giant AIG (AIG), another financial institution whose shares were heavily battered during the 2008 financial crisis. YCharts Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/articles/investing/032915/how-apply-technical-indicators-mutual-funds.asp

How to Apply Technical Indicators to Mutual 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"> Most investors evaluate mutual funds using the principles of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp" rel="noopener noreferrer">fundamental</a> rather than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp" rel="noopener noreferrer">technical</a> analysis. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mutualfund.asp" rel="noopener noreferrer">Mutual funds</a> tend to be long-term, buy-and-hold investments, and technical analysis is better suited to shorter-term trading. </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"> That said, investors should not overlook the value of some common technical indicators to provide trading insights for almost any kind of investment or financial instrument, including mutual funds. Below are five common technical indicators that can be applied to mutual 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>Mutual funds are most often evaluated using fundamental analysis as opposed to technical analysis, which is more commonly used for shorter-term trading.</li><li>Technical analysis, however, can provide a significant amount of insight into most investments and financial assets, including mutual funds.</li><li>Common technical indicators that can help evaluate a mutual fund as a good or bad investment include trendlines, moving averages, the relative strength index (RSI), support and resistance levels, and chart formations.</li></ul></div></div></div> <span class="heading-toc" id="toc-1-trendlines"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> 1. Trendlines </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Most technical analysis starts with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trendline.asp" rel="noopener noreferrer">trendlines</a>, which are lines that connect multiple price points and extend into the future to identify price trends and areas of support/resistance. For mutual funds, look at a long-term price chart in order to determine its trend. </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 trendline can be plotted by drawing a line that connects multiple lows of a mutual fund over time. The fund may have tested this trendline on numerous occasions over the years. If the fund price breaks conclusively through a well-established, long-term trendline, it is 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">bearish</a> signal. An investor in such a fund should consider selling their fund holdings if this occurs<strong>. </strong> </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"> Conversely, a breakout above a well-defined trendline may be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp" rel="noopener noreferrer">bullish</a> signal, indicating the investor should stay in the fund.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-2-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"> 2. Moving Averages </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/movingaverage.asp" rel="noopener noreferrer">Moving averages</a> are averages of time-series data, such as prices. Investors can use these to identify price trends of a mutual fund. A rising moving average suggests that the fund is in an uptrend, while a declining moving average would indicate that it is in a downtrend. </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 second major application arises from the crossover of two moving averages, for example, a short-term, 20-day moving average and a long-term, 200-day moving average. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If the 20-day moving average breaks above the 200-day moving average, this would be considered a bullish signal for the mutual fund. Conversely, if the 20-day moving average breaks below the 200-day moving average, this would be a bearish signal. </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 200-day moving average is considered a key technical indicator, with breaks above or below that regarded as important trading signals. It is especially suited for mutual fund technical analysis because of its longer-term nature. </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-3-relative-strength-index-rsi"></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"> 3. Relative Strength Index (RSI) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rsi.asp" rel="noopener noreferrer">Relative Strength Index</a> (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in order to evaluate whether the mutual fund is overbought or oversold. </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"> An RSI above 70 would suggest that the mutual fund is overbought and its value is overpriced and poised to retreat. An RSI below 30 indicates an oversold state that may trigger a bounce, which may bolster a value investor's buy decision. </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-4-support-and-resistance"></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"> 4. Support and Resistance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/support.asp" rel="noopener noreferrer">support level</a> is formed when a mutual fund trades down to a certain level and then bounces back up. Over time, this level becomes an area of strong support for the mutual fund. Conversely, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/resistance.asp" rel="noopener noreferrer">resistance</a> area is formed when the fund is unable to break above a certain price level. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_31-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_32-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Support and resistance levels highlight the direction of the market and help determine entry and exit points.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The further apart these tests of support and resistance, and the more frequent that the fund trades down or up to the support or resistance level, the more formidable they become. A break of long-term support is very bearish and may signal a substantial downside for the mutual fund. A move above long-term resistance is very bullish and signals significant upside. </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-5-chart-formations"></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"> 5. Chart Formations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> There are a number of different chart types used in technical analysis, with the most common being line charts and bar charts. </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"> Advanced users may prefer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/candlestick-charting-what-is-it/" rel="noopener noreferrer">candlestick</a> charts to point-and-figure charts. Chart formations for a mutual fund can be interpreted like stocks. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/head-shoulders.asp" rel="noopener noreferrer">head-and-shoulders pattern</a>, for instance, is interpreted as being quite bearish for the fund, while the reverse head-and-shoulders pattern is viewed as a bullish signal. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> A chart pattern that is easy to identify and that has a high degree of reliability is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/double-top-and-bottom.asp" rel="noopener noreferrer">double</a> or triple top or bottom. A double top or triple top is typically formed after a long period and signals an imminent trend reversal; if a mutual fund that has been trending higher is unable to break through this formation, it may be headed lower. Conversely, a fund that has formed a double or triple bottom may be poised to move higher. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> While mutual funds do not readily lend themselves to technical analysis, investors can apply some common technical indicators to predict mutual fund movements. Technical indicators like trendlines, moving averages, RSIs, and chart formations are widely used in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/08/analyzing_mutual-funds.asp">mutual fund analysis</a> as they provide reliable signals that are easy to interpret. </p></div>

Most investors evaluate mutual funds using the principles of [fundamental](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) rather than [technical](https://www.investopedia.com/terms/t/technicalanalysis.asp) analysis. [Mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) tend to be long-term, buy-and-hold investments, and technical analysis is better suited to shorter-term trading. That said, investors should not overlook the value of some common technical indicators to provide trading insights for almost any kind of investment or financial instrument, including mutual funds. Below are five common technical indicators that can be applied to mutual funds. ### Key Takeaways * Mutual funds are most often evaluated using fundamental analysis as opposed to technical analysis, which is more commonly used for shorter-term trading. * Technical analysis, however, can provide a significant amount of insight into most investments and financial assets, including mutual funds. * Common technical indicators that can help evaluate a mutual fund as a good or bad investment include trendlines, moving averages, the relative strength index (RSI), support and resistance levels, and chart formations. ## 1. Trendlines Most technical analysis starts with [trendlines](https://www.investopedia.com/terms/t/trendline.asp), which are lines that connect multiple price points and extend into the future to identify price trends and areas of support/resistance. For mutual funds, look at a long-term price chart in order to determine its trend. A trendline can be plotted by drawing a line that connects multiple lows of a mutual fund over time. The fund may have tested this trendline on numerous occasions over the years. If the fund price breaks conclusively through a well-established, long-term trendline, it is a [bearish](https://www.investopedia.com/terms/b/bearmarket.asp) signal. An investor in such a fund should consider selling their fund holdings if this occurs**.** Conversely, a breakout above a well-defined trendline may be a [bullish](https://www.investopedia.com/terms/b/bullmarket.asp) signal, indicating the investor should stay in the fund.  ## 2. Moving Averages [Moving averages](https://www.investopedia.com/terms/m/movingaverage.asp) are averages of time-series data, such as prices. Investors can use these to identify price trends of a mutual fund. A rising moving average suggests that the fund is in an uptrend, while a declining moving average would indicate that it is in a downtrend. A second major application arises from the crossover of two moving averages, for example, a short-term, 20-day moving average and a long-term, 200-day moving average. If the 20-day moving average breaks above the 200-day moving average, this would be considered a bullish signal for the mutual fund. Conversely, if the 20-day moving average breaks below the 200-day moving average, this would be a bearish signal. The 200-day moving average is considered a key technical indicator, with breaks above or below that regarded as important trading signals. It is especially suited for mutual fund technical analysis because of its longer-term nature. ## 3. Relative Strength Index (RSI) The [Relative Strength Index](https://www.investopedia.com/terms/r/rsi.asp) (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in order to evaluate whether the mutual fund is overbought or oversold. An RSI above 70 would suggest that the mutual fund is overbought and its value is overpriced and poised to retreat. An RSI below 30 indicates an oversold state that may trigger a bounce, which may bolster a value investor's buy decision. ## 4. Support and Resistance A [support level](https://www.investopedia.com/terms/s/support.asp) is formed when a mutual fund trades down to a certain level and then bounces back up. Over time, this level becomes an area of strong support for the mutual fund. Conversely, a [resistance](https://www.investopedia.com/terms/r/resistance.asp) area is formed when the fund is unable to break above a certain price level. ### Support and resistance levels highlight the direction of the market and help determine entry and exit points. The further apart these tests of support and resistance, and the more frequent that the fund trades down or up to the support or resistance level, the more formidable they become. A break of long-term support is very bearish and may signal a substantial downside for the mutual fund. A move above long-term resistance is very bullish and signals significant upside. ## 5. Chart Formations There are a number of different chart types used in technical analysis, with the most common being line charts and bar charts. Advanced users may prefer [candlestick](https://www.investopedia.com/trading/candlestick-charting-what-is-it/) charts to point-and-figure charts. Chart formations for a mutual fund can be interpreted like stocks. The [head-and-shoulders pattern](https://www.investopedia.com/terms/h/head-shoulders.asp), for instance, is interpreted as being quite bearish for the fund, while the reverse head-and-shoulders pattern is viewed as a bullish signal. A chart pattern that is easy to identify and that has a high degree of reliability is the [double](https://www.investopedia.com/terms/d/double-top-and-bottom.asp) or triple top or bottom. A double top or triple top is typically formed after a long period and signals an imminent trend reversal; if a mutual fund that has been trending higher is unable to break through this formation, it may be headed lower. Conversely, a fund that has formed a double or triple bottom may be poised to move higher. ## The Bottom Line While mutual funds do not readily lend themselves to technical analysis, investors can apply some common technical indicators to predict mutual fund movements. Technical indicators like trendlines, moving averages, RSIs, and chart formations are widely used in [mutual fund analysis](https://www.investopedia.com/articles/mutualfund/08/analyzing_mutual-funds.asp) as they provide reliable signals that are easy to interpret.

Most investors evaluate mutual funds using the principles of fundamental rather than technical analysis. Mutual funds tend to be long-term, buy-and-hold investments, and technical analysis is better suited to shorter-term trading. That said, investors should not overlook the value of some common technical indicators to provide trading insights for almost any kind of investment or financial instrument, including mutual funds. Below are five common technical indicators that can be applied to mutual funds. Key Takeaways Mutual funds are most often evaluated using fundamental analysis as opposed to technical analysis, which is more commonly used for shorter-term trading.Technical analysis, however, can provide a significant amount of insight into most investments and financial assets, including mutual funds.Common technical indicators that can help evaluate a mutual fund as a good or bad investment include trendlines, moving averages, the relative strength index (RSI), support and resistance levels, and chart formations. 1. Trendlines Most technical analysis starts with trendlines, which are lines that connect multiple price points and extend into the future to identify price trends and areas of support/resistance. For mutual funds, look at a long-term price chart in order to determine its trend. A trendline can be plotted by drawing a line that connects multiple lows of a mutual fund over time. The fund may have tested this trendline on numerous occasions over the years. If the fund price breaks conclusively through a well-established, long-term trendline, it is a bearish signal. An investor in such a fund should consider selling their fund holdings if this occurs. Conversely, a breakout above a well-defined trendline may be a bullish signal, indicating the investor should stay in the fund.  2. Moving Averages Moving averages are averages of time-series data, such as prices. Investors can use these to identify price trends of a mutual fund. A rising moving average suggests that the fund is in an uptrend, while a declining moving average would indicate that it is in a downtrend. A second major application arises from the crossover of two moving averages, for example, a short-term, 20-day moving average and a long-term, 200-day moving average. If the 20-day moving average breaks above the 200-day moving average, this would be considered a bullish signal for the mutual fund. Conversely, if the 20-day moving average breaks below the 200-day moving average, this would be a bearish signal. The 200-day moving average is considered a key technical indicator, with breaks above or below that regarded as important trading signals. It is especially suited for mutual fund technical analysis because of its longer-term nature. 3. Relative Strength Index (RSI) The Relative Strength Index (RSI) is a momentum indicator that compares the magnitude of recent gains to recent losses in order to evaluate whether the mutual fund is overbought or oversold. An RSI above 70 would suggest that the mutual fund is overbought and its value is overpriced and poised to retreat. An RSI below 30 indicates an oversold state that may trigger a bounce, which may bolster a value investor's buy decision. 4. Support and Resistance A support level is formed when a mutual fund trades down to a certain level and then bounces back up. Over time, this level becomes an area of strong support for the mutual fund. Conversely, a resistance area is formed when the fund is unable to break above a certain price level. Support and resistance levels highlight the direction of the market and help determine entry and exit points. The further apart these tests of support and resistance, and the more frequent that the fund trades down or up to the support or resistance level, the more formidable they become. A break of long-term support is very bearish and may signal a substantial downside for the mutual fund. A move above long-term resistance is very bullish and signals significant upside. 5. Chart Formations There are a number of different chart types used in technical analysis, with the most common being line charts and bar charts. Advanced users may prefer candlestick charts to point-and-figure charts. Chart formations for a mutual fund can be interpreted like stocks. The head-and-shoulders pattern, for instance, is interpreted as being quite bearish for the fund, while the reverse head-and-shoulders pattern is viewed as a bullish signal. A chart pattern that is easy to identify and that has a high degree of reliability is the double or triple top or bottom. A double top or triple top is typically formed after a long period and signals an imminent trend reversal; if a mutual fund that has been trending higher is unable to break through this formation, it may be headed lower. Conversely, a fund that has formed a double or triple bottom may be poised to move higher. The Bottom Line While mutual funds do not readily lend themselves to technical analysis, investors can apply some common technical indicators to predict mutual fund movements. Technical indicators like trendlines, moving averages, RSIs, and chart formations are widely used in mutual fund analysis as they provide reliable signals that are easy to interpret.

https://www.investopedia.com/eli-lilly-rises-as-study-shows-omvoh-successful-in-treating-crohn-s-disease-8651860

Eli Lilly Rises As Study Shows Omvoh Successful in Treating Crohn's Disease

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Eli Lilly reported its current treatment for ulcerative colitis, Omvoh, was effective in helping those with Crohn's disease.</li><li>The Phase 3 trial showed more than half of those taking Omvoh achieved clinical remission in a year.</li><li>Eli Lilly shares headed toward an all-time closing high on the news.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Shares of Eli Lilly (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY">LLY</a>) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was successful in treating Crohn’s disease.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The company reported that a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clinical-trials.asp#:~:text=Phase%203%20trials%20are%20used,is%20approved%20by%20the%20FDA.">Phase 3 trial</a> of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” </p> <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"> Lilly explained that 54.1% of those receiving mirikizumab achieved clinical remission, and 48.4% had an endoscopic response. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fda.asp">Food and Drug Administration (FDA)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/european-medicines-agency-ema.asp">European Medicines Agency (EMA)</a>. It added that it plans to make requests to other global regulators as well.  </p> <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"> Eli Lilly shares, which rose 2.9% to $806.23 as of 1:49 p.m. ET Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. In November, the company <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/eli-lilly-shares-hit-all-time-high-after-fda-approves-drug-for-weight-loss-treatment-8399595">received</a> FDA approval for the obesity drug Zepbound, which has the same active ingredient as its best-selling product, diabetes medicine Mounjaro. The two of them combined for $2.32 billion in sales in the first quarter.<span class="ql-inline-citation" data-cite="1"></span> </p></div>

### Key Takeaways * Eli Lilly reported its current treatment for ulcerative colitis, Omvoh, was effective in helping those with Crohn's disease. * The Phase 3 trial showed more than half of those taking Omvoh achieved clinical remission in a year. * Eli Lilly shares headed toward an all-time closing high on the news. Shares of Eli Lilly ([LLY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY)) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was successful in treating Crohn’s disease. The company reported that a [Phase 3 trial](https://www.investopedia.com/terms/c/clinical-trials.asp#:~:text=Phase%203%20trials%20are%20used,is%20approved%20by%20the%20FDA.) of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” Lilly explained that 54.1% of those receiving mirikizumab achieved clinical remission, and 48.4% had an endoscopic response. The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the [Food and Drug Administration (FDA)](https://www.investopedia.com/terms/f/fda.asp) and [European Medicines Agency (EMA)](https://www.investopedia.com/terms/e/european-medicines-agency-ema.asp). It added that it plans to make requests to other global regulators as well.  Eli Lilly shares, which rose 2.9% to $806.23 as of 1:49 p.m. ET Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. In November, the company [received](https://www.investopedia.com/eli-lilly-shares-hit-all-time-high-after-fda-approves-drug-for-weight-loss-treatment-8399595) FDA approval for the obesity drug Zepbound, which has the same active ingredient as its best-selling product, diabetes medicine Mounjaro. The two of them combined for $2.32 billion in sales in the first quarter.

Key Takeaways Eli Lilly reported its current treatment for ulcerative colitis, Omvoh, was effective in helping those with Crohn's disease.The Phase 3 trial showed more than half of those taking Omvoh achieved clinical remission in a year.Eli Lilly shares headed toward an all-time closing high on the news. Shares of Eli Lilly (LLY) were on track to close at an all-time high Tuesday as a study showed the pharmaceutical giant’s current drug for ulcerative colitis also was successful in treating Crohn’s disease. The company reported that a Phase 3 trial of mirikizumab, sold under the brand name of Omvoh, found that patients with moderately or severely active Crohn’s disease “achieved statistically significant and clinically meaningful improvements across multiple clinical and endoscopic endpoints at one year.” Lilly explained that 54.1% of those receiving mirikizumab achieved clinical remission, and 48.4% had an endoscopic response. The company noted that this year it has submitted a supplemental Biologics License Application for use of mirikizumab to treat Crohn’s disease with the Food and Drug Administration (FDA) and European Medicines Agency (EMA). It added that it plans to make requests to other global regulators as well.  Eli Lilly shares, which rose 2.9% to $806.23 as of 1:49 p.m. ET Tuesday, have increased about 38% so far in 2024, boosted by soaring global demand for weight-loss treatments. In November, the company received FDA approval for the obesity drug Zepbound, which has the same active ingredient as its best-selling product, diabetes medicine Mounjaro. The two of them combined for $2.32 billion in sales in the first quarter.

https://www.investopedia.com/terms/i/insurance-underwriter.asp

Insurance Underwriter: Definition, What Underwriters Do

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-insurance-underwriter"></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 Underwriter? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring people and assets. Insurance underwriters establish pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay a potential risk. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriter.asp" rel="noopener noreferrer">Underwriters</a> use specialized software and actuarial data to determine the likelihood and magnitude of a risk. </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>Insurance underwriters evaluate the risks involved in insuring people and assets and establish pricing for a risk. </li><li>Underwriters in investment banking guarantee a minimum share price for a company planning an IPO (initial public offering).</li><li>Commercial banking underwriters assess the risk of lending to individuals or lenders and charge interest to cover the cost of assuming that risk.</li><li>Insurance underwriters assume the risk of a future event and charge premiums in return for a promise to reimburse the client an amount in the event damage or occurs.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_6-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Insurance Underwriter" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ekRMazxBTL18O2jR6V6s68jCYlc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ekRMazxBTL18O2jR6V6s68jCYlc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png" data-srcset="https://www.investopedia.com/thmb/KTq0D8rget0i0nyegij2CNURCfU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Insurance Underwriter" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/ekRMazxBTL18O2jR6V6s68jCYlc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png" srcset="https://www.investopedia.com/thmb/KTq0D8rget0i0nyegij2CNURCfU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.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 / Theresa Chiechi</p></span> </figcaption></figure> <span class="heading-toc" id="toc-investment-banking-underwriters"></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"> Investment Banking Underwriters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp" rel="noopener noreferrer">initial public offering</a> (IPO), an amount which is theoretically provided by investors as the source of capital. The bank acts only as the "facilitator" of the transaction, but they have still taken on an "underwriting risk" by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company's shares. </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-insurance-underwriters"></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"> Insurance Underwriters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Insurance underwriters assume the risk involved in a contract with an individual or entity. For example, an underwriter may assume the risk of the cost of a fire in a home in return for a premium or a monthly payment. Evaluating an insurer's risk before the policy period and at the time of renewal is a vital function of an underwriter. </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, homeowners insurance underwriters must consider numerous variables when rating a homeowner's policy. Property and casualty insurance agents act as field underwriters, initially inspecting homes or rental properties for conditions such as deteriorated roofs or foundations that pose a risk to the carrier. The agents report hazards to the home underwriter. The home underwriter additionally considers hazards that may trigger a liability claim. </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"> Hazards include unfenced swimming pools, cracked sidewalks, and the presence of dead or dying trees on the property. These and other hazards represent risks to an insurance company, which may eventually be required to pay liability claims in the event of accidental drownings or slip and fall injuries. </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"> Inputting a number of factors, which often includes an applicant's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditrating.asp" rel="noopener noreferrer">credit rating</a>, homeowner insurance underwriters employ an algorithmic rating method to pricing. The system generates an appropriate premium based on the platform’s interpretation and the combination of all data reported from the observations of the field underwriter. The lead underwriter also subjectively considers answers submitted by the applicant on the policy application when arriving at a premium. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Insurance companies must balance their approach to underwriting: if too aggressive, greater-than-expected claims could compromise earnings; if too conservative, they will be outpriced by competitors and lose market share.</p></div></div></div> <span class="heading-toc" id="toc-commercial-banking-underwriters"></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"> Commercial Banking Underwriters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Commercial banking underwriters assess the creditworthiness of borrowers to decide whether the individual or entity should receive a loan or funding. The borrower is typically charged a fee to cover the lender's risk if the borrower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">defaults</a> on the loan. </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-medical-stop-loss-underwriters"></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"> Medical Stop-Loss Underwriters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Medical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aggregate-stop-loss-insurance.asp" rel="noopener noreferrer">stop-loss</a> underwriters assess risk based on the individual health conditions of self-insured employer groups. Stop-loss insurance protects groups that pay their own health insurance claims for employees rather than paying premiums to transfer all of the risk to an insurance carrier. </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"> Self-insured entities pay medical and prescription drug claims plus administration fees out of company reserves and assume the risk posed by the potential for large or catastrophic losses such as organ transplants or cancer treatments. Underwriters for self-insured entities must thus assess the individual medical profiles of employees. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/020915/how-do-i-become-underwriter.asp" rel="noopener noreferrer">Underwriters</a> also evaluate the risk of the group as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Fast Fact: Insurance underwriting is a large and profitable industry; according to Business Insider, Warren Buffett used insurance and reinsurance premiums to fund investments at Berkshire Hathaway.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div></div>

## What Is an Insurance Underwriter? Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring people and assets. Insurance underwriters establish pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay a potential risk. [Underwriters](https://www.investopedia.com/terms/u/underwriter.asp) use specialized software and actuarial data to determine the likelihood and magnitude of a risk. ### Key Takeaways * Insurance underwriters evaluate the risks involved in insuring people and assets and establish pricing for a risk. * Underwriters in investment banking guarantee a minimum share price for a company planning an IPO (initial public offering). * Commercial banking underwriters assess the risk of lending to individuals or lenders and charge interest to cover the cost of assuming that risk. * Insurance underwriters assume the risk of a future event and charge premiums in return for a promise to reimburse the client an amount in the event damage or occurs. ![Insurance Underwriter]() :max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png) Investopedia / Theresa Chiechi ## Investment Banking Underwriters The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO), an amount which is theoretically provided by investors as the source of capital. The bank acts only as the "facilitator" of the transaction, but they have still taken on an "underwriting risk" by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company's shares. ## Insurance Underwriters Insurance underwriters assume the risk involved in a contract with an individual or entity. For example, an underwriter may assume the risk of the cost of a fire in a home in return for a premium or a monthly payment. Evaluating an insurer's risk before the policy period and at the time of renewal is a vital function of an underwriter. For example, homeowners insurance underwriters must consider numerous variables when rating a homeowner's policy. Property and casualty insurance agents act as field underwriters, initially inspecting homes or rental properties for conditions such as deteriorated roofs or foundations that pose a risk to the carrier. The agents report hazards to the home underwriter. The home underwriter additionally considers hazards that may trigger a liability claim. Hazards include unfenced swimming pools, cracked sidewalks, and the presence of dead or dying trees on the property. These and other hazards represent risks to an insurance company, which may eventually be required to pay liability claims in the event of accidental drownings or slip and fall injuries. Inputting a number of factors, which often includes an applicant's [credit rating](https://www.investopedia.com/terms/c/creditrating.asp), homeowner insurance underwriters employ an algorithmic rating method to pricing. The system generates an appropriate premium based on the platform’s interpretation and the combination of all data reported from the observations of the field underwriter. The lead underwriter also subjectively considers answers submitted by the applicant on the policy application when arriving at a premium. ### Insurance companies must balance their approach to underwriting: if too aggressive, greater-than-expected claims could compromise earnings; if too conservative, they will be outpriced by competitors and lose market share. ## Commercial Banking Underwriters Commercial banking underwriters assess the creditworthiness of borrowers to decide whether the individual or entity should receive a loan or funding. The borrower is typically charged a fee to cover the lender's risk if the borrower [defaults](https://www.investopedia.com/terms/d/default2.asp) on the loan. ## Medical Stop-Loss Underwriters Medical [stop-loss](https://www.investopedia.com/terms/a/aggregate-stop-loss-insurance.asp) underwriters assess risk based on the individual health conditions of self-insured employer groups. Stop-loss insurance protects groups that pay their own health insurance claims for employees rather than paying premiums to transfer all of the risk to an insurance carrier. Self-insured entities pay medical and prescription drug claims plus administration fees out of company reserves and assume the risk posed by the potential for large or catastrophic losses such as organ transplants or cancer treatments. Underwriters for self-insured entities must thus assess the individual medical profiles of employees. [Underwriters](https://www.investopedia.com/ask/answers/020915/how-do-i-become-underwriter.asp) also evaluate the risk of the group as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer. ### Fast Fact: Insurance underwriting is a large and profitable industry; according to Business Insider, Warren Buffett used insurance and reinsurance premiums to fund investments at Berkshire Hathaway.

What Is an Insurance Underwriter? Insurance underwriters are professionals who evaluate and analyze the risks involved in insuring people and assets. Insurance underwriters establish pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay a potential risk. Underwriters use specialized software and actuarial data to determine the likelihood and magnitude of a risk. Key Takeaways Insurance underwriters evaluate the risks involved in insuring people and assets and establish pricing for a risk. Underwriters in investment banking guarantee a minimum share price for a company planning an IPO (initial public offering).Commercial banking underwriters assess the risk of lending to individuals or lenders and charge interest to cover the cost of assuming that risk.Insurance underwriters assume the risk of a future event and charge premiums in return for a promise to reimburse the client an amount in the event damage or occurs. Investopedia / Theresa Chiechi Investment Banking Underwriters The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an initial public offering (IPO), an amount which is theoretically provided by investors as the source of capital. The bank acts only as the "facilitator" of the transaction, but they have still taken on an "underwriting risk" by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company's shares. Insurance Underwriters Insurance underwriters assume the risk involved in a contract with an individual or entity. For example, an underwriter may assume the risk of the cost of a fire in a home in return for a premium or a monthly payment. Evaluating an insurer's risk before the policy period and at the time of renewal is a vital function of an underwriter. For example, homeowners insurance underwriters must consider numerous variables when rating a homeowner's policy. Property and casualty insurance agents act as field underwriters, initially inspecting homes or rental properties for conditions such as deteriorated roofs or foundations that pose a risk to the carrier. The agents report hazards to the home underwriter. The home underwriter additionally considers hazards that may trigger a liability claim. Hazards include unfenced swimming pools, cracked sidewalks, and the presence of dead or dying trees on the property. These and other hazards represent risks to an insurance company, which may eventually be required to pay liability claims in the event of accidental drownings or slip and fall injuries. Inputting a number of factors, which often includes an applicant's credit rating, homeowner insurance underwriters employ an algorithmic rating method to pricing. The system generates an appropriate premium based on the platform’s interpretation and the combination of all data reported from the observations of the field underwriter. The lead underwriter also subjectively considers answers submitted by the applicant on the policy application when arriving at a premium. Insurance companies must balance their approach to underwriting: if too aggressive, greater-than-expected claims could compromise earnings; if too conservative, they will be outpriced by competitors and lose market share. Commercial Banking Underwriters Commercial banking underwriters assess the creditworthiness of borrowers to decide whether the individual or entity should receive a loan or funding. The borrower is typically charged a fee to cover the lender's risk if the borrower defaults on the loan. Medical Stop-Loss Underwriters Medical stop-loss underwriters assess risk based on the individual health conditions of self-insured employer groups. Stop-loss insurance protects groups that pay their own health insurance claims for employees rather than paying premiums to transfer all of the risk to an insurance carrier. Self-insured entities pay medical and prescription drug claims plus administration fees out of company reserves and assume the risk posed by the potential for large or catastrophic losses such as organ transplants or cancer treatments. Underwriters for self-insured entities must thus assess the individual medical profiles of employees. Underwriters also evaluate the risk of the group as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer. Fast Fact: Insurance underwriting is a large and profitable industry; according to Business Insider, Warren Buffett used insurance and reinsurance premiums to fund investments at Berkshire Hathaway.

https://www.investopedia.com/ask/answers/short-sell-etf-not-index-fund/

Why You Can Short-Sell An ETF But Not An Index Fund

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 ability to short-sell an index exchange-traded fund (ETF) illustrates a key difference between ETFs and mutual funds. Shares in an ETF are bought and sold on a public exchange, as the name implies. Shares in a mutual fund are bought or sold by the financial company that manages 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"> For that reason, there's no way to short-sell a mutual fund. </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 two types of investment share many characteristics. Both mutual funds and ETFs consist of a pool of money from many investors that is invested in a selection of stocks or other assets sold in the form of shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> An index fund, whether it's a mutual fund or an ETF, invests in the stocks that are listed in a particular stock index, matching its weighting as closely as possible. It is a passive investment, meaning that its contents change only when the index is updated. </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 investor's return should be virtually identical to the return of the index, minus the costs charged by the sponsoring company. ETFs are known for their low fees, but it should be noted that index mutual fund fees have been substantially lowered in order to compete. </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-whatyouneedtoknow" 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_1-0">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 mutual funds and index ETFs both are comprised of shares in the stocks that make up a particular index, whether it's the S&amp;P 500 Index or a specialized index such as the Vanguard Energy ETF.</li><li>Like any mutual fund, an index mutual fund is bought and sold directly by the company that manages it. Shares are sold only after the market closes.</li><li>Like any ETF, an index ETF can be bought and sold on an exchange.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-etf-index-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Understanding ETF Index Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When you invest in an index fund, you are buying shares in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> composed of stocks that are listed in a specific index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> This is a passive investment. There is no team of financial professionals behind the scenes deciding when to buy and sell shares. The contents of the fund, and its return to investors, are identical to those of the index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> You can buy index funds for numerous different indices, including the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&amp;P 500</a>, 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</a>, and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell2000.asp">Russell 2000</a>. Or you can buy index funds for specific industries or sectors, such as the energy industry, technology, or gold. </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"> Index funds reduce the risk of losses by spreading the investor's money equally among many companies. Few investors could buy equal amounts of shares in all 500 of the biggest U.S. companies but an S&amp;P 500 Index fund gives that investor precisely that level of diversification. </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-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">The Biggest ETFs</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Two of the three biggest ETFs by assets under management are S&amp;P 500 Index Funds. They are SPDR S&amp;P 500 ETF Trust and iShares Core S&amp;P 500 ETF In third place is the Vanguard Total Stock Market ETF.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div> <span class="heading-toc" id="toc-short-selling-an-etf"></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"> Short-Selling an ETF </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The fact that shares in ETFs are traded on a public exchange gives them many of the same attributes that stock shares have. That includes short-selling. </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"> Traders engage in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">shorting</a> when they borrow stock, usually from a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">broker</a> in order to then sell it to another party. Short sellers are betting that the stock's price will go down so that they can pay less money to buy it back and then return it to the party that lent it. </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 a successful short sale, the short seller profits from the difference between the price at which the security was sold and the lower price at which it was bought back. </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"> An index mutual fund, or any mutual fund for that matter, cannot be short-sold because its shares don't trade on the open market. They are bought from the company that issued it, and must be sold back to that company.<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-other-trading-strategies"></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"> Other Trading Strategies </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Investors are able to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/163.asp">short sell an ETF</a>, buy it on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin.asp">margin</a>, and trade it. In other words, ETFs are traded and exploited like any other stock on an exchange. </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"> Index ETF prices fluctuate throughout the trading day as the index that it is based upon rises or falls in value. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> However, an ETF's price also depends on the forces of supply and demand. For this reason, an ETF might not track the market in perfect unison. Most come very close.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-whats-the-difference-between-an-index-etf-and-an-index-mutual-fund"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's the Difference Between an Index ETF and an Index Mutual Fund?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Both are pools of money that are invested in stocks or other assets that are listed on a specific index. The fund mimics the index, and its performance should be identical.</p><p>There are a few differences:</p><ul><li>Index ETFs were known for having much lower expense charges and fees than mutual funds. This has changed, with many mutual fund fees being drastically reduced in order to compete with comparable ETFs. Before you invest in either, check the fund's "expense ratio."</li><li>ETFs are traded on the open market. Mutual funds are bought and sold directly through the company that manages them.</li><li>Some ETFs have tax advantages over some mutual funds because they trade less frequently, realizing capital gains less often. ETFs and mutual funds are treated identically by the IRS, so any taxable distributions from an index ETF and an index mutual fund should be virtually identical.</li></ul></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-are-all-etfs-index-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are All ETFs Index ETFs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. Although the biggest and best-known ETFs track the major stock indexes, an enormous variety of ETFs is available, and some use benchmarks other than an index.</p><p>Broadly speaking, there are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-etfs-for-january-2024-8415863">ETFs that invest</a> in stocks, bonds, U.S. Treasury notes, commodities, and currencies. As of January 2024, there are ETFs that invest in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/understanding-cryptocurrency-etfs/">cryptocurrencies</a>.</p><p>There also are <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector-etf.asp">sector ETFs</a> that invest in specific industries such as healthcare, energy, or real estate.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-what-is-a-spdr"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a SPDR?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>SPDR is an acronym for Standard &amp; Poor's Depository Receipt. All of the ETFs with SPDR in their names are managed by State Street Global Advisors. The best-known is the SPDR S&amp;P 500 ETF Trust (SPY). It was the first ETF, issued in 1993, and it remains the world's largest.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> From the casual investor's viewpoint, there is little difference between an index ETF and a mutual fund ETF. The ETF might have lower fees, but that has changed, so check the expense ratio before you choose. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> If you're an active investor, you're probably not investing in index ETFs. They are passively-managed investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Nevertheless, ETFs trade just like stocks and you can buy, sell, or even short them just like stock shares. </p></div>

The ability to short-sell an index exchange-traded fund (ETF) illustrates a key difference between ETFs and mutual funds. Shares in an ETF are bought and sold on a public exchange, as the name implies. Shares in a mutual fund are bought or sold by the financial company that manages it. For that reason, there's no way to short-sell a mutual fund. The two types of investment share many characteristics. Both mutual funds and ETFs consist of a pool of money from many investors that is invested in a selection of stocks or other assets sold in the form of shares. An index fund, whether it's a mutual fund or an ETF, invests in the stocks that are listed in a particular stock index, matching its weighting as closely as possible. It is a passive investment, meaning that its contents change only when the index is updated. The investor's return should be virtually identical to the return of the index, minus the costs charged by the sponsoring company. ETFs are known for their low fees, but it should be noted that index mutual fund fees have been substantially lowered in order to compete. ### Key Takeaways * Index mutual funds and index ETFs both are comprised of shares in the stocks that make up a particular index, whether it's the S&P 500 Index or a specialized index such as the Vanguard Energy ETF. * Like any mutual fund, an index mutual fund is bought and sold directly by the company that manages it. Shares are sold only after the market closes. * Like any ETF, an index ETF can be bought and sold on an exchange. ## Understanding ETF Index Funds When you invest in an index fund, you are buying shares in a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) composed of stocks that are listed in a specific index. This is a passive investment. There is no team of financial professionals behind the scenes deciding when to buy and sell shares. The contents of the fund, and its return to investors, are identical to those of the index. You can buy index funds for numerous different indices, including the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp), the [Dow Jones Industrial Average](https://www.investopedia.com/terms/d/djia.asp), and the [Russell 2000](https://www.investopedia.com/terms/r/russell2000.asp). Or you can buy index funds for specific industries or sectors, such as the energy industry, technology, or gold. Index funds reduce the risk of losses by spreading the investor's money equally among many companies. Few investors could buy equal amounts of shares in all 500 of the biggest U.S. companies but an S&P 500 Index fund gives that investor precisely that level of diversification. ### The Biggest ETFs Two of the three biggest ETFs by assets under management are S&P 500 Index Funds. They are SPDR S&P 500 ETF Trust and iShares Core S&P 500 ETF In third place is the Vanguard Total Stock Market ETF. ## Short-Selling an ETF The fact that shares in ETFs are traded on a public exchange gives them many of the same attributes that stock shares have. That includes short-selling. Traders engage in [shorting](https://www.investopedia.com/terms/s/shortselling.asp) when they borrow stock, usually from a [broker](https://www.investopedia.com/terms/b/broker.asp) in order to then sell it to another party. Short sellers are betting that the stock's price will go down so that they can pay less money to buy it back and then return it to the party that lent it. In a successful short sale, the short seller profits from the difference between the price at which the security was sold and the lower price at which it was bought back. An index mutual fund, or any mutual fund for that matter, cannot be short-sold because its shares don't trade on the open market. They are bought from the company that issued it, and must be sold back to that company. ## Other Trading Strategies Investors are able to [short sell an ETF](https://www.investopedia.com/ask/answers/163.asp), buy it on [margin](https://www.investopedia.com/terms/m/margin.asp), and trade it. In other words, ETFs are traded and exploited like any other stock on an exchange. Index ETF prices fluctuate throughout the trading day as the index that it is based upon rises or falls in value. However, an ETF's price also depends on the forces of supply and demand. For this reason, an ETF might not track the market in perfect unison. Most come very close. ## What's the Difference Between an Index ETF and an Index Mutual Fund? Both are pools of money that are invested in stocks or other assets that are listed on a specific index. The fund mimics the index, and its performance should be identical. There are a few differences: * Index ETFs were known for having much lower expense charges and fees than mutual funds. This has changed, with many mutual fund fees being drastically reduced in order to compete with comparable ETFs. Before you invest in either, check the fund's "expense ratio." * ETFs are traded on the open market. Mutual funds are bought and sold directly through the company that manages them. * Some ETFs have tax advantages over some mutual funds because they trade less frequently, realizing capital gains less often. ETFs and mutual funds are treated identically by the IRS, so any taxable distributions from an index ETF and an index mutual fund should be virtually identical. ## Are All ETFs Index ETFs? No. Although the biggest and best-known ETFs track the major stock indexes, an enormous variety of ETFs is available, and some use benchmarks other than an index. Broadly speaking, there are [ETFs that invest](https://www.investopedia.com/top-etfs-for-january-2024-8415863) in stocks, bonds, U.S. Treasury notes, commodities, and currencies. As of January 2024, there are ETFs that invest in [cryptocurrencies](https://www.investopedia.com/investing/understanding-cryptocurrency-etfs/). There also are [sector ETFs](https://www.investopedia.com/terms/s/sector-etf.asp) that invest in specific industries such as healthcare, energy, or real estate. ## What Is a SPDR? SPDR is an acronym for Standard & Poor's Depository Receipt. All of the ETFs with SPDR in their names are managed by State Street Global Advisors. The best-known is the SPDR S&P 500 ETF Trust (SPY). It was the first ETF, issued in 1993, and it remains the world's largest. ## The Bottom Line From the casual investor's viewpoint, there is little difference between an index ETF and a mutual fund ETF. The ETF might have lower fees, but that has changed, so check the expense ratio before you choose. If you're an active investor, you're probably not investing in index ETFs. They are passively-managed investments. Nevertheless, ETFs trade just like stocks and you can buy, sell, or even short them just like stock shares.

The ability to short-sell an index exchange-traded fund (ETF) illustrates a key difference between ETFs and mutual funds. Shares in an ETF are bought and sold on a public exchange, as the name implies. Shares in a mutual fund are bought or sold by the financial company that manages it. For that reason, there's no way to short-sell a mutual fund. The two types of investment share many characteristics. Both mutual funds and ETFs consist of a pool of money from many investors that is invested in a selection of stocks or other assets sold in the form of shares. An index fund, whether it's a mutual fund or an ETF, invests in the stocks that are listed in a particular stock index, matching its weighting as closely as possible. It is a passive investment, meaning that its contents change only when the index is updated. The investor's return should be virtually identical to the return of the index, minus the costs charged by the sponsoring company. ETFs are known for their low fees, but it should be noted that index mutual fund fees have been substantially lowered in order to compete. Key Takeaways Index mutual funds and index ETFs both are comprised of shares in the stocks that make up a particular index, whether it's the S&P 500 Index or a specialized index such as the Vanguard Energy ETF.Like any mutual fund, an index mutual fund is bought and sold directly by the company that manages it. Shares are sold only after the market closes.Like any ETF, an index ETF can be bought and sold on an exchange. Understanding ETF Index Funds When you invest in an index fund, you are buying shares in a portfolio composed of stocks that are listed in a specific index. This is a passive investment. There is no team of financial professionals behind the scenes deciding when to buy and sell shares. The contents of the fund, and its return to investors, are identical to those of the index. You can buy index funds for numerous different indices, including the S&P 500, the Dow Jones Industrial Average, and the Russell 2000. Or you can buy index funds for specific industries or sectors, such as the energy industry, technology, or gold. Index funds reduce the risk of losses by spreading the investor's money equally among many companies. Few investors could buy equal amounts of shares in all 500 of the biggest U.S. companies but an S&P 500 Index fund gives that investor precisely that level of diversification. The Biggest ETFs Two of the three biggest ETFs by assets under management are S&P 500 Index Funds. They are SPDR S&P 500 ETF Trust and iShares Core S&P 500 ETF In third place is the Vanguard Total Stock Market ETF. Short-Selling an ETF The fact that shares in ETFs are traded on a public exchange gives them many of the same attributes that stock shares have. That includes short-selling. Traders engage in shorting when they borrow stock, usually from a broker in order to then sell it to another party. Short sellers are betting that the stock's price will go down so that they can pay less money to buy it back and then return it to the party that lent it. In a successful short sale, the short seller profits from the difference between the price at which the security was sold and the lower price at which it was bought back. An index mutual fund, or any mutual fund for that matter, cannot be short-sold because its shares don't trade on the open market. They are bought from the company that issued it, and must be sold back to that company. Other Trading Strategies Investors are able to short sell an ETF, buy it on margin, and trade it. In other words, ETFs are traded and exploited like any other stock on an exchange. Index ETF prices fluctuate throughout the trading day as the index that it is based upon rises or falls in value. However, an ETF's price also depends on the forces of supply and demand. For this reason, an ETF might not track the market in perfect unison. Most come very close. What's the Difference Between an Index ETF and an Index Mutual Fund? Both are pools of money that are invested in stocks or other assets that are listed on a specific index. The fund mimics the index, and its performance should be identical.There are a few differences:Index ETFs were known for having much lower expense charges and fees than mutual funds. This has changed, with many mutual fund fees being drastically reduced in order to compete with comparable ETFs. Before you invest in either, check the fund's "expense ratio."ETFs are traded on the open market. Mutual funds are bought and sold directly through the company that manages them.Some ETFs have tax advantages over some mutual funds because they trade less frequently, realizing capital gains less often. ETFs and mutual funds are treated identically by the IRS, so any taxable distributions from an index ETF and an index mutual fund should be virtually identical. Are All ETFs Index ETFs? No. Although the biggest and best-known ETFs track the major stock indexes, an enormous variety of ETFs is available, and some use benchmarks other than an index.Broadly speaking, there are ETFs that invest in stocks, bonds, U.S. Treasury notes, commodities, and currencies. As of January 2024, there are ETFs that invest in cryptocurrencies.There also are sector ETFs that invest in specific industries such as healthcare, energy, or real estate. What Is a SPDR? SPDR is an acronym for Standard & Poor's Depository Receipt. All of the ETFs with SPDR in their names are managed by State Street Global Advisors. The best-known is the SPDR S&P 500 ETF Trust (SPY). It was the first ETF, issued in 1993, and it remains the world's largest. The Bottom Line From the casual investor's viewpoint, there is little difference between an index ETF and a mutual fund ETF. The ETF might have lower fees, but that has changed, so check the expense ratio before you choose. If you're an active investor, you're probably not investing in index ETFs. They are passively-managed investments. Nevertheless, ETFs trade just like stocks and you can buy, sell, or even short them just like stock shares.

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

CNN Effect: What It Means and Impact on Economy

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-cnn-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 CNN Effect? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The CNN effect is a theory that 24-hour news networks, such as CNN, influence the general political and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-conditions.asp">economic climate</a>. Because media outlets provide ongoing coverage of a particular event or subject matter, they can narrowly focus viewer attention, potentially for prolonged periods of time. This increased attention can affect the market values of companies and sectors that find themselves in focus. </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 CNN effect demonstrates that real-time coverage of breaking news and world events can prompt a stronger reaction from investors and consumers than would have occurred otherwise.</li><li>This can cause overreactions in the market, but the same constant supply of information may have also helped the markets in many ways.</li><li>Whether the CNN effect is economically helpful or harmful depends on how rationally consumers use the information provided and how true and relevant the information is.</li><li>The CNN effect is a specific instance of a media effect, and the cable news channel it is named for has since been eclipsed by the Internet and social media as the key source for real-time information.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-the-cnn-effect-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How the CNN Effect Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The CNN effect can cause individuals and organizations to react more aggressively toward the subject matter being examined. For example, regular coverage of turmoil in the banking sector may result in investors withdrawing from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_sector.asp">bank stocks</a> or even moving their deposits out of banks being mentioned. This in turn would heighten the turmoil, perhaps feeding into the news cycle again and potentially triggering a wider financial crisis. </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 effect that media outlets have on consumer and investor behavior has been examined since the CNN effect came to prominence during the 1980s. For example, by focusing on natural disasters, news outlets may influence consumers, investors, and even policymakers to react more drastically to what is unfolding. This can manifest as a rush for basic supplies in the region affected and a market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sell-off.asp">sell-off</a> of stocks that have exposure to that region and its infrastructure.<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"> While this tendency can be viewed as a criticism, there is a flipside: media outlets also shed light on the inner workings of governments and businesses, which may increase their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountability.asp">accountability</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-economics-and-the-cnn-effect"></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"> Economics and the CNN Effect </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> One of the key assumptions in microeconomic models of competitive markets and theories like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp">efficient markets hypothesis (EMH)</a> is that all relevant information about market conditions and prices is immediately available at low or zero cost to all market participants.<span class="ql-inline-citation" data-cite="1"></span> However, it is generally understood that this is not the case in real-world markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Information is costly and takes time to obtain, and information asymmetries are both abundant and of economic significance.<span class="ql-inline-citation" data-cite="3"></span> In this regard, lowering the cost of information and speeding its dissemination has the potential to make markets more efficient to the extent that market participants are rational and cognitively capable of using that information, and that the information is true. </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 also means that the economic impact of the CNN effect could cut both ways. If the news is true, but news consumers are irrational, boundedly rational, or cognitively incapable of using the new information, then supplying them with ever greater quantities of information at a faster rate may not improve the quality of their decisions and resulting market outcomes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If, on the other hand, news consumers are rational, but the information supplied by outlets like CNN is not true, then market participants reacting to false signals obviously may lead to poor market outcomes. If news consumers are not rational and the news is not true (or of unknown credibility), then it may not impact the functioning of markets for better or worse, though it could produce disastrous results. This would at best mean that any economic resources used in the production and dissemination of news are essentially wasted (aside from the value to consumers of consuming news as pure entertainment). </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-cnn-effect-post-television"></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"> CNN Effect Post-Television </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The CNN effect is really about the speed at which cable news is able to spread information and how that news seemingly made events far away matter to people who otherwise would not have noticed. Prior to cable news, well-informed people would still experience a delay in information as a news story from Asia, for example, took time to appear in the newspaper. This information lag actually helped to prevent stock <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/panicselling.asp">panics</a> based on international events, as there was every reason to believe that the situation had changed since the article was written. </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"> Cable news came along and offered near real-time footage and further compounded this rapid reporting with a large dose of sensationalism. A typhoon in Asia could be seen making landfall, and markets in North America could react more rapidly to fears of floods or the perceived severity of power outages and the impact on companies in the region.  </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"> However, new developments in technology, including smartphones, meant <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-media.asp">social media</a> soon began to rise. Its immediacy, combined with its accessibility, helped it overtake cable news channels as a dominant source of information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Nearly a third of Americans get new on Facebook on a regular basis, according to a 2021 study by Pew Reasearch Center.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Now cable news channels spend time monitoring the same social media channels that regular people follow because they provide a torrent of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-data.asp">real-time data</a> from all over the world. </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 CNN effect—the theory that real-time information and prolonged focus on a particular event has a market impact—is still valid, but it may now be accurate to rename it since much of the real-time information is spread over social media platforms, such as X (formerly Twitter). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-how-do-you-define-the-cnn-effect"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Define the CNN Effect?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The CNN effect is the theory that real-time news coverage of global events, such as what developed with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062315/5-reasons-cable-tv-industry-dying.asp">cable news channels</a> and now is evident on social media, has a significant impact on consumers and investors as well as on foreign policy.</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-when-did-the-cnn-effect-start"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Did the CNN Effect Start?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The concept of the CNN effect arose during the 1990s. Numerous media studies scholars analyzed this effect throughout the mid- to late 1990s and into the 2000s.<span class="ql-inline-citation" data-cite="5"></span> CNN was launched as a cable news network in 1980.<span class="ql-inline-citation" data-cite="6"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-why-is-the-cnn-effect-relevant"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is the CNN Effect Relevant?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The CNN effect is relevant because it illustrates that the speed with which information is relayed to market participants, and the subject and reliability of that information, can influence market activity. The CNN effect also underpins an understanding of how social media (and future technologies) may shape market activity, foreign policy, and humanitarian efforts.</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"> The CNN effect is a way to describe how the 24/7 news cycle, especially as it developed during the rise of cable news programs, influences market activity. Understanding how media attention might shape public perception or reaction can help you evaluate market changes more critically and make your own financial decisions more rationally. </p></div>

## What Is the CNN Effect? The CNN effect is a theory that 24-hour news networks, such as CNN, influence the general political and [economic climate](https://www.investopedia.com/terms/e/economic-conditions.asp). Because media outlets provide ongoing coverage of a particular event or subject matter, they can narrowly focus viewer attention, potentially for prolonged periods of time. This increased attention can affect the market values of companies and sectors that find themselves in focus. ### Key Takeaways * The CNN effect demonstrates that real-time coverage of breaking news and world events can prompt a stronger reaction from investors and consumers than would have occurred otherwise. * This can cause overreactions in the market, but the same constant supply of information may have also helped the markets in many ways. * Whether the CNN effect is economically helpful or harmful depends on how rationally consumers use the information provided and how true and relevant the information is. * The CNN effect is a specific instance of a media effect, and the cable news channel it is named for has since been eclipsed by the Internet and social media as the key source for real-time information. ## How the CNN Effect Works The CNN effect can cause individuals and organizations to react more aggressively toward the subject matter being examined. For example, regular coverage of turmoil in the banking sector may result in investors withdrawing from [bank stocks](https://www.investopedia.com/terms/f/financial_sector.asp) or even moving their deposits out of banks being mentioned. This in turn would heighten the turmoil, perhaps feeding into the news cycle again and potentially triggering a wider financial crisis. The effect that media outlets have on consumer and investor behavior has been examined since the CNN effect came to prominence during the 1980s. For example, by focusing on natural disasters, news outlets may influence consumers, investors, and even policymakers to react more drastically to what is unfolding. This can manifest as a rush for basic supplies in the region affected and a market [sell-off](https://www.investopedia.com/terms/s/sell-off.asp) of stocks that have exposure to that region and its infrastructure. While this tendency can be viewed as a criticism, there is a flipside: media outlets also shed light on the inner workings of governments and businesses, which may increase their [accountability](https://www.investopedia.com/terms/a/accountability.asp). ## Economics and the CNN Effect One of the key assumptions in microeconomic models of competitive markets and theories like the [efficient markets hypothesis (EMH)](https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp) is that all relevant information about market conditions and prices is immediately available at low or zero cost to all market participants. However, it is generally understood that this is not the case in real-world markets. Information is costly and takes time to obtain, and information asymmetries are both abundant and of economic significance. In this regard, lowering the cost of information and speeding its dissemination has the potential to make markets more efficient to the extent that market participants are rational and cognitively capable of using that information, and that the information is true. This also means that the economic impact of the CNN effect could cut both ways. If the news is true, but news consumers are irrational, boundedly rational, or cognitively incapable of using the new information, then supplying them with ever greater quantities of information at a faster rate may not improve the quality of their decisions and resulting market outcomes. If, on the other hand, news consumers are rational, but the information supplied by outlets like CNN is not true, then market participants reacting to false signals obviously may lead to poor market outcomes. If news consumers are not rational and the news is not true (or of unknown credibility), then it may not impact the functioning of markets for better or worse, though it could produce disastrous results. This would at best mean that any economic resources used in the production and dissemination of news are essentially wasted (aside from the value to consumers of consuming news as pure entertainment). ## CNN Effect Post-Television The CNN effect is really about the speed at which cable news is able to spread information and how that news seemingly made events far away matter to people who otherwise would not have noticed. Prior to cable news, well-informed people would still experience a delay in information as a news story from Asia, for example, took time to appear in the newspaper. This information lag actually helped to prevent stock [panics](https://www.investopedia.com/terms/p/panicselling.asp) based on international events, as there was every reason to believe that the situation had changed since the article was written. Cable news came along and offered near real-time footage and further compounded this rapid reporting with a large dose of sensationalism. A typhoon in Asia could be seen making landfall, and markets in North America could react more rapidly to fears of floods or the perceived severity of power outages and the impact on companies in the region.  However, new developments in technology, including smartphones, meant [social media](https://www.investopedia.com/terms/s/social-media.asp) soon began to rise. Its immediacy, combined with its accessibility, helped it overtake cable news channels as a dominant source of information. ### Nearly a third of Americans get new on Facebook on a regular basis, according to a 2021 study by Pew Reasearch Center. Now cable news channels spend time monitoring the same social media channels that regular people follow because they provide a torrent of [real-time data](https://www.investopedia.com/terms/s/social-data.asp) from all over the world. The CNN effect—the theory that real-time information and prolonged focus on a particular event has a market impact—is still valid, but it may now be accurate to rename it since much of the real-time information is spread over social media platforms, such as X (formerly Twitter). ## How Do You Define the CNN Effect? The CNN effect is the theory that real-time news coverage of global events, such as what developed with [cable news channels](https://www.investopedia.com/articles/personal-finance/062315/5-reasons-cable-tv-industry-dying.asp) and now is evident on social media, has a significant impact on consumers and investors as well as on foreign policy. ## When Did the CNN Effect Start? The concept of the CNN effect arose during the 1990s. Numerous media studies scholars analyzed this effect throughout the mid- to late 1990s and into the 2000s. CNN was launched as a cable news network in 1980. ## Why Is the CNN Effect Relevant? The CNN effect is relevant because it illustrates that the speed with which information is relayed to market participants, and the subject and reliability of that information, can influence market activity. The CNN effect also underpins an understanding of how social media (and future technologies) may shape market activity, foreign policy, and humanitarian efforts. ## The Bottom Line The CNN effect is a way to describe how the 24/7 news cycle, especially as it developed during the rise of cable news programs, influences market activity. Understanding how media attention might shape public perception or reaction can help you evaluate market changes more critically and make your own financial decisions more rationally.

What Is the CNN Effect? The CNN effect is a theory that 24-hour news networks, such as CNN, influence the general political and economic climate. Because media outlets provide ongoing coverage of a particular event or subject matter, they can narrowly focus viewer attention, potentially for prolonged periods of time. This increased attention can affect the market values of companies and sectors that find themselves in focus. Key Takeaways The CNN effect demonstrates that real-time coverage of breaking news and world events can prompt a stronger reaction from investors and consumers than would have occurred otherwise.This can cause overreactions in the market, but the same constant supply of information may have also helped the markets in many ways.Whether the CNN effect is economically helpful or harmful depends on how rationally consumers use the information provided and how true and relevant the information is.The CNN effect is a specific instance of a media effect, and the cable news channel it is named for has since been eclipsed by the Internet and social media as the key source for real-time information. How the CNN Effect Works The CNN effect can cause individuals and organizations to react more aggressively toward the subject matter being examined. For example, regular coverage of turmoil in the banking sector may result in investors withdrawing from bank stocks or even moving their deposits out of banks being mentioned. This in turn would heighten the turmoil, perhaps feeding into the news cycle again and potentially triggering a wider financial crisis. The effect that media outlets have on consumer and investor behavior has been examined since the CNN effect came to prominence during the 1980s. For example, by focusing on natural disasters, news outlets may influence consumers, investors, and even policymakers to react more drastically to what is unfolding. This can manifest as a rush for basic supplies in the region affected and a market sell-off of stocks that have exposure to that region and its infrastructure. While this tendency can be viewed as a criticism, there is a flipside: media outlets also shed light on the inner workings of governments and businesses, which may increase their accountability. Economics and the CNN Effect One of the key assumptions in microeconomic models of competitive markets and theories like the efficient markets hypothesis (EMH) is that all relevant information about market conditions and prices is immediately available at low or zero cost to all market participants. However, it is generally understood that this is not the case in real-world markets. Information is costly and takes time to obtain, and information asymmetries are both abundant and of economic significance. In this regard, lowering the cost of information and speeding its dissemination has the potential to make markets more efficient to the extent that market participants are rational and cognitively capable of using that information, and that the information is true. This also means that the economic impact of the CNN effect could cut both ways. If the news is true, but news consumers are irrational, boundedly rational, or cognitively incapable of using the new information, then supplying them with ever greater quantities of information at a faster rate may not improve the quality of their decisions and resulting market outcomes. If, on the other hand, news consumers are rational, but the information supplied by outlets like CNN is not true, then market participants reacting to false signals obviously may lead to poor market outcomes. If news consumers are not rational and the news is not true (or of unknown credibility), then it may not impact the functioning of markets for better or worse, though it could produce disastrous results. This would at best mean that any economic resources used in the production and dissemination of news are essentially wasted (aside from the value to consumers of consuming news as pure entertainment). CNN Effect Post-Television The CNN effect is really about the speed at which cable news is able to spread information and how that news seemingly made events far away matter to people who otherwise would not have noticed. Prior to cable news, well-informed people would still experience a delay in information as a news story from Asia, for example, took time to appear in the newspaper. This information lag actually helped to prevent stock panics based on international events, as there was every reason to believe that the situation had changed since the article was written. Cable news came along and offered near real-time footage and further compounded this rapid reporting with a large dose of sensationalism. A typhoon in Asia could be seen making landfall, and markets in North America could react more rapidly to fears of floods or the perceived severity of power outages and the impact on companies in the region.  However, new developments in technology, including smartphones, meant social media soon began to rise. Its immediacy, combined with its accessibility, helped it overtake cable news channels as a dominant source of information. Nearly a third of Americans get new on Facebook on a regular basis, according to a 2021 study by Pew Reasearch Center. Now cable news channels spend time monitoring the same social media channels that regular people follow because they provide a torrent of real-time data from all over the world. The CNN effect—the theory that real-time information and prolonged focus on a particular event has a market impact—is still valid, but it may now be accurate to rename it since much of the real-time information is spread over social media platforms, such as X (formerly Twitter). How Do You Define the CNN Effect? The CNN effect is the theory that real-time news coverage of global events, such as what developed with cable news channels and now is evident on social media, has a significant impact on consumers and investors as well as on foreign policy. When Did the CNN Effect Start? The concept of the CNN effect arose during the 1990s. Numerous media studies scholars analyzed this effect throughout the mid- to late 1990s and into the 2000s. CNN was launched as a cable news network in 1980. Why Is the CNN Effect Relevant? The CNN effect is relevant because it illustrates that the speed with which information is relayed to market participants, and the subject and reliability of that information, can influence market activity. The CNN effect also underpins an understanding of how social media (and future technologies) may shape market activity, foreign policy, and humanitarian efforts. The Bottom Line The CNN effect is a way to describe how the 24/7 news cycle, especially as it developed during the rise of cable news programs, influences market activity. Understanding how media attention might shape public perception or reaction can help you evaluate market changes more critically and make your own financial decisions more rationally.

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

Average Directional Index (ADX): Definition and Formula

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-average-directional-index-adx"></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 Average Directional Index (ADX)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The average directional index (ADX) is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalindicator.asp">technical analysis indicator</a> used by some traders to determine the strength of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trend.asp">trend</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The trend can be either up or down, and this is shown by two accompanying indicators, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negativedirectionalindicator.asp">negative directional indicator</a> (-DI) and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/positivedirectionalindicator.asp">positive directional indicator</a> (+DI). Therefore, the ADX commonly includes three separate lines. These are used to help assess whether a trade should be taken long or short, or if a trade should be taken at all.<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_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>Designed by Welles Wilder for commodity daily charts, the ADX is now used in several markets by technical traders to judge the strength of a trend.</li><li>The ADX makes use of a positive (+DI) and negative (-DI) directional indicator in addition to the trendline.</li><li>The trend has strength when ADX is above 25; the trend is weak or the price is trendless when ADX is below 20, according to Wilder.</li><li>Non-trending doesn't mean the price isn't moving. It may not be, but the price could also be making a trend change or is too volatile for a clear direction to be present.</li></ul></div></div></div> <span class="heading-toc" id="toc-average-directional-index-adx-formula"></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"> Average Directional Index (ADX) Formula </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/112814/how-average-directional-index-adx-calculated-and-what-formula.asp">ADX requires a sequence of calculations</a> due to the multiple lines in the indicator.</p> <p><span data-value="\begin{aligned} &amp;\text{+DI} = \left ( \frac{ \text{Smoothed +DM} }{ \text{ATR } } \right ) \times 100 \\ &amp;\text{-DI} = \left ( \frac{ \text{Smoothed -DM} }{ \text{ATR } } \right ) \times 100 \\ &amp;\text{DX} = \left ( \frac{ \mid \text{+DI} - \text{-DI} \mid }{ \mid \text{+DI} + \text{-DI} \mid } \right ) \times 100 \\ &amp;\text{ADX} = \frac{ ( \text{Prior ADX} \times 13 ) + \text{Current ADX} }{ 14 } \\ &amp;\textbf{where:}\\ &amp;\text{+DM (Directional Movement)} = \text{Current High} - \text{PH} \\ &amp;\text{PH} = \text{Previous High} \\ &amp;\text{-DM} = \text{Previous Low} - \text{Current Low} \\ &amp;\text{Smoothed +/-DM} = \textstyle{ \sum_{t=1}^{14} \text{DM} - \left ( \frac{ \sum_{t=1}^{14} \text{DM} }{ 14 } \right ) + \text{CDM} } \\ &amp;\text{CDM} = \text{Current DM} \\ &amp;\text{ATR} = \text{Average True Range} \\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> +DI </mtext> <mo> = </mo> <mrow> <mo> ( </mo> <mfrac> <mtext> Smoothed +DM </mtext> <mtext> ATR  </mtext> </mfrac> <mo> ) </mo> </mrow> <mo> × </mo> <mn> 100 </mn> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> -DI </mtext> <mo> = </mo> <mrow> <mo> ( </mo> <mfrac> <mtext> Smoothed -DM </mtext> <mtext> ATR  </mtext> </mfrac> <mo> ) </mo> </mrow> <mo> × </mo> <mn> 100 </mn> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> DX </mtext> <mo> = </mo> <mrow> <mo> ( </mo> <mfrac> <mrow> <mo> ∣ </mo> <mtext> +DI </mtext> <mo> − </mo> <mtext> -DI </mtext> <mo> ∣ </mo> </mrow> <mrow> <mo> ∣ </mo> <mtext> +DI </mtext> <mo> + </mo> <mtext> -DI </mtext> <mo> ∣ </mo> </mrow> </mfrac> <mo> ) </mo> </mrow> <mo> × </mo> <mn> 100 </mn> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> ADX </mtext> <mo> = </mo> <mfrac> <mrow> <mo> ( </mo> <mtext> Prior ADX </mtext> <mo> × </mo> <mn> 13 </mn> <mo> ) </mo> <mo> + </mo> <mtext> Current ADX </mtext> </mrow> <mn> 14 </mn> </mfrac> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> where: </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> +DM (Directional Movement) </mtext> <mo> = </mo> <mtext> Current High </mtext> <mo> − </mo> <mtext> PH </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> PH </mtext> <mo> = </mo> <mtext> Previous High </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> -DM </mtext> <mo> = </mo> <mtext> Previous Low </mtext> <mo> − </mo> <mtext> Current Low </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Smoothed +/-DM </mtext> <mo> = </mo> <mstyle> <mrow> <msubsup> <mo> ∑ </mo> <mrow> <mi> t </mi> <mo> = </mo> <mn> 1 </mn> </mrow> <mn> 14 </mn> </msubsup> <mtext> DM </mtext> <mo> − </mo> <mrow> <mo> ( </mo> <mfrac> <mrow> <msubsup> <mo> ∑ </mo> <mrow> <mi> t </mi> <mo> = </mo> <mn> 1 </mn> </mrow> <mn> 14 </mn> </msubsup> <mtext> DM </mtext> </mrow> <mn> 14 </mn> </mfrac> <mo> ) </mo> </mrow> <mo> + </mo> <mtext> CDM </mtext> </mrow> </mstyle> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> CDM </mtext> <mo> = </mo> <mtext> Current DM </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> ATR </mtext> <mo> = </mo> <mtext> Average True Range </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\text{+DI} = \left ( \frac{ \text{Smoothed +DM} }{ \text{ATR } } \right ) \times 100 \\ &amp;\text{-DI} = \left ( \frac{ \text{Smoothed -DM} }{ \text{ATR } } \right ) \times 100 \\ &amp;\text{DX} = \left ( \frac{ \mid \text{+DI} - \text{-DI} \mid }{ \mid \text{+DI} + \text{-DI} \mid } \right ) \times 100 \\ &amp;\text{ADX} = \frac{ ( \text{Prior ADX} \times 13 ) + \text{Current ADX} }{ 14 } \\ &amp;\textbf{where:}\\ &amp;\text{+DM (Directional Movement)} = \text{Current High} - \text{PH} \\ &amp;\text{PH} = \text{Previous High} \\ &amp;\text{-DM} = \text{Previous Low} - \text{Current Low} \\ &amp;\text{Smoothed +/-DM} = \textstyle{ \sum_{t=1}^{14} \text{DM} - \left ( \frac{ \sum_{t=1}^{14} \text{DM} }{ 14 } \right ) + \text{CDM} } \\ &amp;\text{CDM} = \text{Current DM} \\ &amp;\text{ATR} = \text{Average True Range} \\ \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 class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">+DI</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="minner"><span class="mopen delimcenter"><span class="delimsizing size3">(</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="mord"><span class="mord text"><span class="mord">ATR </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">Smoothed +DM</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 size3">)</span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">100</span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">-DI</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="minner"><span class="mopen delimcenter"><span class="delimsizing size3">(</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="mord"><span class="mord text"><span class="mord">ATR </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">Smoothed -DM</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 size3">)</span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">100</span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">DX</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="minner"><span class="mopen delimcenter"><span class="delimsizing size3">(</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="mord"><span class="mrel">∣</span><span class="mspace"></span><span class="mord text"><span class="mord">+DI</span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord text"><span class="mord">-DI</span></span><span class="mspace"></span><span class="mrel">∣</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="mrel">∣</span><span class="mspace"></span><span class="mord text"><span class="mord">+DI</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord text"><span class="mord">-DI</span></span><span class="mspace"></span><span class="mrel">∣</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 size3">)</span></span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">100</span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">ADX</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord">14</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="mopen">(</span><span class="mord text"><span class="mord">Prior ADX</span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord">13</span><span class="mclose">)</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord text"><span class="mord">Current ADX</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">+DM (Directional Movement)</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Current High</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord text"><span class="mord">PH</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">PH</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Previous High</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">-DM</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Previous Low</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord text"><span class="mord">Current Low</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Smoothed +/-DM</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mop"><span class="mop op-symbol small-op">∑</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 mathnormal mtight">t</span><span class="mrel mtight">=</span><span class="mord mtight">1</span></span></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mtight">14</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="mord text"><span class="mord">DM</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><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 mtight">14</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="mop mtight"><span class="mop op-symbol small-op mtight">∑</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 mathnormal mtight">t</span><span class="mrel mtight">=</span><span class="mord mtight">1</span></span></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size3 size1 mtight"><span class="mord mtight"><span class="mord mtight">14</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 mtight"></span><span class="mord text mtight"><span class="mord mtight">DM</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="mspace"></span><span class="mbin">+</span><span class="mspace"></span><span class="mord text"><span class="mord">CDM</span></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">CDM</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Current DM</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">ATR</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Average True Range</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_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"> Calculating the ADX </span> </h3> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Calculate +DM, -DM, and the true range (TR) for each period. Fourteen periods are typically used.</li> <li>+DM = current high - previous high.</li> <li>-DM = previous low - current low.</li> <li>Use +DM when current high - previous high &gt; previous low - current low. Use -DM when previous low - current low &gt; current high - previous high.</li> <li>TR is the greater of the current high - current low, current high - previous close, or current low - previous close.</li> <li>Smooth the 14-period averages of +DM, -DM, and TR—the TR formula is below. Insert the -DM and +DM values to calculate the smoothed averages of those.</li> <li>First 14TR = sum of first 14 TR readings.</li> <li>Next 14TR value = first 14TR - (prior 14TR/14) + current TR.</li> <li>Next, divide the smoothed +DM value by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atr.asp">smoothed TR</a> value to get +DI. Multiply by 100.</li> <li>Divide the smoothed -DM value by the smoothed TR value to get -DI. Multiply by 100.</li> <li>The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dmi.asp">directional movement index (DMI)</a> is +DI minus -DI, divided by the sum of +DI and -DI (all absolute values). Multiply by 100.</li> <li>To get the ADX, continue to calculate DX values for at least 14 periods. Then, smooth the results to get ADX.</li> <li>First ADX = sum 14 periods of DX / 14.</li> <li>After that, ADX = ((prior ADX * 13) + current DX) / 14.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-what-does-the-adx-tell-you"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> What Does the ADX Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The ADX, negative directional indicator (-DI), and positive directional indicator (+DI) are momentum indicators. The ADX helps investors determine trend strength, while -DI and +DI help determine trend direction. </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 ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trade-signal.asp" rel="noopener noreferrer">trade signals</a>. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy. On the other hand, if the -DI crosses above the +DI, and the ADX is above 20 or 25, then that is an opportunity to enter a potential <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp" rel="noopener noreferrer">short</a> trade. </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"> Crosses can also be used to exit current trades. For example, if <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp" rel="noopener noreferrer">long</a>, exit when the -DI crosses above the +DI. Meanwhile, when the ADX is below 20 the indicator is signaling that the price is trendless and that it might not be an ideal time to enter a trade. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_21-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.4%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/7xVUqooIzCf3GqNH91Em91U9G-k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/7xVUqooIzCf3GqNH91Em91U9G-k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg" data-srcset="https://www.investopedia.com/thmb/NqCSt4w9iqYI7yRndTbhqigPCgM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg 750w" data-tracking-container="true" height="1814" id="mntl-sc-block-image_1-0" width="2729"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="1814" sizes="750px" src="https://www.investopedia.com/thmb/7xVUqooIzCf3GqNH91Em91U9G-k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg" srcset="https://www.investopedia.com/thmb/NqCSt4w9iqYI7yRndTbhqigPCgM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg 750w" width="2729"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Image by Sabrina Jiang © Investopedia 2021</p></span> </figcaption></figure> <span class="heading-toc" id="toc-the-average-directional-index-vs-the-aroon-indicator"></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"> The Average Directional Index vs. The Aroon Indicator </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The ADX indicator is composed of a total of three lines, while the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aroon.asp" rel="noopener noreferrer">Aroon indicator</a> is composed of two. </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 two indicators are similar in that they both have lines representing positive and negative movement, which helps to identify trend direction. The Aroon reading/level also helps determine trend strength, as the ADX does. The calculations are different though, so crossovers on each of the indicators will occur at different times. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-limitations-of-using-the-adx"></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"> Limitations of Using the ADX </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crossover.asp" rel="noopener noreferrer">Crossovers</a> can occur frequently, sometimes too frequently, resulting in confusion and potentially lost money on trades that quickly go the other way. These are called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/false-signal.asp" rel="noopener noreferrer">false signals</a> and are more common when ADX values are below 25. That said, sometimes the ADX reaches above 25, but is only there temporarily and then reverses along with the price. </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"> Like any indicator, the ADX should be combined with price analysis and potentially other indicators to help filter signals and control risk. </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-what-is-a-good-average-directional-index"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Average Directional Index?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An ADX above 25 is considered strong. When the ADX is below 20, the trend is weak or the price is trendless.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-is-adx-a-good-indicator"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is ADX a Good Indicator?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, but it provides better strategy signals when combined with price. Investors should first use ADX to determine whether prices are trending or non-trending and then choose the appropriate trading strategy for the condition.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_36-0"><span class="heading-toc" id="toc-what-is-the-best-indicator-to-use-with-adx"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Best Indicator to Use With ADX?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The ADX works best when combined with other technical indicators, like 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 (RSI)</a>. While the ADX measures the intensity of the trend, the RSI can help with entries and exits by giving a time-based component to the trend.<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"> The average directional movement index (ADX) is used by technical traders to determine trend strength as well as trend direction. Using the ADX, traders can determine if a market is trading or ranging, and then apply the adequate technical trading strategy. This can be a profitable strategy that involves minimal risk, which makes it a popular strategy among traders. There are other technical analysis indicators similar to the ADX, like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parabolicindicator.asp">parabolic SAR</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/052201.asp">moving averages</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/envelope.asp">envelopes</a>. </p></div>

## What Is the Average Directional Index (ADX)? The average directional index (ADX) is a [technical analysis indicator](https://www.investopedia.com/terms/t/technicalindicator.asp) used by some traders to determine the strength of a [trend](https://www.investopedia.com/terms/t/trend.asp). The trend can be either up or down, and this is shown by two accompanying indicators, the [negative directional indicator](https://www.investopedia.com/terms/n/negativedirectionalindicator.asp) (-DI) and the [positive directional indicator](https://www.investopedia.com/terms/p/positivedirectionalindicator.asp) (+DI). Therefore, the ADX commonly includes three separate lines. These are used to help assess whether a trade should be taken long or short, or if a trade should be taken at all. ### Key Takeaways * Designed by Welles Wilder for commodity daily charts, the ADX is now used in several markets by technical traders to judge the strength of a trend. * The ADX makes use of a positive (+DI) and negative (-DI) directional indicator in addition to the trendline. * The trend has strength when ADX is above 25; the trend is weak or the price is trendless when ADX is below 20, according to Wilder. * Non-trending doesn't mean the price isn't moving. It may not be, but the price could also be making a trend change or is too volatile for a clear direction to be present. ## Average Directional Index (ADX) Formula The [ADX requires a sequence of calculations](https://www.investopedia.com/ask/answers/112814/how-average-directional-index-adx-calculated-and-what-formula.asp) due to the multiple lines in the indicator. +DI = ( Smoothed +DM ATR  ) × 100 -DI = ( Smoothed -DM ATR  ) × 100 DX = ( ∣ +DI − -DI ∣ ∣ +DI + -DI ∣ ) × 100 ADX = ( Prior ADX × 13 ) + Current ADX 14 where: +DM (Directional Movement) = Current High − PH PH = Previous High -DM = Previous Low − Current Low Smoothed +/-DM = ∑ t = 1 14 DM − ( ∑ t = 1 14 DM 14 ) + CDM CDM = Current DM ATR = Average True Range \begin{aligned} &\text{+DI} = \left ( \frac{ \text{Smoothed +DM} }{ \text{ATR } } \right ) \times 100 \\ &\text{-DI} = \left ( \frac{ \text{Smoothed -DM} }{ \text{ATR } } \right ) \times 100 \\ &\text{DX} = \left ( \frac{ \mid \text{+DI} - \text{-DI} \mid }{ \mid \text{+DI} + \text{-DI} \mid } \right ) \times 100 \\ &\text{ADX} = \frac{ ( \text{Prior ADX} \times 13 ) + \text{Current ADX} }{ 14 } \\ &\textbf{where:}\\ &\text{+DM (Directional Movement)} = \text{Current High} - \text{PH} \\ &\text{PH} = \text{Previous High} \\ &\text{-DM} = \text{Previous Low} - \text{Current Low} \\ &\text{Smoothed +/-DM} = \textstyle{ \sum\_{t=1}^{14} \text{DM} - \left ( \frac{ \sum\_{t=1}^{14} \text{DM} }{ 14 } \right ) + \text{CDM} } \\ &\text{CDM} = \text{Current DM} \\ &\text{ATR} = \text{Average True Range} \\ \end{aligned} ​+DI=(ATR Smoothed +DM​)×100-DI=(ATR Smoothed -DM​)×100DX=(∣+DI+-DI∣∣+DI−-DI∣​)×100ADX=14(Prior ADX×13)+Current ADX​where:+DM (Directional Movement)=Current High−PHPH=Previous High-DM=Previous Low−Current LowSmoothed +/-DM=∑t=114​DM−(14∑t=114​DM​)+CDMCDM=Current DMATR=Average True Range​ ### Calculating the ADX 1. Calculate +DM, -DM, and the true range (TR) for each period. Fourteen periods are typically used. 2. +DM = current high - previous high. 3. -DM = previous low - current low. 4. Use +DM when current high - previous high > previous low - current low. Use -DM when previous low - current low > current high - previous high. 5. TR is the greater of the current high - current low, current high - previous close, or current low - previous close. 6. Smooth the 14-period averages of +DM, -DM, and TR—the TR formula is below. Insert the -DM and +DM values to calculate the smoothed averages of those. 7. First 14TR = sum of first 14 TR readings. 8. Next 14TR value = first 14TR - (prior 14TR/14) + current TR. 9. Next, divide the smoothed +DM value by the [smoothed TR](https://www.investopedia.com/terms/a/atr.asp) value to get +DI. Multiply by 100. 10. Divide the smoothed -DM value by the smoothed TR value to get -DI. Multiply by 100. 11. The [directional movement index (DMI)](https://www.investopedia.com/terms/d/dmi.asp) is +DI minus -DI, divided by the sum of +DI and -DI (all absolute values). Multiply by 100. 12. To get the ADX, continue to calculate DX values for at least 14 periods. Then, smooth the results to get ADX. 13. First ADX = sum 14 periods of DX / 14. 14. After that, ADX = ((prior ADX \* 13) + current DX) / 14. ## What Does the ADX Tell You? The ADX, negative directional indicator (-DI), and positive directional indicator (+DI) are momentum indicators. The ADX helps investors determine trend strength, while -DI and +DI help determine trend direction. The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate [trade signals](https://www.investopedia.com/terms/t/trade-signal.asp). For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy. On the other hand, if the -DI crosses above the +DI, and the ADX is above 20 or 25, then that is an opportunity to enter a potential [short](https://www.investopedia.com/terms/s/short.asp) trade. Crosses can also be used to exit current trades. For example, if [long](https://www.investopedia.com/terms/l/long.asp), exit when the -DI crosses above the +DI. Meanwhile, when the ADX is below 20 the indicator is signaling that the price is trendless and that it might not be an ideal time to enter a trade. ![Image]() :max_bytes(150000):strip_icc()/dotdash_INV-final-Average-Directional-Index-ADX-May-2021-01-a4b90b10676a437287683e38e0d2c7bd.jpg) Image by Sabrina Jiang © Investopedia 2021 ## The Average Directional Index vs. The Aroon Indicator The ADX indicator is composed of a total of three lines, while the [Aroon indicator](https://www.investopedia.com/terms/a/aroon.asp) is composed of two. The two indicators are similar in that they both have lines representing positive and negative movement, which helps to identify trend direction. The Aroon reading/level also helps determine trend strength, as the ADX does. The calculations are different though, so crossovers on each of the indicators will occur at different times. ## Limitations of Using the ADX [Crossovers](https://www.investopedia.com/terms/c/crossover.asp) can occur frequently, sometimes too frequently, resulting in confusion and potentially lost money on trades that quickly go the other way. These are called [false signals](https://www.investopedia.com/terms/f/false-signal.asp) and are more common when ADX values are below 25. That said, sometimes the ADX reaches above 25, but is only there temporarily and then reverses along with the price. Like any indicator, the ADX should be combined with price analysis and potentially other indicators to help filter signals and control risk. ## What Is a Good Average Directional Index? An ADX above 25 is considered strong. When the ADX is below 20, the trend is weak or the price is trendless. ## Is ADX a Good Indicator? Yes, but it provides better strategy signals when combined with price. Investors should first use ADX to determine whether prices are trending or non-trending and then choose the appropriate trading strategy for the condition. ## What Is the Best Indicator to Use With ADX? The ADX works best when combined with other technical indicators, like the [relative strength index (RSI)](https://www.investopedia.com/terms/r/rsi.asp). While the ADX measures the intensity of the trend, the RSI can help with entries and exits by giving a time-based component to the trend. ## The Bottom Line The average directional movement index (ADX) is used by technical traders to determine trend strength as well as trend direction. Using the ADX, traders can determine if a market is trading or ranging, and then apply the adequate technical trading strategy. This can be a profitable strategy that involves minimal risk, which makes it a popular strategy among traders. There are other technical analysis indicators similar to the ADX, like the [parabolic SAR](https://www.investopedia.com/terms/p/parabolicindicator.asp), [moving averages](https://www.investopedia.com/articles/technical/052201.asp), and [envelopes](https://www.investopedia.com/terms/e/envelope.asp).

What Is the Average Directional Index (ADX)? The average directional index (ADX) is a technical analysis indicator used by some traders to determine the strength of a trend. The trend can be either up or down, and this is shown by two accompanying indicators, the negative directional indicator (-DI) and the positive directional indicator (+DI). Therefore, the ADX commonly includes three separate lines. These are used to help assess whether a trade should be taken long or short, or if a trade should be taken at all. Key Takeaways Designed by Welles Wilder for commodity daily charts, the ADX is now used in several markets by technical traders to judge the strength of a trend.The ADX makes use of a positive (+DI) and negative (-DI) directional indicator in addition to the trendline.The trend has strength when ADX is above 25; the trend is weak or the price is trendless when ADX is below 20, according to Wilder.Non-trending doesn't mean the price isn't moving. It may not be, but the price could also be making a trend change or is too volatile for a clear direction to be present. Average Directional Index (ADX) Formula The ADX requires a sequence of calculations due to the multiple lines in the indicator. +DI = ( Smoothed +DM ATR  ) × 100 -DI = ( Smoothed -DM ATR  ) × 100 DX = ( ∣ +DI − -DI ∣ ∣ +DI + -DI ∣ ) × 100 ADX = ( Prior ADX × 13 ) + Current ADX 14 where: +DM (Directional Movement) = Current High − PH PH = Previous High -DM = Previous Low − Current Low Smoothed +/-DM = ∑ t = 1 14 DM − ( ∑ t = 1 14 DM 14 ) + CDM CDM = Current DM ATR = Average True Range \begin{aligned} &\text{+DI} = \left ( \frac{ \text{Smoothed +DM} }{ \text{ATR } } \right ) \times 100 \\ &\text{-DI} = \left ( \frac{ \text{Smoothed -DM} }{ \text{ATR } } \right ) \times 100 \\ &\text{DX} = \left ( \frac{ \mid \text{+DI} - \text{-DI} \mid }{ \mid \text{+DI} + \text{-DI} \mid } \right ) \times 100 \\ &\text{ADX} = \frac{ ( \text{Prior ADX} \times 13 ) + \text{Current ADX} }{ 14 } \\ &\textbf{where:}\\ &\text{+DM (Directional Movement)} = \text{Current High} - \text{PH} \\ &\text{PH} = \text{Previous High} \\ &\text{-DM} = \text{Previous Low} - \text{Current Low} \\ &\text{Smoothed +/-DM} = \textstyle{ \sum_{t=1}^{14} \text{DM} - \left ( \frac{ \sum_{t=1}^{14} \text{DM} }{ 14 } \right ) + \text{CDM} } \\ &\text{CDM} = \text{Current DM} \\ &\text{ATR} = \text{Average True Range} \\ \end{aligned} ​+DI=(ATR Smoothed +DM​)×100-DI=(ATR Smoothed -DM​)×100DX=(∣+DI+-DI∣∣+DI−-DI∣​)×100ADX=14(Prior ADX×13)+Current ADX​where:+DM (Directional Movement)=Current High−PHPH=Previous High-DM=Previous Low−Current LowSmoothed +/-DM=∑t=114​DM−(14∑t=114​DM​)+CDMCDM=Current DMATR=Average True Range​ Calculating the ADX Calculate +DM, -DM, and the true range (TR) for each period. Fourteen periods are typically used. +DM = current high - previous high. -DM = previous low - current low. Use +DM when current high - previous high > previous low - current low. Use -DM when previous low - current low > current high - previous high. TR is the greater of the current high - current low, current high - previous close, or current low - previous close. Smooth the 14-period averages of +DM, -DM, and TR—the TR formula is below. Insert the -DM and +DM values to calculate the smoothed averages of those. First 14TR = sum of first 14 TR readings. Next 14TR value = first 14TR - (prior 14TR/14) + current TR. Next, divide the smoothed +DM value by the smoothed TR value to get +DI. Multiply by 100. Divide the smoothed -DM value by the smoothed TR value to get -DI. Multiply by 100. The directional movement index (DMI) is +DI minus -DI, divided by the sum of +DI and -DI (all absolute values). Multiply by 100. To get the ADX, continue to calculate DX values for at least 14 periods. Then, smooth the results to get ADX. First ADX = sum 14 periods of DX / 14. After that, ADX = ((prior ADX * 13) + current DX) / 14. What Does the ADX Tell You? The ADX, negative directional indicator (-DI), and positive directional indicator (+DI) are momentum indicators. The ADX helps investors determine trend strength, while -DI and +DI help determine trend direction. The ADX identifies a strong trend when the ADX is over 25 and a weak trend when the ADX is below 20. Crossovers of the -DI and +DI lines can be used to generate trade signals. For example, if the +DI line crosses above the -DI line and the ADX is above 20, or ideally above 25, then that is a potential signal to buy. On the other hand, if the -DI crosses above the +DI, and the ADX is above 20 or 25, then that is an opportunity to enter a potential short trade. Crosses can also be used to exit current trades. For example, if long, exit when the -DI crosses above the +DI. Meanwhile, when the ADX is below 20 the indicator is signaling that the price is trendless and that it might not be an ideal time to enter a trade. Image by Sabrina Jiang © Investopedia 2021 The Average Directional Index vs. The Aroon Indicator The ADX indicator is composed of a total of three lines, while the Aroon indicator is composed of two. The two indicators are similar in that they both have lines representing positive and negative movement, which helps to identify trend direction. The Aroon reading/level also helps determine trend strength, as the ADX does. The calculations are different though, so crossovers on each of the indicators will occur at different times. Limitations of Using the ADX Crossovers can occur frequently, sometimes too frequently, resulting in confusion and potentially lost money on trades that quickly go the other way. These are called false signals and are more common when ADX values are below 25. That said, sometimes the ADX reaches above 25, but is only there temporarily and then reverses along with the price. Like any indicator, the ADX should be combined with price analysis and potentially other indicators to help filter signals and control risk. What Is a Good Average Directional Index? An ADX above 25 is considered strong. When the ADX is below 20, the trend is weak or the price is trendless. Is ADX a Good Indicator? Yes, but it provides better strategy signals when combined with price. Investors should first use ADX to determine whether prices are trending or non-trending and then choose the appropriate trading strategy for the condition. What Is the Best Indicator to Use With ADX? The ADX works best when combined with other technical indicators, like the relative strength index (RSI). While the ADX measures the intensity of the trend, the RSI can help with entries and exits by giving a time-based component to the trend. The Bottom Line The average directional movement index (ADX) is used by technical traders to determine trend strength as well as trend direction. Using the ADX, traders can determine if a market is trading or ranging, and then apply the adequate technical trading strategy. This can be a profitable strategy that involves minimal risk, which makes it a popular strategy among traders. There are other technical analysis indicators similar to the ADX, like the parabolic SAR, moving averages, and envelopes.

https://www.investopedia.com/chime-bank-review-4846500

Chime Banking Review

<div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body"> <span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="comp product-review-content product-review-content--finance product-review--base" id="product-review-content--finance_1-0"> <div class="comp js-toc-appear article-container article-intro mntl-block" id="article-intro_1-0"> <div class="comp product-card" data-tracking-container="true" data-tracking-id="product-card" id="product-card_1-0" style="--imgWidth: 0px"> <div class="product-card__content"> <div class="product-card__intro expert-content"> <figure class="comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image" id="product-card__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="C" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/8OkRbNBffNDNDvtQtatftJ2IcBU=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhDgAFAPAAAB7Gd////ywAAAAADgAFAEAIIgADCAQwUKBBgwASBkhIcOFChQ4ZPiTY0OHBiw0pMpQYICAAOw==')" width="1500"/> <noscript> <img alt="C" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/8OkRbNBffNDNDvtQtatftJ2IcBU=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png" width="1500"/> </noscript> </div> </div> </figure><!-- end: comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.chime.com/" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> Chime is a technology company that offers digital banking options for people on the go. Chris Britt and Ryan King created Chime in 2013 <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">as an alternative to traditional banks</a>.<span class="ql-inline-citation" data-cite="13"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review"> <ul class="tabbed-sc-block__tabs"> <li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros &amp; Cons</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li> </ul> <div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1"> <span class="tabbed-sc-block__text">Pros &amp; Cons</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1"> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-2"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>No monthly fees</p></li> <li><p>No overdraft fees</p></li> <li><p>Early access to direct deposits</p></li> <li><p>Large ATM network</p></li> </ul> </div> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Cons</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Poor savings rate</p></li> <li><p>Limited services</p></li> <li><p>Difficult to make cash deposits</p></li> <li><p>Out-of-network ATM charges</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2"> <span class="tabbed-sc-block__text">Company Overview</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2"> <div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-4"> <div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0"> <ul class="definition-list__container"> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Year Founded</span> <span class="definition-list__item-content definition-list__item-content-0"> 2013 </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.chime.com </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Banking Products Offered</span> <span class="definition-list__item-content definition-list__item-content-2"> Savings, spending </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Customer Service</span> <span class="definition-list__item-content definition-list__item-content-3"> Phone line: Monday–Saturday, 7 a.m. to 7 p.m. (CST); Sundays, 9 a.m. to 5 p.m. (CST): 844-244-6363. </span> </span> </li> </ul> </div><!-- end: comp 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comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0"> <a class="commerce-button mntl-text-link" data-tracking-container="false" href="https://www.chime.com/" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block --> </div><!-- end: comp sticky-toc-widget__product-container mntl-block --> <div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0"> Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0"> View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Chime Banking Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0"> Chime Banking Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0"> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best for" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-who-is-chime-bank-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best for</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-chime-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-chime-customer-service" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-through-chime" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block --> </div><!-- end: comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block --> </div><!-- end: comp left-nav js-sticky-container product-review__left-nav mntl-block --> <div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0"> <span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-1"> <li><strong>No monthly fees: </strong>Chime provides simple banking options free from monthly maintenance or service fees, along with no minimum balance fees. There are also no <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-transaction-fee.asp">foreign transaction fees</a> attached to Chime.<span class="ql-inline-citation" data-cite="6"></span></li> <li><strong>No overdraft fees: </strong>Many traditional banks charge up to $30 for overdraft fees. Chime offers up to $200 fee-free <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft-protection.asp">overdraft protection</a> through SpotMe, which is available to customers who receive $200 or more in total monthly direct deposits.<span class="ql-inline-citation" data-cite="5"></span></li> <li><strong>Early access to direct deposits: </strong>Payday is always a good day, but with Chime, it’s possible to receive your money up to two days early.<span class="ql-inline-citation" data-cite="3"></span></li> <li><strong>Large ATM network: </strong>Chime customers have access to more than 60,000 fee-free ATMs across the U.S. via MoneyPass ATMs in a 7-Eleven location, and any Allpoint or Visa Plus Alliance ATMs.<span class="ql-inline-citation" data-cite="4"></span></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-cons-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <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>Average savings rate: </strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chime-savings-account-interest-rates-7507603">Chime’s savings account</a> earns 2.00% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage yield</a> (APY), which is considered a high-yield rate. It’s much better than what’s offered by almost all traditional brick-and-mortar banks, but compared with other online banks, Chime’s savings rate still misses the mark.<span class="ql-inline-citation" data-cite="7"></span></li> <li><strong>Limited services: </strong>Chime offers simple banking services, so if you’re looking for a full-service bank with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit</a> (CDs), <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market accounts</a>, and lending options, you’ll need to look elsewhere.</li> <li><strong>Difficult to make cash deposits: </strong>Cash deposits are possible at 75,000 retail locations with Chime's cash deposit partners. However, you may pay a fee for this service.<span class="ql-inline-citation" data-cite="2"></span></li> <li><strong>Out-of-network ATM charges: </strong>Chime might charge a fee for every out-of-network ATM transaction.<span class="ql-inline-citation" data-cite="6"></span></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-who-is-chime-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 Chime 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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/" rel="sponsored nofollow">Chime</a> is a good fit for customers looking for simple banking services with no monthly maintenance fees or minimum balance requirements. Chime allows customers to: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6"> <li>Open a savings account with no minimum balance requirement</li><li>Open a checking account with a debit card</li><li>Have access to a large ATM network</li><li>Use their debit card overseas without foreign transaction fees</li><li>Deposit checks electronically through their mobile phone</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-what-does-chime-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 Chime 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"> Chime keeps its service options simple, with only two account choices available. </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>Savings Account</li><li>Checking Account (with debit card access)</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"> Savings Account </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11"> Chime offers only one savings option—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>. Chime’s savings account comes with a savings rate of 2.00% APY, which is good but still lower than the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a> on the market.<span class="ql-inline-citation" data-cite="7"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-12"> The savings account comes with two optional automatic savings programs, so customers can reach savings goals faster: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13"> <li><strong>Save When You Spend: </strong>When enabled, every purchase you make with your Chime Visa debit card is rounded up to the nearest dollar. The rounded-up amount is transferred to your savings account.</li><li><strong>Save When I Get Paid: </strong>Enrolled customers can automatically transfer a percentage of every direct deposit of $500 or more to their savings account.<span class="ql-inline-citation" data-cite="8"></span></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14"> Depositing cash into your Chime savings account is not a simple process. Customers can either transfer money from their Chime checking account or use the Save When I Get Paid feature. </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_2-0-15"> <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">Chime Savings Account</th> </tr> <tr> <th>ACCOUNT NAME</th> <th>MIN OPENING DEPOSIT</th> <th>MONTHLY FEE</th> <th>APY</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Chime Savings Account </td> <td>$0</td> <td>$0</td> <td>2.00%</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 --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-16"> <span class="mntl-sc-block-subheading__text"> Checking Account </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17"> Chime’s checking account comes with a complimentary Visa debit card. Though it doesn’t come with traditional check-writing privileges, you can write checks using the Chime checkbook feature. You simply choose to pay bills through the checkbook feature, and Chime will send a check on your behalf, typically arriving in three to nine business days. There’s no limit on how many checks you can send per day. This feature is only eligible for checks mailed to recipients in all 50 states and the District of Columbia.<span class="ql-inline-citation" data-cite="9"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18"> Customers can use their debit card without paying a fee at more than 60,000 ATMs across the U.S.<span class="ql-inline-citation" data-cite="4"></span> There are also no foreign transaction fees charged for using your Chime debit card internationally. Unfortunately, using your debit card at out-of-network ATMs can yield a charge per transaction.<span class="ql-inline-citation" data-cite="6"></span> ATM withdrawals are limited to $515 per day.<span class="ql-inline-citation" data-cite="10"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-19"> To combat overdraft fees, Chime offers SpotMe, an overdraft protection service that allows eligible customers to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071114/what-are-pros-and-cons-overdraft-protection.asp">avoid overdraft fees</a> on their spending accounts. SpotMe is available for customers who receive monthly direct deposits totaling at least $200. Chime uses your direct deposit total from the previous 34 days to determine eligibility. Instead of charging a fee, Chime uses your next deposit to cover the overdraft amount.<span class="ql-inline-citation" data-cite="5"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0-20"> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"> <p>Overdrafts through SpotMe are initially limited to $20, but they may be increased up to $200, based on account history and activity.<span class="ql-inline-citation" data-cite="5"></span></p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block --> </div><!-- end: comp theme-important mntl-sc-block prm-sc-block-callout--finance prm-sc-block-callout mntl-sc-block-callout mntl-block --> <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_2-0-21"> <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">Chime Checking Account</th> </tr> <tr> <th>ACCOUNT NAME</th> <th>MIN OPENING DEPOSIT</th> <th>MONTHLY FEE</th> <th>APY</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Chime Checking Account </td> <td>$0</td> <td>$0</td> <td>None</td> </tr> </tbody> </table> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <span class="heading-toc" id="toc-chime-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_2-0-22"> <span class="mntl-sc-block-heading__text"> Chime 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_2-0-23"> Chime embraces mobile banking as evidenced through its mobile phone app, available on iOS and Android. Through the app, customers can: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-24"> <li>View accounts</li><li>Deposit checks electronically</li><li>Send money to other Chime customers</li><li>Freeze your card if it is lost or stolen</li><li>Pay bills</li><li>Transfer funds between accounts</li><li>Receive transaction notifications </li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-25"> Chime offers several ways to contact its customer service when you need help. Besides logging in to the mobile app, customers can also get support from Chime by email ([email protected]) or by calling +1-844-244-6363, 24 hours a day, 7 days a week.<span class="ql-inline-citation" data-cite="1"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-26"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-chime-makes-money-4796705">Chime’s banking services</a> are provided via a partnership with Bancorp Bank or Stride Bank, N.A. Both banks are insured by the Federal Deposit Insurance Corporation (FDIC), which means your deposits are insured by the federal government up to $250,000.<span class="ql-inline-citation" data-cite="11"></span> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-how-to-bank-through-chime"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-27"> <span class="mntl-sc-block-heading__text"> How to Bank Through Chime </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_2-0-28"> Chime makes it easy to open an account. To get started, simply head to Chime’s website or download its mobile app. You’ll need to enter some basic personal information and set up an online account. There is no credit check associated with opening a Chime account. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29"> Account holders must be at least 18 years old. You must be a U.S. citizen or permanent resident to open a Chime account.<span class="ql-inline-citation" data-cite="12"></span> </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_2-0-30"> <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_1-0-1"> <p>Chime is a top choice for customers who want simple banking options with few fees and an excellent mobile app for banking on the go. Although Chime has no physical locations, it does have a large fee-free ATM network that will meet most customers’ in-person needs. While its savings account offers a decent rate, there are other banks to consider that may offer a higher APY. You'll also want to look elsewhere if you want a full-service bank that offers other products, such as CDs and money market accounts.</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_2-0-31"> <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_2-0-32"> 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 need. </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_2-0-33"> <div class="comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block" id="mntl-sc-block-commerce-button-list_1-0"> <a class="button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button" data-retailer-type="none" data-tracking-container="true" href="https://www.chime.com/" id="button_1-0" rel="noskim noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: button mntl-commerce-button js-extended-commerce__button mntl-sc-block-commerce__button --> </div><!-- end: comp mntl-sc-block-commerce-button-list mntl-commerce-button-list-block mntl-block --> </div><!-- end: comp review-content js-sticky-riser-hide mntl-sc-block prm-sc-block-commerce--finance prm-sc-block-commerce mntl-sc-block-commerce--universal-image mntl-sc-block-commerce mntl-block --> </div><!-- end: comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block --> </div><!-- end: comp article-body article-content mntl-block --> </div> </div><!-- end: comp product-review-content product-review-content--finance product-review--base --> </span> </div><div class="loc content-bottom"><div class="comp prm-article-sources article-sources mntl-article-sources mntl-expandable-block" data-scroll-offset="100" id="prm-article-sources_1-0"><div class="loc toggle-content"><div class="comp mntl-article-sources__wrapper mntl-block article-sources__wrapper" data-click-tracked="true" id="mntl-article-sources__wrapper_1-0"><div class="comp mntl-article-sources__heading mntl-text-block article-sources__heading" id="mntl-article-sources__heading_1-0">Article Sources</div> <div class="comp mntl-article-sources__icon-wrapper mntl-block article-sources__icon-wrapper" id="mntl-article-sources__icon-wrapper_1-0"><div class="comp article-sources__show-icon mntl-block" id="article-sources__show-icon_1-0"></div> <div class="comp article-sources__hide-icon mntl-block" id="article-sources__hide-icon_1-0"></div></div></div> </div><div class="loc expandable-content"> <div class="comp article-sources__disclaimer mntl-block" id="article-sources__disclaimer_1-0">Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our <a class="article-sources__disclaimer-text-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/legal-4768893#EditorialPolicy" id="article-sources__disclaimer-text-link_1-0" rel="nocaes"><span class="link__wrapper">editorial policy.</span></a></div> <div class="comp mntl-article-sources__citation-sources-1 mntl-citation-sources mntl-sources" data-tracking-container="true" id="mntl-article-sources__citation-sources-1_1-0"> <ol class="mntl-sources__content"> <li class="mntl-sources__source" id="citation-6"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/policies/bancorp/deposit-account-agreement/#fee-schedule" rel="nofollow sponsored">Fee Schedule</a>."</p></li> <li class="mntl-sources__source" id="citation-5"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/spotme/" rel="nofollow sponsored">Overdraft Worries? Not With SpotMe</a>."</p></li> <li class="mntl-sources__source" id="citation-3"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/get-paid-early/" rel="nofollow sponsored">Get Your Paycheck Up to Two Days Early</a>."</p></li> <li class="mntl-sources__source" id="citation-4"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/atms/" rel="nofollow sponsored">Find ATMs in Your Network</a>."</p></li> <li class="mntl-sources__source" id="citation-7"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/savings-account/" rel="nofollow sponsored">Grow Your Money Faster</a>."</p></li> <li class="mntl-sources__source" id="citation-2"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/checking-account/" rel="nofollow sponsored">Checking Account With No Monthly Fees</a>."</p></li> <li class="mntl-sources__source" id="citation-8"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.chime.com/automatic-savings/" rel="nofollow sponsored">Watch Your Savings Grow, Automatically</a>."</p></li> <li class="mntl-sources__source" id="citation-9"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://help.chime.com/hc/en-us/articles/221488407-Can-I-send-a-check-using-my-Chime-Checking-Account-" rel="nofollow sponsored">Can I Send a Check Using My Chime Checking Account?</a>"</p></li> <li class="mntl-sources__source" id="citation-10"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://help.chime.com/hc/en-us/articles/221487907-What-are-my-spending-and-cash-withdrawal-limits-" rel="nofollow sponsored">What Are My Spending and Cash Withdrawal Limits?</a>"</p></li> <li class="mntl-sources__source" id="citation-1"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://help.chime.com/hc/en-us" rel="nofollow sponsored">How Can We Help?</a>"</p></li> <li class="mntl-sources__source" id="citation-11"><p>Chime. "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://help.chime.com/hc/en-us/articles/224459628-Are-Chime-Accounts-FDIC-insured-" rel="nofollow sponsored">Are Chime Accounts FDIC insured?</a>"</p></li> <li class="mntl-sources__source" id="citation-12"><p>Chime. 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Review</span></span> <div class="card__byline mntl-card__byline" data-byline="By Kevin Payne"></div> </div> </a></div> </div></section></div> </div></div>

:fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png) :fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png) [Open Account](https://www.chime.com/) Chime is a technology company that offers digital banking options for people on the go. Chris Britt and Ryan King created Chime in 2013 [as an alternative to traditional banks](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp). * Pros & Cons * Company Overview Pros & Cons Pros * No monthly fees * No overdraft fees * Early access to direct deposits * Large ATM network Cons * Poor savings rate * Limited services * Difficult to make cash deposits * Out-of-network ATM charges Company Overview * Year Founded 2013 * Official Website www.chime.com * Banking Products Offered Savings, spending * Customer Service Phone line: Monday–Saturday, 7 a.m. to 7 p.m. (CST); Sundays, 9 a.m. to 5 p.m. (CST): 844-244-6363. :fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png) :fill(white):max_bytes(150000):strip_icc()/chime-d1be08f6746f4262b8e8a298211b5ce1.png) [Open Account](https://www.chime.com/) Table of Contents View All Chime Banking Review * [Pros Explained](#toc-pros-explained) * [Cons Explained](#toc-cons-explained) * [Best for](#toc-who-is-chime-bank-best-for) * [Bank Offerings](#toc-what-does-chime-offer) * [Customer Service](#toc-chime-customer-service) * [How to Bank](#toc-how-to-bank-through-chime) * [Methodology](#toc-methodology) ## Pros Explained * **No monthly fees:** Chime provides simple banking options free from monthly maintenance or service fees, along with no minimum balance fees. There are also no [foreign transaction fees](https://www.investopedia.com/terms/f/foreign-transaction-fee.asp) attached to Chime. * **No overdraft fees:** Many traditional banks charge up to $30 for overdraft fees. Chime offers up to $200 fee-free [overdraft protection](https://www.investopedia.com/terms/o/overdraft-protection.asp) through SpotMe, which is available to customers who receive $200 or more in total monthly direct deposits. * **Early access to direct deposits:** Payday is always a good day, but with Chime, it’s possible to receive your money up to two days early. * **Large ATM network:** Chime customers have access to more than 60,000 fee-free ATMs across the U.S. via MoneyPass ATMs in a 7-Eleven location, and any Allpoint or Visa Plus Alliance ATMs. ## Cons Explained * **Average savings rate:** [Chime’s savings account](https://www.investopedia.com/chime-savings-account-interest-rates-7507603) earns 2.00% [annual percentage yield](https://www.investopedia.com/terms/a/apy.asp) (APY), which is considered a high-yield rate. It’s much better than what’s offered by almost all traditional brick-and-mortar banks, but compared with other online banks, Chime’s savings rate still misses the mark. * **Limited services:** Chime offers simple banking services, so if you’re looking for a full-service bank with [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CDs), [money market accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp), and lending options, you’ll need to look elsewhere. * **Difficult to make cash deposits:** Cash deposits are possible at 75,000 retail locations with Chime's cash deposit partners. However, you may pay a fee for this service. * **Out-of-network ATM charges:** Chime might charge a fee for every out-of-network ATM transaction. ## Who Is Chime Bank Best for? [Chime](https://www.chime.com/) is a good fit for customers looking for simple banking services with no monthly maintenance fees or minimum balance requirements. Chime allows customers to: * Open a savings account with no minimum balance requirement * Open a checking account with a debit card * Have access to a large ATM network * Use their debit card overseas without foreign transaction fees * Deposit checks electronically through their mobile phone ## What Does Chime Offer? Chime keeps its service options simple, with only two account choices available. * Savings Account * Checking Account (with debit card access) ### Savings Account Chime offers only one savings option—a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp). Chime’s savings account comes with a savings rate of 2.00% APY, which is good but still lower than the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) on the market. The savings account comes with two optional automatic savings programs, so customers can reach savings goals faster: * **Save When You Spend:** When enabled, every purchase you make with your Chime Visa debit card is rounded up to the nearest dollar. The rounded-up amount is transferred to your savings account. * **Save When I Get Paid:** Enrolled customers can automatically transfer a percentage of every direct deposit of $500 or more to their savings account. Depositing cash into your Chime savings account is not a simple process. Customers can either transfer money from their Chime checking account or use the Save When I Get Paid feature. | Chime Savings Account | | | | | --- | --- | --- | --- | | ACCOUNT NAME | MIN OPENING DEPOSIT | MONTHLY FEE | APY | | Chime Savings Account | $0 | $0 | 2.00% | ### Checking Account Chime’s checking account comes with a complimentary Visa debit card. Though it doesn’t come with traditional check-writing privileges, you can write checks using the Chime checkbook feature. You simply choose to pay bills through the checkbook feature, and Chime will send a check on your behalf, typically arriving in three to nine business days. There’s no limit on how many checks you can send per day. This feature is only eligible for checks mailed to recipients in all 50 states and the District of Columbia. Customers can use their debit card without paying a fee at more than 60,000 ATMs across the U.S. There are also no foreign transaction fees charged for using your Chime debit card internationally. Unfortunately, using your debit card at out-of-network ATMs can yield a charge per transaction. ATM withdrawals are limited to $515 per day. To combat overdraft fees, Chime offers SpotMe, an overdraft protection service that allows eligible customers to [avoid overdraft fees](https://www.investopedia.com/ask/answers/071114/what-are-pros-and-cons-overdraft-protection.asp) on their spending accounts. SpotMe is available for customers who receive monthly direct deposits totaling at least $200. Chime uses your direct deposit total from the previous 34 days to determine eligibility. Instead of charging a fee, Chime uses your next deposit to cover the overdraft amount. Overdrafts through SpotMe are initially limited to $20, but they may be increased up to $200, based on account history and activity. | Chime Checking Account | | | | | --- | --- | --- | --- | | ACCOUNT NAME | MIN OPENING DEPOSIT | MONTHLY FEE | APY | | Chime Checking Account | $0 | $0 | None | ## Chime Customer Service Chime embraces mobile banking as evidenced through its mobile phone app, available on iOS and Android. Through the app, customers can: * View accounts * Deposit checks electronically * Send money to other Chime customers * Freeze your card if it is lost or stolen * Pay bills * Transfer funds between accounts * Receive transaction notifications Chime offers several ways to contact its customer service when you need help. Besides logging in to the mobile app, customers can also get support from Chime by email ([email protected]) or by calling +1-844-244-6363, 24 hours a day, 7 days a week. [Chime’s banking services](https://www.investopedia.com/how-chime-makes-money-4796705) are provided via a partnership with Bancorp Bank or Stride Bank, N.A. Both banks are insured by the Federal Deposit Insurance Corporation (FDIC), which means your deposits are insured by the federal government up to $250,000. ## How to Bank Through Chime Chime makes it easy to open an account. To get started, simply head to Chime’s website or download its mobile app. You’ll need to enter some basic personal information and set up an online account. There is no credit check associated with opening a Chime account. Account holders must be at least 18 years old. You must be a U.S. citizen or permanent resident to open a Chime account. Verdict Chime is a top choice for customers who want simple banking options with few fees and an excellent mobile app for banking on the go. Although Chime has no physical locations, it does have a large fee-free ATM network that will meet most customers’ in-person needs. While its savings account offers a decent rate, there are other banks to consider that may offer a higher APY. You'll also want to look elsewhere if you want a full-service bank that offers other products, such as CDs and money market accounts. ## 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 need. [Open Account](https://www.chime.com/) Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. Chime. "[Fee Schedule](https://www.chime.com/policies/bancorp/deposit-account-agreement/#fee-schedule)." 2. Chime. "[Overdraft Worries? Not With SpotMe](https://www.chime.com/spotme/)." 3. Chime. "[Get Your Paycheck Up to Two Days Early](https://www.chime.com/get-paid-early/)." 4. Chime. "[Find ATMs in Your Network](https://www.chime.com/atms/)." 5. Chime. "[Grow Your Money Faster](https://www.chime.com/savings-account/)." 6. Chime. "[Checking Account With No Monthly Fees](https://www.chime.com/checking-account/)." 7. Chime. "[Watch Your Savings Grow, Automatically](https://www.chime.com/automatic-savings/)." 8. Chime. "[Can I Send a Check Using My Chime Checking Account?](https://help.chime.com/hc/en-us/articles/221488407-Can-I-send-a-check-using-my-Chime-Checking-Account-)" 9. Chime. "[What Are My Spending and Cash Withdrawal Limits?](https://help.chime.com/hc/en-us/articles/221487907-What-are-my-spending-and-cash-withdrawal-limits-)" 10. Chime. "[How Can We Help?](https://help.chime.com/hc/en-us)" 11. Chime. "[Are Chime Accounts FDIC insured?](https://help.chime.com/hc/en-us/articles/224459628-Are-Chime-Accounts-FDIC-insured-)" 12. Chime. 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Open Account Chime is a technology company that offers digital banking options for people on the go. Chris Britt and Ryan King created Chime in 2013 as an alternative to traditional banks. Pros & Cons Company Overview Pros & Cons Pros No monthly fees No overdraft fees Early access to direct deposits Large ATM network Cons Poor savings rate Limited services Difficult to make cash deposits Out-of-network ATM charges Company Overview Year Founded 2013 Official Website www.chime.com Banking Products Offered Savings, spending Customer Service Phone line: Monday–Saturday, 7 a.m. to 7 p.m. (CST); Sundays, 9 a.m. to 5 p.m. (CST): 844-244-6363. Open Account Table of Contents View All Chime Banking Review Pros Explained Cons Explained Best for Bank Offerings Customer Service How to Bank Methodology Pros Explained No monthly fees: Chime provides simple banking options free from monthly maintenance or service fees, along with no minimum balance fees. There are also no foreign transaction fees attached to Chime. No overdraft fees: Many traditional banks charge up to $30 for overdraft fees. Chime offers up to $200 fee-free overdraft protection through SpotMe, which is available to customers who receive $200 or more in total monthly direct deposits. Early access to direct deposits: Payday is always a good day, but with Chime, it’s possible to receive your money up to two days early. Large ATM network: Chime customers have access to more than 60,000 fee-free ATMs across the U.S. via MoneyPass ATMs in a 7-Eleven location, and any Allpoint or Visa Plus Alliance ATMs. Cons Explained Average savings rate: Chime’s savings account earns 2.00% annual percentage yield (APY), which is considered a high-yield rate. It’s much better than what’s offered by almost all traditional brick-and-mortar banks, but compared with other online banks, Chime’s savings rate still misses the mark. Limited services: Chime offers simple banking services, so if you’re looking for a full-service bank with certificates of deposit (CDs), money market accounts, and lending options, you’ll need to look elsewhere. Difficult to make cash deposits: Cash deposits are possible at 75,000 retail locations with Chime's cash deposit partners. However, you may pay a fee for this service. Out-of-network ATM charges: Chime might charge a fee for every out-of-network ATM transaction. Who Is Chime Bank Best for? Chime is a good fit for customers looking for simple banking services with no monthly maintenance fees or minimum balance requirements. Chime allows customers to: Open a savings account with no minimum balance requirementOpen a checking account with a debit cardHave access to a large ATM networkUse their debit card overseas without foreign transaction feesDeposit checks electronically through their mobile phone What Does Chime Offer? Chime keeps its service options simple, with only two account choices available. Savings AccountChecking Account (with debit card access) Savings Account Chime offers only one savings option—a high-yield savings account. Chime’s savings account comes with a savings rate of 2.00% APY, which is good but still lower than the best high-yield savings accounts on the market. The savings account comes with two optional automatic savings programs, so customers can reach savings goals faster: Save When You Spend: When enabled, every purchase you make with your Chime Visa debit card is rounded up to the nearest dollar. The rounded-up amount is transferred to your savings account.Save When I Get Paid: Enrolled customers can automatically transfer a percentage of every direct deposit of $500 or more to their savings account. Depositing cash into your Chime savings account is not a simple process. Customers can either transfer money from their Chime checking account or use the Save When I Get Paid feature. Chime Savings Account ACCOUNT NAME MIN OPENING DEPOSIT MONTHLY FEE APY Chime Savings Account  $0 $0 2.00% Checking Account Chime’s checking account comes with a complimentary Visa debit card. Though it doesn’t come with traditional check-writing privileges, you can write checks using the Chime checkbook feature. You simply choose to pay bills through the checkbook feature, and Chime will send a check on your behalf, typically arriving in three to nine business days. There’s no limit on how many checks you can send per day. This feature is only eligible for checks mailed to recipients in all 50 states and the District of Columbia. Customers can use their debit card without paying a fee at more than 60,000 ATMs across the U.S. There are also no foreign transaction fees charged for using your Chime debit card internationally. Unfortunately, using your debit card at out-of-network ATMs can yield a charge per transaction. ATM withdrawals are limited to $515 per day. To combat overdraft fees, Chime offers SpotMe, an overdraft protection service that allows eligible customers to avoid overdraft fees on their spending accounts. SpotMe is available for customers who receive monthly direct deposits totaling at least $200. Chime uses your direct deposit total from the previous 34 days to determine eligibility. Instead of charging a fee, Chime uses your next deposit to cover the overdraft amount. Overdrafts through SpotMe are initially limited to $20, but they may be increased up to $200, based on account history and activity. Chime Checking Account ACCOUNT NAME MIN OPENING DEPOSIT MONTHLY FEE APY Chime Checking Account  $0 $0 None Chime Customer Service Chime embraces mobile banking as evidenced through its mobile phone app, available on iOS and Android. Through the app, customers can: View accountsDeposit checks electronicallySend money to other Chime customersFreeze your card if it is lost or stolenPay billsTransfer funds between accountsReceive transaction notifications  Chime offers several ways to contact its customer service when you need help. Besides logging in to the mobile app, customers can also get support from Chime by email ([email protected]) or by calling +1-844-244-6363, 24 hours a day, 7 days a week. Chime’s banking services are provided via a partnership with Bancorp Bank or Stride Bank, N.A. Both banks are insured by the Federal Deposit Insurance Corporation (FDIC), which means your deposits are insured by the federal government up to $250,000. How to Bank Through Chime Chime makes it easy to open an account. To get started, simply head to Chime’s website or download its mobile app. You’ll need to enter some basic personal information and set up an online account. There is no credit check associated with opening a Chime account. Account holders must be at least 18 years old. You must be a U.S. citizen or permanent resident to open a Chime account. Verdict Chime is a top choice for customers who want simple banking options with few fees and an excellent mobile app for banking on the go. Although Chime has no physical locations, it does have a large fee-free ATM network that will meet most customers’ in-person needs. While its savings account offers a decent rate, there are other banks to consider that may offer a higher APY. You'll also want to look elsewhere if you want a full-service bank that offers other products, such as CDs and money market accounts. 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 need. Open Account Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Chime. "Fee Schedule." Chime. "Overdraft Worries? Not With SpotMe." Chime. "Get Your Paycheck Up to Two Days Early." Chime. "Find ATMs in Your Network." Chime. "Grow Your Money Faster." Chime. "Checking Account With No Monthly Fees." Chime. "Watch Your Savings Grow, Automatically." Chime. "Can I Send a Check Using My Chime Checking Account?" Chime. "What Are My Spending and Cash Withdrawal Limits?" Chime. "How Can We Help?" Chime. "Are Chime Accounts FDIC insured?" Chime. "How Do I Open a Chime Account?" Related Articles Regions Bank Review 2024 Varo Money Review Best Free Checking Accounts KeyBank Review 2024 The 6 Best Online Banks for May 2024 Ally Bank Review

https://www.investopedia.com/uber-earnings-q1-2024-earnings-miss-loss-stock-drops-8644819

Uber Sinks as Gross Bookings Miss Estimates, Investment Charges Drive Net Loss

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Uber stock fell sharply in premarket trading Wednesday following the release of first-quarter results.</li><li>Revenue met estimates while gross bookings fell short, and $721 million in charges related to revaluations of Uber's investments led the company to report a surprising net loss for the quarter.</li><li>For the current quarter, gross bookings are projected to range between $38.75 billion to $40.25 billion, mostly below the $40.12 billion analysts are projecting.</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"> Ridesharing giant Uber Technologies' (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=UBER">UBER</a>) shares sank in premarket trading Wednesday as the company released its first-quarter results. Revenue met estimates but gross bookings missed, and Uber posted a net loss after reporting hundreds of millions in charges related to revaluations of its investments. </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-revenue-meets-expectations-gross-bookings-miss-revaluation-of-investments-contributes-to-net-loss"></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"> Revenue Meets Expectations, Gross Bookings Miss, Revaluation of Investments Contributes to Net Loss </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Uber reported $10.13 billion in revenue, crossing the $10 billion mark for the first time as analysts projected, on $37.65 billion in gross bookings through the platform, below expectations of $38.02 billion, according to estimates compiled by Visible Alpha.<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"> Uber reported a net loss of $654 million, or 32 cents per share, when analysts were expecting profit of $477.2 million, or 22 cents per share. It posted a $721 million pre-tax headwind related to "net unrealized losses related to the revaluation of Uber’s equity investments," the company said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In the first quarter of 2023, Uber reported revenue of $8.82 billion on $31.4 billion in gross bookings, with a net loss of $157 million, or 8 cents per share.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For the current quarter, Uber projects gross bookings to fall between $38.75 billion to $40.25 billion, which would represent growth of 18% to 23% year-over-year on a constant-currency basis. Analysts are looking for $40.12 billion in gross bookings, according to Visible Alpha consensus.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_14-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td></td> <td>Q1 2024 Actuals</td> <td>Analyst Estimates for Q1 2024</td> <td>Q1 2023</td> </tr> <tr> <td>Revenue</td> <td>$10.13 billion</td> <td>$10.1 billion</td> <td>$8.82 billion</td> </tr> <tr> <td>Diluted Earnings Per Share / (Loss)</td> <td>(32 cents)</td> <td>22 cents</td> <td>(8 cents)</td> </tr> <tr> <td>Net Income / (Loss)</td> <td>($654 million)</td> <td>$477.2 million</td> <td>($157 million)</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-pre-report-news-instacart-partnership-analyst-thoughts"></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"> Pre-Report News: Instacart Partnership, Analyst Thoughts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A day ahead of the report, Uber announced a partnership with grocery delivery app Instacart (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CART">CART</a>) to bring Uber Eats restaurant delivery to the Instacart app "in the coming weeks" nationwide.<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"> “Through this partnership, Instacart customers now have access to both the best online grocery selection in the U.S. and restaurant delivery, making it even easier for them to conveniently tackle all their food needs from a single app,” Instacart <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>) Fidji Simo said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In the weeks <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/uber-q1-fy-2024-earnings-preview-8640233">leading up to the report</a>, Jefferies analysts <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/uber-stock-gets-bump-from-jefferies-price-target-increase-8625365">raised their target price</a> for Uber stock to $100 from $95, writing that the company's top line could benefit as consumers adopt new booking methods that have been released in recent months. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In an April 29 note, Bank of America analysts wrote that they would be looking for executives to answer questions about Uber's plans to deal with the rise of autonomous vehicles through companies like Waymo and Tesla that could act as taxis and disrupt Uber's business model. While the shift to autonomous vehicles will take years, the analysts wrote, events like Tesla's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/elon-musk-says-tesla-will-unveil-robotaxi-in-august-here-is-what-you-need-to-know-8627875">planned robotaxi reveal</a> currently scheduled for August could negatively impact Uber's stock price. </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"> Uber shares fell as much as 9% in the minutes after the report's release, and recovered slightly to be down about 6% to $66.30 about 90 minutes before the opening bell. </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"> <em>Correction—May 8, 2024: This article has been updated to correct that Uber did not swing to a loss.</em> </p></div>

### Key Takeaways * Uber stock fell sharply in premarket trading Wednesday following the release of first-quarter results. * Revenue met estimates while gross bookings fell short, and $721 million in charges related to revaluations of Uber's investments led the company to report a surprising net loss for the quarter. * For the current quarter, gross bookings are projected to range between $38.75 billion to $40.25 billion, mostly below the $40.12 billion analysts are projecting. Ridesharing giant Uber Technologies' ([UBER](https://www.investopedia.com/markets/quote?tvwidgetsymbol=UBER)) shares sank in premarket trading Wednesday as the company released its first-quarter results. Revenue met estimates but gross bookings missed, and Uber posted a net loss after reporting hundreds of millions in charges related to revaluations of its investments. ## Revenue Meets Expectations, Gross Bookings Miss, Revaluation of Investments Contributes to Net Loss Uber reported $10.13 billion in revenue, crossing the $10 billion mark for the first time as analysts projected, on $37.65 billion in gross bookings through the platform, below expectations of $38.02 billion, according to estimates compiled by Visible Alpha. Uber reported a net loss of $654 million, or 32 cents per share, when analysts were expecting profit of $477.2 million, or 22 cents per share. It posted a $721 million pre-tax headwind related to "net unrealized losses related to the revaluation of Uber’s equity investments," the company said. In the first quarter of 2023, Uber reported revenue of $8.82 billion on $31.4 billion in gross bookings, with a net loss of $157 million, or 8 cents per share. For the current quarter, Uber projects gross bookings to fall between $38.75 billion to $40.25 billion, which would represent growth of 18% to 23% year-over-year on a constant-currency basis. Analysts are looking for $40.12 billion in gross bookings, according to Visible Alpha consensus. | | Q1 2024 Actuals | Analyst Estimates for Q1 2024 | Q1 2023 | | --- | --- | --- | --- | | Revenue | $10.13 billion | $10.1 billion | $8.82 billion | | Diluted Earnings Per Share / (Loss) | (32 cents) | 22 cents | (8 cents) | | Net Income / (Loss) | ($654 million) | $477.2 million | ($157 million) | ## Pre-Report News: Instacart Partnership, Analyst Thoughts A day ahead of the report, Uber announced a partnership with grocery delivery app Instacart ([CART](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CART)) to bring Uber Eats restaurant delivery to the Instacart app "in the coming weeks" nationwide. “Through this partnership, Instacart customers now have access to both the best online grocery selection in the U.S. and restaurant delivery, making it even easier for them to conveniently tackle all their food needs from a single app,” Instacart [Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) Fidji Simo said. In the weeks [leading up to the report](https://www.investopedia.com/uber-q1-fy-2024-earnings-preview-8640233), Jefferies analysts [raised their target price](https://www.investopedia.com/uber-stock-gets-bump-from-jefferies-price-target-increase-8625365) for Uber stock to $100 from $95, writing that the company's top line could benefit as consumers adopt new booking methods that have been released in recent months. In an April 29 note, Bank of America analysts wrote that they would be looking for executives to answer questions about Uber's plans to deal with the rise of autonomous vehicles through companies like Waymo and Tesla that could act as taxis and disrupt Uber's business model. While the shift to autonomous vehicles will take years, the analysts wrote, events like Tesla's [planned robotaxi reveal](https://www.investopedia.com/elon-musk-says-tesla-will-unveil-robotaxi-in-august-here-is-what-you-need-to-know-8627875) currently scheduled for August could negatively impact Uber's stock price. Uber shares fell as much as 9% in the minutes after the report's release, and recovered slightly to be down about 6% to $66.30 about 90 minutes before the opening bell. *Correction—May 8, 2024: This article has been updated to correct that Uber did not swing to a loss.*

Key Takeaways Uber stock fell sharply in premarket trading Wednesday following the release of first-quarter results.Revenue met estimates while gross bookings fell short, and $721 million in charges related to revaluations of Uber's investments led the company to report a surprising net loss for the quarter.For the current quarter, gross bookings are projected to range between $38.75 billion to $40.25 billion, mostly below the $40.12 billion analysts are projecting. Ridesharing giant Uber Technologies' (UBER) shares sank in premarket trading Wednesday as the company released its first-quarter results. Revenue met estimates but gross bookings missed, and Uber posted a net loss after reporting hundreds of millions in charges related to revaluations of its investments. Revenue Meets Expectations, Gross Bookings Miss, Revaluation of Investments Contributes to Net Loss Uber reported $10.13 billion in revenue, crossing the $10 billion mark for the first time as analysts projected, on $37.65 billion in gross bookings through the platform, below expectations of $38.02 billion, according to estimates compiled by Visible Alpha. Uber reported a net loss of $654 million, or 32 cents per share, when analysts were expecting profit of $477.2 million, or 22 cents per share. It posted a $721 million pre-tax headwind related to "net unrealized losses related to the revaluation of Uber’s equity investments," the company said. In the first quarter of 2023, Uber reported revenue of $8.82 billion on $31.4 billion in gross bookings, with a net loss of $157 million, or 8 cents per share. For the current quarter, Uber projects gross bookings to fall between $38.75 billion to $40.25 billion, which would represent growth of 18% to 23% year-over-year on a constant-currency basis. Analysts are looking for $40.12 billion in gross bookings, according to Visible Alpha consensus. Q1 2024 Actuals Analyst Estimates for Q1 2024 Q1 2023 Revenue $10.13 billion $10.1 billion $8.82 billion Diluted Earnings Per Share / (Loss) (32 cents) 22 cents (8 cents) Net Income / (Loss) ($654 million) $477.2 million ($157 million) Pre-Report News: Instacart Partnership, Analyst Thoughts A day ahead of the report, Uber announced a partnership with grocery delivery app Instacart (CART) to bring Uber Eats restaurant delivery to the Instacart app "in the coming weeks" nationwide. “Through this partnership, Instacart customers now have access to both the best online grocery selection in the U.S. and restaurant delivery, making it even easier for them to conveniently tackle all their food needs from a single app,” Instacart Chief Executive Officer (CEO) Fidji Simo said. In the weeks leading up to the report, Jefferies analysts raised their target price for Uber stock to $100 from $95, writing that the company's top line could benefit as consumers adopt new booking methods that have been released in recent months. In an April 29 note, Bank of America analysts wrote that they would be looking for executives to answer questions about Uber's plans to deal with the rise of autonomous vehicles through companies like Waymo and Tesla that could act as taxis and disrupt Uber's business model. While the shift to autonomous vehicles will take years, the analysts wrote, events like Tesla's planned robotaxi reveal currently scheduled for August could negatively impact Uber's stock price. Uber shares fell as much as 9% in the minutes after the report's release, and recovered slightly to be down about 6% to $66.30 about 90 minutes before the opening bell. Correction—May 8, 2024: This article has been updated to correct that Uber did not swing to a loss.

https://www.investopedia.com/30-year-mortgage-rates-drop-to-new-2-week-low-8604365

30-Year Mortgage Rates Fall to New 2-Week Low

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year new purchase loans dropped Monday to their cheapest level since mid-February, landing at an average of 7.35%. Rates for other new purchase mortgages were mixed, while Monday refi rates mostly climbed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Because rates vary widely across lenders, it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly, no matter the type of home loan you're seeking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_5-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.35%</td> <td>7.84%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.37%</td> <td>7.89%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.82%</td> <td>6.83%</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.77%</td> <td>6.91%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.66%</td> <td>7.74%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_7-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> After recently shooting up to 7.48%—the priciest level in almost three months—30-year new purchase rates have come down an eighth of a point. Shedding 3 basis points Monday, the 30-year average has fallen to 7.35%, its lowest mark since Feb. 15. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_14-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/9zJmP/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="History of 30y average since Jun 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_17-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Rates on 15-year new purchase loans were roughly flat on Monday, adding a minimal basis point to raise the average to 6.77%. That's about two-thirds of a percentage point more expensive than we saw just before the new year when 15-year rates sank to a seven-month low of 6.10%. But in October, 15-year rates soared to a 7.59% peak—their highest level since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> After jumping last week to a three-month-high of 6.95%, the jumbo 30-year average is holding at a slightly lower 6.82%. Though daily historical jumbo rates were not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Many new purchase averages marked time Monday or moved only a basis point or two. The biggest movers were VA 30-year loans, whose average plunged 23 basis points, and 20-year loans, whose rates fell 8 points on average. On the other side of the coin, 7/6 adjustable-rate loans saw rates rise by 6 basis points </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_25-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.35%</td> <td>-0.03</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.37%</td> <td>No Change</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.10%</td> <td>-0.23</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.82%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.15%</td> <td>-0.08</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.77%</td> <td>+0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.84%</td> <td>-0.01</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.67%</td> <td>No Change</td> </tr> <tr> <td>10/6 ARM</td> <td>7.57%</td> <td>-0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>7.58%</td> <td>+0.06</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.45%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.66%</td> <td>+0.02</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_27-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/RFqdJ/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_29-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Most refinancing averages moved to higher ground Monday, including a jump of 15 basis points in the 30-year refi average. That widens Monday's gap between 30-year new purchase and refi rates to 49 basis points, vs. just 31 points Friday. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Similar to new purchase rates, Monday's 15-year and jumbo 30-year refi averages were essentially flat, while the 20-year refi average sank 19 basis points. Among the climbing refi averages, FHA 30-year and VA 30-year loans saw increases of 8 and 9 basis points, respectively. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_39-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 155px;"></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - Refinance</th> </tr> <tr> <th>Loan Type</th> <th><b>Refinance Rates</b></th> <th>Daily Change</th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.84%</td> <td>+0.15</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.89%</td> <td>+0.08</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.62%</td> <td>+0.09</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.83%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.46%</td> <td>-0.19</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.91%</td> <td>-0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.97%</td> <td>+0.05</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.78%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.85%</td> <td>No Change</td> </tr> <tr> <td>10/6 ARM</td> <td>7.75%</td> <td>+0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>7.83%</td> <td>+0.04</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.74%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.55%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_44-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here.</p></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_45-0"><div class="comp mortgage-loan-calculator mntl-block" data-defer="load" id="mortgage-loan-calculator_1-0"></div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-lowest-mortgage-rates-by-state"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-heading__text"> Lowest Mortgage Rates by State </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Alabama, Minnesota, Oregon, Arizona, Georgia, and Nevada. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_52-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/iVTqt/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="State-by-state average minimum rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/jerome-powell-5210572">Jerome Powell</a> stated that inflation is still too high, and they will therefore proceed cautiously on deciding <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695">when to make the first rate cut</a>. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%.<span class="ql-inline-citation" data-cite="5"></span> But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>

Rates on 30-year new purchase loans dropped Monday to their cheapest level since mid-February, landing at an average of 7.35%. Rates for other new purchase mortgages were mixed, while Monday refi rates mostly climbed. Because rates vary widely across lenders, it's always smart to shop around for [your best mortgage option](https://www.investopedia.com/mortgage-rates-5094943) and compare rates regularly, no matter the type of home loan you're seeking. | National Averages of Lenders' Best Rates | | | | --- | --- | --- | | **Loan Type** | **New Purchase** | **Refinance** | | 30-Year Fixed | 7.35% | 7.84% | | FHA 30-Year Fixed | 7.37% | 7.89% | | Jumbo 30-Year Fixed | 6.82% | 6.83% | | 15-Year Fixed | 6.77% | 6.91% | | 5/6 ARM | 7.66% | 7.74% | National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. ## Today's Mortgage Rate Averages: New Purchase After recently shooting up to 7.48%—the priciest level in almost three months—30-year new purchase rates have come down an eighth of a point. Shedding 3 basis points Monday, the 30-year average has fallen to 7.35%, its lowest mark since Feb. 15. Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. [Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943) Rates on 15-year new purchase loans were roughly flat on Monday, adding a minimal basis point to raise the average to 6.77%. That's about two-thirds of a percentage point more expensive than we saw just before the new year when 15-year rates sank to a seven-month low of 6.10%. But in October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping last week to a three-month-high of 6.95%, the jumbo 30-year average is holding at a slightly lower 6.82%. Though daily historical jumbo rates were not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Many new purchase averages marked time Monday or moved only a basis point or two. The biggest movers were VA 30-year loans, whose average plunged 23 basis points, and 20-year loans, whose rates fell 8 points on average. On the other side of the coin, 7/6 adjustable-rate loans saw rates rise by 6 basis points | National Averages of Lenders' Best Rates - New Purchase | | | | --- | --- | --- | | Loan Type | **New Purchase Rates** | **Daily Change** | | 30-Year Fixed | 7.35% | -0.03 | | FHA 30-Year Fixed | 7.37% | No Change | | VA 30-Year Fixed | 7.10% | -0.23 | | Jumbo 30-Year Fixed | 6.82% | No Change | | 20-Year Fixed | 7.15% | -0.08 | | 15-Year Fixed | 6.77% | +0.01 | | FHA 15-Year Fixed | 6.84% | -0.01 | | Jumbo 15-Year Fixed | 6.78% | No Change | | 10-Year Fixed | 6.67% | No Change | | 10/6 ARM | 7.57% | -0.01 | | 7/6 ARM | 7.58% | +0.06 | | Jumbo 7/6 ARM | 6.45% | No Change | | 5/6 ARM | 7.66% | +0.02 | | Jumbo 5/6 ARM | 6.55% | No Change | ## The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a *weekly* average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with [discount points](https://www.investopedia.com/terms/d/discountpoints.asp), while Investopedia’s averages only include zero-point loans. ## Today's Mortgage Rate Averages: Refinancing Most refinancing averages moved to higher ground Monday, including a jump of 15 basis points in the 30-year refi average. That widens Monday's gap between 30-year new purchase and refi rates to 49 basis points, vs. just 31 points Friday. Similar to new purchase rates, Monday's 15-year and jumbo 30-year refi averages were essentially flat, while the 20-year refi average sank 19 basis points. Among the climbing refi averages, FHA 30-year and VA 30-year loans saw increases of 8 and 9 basis points, respectively. | National Averages of Lenders' Best Rates - Refinance | | | | --- | --- | --- | | Loan Type | **Refinance Rates** | Daily Change | | 30-Year Fixed | 7.84% | +0.15 | | FHA 30-Year Fixed | 7.89% | +0.08 | | VA 30-Year Fixed | 7.62% | +0.09 | | Jumbo 30-Year Fixed | 6.83% | No Change | | 20-Year Fixed | 7.46% | -0.19 | | 15-Year Fixed | 6.91% | -0.01 | | FHA 15-Year Fixed | 6.97% | +0.05 | | Jumbo 15-Year Fixed | 6.78% | No Change | | 10-Year Fixed | 6.85% | No Change | | 10/6 ARM | 7.75% | +0.01 | | 7/6 ARM | 7.83% | +0.04 | | Jumbo 7/6 ARM | 6.55% | No Change | | 5/6 ARM | 7.74% | +0.01 | | Jumbo 5/6 ARM | 6.55% | No Change | Calculate monthly payments for different loan scenarios with our [Mortgage Calculator](https://www.investopedia.com/mortgage-calculator-5084794). ### The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. ## Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Alabama, Minnesota, Oregon, Arizona, Georgia, and Nevada. ## What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: * The level and direction of the bond market, especially 10-year Treasury yields * The [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) current monetary policy, especially as it relates to bond buying and funding government-backed mortgages * Competition between [mortgage lenders and across loan types](https://www.investopedia.com/best-mortgage-lenders-5076852) Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This [bond-buying policy](https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp) is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair [Jerome Powell](https://www.investopedia.com/jerome-powell-5210572) stated that inflation is still too high, and they will therefore proceed cautiously on deciding [when to make the first rate cut](https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695). Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. ## How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a [loan-to-value ratio (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

Rates on 30-year new purchase loans dropped Monday to their cheapest level since mid-February, landing at an average of 7.35%. Rates for other new purchase mortgages were mixed, while Monday refi rates mostly climbed. Because rates vary widely across lenders, it's always smart to shop around for your best mortgage option and compare rates regularly, no matter the type of home loan you're seeking. National Averages of Lenders' Best Rates Loan Type New Purchase Refinance 30-Year Fixed 7.35% 7.84% FHA 30-Year Fixed 7.37% 7.89% Jumbo 30-Year Fixed 6.82% 6.83% 15-Year Fixed 6.77% 6.91% 5/6 ARM 7.66% 7.74% National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Today's Mortgage Rate Averages: New Purchase After recently shooting up to 7.48%—the priciest level in almost three months—30-year new purchase rates have come down an eighth of a point. Shedding 3 basis points Monday, the 30-year average has fallen to 7.35%, its lowest mark since Feb. 15. Given that 30-year rates dipped into 6% territory at the start of February, the current average is still elevated. But rates are notably cheaper than October, when the 30-year average notched a historic 23-year peak of 8.45%. Compare the Best Mortgage Rates Today - May 21, 2024 Rates on 15-year new purchase loans were roughly flat on Monday, adding a minimal basis point to raise the average to 6.77%. That's about two-thirds of a percentage point more expensive than we saw just before the new year when 15-year rates sank to a seven-month low of 6.10%. But in October, 15-year rates soared to a 7.59% peak—their highest level since 2000. After jumping last week to a three-month-high of 6.95%, the jumbo 30-year average is holding at a slightly lower 6.82%. Though daily historical jumbo rates were not available before 2009, it's estimated the 7.52% peak reached in October was the most expensive jumbo 30-year average in more than 20 years. Many new purchase averages marked time Monday or moved only a basis point or two. The biggest movers were VA 30-year loans, whose average plunged 23 basis points, and 20-year loans, whose rates fell 8 points on average. On the other side of the coin, 7/6 adjustable-rate loans saw rates rise by 6 basis points National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.35% -0.03 FHA 30-Year Fixed 7.37% No Change VA 30-Year Fixed 7.10% -0.23 Jumbo 30-Year Fixed 6.82% No Change 20-Year Fixed 7.15% -0.08 15-Year Fixed 6.77% +0.01 FHA 15-Year Fixed 6.84% -0.01 Jumbo 15-Year Fixed 6.78% No Change 10-Year Fixed 6.67% No Change 10/6 ARM 7.57% -0.01 7/6 ARM 7.58% +0.06 Jumbo 7/6 ARM 6.45% No Change 5/6 ARM 7.66% +0.02 Jumbo 5/6 ARM 6.55% No Change The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading added 4 basis points to reach 6.94%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with discount points, while Investopedia’s averages only include zero-point loans. Today's Mortgage Rate Averages: Refinancing Most refinancing averages moved to higher ground Monday, including a jump of 15 basis points in the 30-year refi average. That widens Monday's gap between 30-year new purchase and refi rates to 49 basis points, vs. just 31 points Friday. Similar to new purchase rates, Monday's 15-year and jumbo 30-year refi averages were essentially flat, while the 20-year refi average sank 19 basis points. Among the climbing refi averages, FHA 30-year and VA 30-year loans saw increases of 8 and 9 basis points, respectively. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.84% +0.15 FHA 30-Year Fixed 7.89% +0.08 VA 30-Year Fixed 7.62% +0.09 Jumbo 30-Year Fixed 6.83% No Change 20-Year Fixed 7.46% -0.19 15-Year Fixed 6.91% -0.01 FHA 15-Year Fixed 6.97% +0.05 Jumbo 15-Year Fixed 6.78% No Change 10-Year Fixed 6.85% No Change 10/6 ARM 7.75% +0.01 7/6 ARM 7.83% +0.04 Jumbo 7/6 ARM 6.55% No Change 5/6 ARM 7.74% +0.01 Jumbo 5/6 ARM 6.55% No Change Calculate monthly payments for different loan scenarios with our Mortgage Calculator. The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Vermont, Hawaii, Iowa, and Louisiana, while the states with the most expensive rates were Alabama, Minnesota, Oregon, Arizona, Georgia, and Nevada. What Causes Mortgage Rates to Rise or Fall? Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: The level and direction of the bond market, especially 10-year Treasury yields The Federal Reserve's current monetary policy, especially as it relates to bond buying and funding government-backed mortgages Competition between mortgage lenders and across loan types Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This bond-buying policy is a major influencer of mortgage rates. But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022. Between that time and July 2023, the Fed aggressively raised the federal funds rate to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. The Fed has opted to hold rates steady at its last four meetings, the last of which concluded Jan. 31. Though the central bank's statement signaled that we have almost certainly reached the end of Fed rate hikes in this campaign, Fed Chair Jerome Powell stated that inflation is still too high, and they will therefore proceed cautiously on deciding when to make the first rate cut. Specifically, he indicated it's unlikely they will be ready for any rate reduction by the time of their next meeting, which is scheduled for March 19–20. After its December meeting, the Fed released quarterly data that showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%. But when in 2024 these will begin—and ultimately how many are implemented this year—is an open question at this time. How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a loan-to-value ratio (LTV) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.

https://www.investopedia.com/terms/i/insurtech.asp

Overview of Insurtech & Its Impact on the Insurance Industry

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-insurtech"></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 Insurtech? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Insurtech refers to the use of technology innovations designed to find cost savings and efficiency from the current <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance.asp">insurance</a> industry model. Insurtech is a combination of the words “insurance” and “technology,” inspired by the term fintech.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Insurtech is the use of technology innovations designed to make the current insurance model more efficient.</li><li>By using technology such as data analysis, IoT, and AI, insurtech allows products to be priced more competitively.</li><li>Insurtech is used to more effectively process claims, evaluate risk, process contracts, or underwrite policies.</li><li>Insurtech is similar to fintech, as both leverage modern solutions that are revolutionizing each respective traditional industry.</li><li>There are headwinds for insurtechs, notably regulation issues and a reluctance of established insurers to work with them. </li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-insurtech"></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 Insurtech </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Insurtech is premised on the belief that the insurance industry is ripe for innovation and disruption. Insurtech is exploring avenues that large insurance firms have less incentive to exploit, such as offering ultra-customized policies, social insurance, and using new streams of data from Internet-enabled devices to dynamically price premiums according to observed behavior. </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"> Regarding traditional insurance, some people pay more than they should be based on the basic level of data used to group people. Among other things, insurtech is looking to tackle this data and analysis issue head-on. Using inputs from all manners of devices, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/geolocation.asp">geolocation</a> tracking of cars to the activity trackers on our wrists, these companies are building more finely delineated groupings of risk, allowing products to be priced more competitively.<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"> In addition to better pricing models, insurtech <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/startup.asp">startups</a> are testing the waters on a host of potential game-changers. These include using deep learning trained artificial intelligence (AI) to handle the tasks of brokers and find the right mix of policies to complete an individual’s coverage. </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 is also interest in the use of apps to pull disparate policies into one platform for management and monitoring, creating on-demand insurance for micro-events like borrowing a friend's car, and the adoption of the peer-to-peer model to both create customized group coverage and incentivize positive choices through group rebates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>There are many similarities to the goals and implementations of insurtech and fintech, as both the insurance industry and financial industry are undergoing substantial process changes.</p></div></div></div> <span class="heading-toc" id="toc-importance-of-insurtech"></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"> Importance of Insurtech </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Insurtech plays an important part in changing how coverage is applied and paid for in a number of different ways: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <li><strong>Insurtech enhances the customer experience.</strong> By leveraging technology, customers are more engaged in selecting their coverage, understanding their needs, and getting personalized service. Instead of having to travel to a branch or speak to a representative, the future of insurtech is moving towards self-serve, online dealings where customers have their choice of engagement channel.</li> <li><strong>Insurtech promotes efficiency. </strong>Policy-seekers and policy-holders can often research and explore options using the internet and apps. Without having to wait for business hours or an available representative, many insurtech companies empower users to quickly access the information they need without being bogged down in processes.</li> <li><strong>Insurtech emphasizes individuality. </strong>Due to the innovative nature of information gathering and data processing, many new tools (discussed below) are now available to better understand each individual's true needs. This not only improves pricing but delivers more reliable, consistent coverage based on historical data.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Insurtech improves flexibility. </strong>Modern insurtech offerings are more likely to have flexibile, customized, short-term, or transferrable plans. Instead of needing to lock into long-term arrangements, insurtech is more likely to give individuals specific coverage for a specific need over a specific duration.</li> <li><strong>Insurtech reduces operating costs. </strong>Traditional insurance companies relied on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brickandmortar.asp">brick-and-mortar</a> locations that necessitated manual labor. Now, insurtech companies can operate remotely with staff engaging with customers around the world. The operating model of the online company is similar skimmer with less overhead.</li> <li><strong>Insurtech may decrease fraud.</strong> By leveraging data, analytics, trend analysis, and machine learning, insurtech companies may be able to detect fraudulent activities if inconsistencies in data arises. In addition, big data may also be able to discover potential loopholes that insurers can seek to close to avoid exploitation.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-what-insurance-areas-does-insurtech-solve"></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"> What Insurance Areas Does Insurtech Solve? </span> </h2> <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"> Claims Management </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The claims management process traditionally resulted in manually reviewing each claim, deciding what compensation to award, then remitting that compensation. Now, insurtech companies aim to build processes that automate certain processes and detect fraud. </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"> Larger companies can leverage technology to gather and aggregate specific data points regarding specific claims. These claims may also be validated using automation by comparing different data streams. Last, large companies can use automation or repetitive workflows to pay out a large number of claims with minimal human intervention. </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"> Underwriting </span> </h3> <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/u/underwriting.asp">underwriting</a> process entails reviewing an individual's profile, assessing their risk profile, and extending them an insurance package offer that includes their coverage. The information provided to a client also includes their monthly premium in addition to what compensation they may be entitled to under various claims. </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"> Much of this data can be mined or gathered automatically. Even if a client must submit information, modern technology uses many data points to compare against historical data that can continually learn, grow, and make more educated assumptions. This means the data decides for itself whether to extend a policy to the individual and what price is fair for the associated level of risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-subheading__text"> Contract Execution </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Whether it's related to paying out a claim, enforcing a different insurance level tier, closing a customer's policy that has expired, or approving a new customer, there are a tremendous number of contracts that occur related to insurance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> When leveraging blockchain technology, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-contracts.asp">smart contracts</a> can be triggered to execute when specific criteria is met. This eliminates the human element for needing to handle the contract, and this allows an unbiased, neutral party (i.e. technology) to evaluate the criteria of a contract and decide the appropriate course of action. </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"> Risk Mitigation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> As mentioned earlier, big data can be used to gather, analyze, and summarize information. This includes analyzing a customer's historical activity or assessing a broad range of claim types. Based on the information gathered, insurers may be able to detect fraud, protect against unsuitable risk, or better understand where they may be most exposed. </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 no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>According to Grand View Research, the total insurtech industry value in 2022 was $5.4 billion. The revenue forecast for 2030 is $152 billion.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-innovations-driving-insurtech-change"></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"> Innovations Driving Insurtech Change </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> There continues to be a growing, evolving range of technology used in insurtech that changes the way insurance is being performed. Here are the following most notable technologies being leveraged. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Artificial Intelligence/Machine Learning </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Artificial intelligence functions allow certain tasks that previously required human interaction to now be performed exclusively reliant on technology. For example, customers would previously have to interact with representatives to have questions answered; now, interactive discussions with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chatbot.asp">chatbots</a> may allow a customer to receive help without talking to a human. </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"> A subset of artificial intelligence is machine learning, the ability to extract historical data and compile predictive models. These models are then used to distribute information and may be set to a feedback loop. If future data in fed into the model, the model may "learn" and continually evaluate how to calculate appropriate premiums based on demographics or risk profiles. </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"> Automation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Insurtech change relies on efficiency. This means that when insurance clients fill out a document online, that record is automatically stored in a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/data-warehousing.asp">data warehouse</a> or used to automatically compile a policy ready for signature. Automation tools are utilized to avoid manual human intervention when technological tools can carry out a process on its own. </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"> Big Data </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Big data refers to the collection of massive amounts of information. This includes a broad range of data, the fast collection of real-time data, and a variety of data sets. Big data collection techniques allow insurers to gather a broader set of data used to analyze the risk profile of a customer to better understand their characteristics and habits. In addition, this information can be gathered for millions of customers and fed into predictive models discussed earlier. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-subheading__text"> Blockchain </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Though most known for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a>, the fundamental basis for blockchain technology is immutable, distributed legers. This allows for unalterable record-keeping to ensure security and reliability in information storage. It also allows for smart contract execution to reside on a blockchain, remaining dormant until specific conditions are met to release insurance proceeds or validate an insurance client. </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"> Drones </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Insurtech also relies on innovative hardware technologies as well. <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/010615/how-drones-are-changing-business-world.asp">Drones</a> can be used to assess properties, evaluate property damage where it might have been physically unsafe for humans to traverse, or audit a site for a claim. Drones are now becoming increasingly reliant on high-definition photo and video quality, allowing for assessors to heavily rely on photographs and stored images from flights. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_63-0"> <span class="mntl-sc-block-subheading__text"> Internet of Things </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Another insurtech innovation that relies on physical innovation is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/internet-things.asp">Internet of Things (IoT)</a>. Though a digital concept, IoT relies on the interaction between physical goods and software. For example, auto insurers now commonly offer devices that gauge vehicle speed, handling, and driving habits that can be used to reward positive driving habits or penalize negative driving habits. While this level of information has never been available before, insurance companies can now base premiums on the smallest of details. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_66-0"><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_67-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>According to Hourly, there are over 3,400 insurtech companies, up from 1,500 companies in 2018.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-insurtech-companies"></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"> Insurtech Companies </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Below are examples of real insurtech companies and the ways each are innovating the insurance industry. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-subheading__text"> Lemonade </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Lemonade directly sells insurance coverage via a custom mobile app. This coverage is sold directly to the customer as opposed to being transmitted via brokers. Insurance policies include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance/renters-insurance/">renters' insurance</a>, homeowners' insurance, pet insurance, and auto insurance. All insurance claims processing is performed through the digital platform. </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"> Dacadoo </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Dacadoo leverages consumer devices such as phones and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wearable-technology.asp">smartwatches</a> to gather information via an integrated API. This information crafts individual consumer profiles that allows Dacadoo to assess risk in real-time and adjust profiles based on positive or negative life improvements. </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"> Bdeo </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Bdeo leverages artificial intelligence to improve the claim processing experience. Bdeo relies on chatbots to interact with customers to gather claim information. The chatbot gives direction on what information is needed, how to photograph the damage, and where to input information. Then, remote adjusters analyze the information provided. The company also leverages a computer vision model that utilizes technology to minimize adjustor misevaluations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_80-0"> <span class="mntl-sc-block-subheading__text"> Etherisc </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Etherisc leverages blockchain technology to utilize smart contracts. Etherisc gathers information from third-party providers. Then, as events unfold, the company is able to have their contracts automatically perform tasks based on outcomes that are compared against this third-party information. For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agribusiness.asp">agribusiness</a> insurance claims may automatically process when specific natural conditions occur; these natural conditions such as rainfall are compared with third-party data to ensure no fraudulent activity may occur. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Avinew </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Avinew is a pioneer in the insurtech industry regarding internet of thing technology. The company offers lower premiums to customers who change their driving habits, choose less risky routes, or use an automatic driving system. This information is all possible by onboard devices that track vehicle useage and tendencies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <span class="heading-toc" id="toc-criticism-of-insurtech"></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"> Criticism of Insurtech </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Although many of these innovations are long overdue, there are reasons why the incumbent insurance companies are so reluctant to adapt. Insurance is a highly regulated industry with many layers of jurisdictional legal baggage to deal with. As such, the major companies have survived this long by being incredibly cautious, which has made them shy away from working with any startups—let alone startups in their own, very stable industry. </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"> This is a bigger problem than it sounds, as many of the insurtech startups still require the help of traditional insurers to handle underwriting and manage catastrophic risk. That said, as more insurtech startups garner consumer interest with a refined model and a user-friendly approach, they may find that the incumbent players warm to the idea of insurtech and become interested in buying up some of the innovation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> There is also a certain level of privacy that is relinquished when adopting insurtech methodologies. Consider tracking devices that can detect whether you actually stop at stop signs. These devices also track your location, the places you visit, and how long you are at those locations. For some, this level of data collection and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personally-identifiable-information-pii.asp">personally identifiable information</a> is less preferable than the benefit received from the efficient, innovation of insurtech.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_93-0"><span class="heading-toc" id="toc-what-does-insurtech-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Insurtech Mean?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Insurtech is a combination of "insurance" and "technology". It is an emerging industry that utilizes technology and modern innovations to change how traditional insurance is performed.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_95-0"><span class="heading-toc" id="toc-is-insurtech-a-component-of-fintech"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Insurtech a Component of Fintech?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Insurtech and fintech are often considered two different industries. Both rely on modern solutions to change how traditional services are performed. However, there are many differences between the financial sector and insurance sector. Therefore, insurtech companies are not likely to offer financial services in addition to insurance coverage.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_97-0"><span class="heading-toc" id="toc-how-does-insurtech-make-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Insurtech Make Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Insurtech relies on minimal overhead and operational efficient to make money. Though it still earns revenue from clients, the goal is to have minimal costs by eliminating a physical office or personnel to perform tasks that have been eliminated through chatbots or automation. Due to lower costs, insurtech companies are often able to offer lower prices.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_99-0"><span class="heading-toc" id="toc-is-insurtech-better-than-traditional-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Insurtech Better than Traditional Insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Some customers may prefer face-to-face interactions with a dedicated insurance agent they've gotten to know for years. Other customers may prefer to self-select their own policy that can be canceled using an app. Insurtech simply offers a different method of delivering insurance coverage that traditional insurance may not have been able to offer. Whether one is better than the other is simply a matter of consumer preference.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_101-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_102-0"> The traditional insurance industry is being disrupted by the introduction of technology. This new sector called insurtech offers customers a new way to do things by gathering information differently, executing contracts more efficiently, and analyzing information more accurately. Though some may feel the insurance industry will be losing a personal touch, insurtech strives to offer lower, more custom, and more flexible coverage. </p></div>

## What Is Insurtech? Insurtech refers to the use of technology innovations designed to find cost savings and efficiency from the current [insurance](https://www.investopedia.com/terms/i/insurance.asp) industry model. Insurtech is a combination of the words “insurance” and “technology,” inspired by the term fintech. ### Key Takeaways * Insurtech is the use of technology innovations designed to make the current insurance model more efficient. * By using technology such as data analysis, IoT, and AI, insurtech allows products to be priced more competitively. * Insurtech is used to more effectively process claims, evaluate risk, process contracts, or underwrite policies. * Insurtech is similar to fintech, as both leverage modern solutions that are revolutionizing each respective traditional industry. * There are headwinds for insurtechs, notably regulation issues and a reluctance of established insurers to work with them. ## Understanding Insurtech Insurtech is premised on the belief that the insurance industry is ripe for innovation and disruption. Insurtech is exploring avenues that large insurance firms have less incentive to exploit, such as offering ultra-customized policies, social insurance, and using new streams of data from Internet-enabled devices to dynamically price premiums according to observed behavior. Regarding traditional insurance, some people pay more than they should be based on the basic level of data used to group people. Among other things, insurtech is looking to tackle this data and analysis issue head-on. Using inputs from all manners of devices, including [geolocation](https://www.investopedia.com/terms/g/geolocation.asp) tracking of cars to the activity trackers on our wrists, these companies are building more finely delineated groupings of risk, allowing products to be priced more competitively. In addition to better pricing models, insurtech [startups](https://www.investopedia.com/terms/s/startup.asp) are testing the waters on a host of potential game-changers. These include using deep learning trained artificial intelligence (AI) to handle the tasks of brokers and find the right mix of policies to complete an individual’s coverage. There is also interest in the use of apps to pull disparate policies into one platform for management and monitoring, creating on-demand insurance for micro-events like borrowing a friend's car, and the adoption of the peer-to-peer model to both create customized group coverage and incentivize positive choices through group rebates. ### There are many similarities to the goals and implementations of insurtech and fintech, as both the insurance industry and financial industry are undergoing substantial process changes. ## Importance of Insurtech Insurtech plays an important part in changing how coverage is applied and paid for in a number of different ways: * **Insurtech enhances the customer experience.** By leveraging technology, customers are more engaged in selecting their coverage, understanding their needs, and getting personalized service. Instead of having to travel to a branch or speak to a representative, the future of insurtech is moving towards self-serve, online dealings where customers have their choice of engagement channel. * **Insurtech promotes efficiency.** Policy-seekers and policy-holders can often research and explore options using the internet and apps. Without having to wait for business hours or an available representative, many insurtech companies empower users to quickly access the information they need without being bogged down in processes. * **Insurtech emphasizes individuality.** Due to the innovative nature of information gathering and data processing, many new tools (discussed below) are now available to better understand each individual's true needs. This not only improves pricing but delivers more reliable, consistent coverage based on historical data. * **Insurtech improves flexibility.** Modern insurtech offerings are more likely to have flexibile, customized, short-term, or transferrable plans. Instead of needing to lock into long-term arrangements, insurtech is more likely to give individuals specific coverage for a specific need over a specific duration. * **Insurtech reduces operating costs.** Traditional insurance companies relied on [brick-and-mortar](https://www.investopedia.com/terms/b/brickandmortar.asp) locations that necessitated manual labor. Now, insurtech companies can operate remotely with staff engaging with customers around the world. The operating model of the online company is similar skimmer with less overhead. * **Insurtech may decrease fraud.** By leveraging data, analytics, trend analysis, and machine learning, insurtech companies may be able to detect fraudulent activities if inconsistencies in data arises. In addition, big data may also be able to discover potential loopholes that insurers can seek to close to avoid exploitation. ## What Insurance Areas Does Insurtech Solve? ### Claims Management The claims management process traditionally resulted in manually reviewing each claim, deciding what compensation to award, then remitting that compensation. Now, insurtech companies aim to build processes that automate certain processes and detect fraud. Larger companies can leverage technology to gather and aggregate specific data points regarding specific claims. These claims may also be validated using automation by comparing different data streams. Last, large companies can use automation or repetitive workflows to pay out a large number of claims with minimal human intervention. ### Underwriting The [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) process entails reviewing an individual's profile, assessing their risk profile, and extending them an insurance package offer that includes their coverage. The information provided to a client also includes their monthly premium in addition to what compensation they may be entitled to under various claims. Much of this data can be mined or gathered automatically. Even if a client must submit information, modern technology uses many data points to compare against historical data that can continually learn, grow, and make more educated assumptions. This means the data decides for itself whether to extend a policy to the individual and what price is fair for the associated level of risk. ### Contract Execution Whether it's related to paying out a claim, enforcing a different insurance level tier, closing a customer's policy that has expired, or approving a new customer, there are a tremendous number of contracts that occur related to insurance. When leveraging blockchain technology, [smart contracts](https://www.investopedia.com/terms/s/smart-contracts.asp) can be triggered to execute when specific criteria is met. This eliminates the human element for needing to handle the contract, and this allows an unbiased, neutral party (i.e. technology) to evaluate the criteria of a contract and decide the appropriate course of action. ### Risk Mitigation As mentioned earlier, big data can be used to gather, analyze, and summarize information. This includes analyzing a customer's historical activity or assessing a broad range of claim types. Based on the information gathered, insurers may be able to detect fraud, protect against unsuitable risk, or better understand where they may be most exposed. ### According to Grand View Research, the total insurtech industry value in 2022 was $5.4 billion. The revenue forecast for 2030 is $152 billion. ## Innovations Driving Insurtech Change There continues to be a growing, evolving range of technology used in insurtech that changes the way insurance is being performed. Here are the following most notable technologies being leveraged. ### Artificial Intelligence/Machine Learning Artificial intelligence functions allow certain tasks that previously required human interaction to now be performed exclusively reliant on technology. For example, customers would previously have to interact with representatives to have questions answered; now, interactive discussions with [chatbots](https://www.investopedia.com/terms/c/chatbot.asp) may allow a customer to receive help without talking to a human. A subset of artificial intelligence is machine learning, the ability to extract historical data and compile predictive models. These models are then used to distribute information and may be set to a feedback loop. If future data in fed into the model, the model may "learn" and continually evaluate how to calculate appropriate premiums based on demographics or risk profiles. ### Automation Insurtech change relies on efficiency. This means that when insurance clients fill out a document online, that record is automatically stored in a [data warehouse](https://www.investopedia.com/terms/d/data-warehousing.asp) or used to automatically compile a policy ready for signature. Automation tools are utilized to avoid manual human intervention when technological tools can carry out a process on its own. ### Big Data Big data refers to the collection of massive amounts of information. This includes a broad range of data, the fast collection of real-time data, and a variety of data sets. Big data collection techniques allow insurers to gather a broader set of data used to analyze the risk profile of a customer to better understand their characteristics and habits. In addition, this information can be gathered for millions of customers and fed into predictive models discussed earlier. ### Blockchain Though most known for [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp), the fundamental basis for blockchain technology is immutable, distributed legers. This allows for unalterable record-keeping to ensure security and reliability in information storage. It also allows for smart contract execution to reside on a blockchain, remaining dormant until specific conditions are met to release insurance proceeds or validate an insurance client. ### Drones Insurtech also relies on innovative hardware technologies as well. [Drones](https://www.investopedia.com/articles/investing/010615/how-drones-are-changing-business-world.asp) can be used to assess properties, evaluate property damage where it might have been physically unsafe for humans to traverse, or audit a site for a claim. Drones are now becoming increasingly reliant on high-definition photo and video quality, allowing for assessors to heavily rely on photographs and stored images from flights. ### Internet of Things Another insurtech innovation that relies on physical innovation is the [Internet of Things (IoT)](https://www.investopedia.com/terms/i/internet-things.asp). Though a digital concept, IoT relies on the interaction between physical goods and software. For example, auto insurers now commonly offer devices that gauge vehicle speed, handling, and driving habits that can be used to reward positive driving habits or penalize negative driving habits. While this level of information has never been available before, insurance companies can now base premiums on the smallest of details. ### According to Hourly, there are over 3,400 insurtech companies, up from 1,500 companies in 2018. ## Insurtech Companies Below are examples of real insurtech companies and the ways each are innovating the insurance industry. ### Lemonade Lemonade directly sells insurance coverage via a custom mobile app. This coverage is sold directly to the customer as opposed to being transmitted via brokers. Insurance policies include [renters' insurance](https://www.investopedia.com/insurance/renters-insurance/), homeowners' insurance, pet insurance, and auto insurance. All insurance claims processing is performed through the digital platform. ### Dacadoo Dacadoo leverages consumer devices such as phones and [smartwatches](https://www.investopedia.com/terms/w/wearable-technology.asp) to gather information via an integrated API. This information crafts individual consumer profiles that allows Dacadoo to assess risk in real-time and adjust profiles based on positive or negative life improvements. ### Bdeo Bdeo leverages artificial intelligence to improve the claim processing experience. Bdeo relies on chatbots to interact with customers to gather claim information. The chatbot gives direction on what information is needed, how to photograph the damage, and where to input information. Then, remote adjusters analyze the information provided. The company also leverages a computer vision model that utilizes technology to minimize adjustor misevaluations. ### Etherisc Etherisc leverages blockchain technology to utilize smart contracts. Etherisc gathers information from third-party providers. Then, as events unfold, the company is able to have their contracts automatically perform tasks based on outcomes that are compared against this third-party information. For example, [agribusiness](https://www.investopedia.com/terms/a/agribusiness.asp) insurance claims may automatically process when specific natural conditions occur; these natural conditions such as rainfall are compared with third-party data to ensure no fraudulent activity may occur. ### Avinew Avinew is a pioneer in the insurtech industry regarding internet of thing technology. The company offers lower premiums to customers who change their driving habits, choose less risky routes, or use an automatic driving system. This information is all possible by onboard devices that track vehicle useage and tendencies. ## Criticism of Insurtech Although many of these innovations are long overdue, there are reasons why the incumbent insurance companies are so reluctant to adapt. Insurance is a highly regulated industry with many layers of jurisdictional legal baggage to deal with. As such, the major companies have survived this long by being incredibly cautious, which has made them shy away from working with any startups—let alone startups in their own, very stable industry. This is a bigger problem than it sounds, as many of the insurtech startups still require the help of traditional insurers to handle underwriting and manage catastrophic risk. That said, as more insurtech startups garner consumer interest with a refined model and a user-friendly approach, they may find that the incumbent players warm to the idea of insurtech and become interested in buying up some of the innovation. There is also a certain level of privacy that is relinquished when adopting insurtech methodologies. Consider tracking devices that can detect whether you actually stop at stop signs. These devices also track your location, the places you visit, and how long you are at those locations. For some, this level of data collection and [personally identifiable information](https://www.investopedia.com/terms/p/personally-identifiable-information-pii.asp) is less preferable than the benefit received from the efficient, innovation of insurtech. ## What Does Insurtech Mean? Insurtech is a combination of "insurance" and "technology". It is an emerging industry that utilizes technology and modern innovations to change how traditional insurance is performed. ## Is Insurtech a Component of Fintech? Insurtech and fintech are often considered two different industries. Both rely on modern solutions to change how traditional services are performed. However, there are many differences between the financial sector and insurance sector. Therefore, insurtech companies are not likely to offer financial services in addition to insurance coverage. ## How Does Insurtech Make Money? Insurtech relies on minimal overhead and operational efficient to make money. Though it still earns revenue from clients, the goal is to have minimal costs by eliminating a physical office or personnel to perform tasks that have been eliminated through chatbots or automation. Due to lower costs, insurtech companies are often able to offer lower prices. ## Is Insurtech Better than Traditional Insurance? Some customers may prefer face-to-face interactions with a dedicated insurance agent they've gotten to know for years. Other customers may prefer to self-select their own policy that can be canceled using an app. Insurtech simply offers a different method of delivering insurance coverage that traditional insurance may not have been able to offer. Whether one is better than the other is simply a matter of consumer preference. ## The Bottom Line The traditional insurance industry is being disrupted by the introduction of technology. This new sector called insurtech offers customers a new way to do things by gathering information differently, executing contracts more efficiently, and analyzing information more accurately. Though some may feel the insurance industry will be losing a personal touch, insurtech strives to offer lower, more custom, and more flexible coverage.

What Is Insurtech? Insurtech refers to the use of technology innovations designed to find cost savings and efficiency from the current insurance industry model. Insurtech is a combination of the words “insurance” and “technology,” inspired by the term fintech. Key Takeaways Insurtech is the use of technology innovations designed to make the current insurance model more efficient.By using technology such as data analysis, IoT, and AI, insurtech allows products to be priced more competitively.Insurtech is used to more effectively process claims, evaluate risk, process contracts, or underwrite policies.Insurtech is similar to fintech, as both leverage modern solutions that are revolutionizing each respective traditional industry.There are headwinds for insurtechs, notably regulation issues and a reluctance of established insurers to work with them.  Understanding Insurtech Insurtech is premised on the belief that the insurance industry is ripe for innovation and disruption. Insurtech is exploring avenues that large insurance firms have less incentive to exploit, such as offering ultra-customized policies, social insurance, and using new streams of data from Internet-enabled devices to dynamically price premiums according to observed behavior. Regarding traditional insurance, some people pay more than they should be based on the basic level of data used to group people. Among other things, insurtech is looking to tackle this data and analysis issue head-on. Using inputs from all manners of devices, including geolocation tracking of cars to the activity trackers on our wrists, these companies are building more finely delineated groupings of risk, allowing products to be priced more competitively. In addition to better pricing models, insurtech startups are testing the waters on a host of potential game-changers. These include using deep learning trained artificial intelligence (AI) to handle the tasks of brokers and find the right mix of policies to complete an individual’s coverage. There is also interest in the use of apps to pull disparate policies into one platform for management and monitoring, creating on-demand insurance for micro-events like borrowing a friend's car, and the adoption of the peer-to-peer model to both create customized group coverage and incentivize positive choices through group rebates. There are many similarities to the goals and implementations of insurtech and fintech, as both the insurance industry and financial industry are undergoing substantial process changes. Importance of Insurtech Insurtech plays an important part in changing how coverage is applied and paid for in a number of different ways: Insurtech enhances the customer experience. By leveraging technology, customers are more engaged in selecting their coverage, understanding their needs, and getting personalized service. Instead of having to travel to a branch or speak to a representative, the future of insurtech is moving towards self-serve, online dealings where customers have their choice of engagement channel. Insurtech promotes efficiency. Policy-seekers and policy-holders can often research and explore options using the internet and apps. Without having to wait for business hours or an available representative, many insurtech companies empower users to quickly access the information they need without being bogged down in processes. Insurtech emphasizes individuality. Due to the innovative nature of information gathering and data processing, many new tools (discussed below) are now available to better understand each individual's true needs. This not only improves pricing but delivers more reliable, consistent coverage based on historical data. Insurtech improves flexibility. Modern insurtech offerings are more likely to have flexibile, customized, short-term, or transferrable plans. Instead of needing to lock into long-term arrangements, insurtech is more likely to give individuals specific coverage for a specific need over a specific duration. Insurtech reduces operating costs. Traditional insurance companies relied on brick-and-mortar locations that necessitated manual labor. Now, insurtech companies can operate remotely with staff engaging with customers around the world. The operating model of the online company is similar skimmer with less overhead. Insurtech may decrease fraud. By leveraging data, analytics, trend analysis, and machine learning, insurtech companies may be able to detect fraudulent activities if inconsistencies in data arises. In addition, big data may also be able to discover potential loopholes that insurers can seek to close to avoid exploitation. What Insurance Areas Does Insurtech Solve? Claims Management The claims management process traditionally resulted in manually reviewing each claim, deciding what compensation to award, then remitting that compensation. Now, insurtech companies aim to build processes that automate certain processes and detect fraud. Larger companies can leverage technology to gather and aggregate specific data points regarding specific claims. These claims may also be validated using automation by comparing different data streams. Last, large companies can use automation or repetitive workflows to pay out a large number of claims with minimal human intervention. Underwriting The underwriting process entails reviewing an individual's profile, assessing their risk profile, and extending them an insurance package offer that includes their coverage. The information provided to a client also includes their monthly premium in addition to what compensation they may be entitled to under various claims. Much of this data can be mined or gathered automatically. Even if a client must submit information, modern technology uses many data points to compare against historical data that can continually learn, grow, and make more educated assumptions. This means the data decides for itself whether to extend a policy to the individual and what price is fair for the associated level of risk. Contract Execution Whether it's related to paying out a claim, enforcing a different insurance level tier, closing a customer's policy that has expired, or approving a new customer, there are a tremendous number of contracts that occur related to insurance. When leveraging blockchain technology, smart contracts can be triggered to execute when specific criteria is met. This eliminates the human element for needing to handle the contract, and this allows an unbiased, neutral party (i.e. technology) to evaluate the criteria of a contract and decide the appropriate course of action. Risk Mitigation As mentioned earlier, big data can be used to gather, analyze, and summarize information. This includes analyzing a customer's historical activity or assessing a broad range of claim types. Based on the information gathered, insurers may be able to detect fraud, protect against unsuitable risk, or better understand where they may be most exposed. According to Grand View Research, the total insurtech industry value in 2022 was $5.4 billion. The revenue forecast for 2030 is $152 billion. Innovations Driving Insurtech Change There continues to be a growing, evolving range of technology used in insurtech that changes the way insurance is being performed. Here are the following most notable technologies being leveraged. Artificial Intelligence/Machine Learning Artificial intelligence functions allow certain tasks that previously required human interaction to now be performed exclusively reliant on technology. For example, customers would previously have to interact with representatives to have questions answered; now, interactive discussions with chatbots may allow a customer to receive help without talking to a human. A subset of artificial intelligence is machine learning, the ability to extract historical data and compile predictive models. These models are then used to distribute information and may be set to a feedback loop. If future data in fed into the model, the model may "learn" and continually evaluate how to calculate appropriate premiums based on demographics or risk profiles. Automation Insurtech change relies on efficiency. This means that when insurance clients fill out a document online, that record is automatically stored in a data warehouse or used to automatically compile a policy ready for signature. Automation tools are utilized to avoid manual human intervention when technological tools can carry out a process on its own. Big Data Big data refers to the collection of massive amounts of information. This includes a broad range of data, the fast collection of real-time data, and a variety of data sets. Big data collection techniques allow insurers to gather a broader set of data used to analyze the risk profile of a customer to better understand their characteristics and habits. In addition, this information can be gathered for millions of customers and fed into predictive models discussed earlier. Blockchain Though most known for cryptocurrency, the fundamental basis for blockchain technology is immutable, distributed legers. This allows for unalterable record-keeping to ensure security and reliability in information storage. It also allows for smart contract execution to reside on a blockchain, remaining dormant until specific conditions are met to release insurance proceeds or validate an insurance client. Drones Insurtech also relies on innovative hardware technologies as well. Drones can be used to assess properties, evaluate property damage where it might have been physically unsafe for humans to traverse, or audit a site for a claim. Drones are now becoming increasingly reliant on high-definition photo and video quality, allowing for assessors to heavily rely on photographs and stored images from flights. Internet of Things Another insurtech innovation that relies on physical innovation is the Internet of Things (IoT). Though a digital concept, IoT relies on the interaction between physical goods and software. For example, auto insurers now commonly offer devices that gauge vehicle speed, handling, and driving habits that can be used to reward positive driving habits or penalize negative driving habits. While this level of information has never been available before, insurance companies can now base premiums on the smallest of details. According to Hourly, there are over 3,400 insurtech companies, up from 1,500 companies in 2018. Insurtech Companies Below are examples of real insurtech companies and the ways each are innovating the insurance industry. Lemonade Lemonade directly sells insurance coverage via a custom mobile app. This coverage is sold directly to the customer as opposed to being transmitted via brokers. Insurance policies include renters' insurance, homeowners' insurance, pet insurance, and auto insurance. All insurance claims processing is performed through the digital platform. Dacadoo Dacadoo leverages consumer devices such as phones and smartwatches to gather information via an integrated API. This information crafts individual consumer profiles that allows Dacadoo to assess risk in real-time and adjust profiles based on positive or negative life improvements. Bdeo Bdeo leverages artificial intelligence to improve the claim processing experience. Bdeo relies on chatbots to interact with customers to gather claim information. The chatbot gives direction on what information is needed, how to photograph the damage, and where to input information. Then, remote adjusters analyze the information provided. The company also leverages a computer vision model that utilizes technology to minimize adjustor misevaluations. Etherisc Etherisc leverages blockchain technology to utilize smart contracts. Etherisc gathers information from third-party providers. Then, as events unfold, the company is able to have their contracts automatically perform tasks based on outcomes that are compared against this third-party information. For example, agribusiness insurance claims may automatically process when specific natural conditions occur; these natural conditions such as rainfall are compared with third-party data to ensure no fraudulent activity may occur. Avinew Avinew is a pioneer in the insurtech industry regarding internet of thing technology. The company offers lower premiums to customers who change their driving habits, choose less risky routes, or use an automatic driving system. This information is all possible by onboard devices that track vehicle useage and tendencies. Criticism of Insurtech Although many of these innovations are long overdue, there are reasons why the incumbent insurance companies are so reluctant to adapt. Insurance is a highly regulated industry with many layers of jurisdictional legal baggage to deal with. As such, the major companies have survived this long by being incredibly cautious, which has made them shy away from working with any startups—let alone startups in their own, very stable industry. This is a bigger problem than it sounds, as many of the insurtech startups still require the help of traditional insurers to handle underwriting and manage catastrophic risk. That said, as more insurtech startups garner consumer interest with a refined model and a user-friendly approach, they may find that the incumbent players warm to the idea of insurtech and become interested in buying up some of the innovation. There is also a certain level of privacy that is relinquished when adopting insurtech methodologies. Consider tracking devices that can detect whether you actually stop at stop signs. These devices also track your location, the places you visit, and how long you are at those locations. For some, this level of data collection and personally identifiable information is less preferable than the benefit received from the efficient, innovation of insurtech. What Does Insurtech Mean? Insurtech is a combination of "insurance" and "technology". It is an emerging industry that utilizes technology and modern innovations to change how traditional insurance is performed. Is Insurtech a Component of Fintech? Insurtech and fintech are often considered two different industries. Both rely on modern solutions to change how traditional services are performed. However, there are many differences between the financial sector and insurance sector. Therefore, insurtech companies are not likely to offer financial services in addition to insurance coverage. How Does Insurtech Make Money? Insurtech relies on minimal overhead and operational efficient to make money. Though it still earns revenue from clients, the goal is to have minimal costs by eliminating a physical office or personnel to perform tasks that have been eliminated through chatbots or automation. Due to lower costs, insurtech companies are often able to offer lower prices. Is Insurtech Better than Traditional Insurance? Some customers may prefer face-to-face interactions with a dedicated insurance agent they've gotten to know for years. Other customers may prefer to self-select their own policy that can be canceled using an app. Insurtech simply offers a different method of delivering insurance coverage that traditional insurance may not have been able to offer. Whether one is better than the other is simply a matter of consumer preference. The Bottom Line The traditional insurance industry is being disrupted by the introduction of technology. This new sector called insurtech offers customers a new way to do things by gathering information differently, executing contracts more efficiently, and analyzing information more accurately. Though some may feel the insurance industry will be losing a personal touch, insurtech strives to offer lower, more custom, and more flexible coverage.

https://www.investopedia.com/how-do-credit-card-payments-work-5069924

How Do Credit Card Payments Work?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Having a credit card is practically a necessity in today’s world. If you're just starting out, making regular, monthly payments on a credit card is a good way to build a credit history and establish a strong <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a>. Here is what you need to know about how credit card payments work. </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>Your credit card issuer will specify the minimum payment you need to make each month, as well as a due date for your payment.</li><li>By paying at least the minimum—and on time—you'll build a good credit history and raise your credit score.</li><li>Paying more than the minimum will reduce the interest you owe on your credit card balance. If you pay your balance in full every month, you can avoid interest payments altogether.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-a-credit-card-balance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> What Is a Credit Card Balance? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> When you use a credit card to make a purchase, the amount you charge is added to what you owe in total, typically referred to as your credit card's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-card-balance.asp">balance</a>. Your balance is not just the sum of your purchases, however. </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"> It also includes the interest you owe on your balance, as well as any fees and penalties the card issuer has charged you. Those may include annual fees, foreign transaction fees, cash advance fees, late payment penalties, and many others, as we'll explain later. </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"> At the end of each monthly billing cycle, the card issuer will tell you how much you owe, the minimum payment it requires from you, and when that payment is due. By making at least the minimum payment and making it on time, you'll stay in good standing with your credit issuer. </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 remaining balance then rolls over into the next month’s balance and continues to accrue <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/061301.asp">interest</a>. For that reason, it's best to pay more than the minimum and, ideally, to pay off your balance in full each month. However, you can't use one credit card to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-you-pay-a-credit-card-with-a-credit-card-5070049">pay off the balance of another card</a>.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>Credit cards charge a wide range of fees and penalties, many of which are avoidable. But if you aren't careful, they could end up representing a substantial part of your monthly payments.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Making just the minimum payment and rolling your balance over to the next month will not affect your credit score. However, if you're carrying too large a balance relative to your total credit limit, that can be a problem. </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"> Prospective lenders consider your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a> in deciding how risky it might be to lend money to you. Someone who routinely maxes out their credit card will seem less financially responsible than someone who keeps a good portion of their available credit in reserve, just in case. </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"> Your credit utilization ratio is also a major factor in determining your credit score. A good ratio is usually 30% or less, so if you have a credit limit of $5,000 on your credit card, for example, you should try to avoid letting your balance exceed $1,500.<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> <span class="heading-toc" id="toc-how-credit-card-interest-rates-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> How Credit Card Interest Rates Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The interest that your credit card issuer charges you is calculated as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/purchase-apr.asp">annual percentage rate</a>, or APR. Because the APR is an annualized percentage, it is divided by 12 and applied to your outstanding balance each month. For example, a credit card with 20% APR will charge you about 1.67% interest on your outstanding balance each month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> This example applies to a typical revolving credit card, which allows you to roll your balance over between billing periods. Another type of card, often referred to as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chargecard.asp">charge card</a>, looks and works much like a credit card but requires that you pay off your balance in full each month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Some cards have more than a single APR, such as one for purchases and another one for cash advances. That is all spelled out in the credit card's terms, which you should receive when you open your account. If you're shopping for a credit card, you can usually find its terms online. </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-understanding-and-avoiding-credit-card-fees"></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"> Understanding (and Avoiding) Credit Card Fees </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Credit cards usually come with a lot of fine print regarding fees, penalties, and other charges you can rack up, sometimes just by accident. Some important ones to know about: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> <strong>Late fees.</strong> If you miss the due date for your minimum payment, you may be hit with a late fee. A late fee is usually $32 but can vary by card provider and how many times you've been late. What's more, your late payments will be reported to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp">credit bureaus</a> and reflected in your credit history, which can be damaging to your credit score.<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> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_34-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/wnjPt/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Consumer Financial Protection Bureau Caps Credit Card Late Fees at $8"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <strong>Over-limit fees.</strong> If you exceed the credit limit on your card, your credit card issuer may charge you an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overlimit-fee.asp">over-limit fee</a>. This fee can range from $25 to $35, depending on how often you go over your limit. Note that some card issuers will simply decline any charges that exceed your credit limit when you attempt to make a purchase.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <strong>Annual fees.</strong> This is the yearly fee you pay simply to have the card. Many credit cards are available without annual fees, although those with annual fees may have rewards programs that offer higher rewards on your purchases. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <strong>Cash advance fees.</strong> Some credit cards allow you to take out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashadvance.asp">cash advances</a>. This fee is usually calculated as a percentage of the cash you receive, and it can be costly. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <strong>Returned payment fees.</strong> You'll face this fee if your credit card payment bounces due to insufficient funds or for some other reason. </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-a-monthly-payment-on-a-credit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Monthly Payment on a Credit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The monthly payment on a credit card is the minimum payment a cardholder must pay to avoid their card payments from being past due. It is typically calculated on the statement total; usually a percentage of the balance. It could include past due amounts and late fees, as well. It will vary on the provider. If you can, you should pay more than the minimum monthly payment—you should pay the entire balance in order to avoid the high interest charges that quickly grow your credit card bill.</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-are-credit-cards-as-a-form-of-payment"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Credit Cards as a Form of Payment?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Credit cards are essentially financing. You are borrowing money to pay for whatever you are purchasing with a credit card. The payment is due at the end of the month and if you cannot make the whole payment, then you are charged interest for borrowing the money you can't pay back. A credit card is basically a revolving loan.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-do-you-pay-interest-on-a-credit-card-if-you-pay-it-off-every-month"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do You Pay Interest on a Credit Card if You Pay It Off Every Month?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, you do not pay interest on a credit card if you pay your balance off every month. Interest is only charged on the amounts you haven't paid off. If you pay off your entire balance, there isn't any amount to charge interest on.</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"> Credit cards are a good way to build a solid credit history, but it’s important not to overextend yourself and end up in deep credit card debt. If you can only make the required minimum payment each month, that's better than missing a payment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> But the more of your card's balance you can pay off, the less you'll have to pay in interest charges. Paying your balance in full every month, if you can manage it, will provide you with the convenience and other benefits of a credit card, at the least cost. </p></div>

Having a credit card is practically a necessity in today’s world. If you're just starting out, making regular, monthly payments on a credit card is a good way to build a credit history and establish a strong [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Here is what you need to know about how credit card payments work. ### Key Takeaways * Your credit card issuer will specify the minimum payment you need to make each month, as well as a due date for your payment. * By paying at least the minimum—and on time—you'll build a good credit history and raise your credit score. * Paying more than the minimum will reduce the interest you owe on your credit card balance. If you pay your balance in full every month, you can avoid interest payments altogether. ## What Is a Credit Card Balance? When you use a credit card to make a purchase, the amount you charge is added to what you owe in total, typically referred to as your credit card's [balance](https://www.investopedia.com/terms/c/credit-card-balance.asp). Your balance is not just the sum of your purchases, however. It also includes the interest you owe on your balance, as well as any fees and penalties the card issuer has charged you. Those may include annual fees, foreign transaction fees, cash advance fees, late payment penalties, and many others, as we'll explain later. At the end of each monthly billing cycle, the card issuer will tell you how much you owe, the minimum payment it requires from you, and when that payment is due. By making at least the minimum payment and making it on time, you'll stay in good standing with your credit issuer. The remaining balance then rolls over into the next month’s balance and continues to accrue [interest](https://www.investopedia.com/articles/01/061301.asp). For that reason, it's best to pay more than the minimum and, ideally, to pay off your balance in full each month. However, you can't use one credit card to [pay off the balance of another card](https://www.investopedia.com/can-you-pay-a-credit-card-with-a-credit-card-5070049). ### Credit cards charge a wide range of fees and penalties, many of which are avoidable. But if you aren't careful, they could end up representing a substantial part of your monthly payments. Making just the minimum payment and rolling your balance over to the next month will not affect your credit score. However, if you're carrying too large a balance relative to your total credit limit, that can be a problem. Prospective lenders consider your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp) in deciding how risky it might be to lend money to you. Someone who routinely maxes out their credit card will seem less financially responsible than someone who keeps a good portion of their available credit in reserve, just in case. Your credit utilization ratio is also a major factor in determining your credit score. A good ratio is usually 30% or less, so if you have a credit limit of $5,000 on your credit card, for example, you should try to avoid letting your balance exceed $1,500. ## How Credit Card Interest Rates Work The interest that your credit card issuer charges you is calculated as an [annual percentage rate](https://www.investopedia.com/terms/p/purchase-apr.asp), or APR. Because the APR is an annualized percentage, it is divided by 12 and applied to your outstanding balance each month. For example, a credit card with 20% APR will charge you about 1.67% interest on your outstanding balance each month. This example applies to a typical revolving credit card, which allows you to roll your balance over between billing periods. Another type of card, often referred to as a [charge card](https://www.investopedia.com/terms/c/chargecard.asp), looks and works much like a credit card but requires that you pay off your balance in full each month. Some cards have more than a single APR, such as one for purchases and another one for cash advances. That is all spelled out in the credit card's terms, which you should receive when you open your account. If you're shopping for a credit card, you can usually find its terms online. ## Understanding (and Avoiding) Credit Card Fees Credit cards usually come with a lot of fine print regarding fees, penalties, and other charges you can rack up, sometimes just by accident. Some important ones to know about: **Late fees.** If you miss the due date for your minimum payment, you may be hit with a late fee. A late fee is usually $32 but can vary by card provider and how many times you've been late. What's more, your late payments will be reported to the [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp) and reflected in your credit history, which can be damaging to your credit score. **Over-limit fees.** If you exceed the credit limit on your card, your credit card issuer may charge you an [over-limit fee](https://www.investopedia.com/terms/o/overlimit-fee.asp). This fee can range from $25 to $35, depending on how often you go over your limit. Note that some card issuers will simply decline any charges that exceed your credit limit when you attempt to make a purchase. **Annual fees.** This is the yearly fee you pay simply to have the card. Many credit cards are available without annual fees, although those with annual fees may have rewards programs that offer higher rewards on your purchases. **Cash advance fees.** Some credit cards allow you to take out [cash advances](https://www.investopedia.com/terms/c/cashadvance.asp). This fee is usually calculated as a percentage of the cash you receive, and it can be costly. **Returned payment fees.** You'll face this fee if your credit card payment bounces due to insufficient funds or for some other reason. ## What Is a Monthly Payment on a Credit Card? The monthly payment on a credit card is the minimum payment a cardholder must pay to avoid their card payments from being past due. It is typically calculated on the statement total; usually a percentage of the balance. It could include past due amounts and late fees, as well. It will vary on the provider. If you can, you should pay more than the minimum monthly payment—you should pay the entire balance in order to avoid the high interest charges that quickly grow your credit card bill. ## What Are Credit Cards as a Form of Payment? Credit cards are essentially financing. You are borrowing money to pay for whatever you are purchasing with a credit card. The payment is due at the end of the month and if you cannot make the whole payment, then you are charged interest for borrowing the money you can't pay back. A credit card is basically a revolving loan. ## Do You Pay Interest on a Credit Card if You Pay It Off Every Month? No, you do not pay interest on a credit card if you pay your balance off every month. Interest is only charged on the amounts you haven't paid off. If you pay off your entire balance, there isn't any amount to charge interest on. ## The Bottom Line Credit cards are a good way to build a solid credit history, but it’s important not to overextend yourself and end up in deep credit card debt. If you can only make the required minimum payment each month, that's better than missing a payment. But the more of your card's balance you can pay off, the less you'll have to pay in interest charges. Paying your balance in full every month, if you can manage it, will provide you with the convenience and other benefits of a credit card, at the least cost.

Having a credit card is practically a necessity in today’s world. If you're just starting out, making regular, monthly payments on a credit card is a good way to build a credit history and establish a strong credit score. Here is what you need to know about how credit card payments work. Key Takeaways Your credit card issuer will specify the minimum payment you need to make each month, as well as a due date for your payment.By paying at least the minimum—and on time—you'll build a good credit history and raise your credit score.Paying more than the minimum will reduce the interest you owe on your credit card balance. If you pay your balance in full every month, you can avoid interest payments altogether. What Is a Credit Card Balance? When you use a credit card to make a purchase, the amount you charge is added to what you owe in total, typically referred to as your credit card's balance. Your balance is not just the sum of your purchases, however. It also includes the interest you owe on your balance, as well as any fees and penalties the card issuer has charged you. Those may include annual fees, foreign transaction fees, cash advance fees, late payment penalties, and many others, as we'll explain later. At the end of each monthly billing cycle, the card issuer will tell you how much you owe, the minimum payment it requires from you, and when that payment is due. By making at least the minimum payment and making it on time, you'll stay in good standing with your credit issuer. The remaining balance then rolls over into the next month’s balance and continues to accrue interest. For that reason, it's best to pay more than the minimum and, ideally, to pay off your balance in full each month. However, you can't use one credit card to pay off the balance of another card. Credit cards charge a wide range of fees and penalties, many of which are avoidable. But if you aren't careful, they could end up representing a substantial part of your monthly payments. Making just the minimum payment and rolling your balance over to the next month will not affect your credit score. However, if you're carrying too large a balance relative to your total credit limit, that can be a problem. Prospective lenders consider your credit utilization ratio in deciding how risky it might be to lend money to you. Someone who routinely maxes out their credit card will seem less financially responsible than someone who keeps a good portion of their available credit in reserve, just in case. Your credit utilization ratio is also a major factor in determining your credit score. A good ratio is usually 30% or less, so if you have a credit limit of $5,000 on your credit card, for example, you should try to avoid letting your balance exceed $1,500. How Credit Card Interest Rates Work The interest that your credit card issuer charges you is calculated as an annual percentage rate, or APR. Because the APR is an annualized percentage, it is divided by 12 and applied to your outstanding balance each month. For example, a credit card with 20% APR will charge you about 1.67% interest on your outstanding balance each month. This example applies to a typical revolving credit card, which allows you to roll your balance over between billing periods. Another type of card, often referred to as a charge card, looks and works much like a credit card but requires that you pay off your balance in full each month. Some cards have more than a single APR, such as one for purchases and another one for cash advances. That is all spelled out in the credit card's terms, which you should receive when you open your account. If you're shopping for a credit card, you can usually find its terms online. Understanding (and Avoiding) Credit Card Fees Credit cards usually come with a lot of fine print regarding fees, penalties, and other charges you can rack up, sometimes just by accident. Some important ones to know about: Late fees. If you miss the due date for your minimum payment, you may be hit with a late fee. A late fee is usually $32 but can vary by card provider and how many times you've been late. What's more, your late payments will be reported to the credit bureaus and reflected in your credit history, which can be damaging to your credit score. Over-limit fees. If you exceed the credit limit on your card, your credit card issuer may charge you an over-limit fee. This fee can range from $25 to $35, depending on how often you go over your limit. Note that some card issuers will simply decline any charges that exceed your credit limit when you attempt to make a purchase. Annual fees. This is the yearly fee you pay simply to have the card. Many credit cards are available without annual fees, although those with annual fees may have rewards programs that offer higher rewards on your purchases. Cash advance fees. Some credit cards allow you to take out cash advances. This fee is usually calculated as a percentage of the cash you receive, and it can be costly. Returned payment fees. You'll face this fee if your credit card payment bounces due to insufficient funds or for some other reason. What Is a Monthly Payment on a Credit Card? The monthly payment on a credit card is the minimum payment a cardholder must pay to avoid their card payments from being past due. It is typically calculated on the statement total; usually a percentage of the balance. It could include past due amounts and late fees, as well. It will vary on the provider. If you can, you should pay more than the minimum monthly payment—you should pay the entire balance in order to avoid the high interest charges that quickly grow your credit card bill. What Are Credit Cards as a Form of Payment? Credit cards are essentially financing. You are borrowing money to pay for whatever you are purchasing with a credit card. The payment is due at the end of the month and if you cannot make the whole payment, then you are charged interest for borrowing the money you can't pay back. A credit card is basically a revolving loan. Do You Pay Interest on a Credit Card if You Pay It Off Every Month? No, you do not pay interest on a credit card if you pay your balance off every month. Interest is only charged on the amounts you haven't paid off. If you pay off your entire balance, there isn't any amount to charge interest on. The Bottom Line Credit cards are a good way to build a solid credit history, but it’s important not to overextend yourself and end up in deep credit card debt. If you can only make the required minimum payment each month, that's better than missing a payment. But the more of your card's balance you can pay off, the less you'll have to pay in interest charges. Paying your balance in full every month, if you can manage it, will provide you with the convenience and other benefits of a credit card, at the least cost.

https://www.investopedia.com/terms/w/winsorized_mean.asp

Winsorized Mean: Formula, Examples and Meaning

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-winsorized-mean"></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 Winsorized Mean? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Winsorized mean is a method of averaging that initially replaces the smallest and largest values with the observations closest to them. This is done to limit the effect of outliers or abnormal extreme values, or outliers, on the calculation. </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"> After replacing the values, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arithmeticmean.asp">arithmetic mean</a> formula is then used to calculate the winsorized mean. </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 winsorized mean is an averaging method that involves replacing the smallest and largest values of a data set with the observations closest to them.</li><li>It mitigates the effects of outliers by replacing them with less extreme values.</li><li>The winsorized mean is not the same as the trimmed mean, which involves removing data points as opposed to replacing them—although the results of the two tend to be close.</li><li>The winsorized mean is also not the same as the arithmetic mean which does not adjust for outliers.</li></ul></div></div></div> <span class="heading-toc" id="toc-formula-for-the-winsorized-mean"></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"> Formula for the Winsorized Mean </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <span data-value="\begin{aligned} &amp;\text{Winsorized Mean}\ =\ \frac{x_{n}\dots x_{n+1}\ +\ x_{n+2}\dots x_{n}}{N}\\ &amp;\textbf{where:}\\ &amp;\begin{aligned} n\ =\ &amp;\text{The number of largest and smallest data}\\ &amp;\text{points to be replaced by the observation}\\ &amp;\text{closest to them}\end{aligned}\\ &amp;N\ =\ \text{Total number of data points} \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Winsorized Mean  </mtext> <mo> = </mo> <mtext>   </mtext> <mfrac> <mrow> <msub> <mi> x </mi> <mi> n </mi> </msub> <mo> … </mo> <msub> <mi> x </mi> <mrow> <mi> n </mi> <mo> + </mo> <mn> 1 </mn> </mrow> </msub> <mtext>   </mtext> <mo> + </mo> <mtext>   </mtext> <msub> <mi> x </mi> <mrow> <mi> n </mi> <mo> + </mo> <mn> 2 </mn> </mrow> </msub> <mo> … </mo> <msub> <mi> x </mi> <mi> n </mi> </msub> </mrow> <mi> N </mi> </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> <mtable> <mtr> <mtd> <mstyle> <mrow> <mi> n </mi> <mtext>   </mtext> <mo> = </mo> <mtext>   </mtext> </mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> The number of largest and smallest data </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> points to be replaced by the observation </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> closest to them </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mi> N </mi> <mtext>   </mtext> <mo> = </mo> <mtext>  Total number of data points </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\text{Winsorized Mean}\ =\ \frac{x_{n}\dots x_{n+1}\ +\ x_{n+2}\dots x_{n}}{N}\\ &amp;\textbf{where:}\\ &amp;\begin{aligned} n\ =\ &amp;\text{The number of largest and smallest data}\\ &amp;\text{points to be replaced by the observation}\\ &amp;\text{closest to them}\end{aligned}\\ &amp;N\ =\ \text{Total number of data points} \end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Winsorized Mean</span></span><span class="mspace"></span><span class="mspace"> </span><span class="mrel">=</span><span class="mspace"></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">N</span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathdefault">x</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">n</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="minner">…</span><span class="mspace"></span><span class="mord"><span class="mord mathdefault">x</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">n</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="mspace"> </span><span class="mbin">+</span><span class="mspace"></span><span class="mspace"> </span><span class="mord"><span class="mord mathdefault">x</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">n</span><span class="mbin mtight">+</span><span class="mord mtight">2</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="minner">…</span><span class="mspace"></span><span class="mord"><span class="mord mathdefault">x</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">n</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="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 class="mord mathdefault">n</span><span class="mspace"></span><span class="mspace"> </span><span class="mrel">=</span><span class="mspace"> </span></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">The number of largest and smallest data</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">points to be replaced by the observation</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">closest to them</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="mord"><span class="mord"></span><span class="mord mathdefault">N</span><span class="mspace"></span><span class="mspace"> </span><span class="mrel">=</span><span class="mspace"></span><span class="mspace"> </span><span class="mord text"><span class="mord">Total number of data points</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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Winsorized means are expressed in two ways. A "kⁿ" winsorized mean refers to the replacement of the "k" smallest and largest observations, where "k" is an integer. An "X%" winsorized mean involves replacing a given percentage of values from both ends of the data. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The winsorized mean is achieved by replacing the smallest and largest data points, then summing all the data points and dividing the sum by the total number of data points.</p></div></div></div> <span class="heading-toc" id="toc-what-does-the-winsorized-mean-tell-you"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> What Does the Winsorized Mean Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The winsorized mean is less sensitive to outliers because it can replace them with less extreme values. That is, it is less susceptible to outliers versus the arithmetic average. However, if a distribution has fat tails, the effect of removing the highest and lowest values in the distribution will have little influence because of the high degree of variability in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distribution.asp">distribution</a> figures. </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"> One major downside for winsorized means is that they naturally introduce some bias into the data set. By reducing the influence of outliers, the analysis is modified for better analysis, but also removes information about the underlying data. </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-strengths-of-winsorized-mean"></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"> Strengths of Winsorized Mean </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 situations in which using the winsorized mean is best. These vague situations are listed below, with more specific examples of where winsorized mean may be most useful in the next section. Times when it's sometimes best to use winsorized mean includes when there's: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <li><strong>Outliers in the Dataset.</strong> Using the conventional arithmetic mean might produce false results when your dataset contains outliers, or extreme values that are considerably different from the other data points. Winsorized mean offers a more accurate representation of central trend and reduces the influence of these outliers.</li><li><strong>Skewed Distributions.</strong> Winsorized mean can be useful for datasets with significantly skewed distributions. In skewed distributions, there may be extreme values and a lengthy tail on one side. In order to reduce the skewness and create a more reliable estimate of the central tendency, winsorizing is used.</li><li><strong>Data with Measurement Mistakes.</strong> Measurement mistakes might cause outliers when they are present in the data. These measurement errors can be lessened by using the winsorized mean.</li><li><strong>Temporarily Value Fluctuations.</strong> Winsorized mean can be helpful in circumstances where brief variations in data could lead to extreme numbers since it is resistant to these fluctuations. Over time, the winsorized mean becomes more reliable and stable by taking the place of these outliers.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><li><strong>Limited Sample Size: </strong>When there are few data points and a small sample size, the influence of outliers on the conventional mean may be greater. In these circumstances, the winsorized mean can offer a more accurate estimation of the central tendency.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-winsorized-mean-level"></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"> Winsorized Mean Level </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The winsorization level is crucial for effectively using the winsorized mean. The winsorization level determines the percentage of extreme values to be replaced with less extreme ones. To determine the appropriate winsorization level, consider data exploration, relying on domain knowledge, conducting <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sensitivityanalysis.asp">sensitivity analyses</a>, and consulting with experts who may be more familiar on what extreme values may look like. </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"> When assessing the winsorized level, understanding the nature of outliers and their reasons can help determine the appropriate level. Outliers can influence the statistical analysis, so a higher winsorization level may be beneficial if they unduly influence results. However, a lower level may be more appropriate if the goal is to preserve some of the data's original characteristics. When picking the level, gauge your interest in how important keeping the original data's composition is. </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"> In many cases, data domain knowledge is essential in setting the winsorization level. Consider any data set and what the typical range of values would be. Without historical, implicit knowledge of the industry, it would be much more challenging to identify bad data. In some cases, experimentation is crucial in observing how the winsorized mean changes with varying levels. </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-winsorized-mean-and-real-world-situations"></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"> Winsorized Mean and Real World Situations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> More specifically, there's a handful of situations or industries where winsorized mean makes more sense than other forms of measurement. These real world situations may include but aren't limited to the categories below. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-subheading__text"> Financial/Investments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">Market volatility</a> can have a material impact on financial data. Stock prices, asset returns, and other financial indicators may display extreme levels in the world of finance and investing. The impact of severe price volatility and outliers can be lessened when financial data estimates are computed using the winsorized mean. </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"> Payroll/Salaries </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Distributions of salaries or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payroll.asp">payroll</a> within businesses can occasionally be very skewed. This is especially true in sectors where there is a significant income gap or sectors that materially reward those who have been in the industry long or "penalize" those who are just starting their careers. By minimizing the impact of abnormally high or low incomes, the winsorized mean can assist in providing a more accurate measurement of the typical pay range. </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"> Health Care </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Because of uncommon medical illnesses or extreme measures, medical data may contain outliers. Health-related indicators like blood pressure, cholesterol levels, or patient recovery durations can be better understood should extremes be removed. For example, information may be more helpful to know regarding a collective average of patients should that data set not be skewed by any abnormally high or abnormally low medical readings. </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"> Education </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Due to a variety of variables, some children may have unusually high or low test results. It may not be as useful to incorporate these abnormal test scores when evaluating a specific cohort's performance; therefore, an assessment's average score can be calculated using the winsorized mean to remove any negative (or positive) implications that student may have when evaluating how a specific teacher or course was perceived. </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"> Customer Satisfaction </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> On a very similar note, when assessing customer satisfaction ratings, outliers may appear because a tiny percentage of consumers provided extremely good or negative comments. In the example above regarding a class, perhaps a single disgruntled student brings down the course evaluation score. Winsorized mean can help reduce the influence of these extreme scores and produce a more realistic picture of overall happiness. </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"> Environmental Data </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> With seemingly more uncommon occurrences or extreme weather conditions occurring, there may be situations where environmental data without these extremes are useful. For example, consider a measure of average air quality or the amount of water contamination. Abnormally high or low levels of contamination in either context may mislead decision-makers in understanding what the average daily situation may be; for example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/environmental-economics.asp">environmental economic</a> resources may be misallocated. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-example-of-how-to-use-winsorized-mean"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Example of How to Use Winsorized Mean </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Let's calculate the winsorized mean for the following data set: 1, 5, 7, 8, 9, 10, 34. In this example, we assume the winsorized mean is in the first order, in which we replace the smallest and largest values with their nearest observations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The data set now appears as follows: 5, 5, 7, 8, 9, 10, 10. Taking an arithmetic average of the new set produces a winsorized mean of 7.7, or (5 + 5 + 7 + 8 + 9 + 10 + 10) divided by 7. Note that the arithmetic mean would have been higher—10.6. The winsorized mean effectively reduces the influence of the 34 value as an outlier. </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"> Or consider a 20% winsorized mean that takes the top 10% and bottom 10% and replaces them with their next closest value. We will winsorize the following data set: 2, 4, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 62, 75. The two smallest and two largest data points—20% of the 20 data points—will be replaced with their next closest value. Thus, the new data set is as follows: 7, 7, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 61, 61. The winsorized mean is 33.9, or the total of the data (678) divided by the total number of data points (20). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <span class="heading-toc" id="toc-winsorized-mean-vs-other-measurements"></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"> Winsorized Mean vs. Other Measurements </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> There are several other common forms of 'mean', each of which slightly vary from winsorized mean. Also, there are other measurement such as median that give comparable but different information. In general, the winsorized mean is designed to be more resistant to outliers compared to other types of means. Those other types of measurement may include:<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> <li><strong>Traditional/Arithmetic Mean: </strong>The traditional mean, also known as the arithmetic mean, is calculated by summing all the data points in a dataset and dividing by the number of data points. It is sensitive to extreme values and can be significantly affected by outliers.</li> <li><strong>Trimmed Mean:</strong> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trimmed_mean.asp">trimmed mean</a> is another type of robust mean that involves removing a certain percentage of extreme values from both ends. These ends may be referred to as the top and bottom of the data distribution. The trimmed mean retains a specific portion of the data's central values and discards the extreme values, making it more resistant to the influence of outliers compared to the arithmetic mean.</li> <li><strong>Median:</strong> The median isn't a mean calculation at all; instead, it represents the middle value of a dataset when arranged in ascending or descending order. Unlike the traditional mean, the median is not affected by extreme values because it only considers the central value(s) in the dataset.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_65-0"><span class="heading-toc" id="toc-can-winsorized-mean-handle-multiple-outliers"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Winsorized Mean Handle Multiple Outliers?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, winsorized mean can handle multiple outliers within the dataset. It effectively replaces the specified percentage of extreme values, regardless of the number of outliers present. By replacing multiple outliers with less extreme values, the winsorized mean remains less sensitive to the influence of these outliers.</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-winsorized-mean-be-used-with-non-numeric-data"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Winsorized Mean Be Used with Non-Numeric Data?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Not really. Winsorized mean is primarily designed for numeric data, as it involves replacing numerical outliers with other numerical values. For non-numeric data, such as categorical variables or text data, other robust statistical measures or preprocessing techniques may be more appropriate.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-does-winsorized-mean-preserve-data-variability"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Winsorized Mean Preserve Data Variability?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Winsorized mean retains more data variability than the trimmed mean, as it only replaces the extreme values with values closer to the dataset's central part. Therefore, it preserves more of the original data range and variability, making it a desirable choice in cases where maintaining variability is essential.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-how-does-winsorized-mean-impact-hypothesis-testing"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Winsorized Mean Impact Hypothesis Testing?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Winsorized mean can affect the results of hypothesis testing by reducing the impact of extreme values on statistical tests. In cases where outliers might lead to erroneous conclusions, winsorized mean can provide more reliable test outcomes, making it a useful tool in hypothesis testing with non-normal or skewed data.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Winsorized mean is a statistical measure used to calculate the average of a dataset by replacing a specified percentage of extreme values or outliers with less extreme ones. This approach reduces the impact of outliers, providing a more robust estimate of the central tendency that is less sensitive to extreme values compared to the traditional arithmetic mean. </p></div>

## What Is the Winsorized Mean? Winsorized mean is a method of averaging that initially replaces the smallest and largest values with the observations closest to them. This is done to limit the effect of outliers or abnormal extreme values, or outliers, on the calculation. After replacing the values, the [arithmetic mean](https://www.investopedia.com/terms/a/arithmeticmean.asp) formula is then used to calculate the winsorized mean. ### Key takeaways * The winsorized mean is an averaging method that involves replacing the smallest and largest values of a data set with the observations closest to them. * It mitigates the effects of outliers by replacing them with less extreme values. * The winsorized mean is not the same as the trimmed mean, which involves removing data points as opposed to replacing them—although the results of the two tend to be close. * The winsorized mean is also not the same as the arithmetic mean which does not adjust for outliers. ## Formula for the Winsorized Mean Winsorized Mean  =   x n … x n + 1   +   x n + 2 … x n N where: n   =   The number of largest and smallest data points to be replaced by the observation closest to them N   =  Total number of data points \begin{aligned} &\text{Winsorized Mean}\ =\ \frac{x\_{n}\dots x\_{n+1}\ +\ x\_{n+2}\dots x\_{n}}{N}\\ &\textbf{where:}\\ &\begin{aligned} n\ =\ &\text{The number of largest and smallest data}\\ &\text{points to be replaced by the observation}\\ &\text{closest to them}\end{aligned}\\ &N\ =\ \text{Total number of data points} \end{aligned} ​Winsorized Mean = Nxn​…xn+1​ + xn+2​…xn​​where:n = ​The number of largest and smallest datapoints to be replaced by the observationclosest to them​N = Total number of data points​ Winsorized means are expressed in two ways. A "kn" winsorized mean refers to the replacement of the "k" smallest and largest observations, where "k" is an integer. An "X%" winsorized mean involves replacing a given percentage of values from both ends of the data. ### The winsorized mean is achieved by replacing the smallest and largest data points, then summing all the data points and dividing the sum by the total number of data points. ## What Does the Winsorized Mean Tell You? The winsorized mean is less sensitive to outliers because it can replace them with less extreme values. That is, it is less susceptible to outliers versus the arithmetic average. However, if a distribution has fat tails, the effect of removing the highest and lowest values in the distribution will have little influence because of the high degree of variability in the [distribution](https://www.investopedia.com/terms/d/distribution.asp) figures. One major downside for winsorized means is that they naturally introduce some bias into the data set. By reducing the influence of outliers, the analysis is modified for better analysis, but also removes information about the underlying data. ## Strengths of Winsorized Mean There are several situations in which using the winsorized mean is best. These vague situations are listed below, with more specific examples of where winsorized mean may be most useful in the next section. Times when it's sometimes best to use winsorized mean includes when there's: * **Outliers in the Dataset.** Using the conventional arithmetic mean might produce false results when your dataset contains outliers, or extreme values that are considerably different from the other data points. Winsorized mean offers a more accurate representation of central trend and reduces the influence of these outliers. * **Skewed Distributions.** Winsorized mean can be useful for datasets with significantly skewed distributions. In skewed distributions, there may be extreme values and a lengthy tail on one side. In order to reduce the skewness and create a more reliable estimate of the central tendency, winsorizing is used. * **Data with Measurement Mistakes.** Measurement mistakes might cause outliers when they are present in the data. These measurement errors can be lessened by using the winsorized mean. * **Temporarily Value Fluctuations.** Winsorized mean can be helpful in circumstances where brief variations in data could lead to extreme numbers since it is resistant to these fluctuations. Over time, the winsorized mean becomes more reliable and stable by taking the place of these outliers. * **Limited Sample Size:** When there are few data points and a small sample size, the influence of outliers on the conventional mean may be greater. In these circumstances, the winsorized mean can offer a more accurate estimation of the central tendency. ## Winsorized Mean Level The winsorization level is crucial for effectively using the winsorized mean. The winsorization level determines the percentage of extreme values to be replaced with less extreme ones. To determine the appropriate winsorization level, consider data exploration, relying on domain knowledge, conducting [sensitivity analyses](https://www.investopedia.com/terms/s/sensitivityanalysis.asp), and consulting with experts who may be more familiar on what extreme values may look like. When assessing the winsorized level, understanding the nature of outliers and their reasons can help determine the appropriate level. Outliers can influence the statistical analysis, so a higher winsorization level may be beneficial if they unduly influence results. However, a lower level may be more appropriate if the goal is to preserve some of the data's original characteristics. When picking the level, gauge your interest in how important keeping the original data's composition is. In many cases, data domain knowledge is essential in setting the winsorization level. Consider any data set and what the typical range of values would be. Without historical, implicit knowledge of the industry, it would be much more challenging to identify bad data. In some cases, experimentation is crucial in observing how the winsorized mean changes with varying levels. ## Winsorized Mean and Real World Situations More specifically, there's a handful of situations or industries where winsorized mean makes more sense than other forms of measurement. These real world situations may include but aren't limited to the categories below. ### Financial/Investments [Market volatility](https://www.investopedia.com/terms/v/volatility.asp) can have a material impact on financial data. Stock prices, asset returns, and other financial indicators may display extreme levels in the world of finance and investing. The impact of severe price volatility and outliers can be lessened when financial data estimates are computed using the winsorized mean. ### Payroll/Salaries Distributions of salaries or [payroll](https://www.investopedia.com/terms/p/payroll.asp) within businesses can occasionally be very skewed. This is especially true in sectors where there is a significant income gap or sectors that materially reward those who have been in the industry long or "penalize" those who are just starting their careers. By minimizing the impact of abnormally high or low incomes, the winsorized mean can assist in providing a more accurate measurement of the typical pay range. ### Health Care Because of uncommon medical illnesses or extreme measures, medical data may contain outliers. Health-related indicators like blood pressure, cholesterol levels, or patient recovery durations can be better understood should extremes be removed. For example, information may be more helpful to know regarding a collective average of patients should that data set not be skewed by any abnormally high or abnormally low medical readings. ### Education Due to a variety of variables, some children may have unusually high or low test results. It may not be as useful to incorporate these abnormal test scores when evaluating a specific cohort's performance; therefore, an assessment's average score can be calculated using the winsorized mean to remove any negative (or positive) implications that student may have when evaluating how a specific teacher or course was perceived. ### Customer Satisfaction On a very similar note, when assessing customer satisfaction ratings, outliers may appear because a tiny percentage of consumers provided extremely good or negative comments. In the example above regarding a class, perhaps a single disgruntled student brings down the course evaluation score. Winsorized mean can help reduce the influence of these extreme scores and produce a more realistic picture of overall happiness. ### Environmental Data With seemingly more uncommon occurrences or extreme weather conditions occurring, there may be situations where environmental data without these extremes are useful. For example, consider a measure of average air quality or the amount of water contamination. Abnormally high or low levels of contamination in either context may mislead decision-makers in understanding what the average daily situation may be; for example, [environmental economic](https://www.investopedia.com/terms/e/environmental-economics.asp) resources may be misallocated. ## Example of How to Use Winsorized Mean Let's calculate the winsorized mean for the following data set: 1, 5, 7, 8, 9, 10, 34. In this example, we assume the winsorized mean is in the first order, in which we replace the smallest and largest values with their nearest observations. The data set now appears as follows: 5, 5, 7, 8, 9, 10, 10. Taking an arithmetic average of the new set produces a winsorized mean of 7.7, or (5 + 5 + 7 + 8 + 9 + 10 + 10) divided by 7. Note that the arithmetic mean would have been higher—10.6. The winsorized mean effectively reduces the influence of the 34 value as an outlier. Or consider a 20% winsorized mean that takes the top 10% and bottom 10% and replaces them with their next closest value. We will winsorize the following data set: 2, 4, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 62, 75. The two smallest and two largest data points—20% of the 20 data points—will be replaced with their next closest value. Thus, the new data set is as follows: 7, 7, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 61, 61. The winsorized mean is 33.9, or the total of the data (678) divided by the total number of data points (20). ## Winsorized Mean vs. Other Measurements There are several other common forms of 'mean', each of which slightly vary from winsorized mean. Also, there are other measurement such as median that give comparable but different information. In general, the winsorized mean is designed to be more resistant to outliers compared to other types of means. Those other types of measurement may include: * **Traditional/Arithmetic Mean:** The traditional mean, also known as the arithmetic mean, is calculated by summing all the data points in a dataset and dividing by the number of data points. It is sensitive to extreme values and can be significantly affected by outliers. * **Trimmed Mean:** The [trimmed mean](https://www.investopedia.com/terms/t/trimmed_mean.asp) is another type of robust mean that involves removing a certain percentage of extreme values from both ends. These ends may be referred to as the top and bottom of the data distribution. The trimmed mean retains a specific portion of the data's central values and discards the extreme values, making it more resistant to the influence of outliers compared to the arithmetic mean. * **Median:** The median isn't a mean calculation at all; instead, it represents the middle value of a dataset when arranged in ascending or descending order. Unlike the traditional mean, the median is not affected by extreme values because it only considers the central value(s) in the dataset. ## Can Winsorized Mean Handle Multiple Outliers? Yes, winsorized mean can handle multiple outliers within the dataset. It effectively replaces the specified percentage of extreme values, regardless of the number of outliers present. By replacing multiple outliers with less extreme values, the winsorized mean remains less sensitive to the influence of these outliers. ## Can Winsorized Mean Be Used with Non-Numeric Data? Not really. Winsorized mean is primarily designed for numeric data, as it involves replacing numerical outliers with other numerical values. For non-numeric data, such as categorical variables or text data, other robust statistical measures or preprocessing techniques may be more appropriate. ## Does Winsorized Mean Preserve Data Variability? Winsorized mean retains more data variability than the trimmed mean, as it only replaces the extreme values with values closer to the dataset's central part. Therefore, it preserves more of the original data range and variability, making it a desirable choice in cases where maintaining variability is essential. ## How Does Winsorized Mean Impact Hypothesis Testing? Winsorized mean can affect the results of hypothesis testing by reducing the impact of extreme values on statistical tests. In cases where outliers might lead to erroneous conclusions, winsorized mean can provide more reliable test outcomes, making it a useful tool in hypothesis testing with non-normal or skewed data. ## The Bottom Line Winsorized mean is a statistical measure used to calculate the average of a dataset by replacing a specified percentage of extreme values or outliers with less extreme ones. This approach reduces the impact of outliers, providing a more robust estimate of the central tendency that is less sensitive to extreme values compared to the traditional arithmetic mean.

What Is the Winsorized Mean? Winsorized mean is a method of averaging that initially replaces the smallest and largest values with the observations closest to them. This is done to limit the effect of outliers or abnormal extreme values, or outliers, on the calculation. After replacing the values, the arithmetic mean formula is then used to calculate the winsorized mean. Key takeaways The winsorized mean is an averaging method that involves replacing the smallest and largest values of a data set with the observations closest to them.It mitigates the effects of outliers by replacing them with less extreme values.The winsorized mean is not the same as the trimmed mean, which involves removing data points as opposed to replacing them—although the results of the two tend to be close.The winsorized mean is also not the same as the arithmetic mean which does not adjust for outliers. Formula for the Winsorized Mean Winsorized Mean  =   x n … x n + 1   +   x n + 2 … x n N where: n   =   The number of largest and smallest data points to be replaced by the observation closest to them N   =  Total number of data points \begin{aligned} &\text{Winsorized Mean}\ =\ \frac{x_{n}\dots x_{n+1}\ +\ x_{n+2}\dots x_{n}}{N}\\ &\textbf{where:}\\ &\begin{aligned} n\ =\ &\text{The number of largest and smallest data}\\ &\text{points to be replaced by the observation}\\ &\text{closest to them}\end{aligned}\\ &N\ =\ \text{Total number of data points} \end{aligned} ​Winsorized Mean = Nxn​…xn+1​ + xn+2​…xn​​where:n = ​The number of largest and smallest datapoints to be replaced by the observationclosest to them​N = Total number of data points​ Winsorized means are expressed in two ways. A "kn" winsorized mean refers to the replacement of the "k" smallest and largest observations, where "k" is an integer. An "X%" winsorized mean involves replacing a given percentage of values from both ends of the data. The winsorized mean is achieved by replacing the smallest and largest data points, then summing all the data points and dividing the sum by the total number of data points. What Does the Winsorized Mean Tell You? The winsorized mean is less sensitive to outliers because it can replace them with less extreme values. That is, it is less susceptible to outliers versus the arithmetic average. However, if a distribution has fat tails, the effect of removing the highest and lowest values in the distribution will have little influence because of the high degree of variability in the distribution figures. One major downside for winsorized means is that they naturally introduce some bias into the data set. By reducing the influence of outliers, the analysis is modified for better analysis, but also removes information about the underlying data. Strengths of Winsorized Mean There are several situations in which using the winsorized mean is best. These vague situations are listed below, with more specific examples of where winsorized mean may be most useful in the next section. Times when it's sometimes best to use winsorized mean includes when there's: Outliers in the Dataset. Using the conventional arithmetic mean might produce false results when your dataset contains outliers, or extreme values that are considerably different from the other data points. Winsorized mean offers a more accurate representation of central trend and reduces the influence of these outliers.Skewed Distributions. Winsorized mean can be useful for datasets with significantly skewed distributions. In skewed distributions, there may be extreme values and a lengthy tail on one side. In order to reduce the skewness and create a more reliable estimate of the central tendency, winsorizing is used.Data with Measurement Mistakes. Measurement mistakes might cause outliers when they are present in the data. These measurement errors can be lessened by using the winsorized mean.Temporarily Value Fluctuations. Winsorized mean can be helpful in circumstances where brief variations in data could lead to extreme numbers since it is resistant to these fluctuations. Over time, the winsorized mean becomes more reliable and stable by taking the place of these outliers.Limited Sample Size: When there are few data points and a small sample size, the influence of outliers on the conventional mean may be greater. In these circumstances, the winsorized mean can offer a more accurate estimation of the central tendency. Winsorized Mean Level The winsorization level is crucial for effectively using the winsorized mean. The winsorization level determines the percentage of extreme values to be replaced with less extreme ones. To determine the appropriate winsorization level, consider data exploration, relying on domain knowledge, conducting sensitivity analyses, and consulting with experts who may be more familiar on what extreme values may look like. When assessing the winsorized level, understanding the nature of outliers and their reasons can help determine the appropriate level. Outliers can influence the statistical analysis, so a higher winsorization level may be beneficial if they unduly influence results. However, a lower level may be more appropriate if the goal is to preserve some of the data's original characteristics. When picking the level, gauge your interest in how important keeping the original data's composition is. In many cases, data domain knowledge is essential in setting the winsorization level. Consider any data set and what the typical range of values would be. Without historical, implicit knowledge of the industry, it would be much more challenging to identify bad data. In some cases, experimentation is crucial in observing how the winsorized mean changes with varying levels. Winsorized Mean and Real World Situations More specifically, there's a handful of situations or industries where winsorized mean makes more sense than other forms of measurement. These real world situations may include but aren't limited to the categories below. Financial/Investments Market volatility can have a material impact on financial data. Stock prices, asset returns, and other financial indicators may display extreme levels in the world of finance and investing. The impact of severe price volatility and outliers can be lessened when financial data estimates are computed using the winsorized mean. Payroll/Salaries Distributions of salaries or payroll within businesses can occasionally be very skewed. This is especially true in sectors where there is a significant income gap or sectors that materially reward those who have been in the industry long or "penalize" those who are just starting their careers. By minimizing the impact of abnormally high or low incomes, the winsorized mean can assist in providing a more accurate measurement of the typical pay range. Health Care Because of uncommon medical illnesses or extreme measures, medical data may contain outliers. Health-related indicators like blood pressure, cholesterol levels, or patient recovery durations can be better understood should extremes be removed. For example, information may be more helpful to know regarding a collective average of patients should that data set not be skewed by any abnormally high or abnormally low medical readings. Education Due to a variety of variables, some children may have unusually high or low test results. It may not be as useful to incorporate these abnormal test scores when evaluating a specific cohort's performance; therefore, an assessment's average score can be calculated using the winsorized mean to remove any negative (or positive) implications that student may have when evaluating how a specific teacher or course was perceived. Customer Satisfaction On a very similar note, when assessing customer satisfaction ratings, outliers may appear because a tiny percentage of consumers provided extremely good or negative comments. In the example above regarding a class, perhaps a single disgruntled student brings down the course evaluation score. Winsorized mean can help reduce the influence of these extreme scores and produce a more realistic picture of overall happiness. Environmental Data With seemingly more uncommon occurrences or extreme weather conditions occurring, there may be situations where environmental data without these extremes are useful. For example, consider a measure of average air quality or the amount of water contamination. Abnormally high or low levels of contamination in either context may mislead decision-makers in understanding what the average daily situation may be; for example, environmental economic resources may be misallocated. Example of How to Use Winsorized Mean Let's calculate the winsorized mean for the following data set: 1, 5, 7, 8, 9, 10, 34. In this example, we assume the winsorized mean is in the first order, in which we replace the smallest and largest values with their nearest observations. The data set now appears as follows: 5, 5, 7, 8, 9, 10, 10. Taking an arithmetic average of the new set produces a winsorized mean of 7.7, or (5 + 5 + 7 + 8 + 9 + 10 + 10) divided by 7. Note that the arithmetic mean would have been higher—10.6. The winsorized mean effectively reduces the influence of the 34 value as an outlier. Or consider a 20% winsorized mean that takes the top 10% and bottom 10% and replaces them with their next closest value. We will winsorize the following data set: 2, 4, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 62, 75. The two smallest and two largest data points—20% of the 20 data points—will be replaced with their next closest value. Thus, the new data set is as follows: 7, 7, 7, 8, 11, 14, 18, 23, 23, 27, 35, 40, 49, 50, 55, 60, 61, 61, 61, 61. The winsorized mean is 33.9, or the total of the data (678) divided by the total number of data points (20). Winsorized Mean vs. Other Measurements There are several other common forms of 'mean', each of which slightly vary from winsorized mean. Also, there are other measurement such as median that give comparable but different information. In general, the winsorized mean is designed to be more resistant to outliers compared to other types of means. Those other types of measurement may include: Traditional/Arithmetic Mean: The traditional mean, also known as the arithmetic mean, is calculated by summing all the data points in a dataset and dividing by the number of data points. It is sensitive to extreme values and can be significantly affected by outliers. Trimmed Mean: The trimmed mean is another type of robust mean that involves removing a certain percentage of extreme values from both ends. These ends may be referred to as the top and bottom of the data distribution. The trimmed mean retains a specific portion of the data's central values and discards the extreme values, making it more resistant to the influence of outliers compared to the arithmetic mean. Median: The median isn't a mean calculation at all; instead, it represents the middle value of a dataset when arranged in ascending or descending order. Unlike the traditional mean, the median is not affected by extreme values because it only considers the central value(s) in the dataset. Can Winsorized Mean Handle Multiple Outliers? Yes, winsorized mean can handle multiple outliers within the dataset. It effectively replaces the specified percentage of extreme values, regardless of the number of outliers present. By replacing multiple outliers with less extreme values, the winsorized mean remains less sensitive to the influence of these outliers. Can Winsorized Mean Be Used with Non-Numeric Data? Not really. Winsorized mean is primarily designed for numeric data, as it involves replacing numerical outliers with other numerical values. For non-numeric data, such as categorical variables or text data, other robust statistical measures or preprocessing techniques may be more appropriate. Does Winsorized Mean Preserve Data Variability? Winsorized mean retains more data variability than the trimmed mean, as it only replaces the extreme values with values closer to the dataset's central part. Therefore, it preserves more of the original data range and variability, making it a desirable choice in cases where maintaining variability is essential. How Does Winsorized Mean Impact Hypothesis Testing? Winsorized mean can affect the results of hypothesis testing by reducing the impact of extreme values on statistical tests. In cases where outliers might lead to erroneous conclusions, winsorized mean can provide more reliable test outcomes, making it a useful tool in hypothesis testing with non-normal or skewed data. The Bottom Line Winsorized mean is a statistical measure used to calculate the average of a dataset by replacing a specified percentage of extreme values or outliers with less extreme ones. This approach reduces the impact of outliers, providing a more robust estimate of the central tendency that is less sensitive to extreme values compared to the traditional arithmetic mean.

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

What Is the Commodity Channel Index (CCI)? How To Calculate

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-commodity-channel-index-cci"></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 Commodity Channel Index (CCI)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Commodity Channel Index​ (CCI) is a momentum-based <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oscillator.asp">oscillator</a> used to help determine when an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentvehicle.asp">investment vehicle</a> is reaching a condition of being overbought or oversold. </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"> Developed by Donald Lambert, this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalindicator.asp">technical indicator</a> assesses price trend direction and strength, allowing traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position. In this way, the indicator can be used to provide <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trade-signal.asp">trade signals</a> when it acts in a certain way.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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 Commodity Channel Index (CCI) is a technical indicator that measures the difference between the current price and the historical average price.</li><li>When the CCI is above zero, it indicates the price is above the historic average. Conversely, when the CCI is below zero, the price is below the historic average.</li><li>The CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-formula-for-the-commodity-channel-index-cci-is"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> The Formula for the Commodity Channel Index (CCI) Is: </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <span data-value="\begin{aligned} &amp;\text{CCI} = \frac{ \text{Typical Price} - \text{MA} }{ .015 \times \text{Mean Deviation} } \\ &amp;\textbf{where:}\\ &amp;\text{Typical Price} = \textstyle{ \sum_{i=1}^{P} ( ( \text{High} + \text{Low} + \text{Close} ) \div 3 ) } \\ &amp;P = \text{Number of periods} \\ &amp;\text{MA} = \text{Moving Average} \\ &amp;\text{Moving Average} = ( \textstyle{ \sum_{i=1}^{P} \text{Typical Price} } ) \div P \\ &amp;\text{Mean Deviation} = ( \textstyle{ \sum_{i=1}^{P} \mid \text{Typical Price} - \text{MA} \mid } ) \div P \\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mrow> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> CCI </mtext> <mo> = </mo> <mfrac> <mrow> <mtext> Typical Price </mtext> <mo> − </mo> <mtext> MA </mtext> </mrow> <mrow> <mi> . </mi> <mn> 0 </mn> <mn> 1 </mn> <mn> 5 </mn> <mo> × </mo> <mtext> Mean Deviation </mtext> </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> <mtext> Typical Price </mtext> <mo> = </mo> <mstyle> <mrow> <msubsup> <mo> ∑ </mo> <mrow> <mi> i </mi> <mo> = </mo> <mn> 1 </mn> </mrow> <mi> P </mi> </msubsup> <mo> ( </mo> <mo> ( </mo> <mtext> High </mtext> <mo> + </mo> <mtext> Low </mtext> <mo> + </mo> <mtext> Close </mtext> <mo> ) </mo> <mo> ÷ </mo> <mn> 3 </mn> <mo> ) </mo> </mrow> </mstyle> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mi> P </mi> <mo> = </mo> <mtext> Number of periods </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> MA </mtext> <mo> = </mo> <mtext> Moving Average </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Moving Average </mtext> <mo> = </mo> <mo> ( </mo> <mstyle> <mrow> <msubsup> <mo> ∑ </mo> <mrow> <mi> i </mi> <mo> = </mo> <mn> 1 </mn> </mrow> <mi> P </mi> </msubsup> <mtext> Typical Price </mtext> </mrow> <mo> ) </mo> <mo> ÷ </mo> <mi> P </mi> </mstyle> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Mean Deviation </mtext> <mo> = </mo> <mo> ( </mo> <mstyle> <mrow> <msubsup> <mo> ∑ </mo> <mrow> <mi> i </mi> <mo> = </mo> <mn> 1 </mn> </mrow> <mi> P </mi> </msubsup> <mo> ∣ </mo> <mtext> Typical Price </mtext> <mo> − </mo> <mtext> MA </mtext> <mo> ∣ </mo> </mrow> <mo> ) </mo> <mo> ÷ </mo> <mi> P </mi> </mstyle> </mrow> </mstyle> </mtd> </mtr> </mtable> </mrow> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\text{CCI} = \frac{ \text{Typical Price} - \text{MA} }{ .015 \times \text{Mean Deviation} } \\ &amp;\textbf{where:}\\ &amp;\text{Typical Price} = \textstyle{ \sum_{i=1}^{P} ( ( \text{High} + \text{Low} + \text{Close} ) \div 3 ) } \\ &amp;P = \text{Number of periods} \\ &amp;\text{MA} = \text{Moving Average} \\ &amp;\text{Moving Average} = ( \textstyle{ \sum_{i=1}^{P} \text{Typical Price} } ) \div P \\ &amp;\text{Mean Deviation} = ( \textstyle{ \sum_{i=1}^{P} \mid \text{Typical Price} - \text{MA} \mid } ) \div P \\ \end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="strut"></span><span class="strut bottom"></span><span class="base"><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">CCI</span></span><span class="mrel">=</span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord mathrm">.</span><span class="mord mathrm">0</span><span class="mord mathrm">1</span><span class="mord mathrm">5</span><span class="mbin">×</span><span class="mord text"><span class="mord mathrm">Mean Deviation</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord mathrm">Typical Price</span></span><span class="mbin">−</span><span class="mord text"><span class="mord mathrm">MA</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">Typical Price</span></span><span class="mrel">=</span><span class="mord"><span class="mop"><span class="mop op-symbol small-op">∑</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 mathit mtight">i</span><span class="mrel mtight">=</span><span class="mord mathrm mtight">1</span></span></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mathit mtight">P</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span><span class="mopen">(</span><span class="mopen">(</span><span class="mord text"><span class="mord mathrm">High</span></span><span class="mbin">+</span><span class="mord text"><span class="mord mathrm">Low</span></span><span class="mbin">+</span><span class="mord text"><span class="mord mathrm">Close</span></span><span class="mclose">)</span><span class="mbin">÷</span><span class="mord mathrm">3</span><span class="mclose">)</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathit">P</span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Number of periods</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">MA</span></span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Moving Average</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">Moving Average</span></span><span class="mrel">=</span><span class="mopen">(</span><span class="mord"><span class="mop"><span class="mop op-symbol small-op">∑</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 mathit mtight">i</span><span class="mrel mtight">=</span><span class="mord mathrm mtight">1</span></span></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mathit mtight">P</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span><span class="mord text"><span class="mord mathrm">Typical Price</span></span></span><span class="mclose">)</span><span class="mbin">÷</span><span class="mord mathit">P</span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathrm">Mean Deviation</span></span><span class="mrel">=</span><span class="mopen">(</span><span class="mord"><span class="mop"><span class="mop op-symbol small-op">∑</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 mathit mtight">i</span><span class="mrel mtight">=</span><span class="mord mathrm mtight">1</span></span></span></span><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mathit mtight">P</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span><span class="mrel">∣</span><span class="mord text"><span class="mord mathrm">Typical Price</span></span><span class="mbin">−</span><span class="mord text"><span class="mord mathrm">MA</span></span><span class="mrel">∣</span></span><span class="mclose">)</span><span class="mbin">÷</span><span class="mord mathit">P</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"></span></span></span></span></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-how-to-calculate-the-commodity-channel-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"> How to Calculate the Commodity Channel Index </span> </h2> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <li>Determine how many periods your CCI will analyze. Twenty is commonly used. Fewer periods result in a more volatile indicator, while more periods will make it smoother. For this calculation, we will assume 20 periods. Adjust the calculation if using a different number.</li> <li>In a spreadsheet, track the high, low, and close for 20 periods and compute the typical price.</li> <li>After 20 periods, compute 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 (MA)</a> of the typical price by summing the last 20 typical prices and dividing by 20.</li> <li>Calculate the mean deviation by subtracting the MA from the typical price for the last 20 periods. Sum the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/absolute-value.asp">absolute values</a> (ignore minus signs) of these figures and then divide by 20.</li> <li>Insert the most recent typical price, the MA, and the mean deviation into the formula to compute the current CCI reading.</li> <li>Repeat the process as each new period ends.<span class="ql-inline-citation" data-cite="5"></span></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <span class="heading-toc" id="toc-what-does-the-commodity-channel-index-tell-you"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_14-0"> <span class="mntl-sc-block-heading__text"> What Does the Commodity Channel Index Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The CCI is primarily used for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/031914/how-traders-can-utilize-cci-commodity-channel-index-trade-stock-trends.asp">spotting new trends</a>, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend.<span class="ql-inline-citation" data-cite="1"></span> Once this occurs, traders can watch for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pullback.asp">pullback</a> in price followed by a rally in both price and the CCI to signal a buying opportunity. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_19-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:64.8%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/QTMh1mPaDP2fxsjBOD7M2w21fxQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/QTMh1mPaDP2fxsjBOD7M2w21fxQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg" data-srcset="https://www.investopedia.com/thmb/2cakkO6jXhcKBtUdwXy0t0DsOow=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg 750w" data-tracking-container="true" height="1893" id="mntl-sc-block-image_1-0" width="2917"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="1893" sizes="750px" src="https://www.investopedia.com/thmb/QTMh1mPaDP2fxsjBOD7M2w21fxQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg" srcset="https://www.investopedia.com/thmb/2cakkO6jXhcKBtUdwXy0t0DsOow=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg 750w" width="2917"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Image by Sabrina Jiang © Investopedia 2021</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The same concept applies to an emerging <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downtrend.asp">downtrend</a>. When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting.<span class="ql-inline-citation" data-cite="1"></span> This is a signal to get out of longs or to start watching for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">shorting</a> opportunities. </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>Despite its name, the CCI can be used in any market and is not just for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodities</a>.<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_24-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overbought.asp">Overbought</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oversold.asp">oversold</a> levels are not fixed since the indicator is unbound. Therefore, traders look at past readings on the indicator to get a sense of where the price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity, meanwhile, may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> There are also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divergence.asp">divergences</a>—when the price is moving in the opposite direction of the indicator. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way, they can tighten <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop loss</a> levels or hold off on taking new trades in the price trend direction. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <span class="heading-toc" id="toc-the-commodity-channel-index-vs-the-stochastic-oscillator"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_28-0"> <span class="mntl-sc-block-heading__text"> The Commodity Channel Index vs. the Stochastic Oscillator </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Both of these technical indicators are oscillators, but they are calculated quite differently. One of the main differences is that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stochasticoscillator.asp">stochastic oscillator</a> is bound between zero and 100, while the CCI is unbounded.<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_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Due to the calculation differences, they will provide different signals at different times, such as overbought and oversold readings. </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-limitations-of-using-the-commodity-channel-index"></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"> Limitations of Using the Commodity Channel Index </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> While often used to spot overbought and oversold conditions, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012015/what-are-differences-between-relative-strength-index-rsi-commodity-channel-index-cci.asp">the CCI is highly subjective</a> in this regard.<span class="ql-inline-citation" data-cite="4"></span> The indicator is unbound and, therefore, prior overbought and oversold levels may have little impact in the future. </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 indicator is also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/laggingindicator.asp">lagging</a>, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/correction.asp">correct</a> already. </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"> Such incidents are called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/whipsaw.asp">whipsaws</a>; a signal is provided by the indicator but the price doesn't follow through after that signal and money is lost on the trade. If not careful, whipsaws can occur frequently. Therefore, the indicator is best used in conjunction with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-action.asp">price analysis</a> and other forms of technical analysis or indicators to help confirm or reject CCI signals. </p></div>

## What Is the Commodity Channel Index (CCI)? The Commodity Channel Index​ (CCI) is a momentum-based [oscillator](https://www.investopedia.com/terms/o/oscillator.asp) used to help determine when an [investment vehicle](https://www.investopedia.com/terms/i/investmentvehicle.asp) is reaching a condition of being overbought or oversold. Developed by Donald Lambert, this [technical indicator](https://www.investopedia.com/terms/t/technicalindicator.asp) assesses price trend direction and strength, allowing traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position. In this way, the indicator can be used to provide [trade signals](https://www.investopedia.com/terms/t/trade-signal.asp) when it acts in a certain way. ### Key Takeaways * The Commodity Channel Index (CCI) is a technical indicator that measures the difference between the current price and the historical average price. * When the CCI is above zero, it indicates the price is above the historic average. Conversely, when the CCI is below zero, the price is below the historic average. * The CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from. ## The Formula for the Commodity Channel Index (CCI) Is:  CCI = Typical Price − MA . 0 1 5 × Mean Deviation where: Typical Price = ∑ i = 1 P ( ( High + Low + Close ) ÷ 3 ) P = Number of periods MA = Moving Average Moving Average = ( ∑ i = 1 P Typical Price ) ÷ P Mean Deviation = ( ∑ i = 1 P ∣ Typical Price − MA ∣ ) ÷ P \begin{aligned} &\text{CCI} = \frac{ \text{Typical Price} - \text{MA} }{ .015 \times \text{Mean Deviation} } \\ &\textbf{where:}\\ &\text{Typical Price} = \textstyle{ \sum\_{i=1}^{P} ( ( \text{High} + \text{Low} + \text{Close} ) \div 3 ) } \\ &P = \text{Number of periods} \\ &\text{MA} = \text{Moving Average} \\ &\text{Moving Average} = ( \textstyle{ \sum\_{i=1}^{P} \text{Typical Price} } ) \div P \\ &\text{Mean Deviation} = ( \textstyle{ \sum\_{i=1}^{P} \mid \text{Typical Price} - \text{MA} \mid } ) \div P \\ \end{aligned} ​CCI=.015×Mean DeviationTypical Price−MA​where:Typical Price=∑i=1P​((High+Low+Close)÷3)P=Number of periodsMA=Moving AverageMoving Average=(∑i=1P​Typical Price)÷PMean Deviation=(∑i=1P​∣Typical Price−MA∣)÷P​ ## How to Calculate the Commodity Channel Index 1. Determine how many periods your CCI will analyze. Twenty is commonly used. Fewer periods result in a more volatile indicator, while more periods will make it smoother. For this calculation, we will assume 20 periods. Adjust the calculation if using a different number. 2. In a spreadsheet, track the high, low, and close for 20 periods and compute the typical price. 3. After 20 periods, compute the [moving average (MA)](https://www.investopedia.com/terms/m/movingaverage.asp) of the typical price by summing the last 20 typical prices and dividing by 20. 4. Calculate the mean deviation by subtracting the MA from the typical price for the last 20 periods. Sum the [absolute values](https://www.investopedia.com/terms/a/absolute-value.asp) (ignore minus signs) of these figures and then divide by 20. 5. Insert the most recent typical price, the MA, and the mean deviation into the formula to compute the current CCI reading. 6. Repeat the process as each new period ends. ## What Does the Commodity Channel Index Tell You? The CCI is primarily used for [spotting new trends](https://www.investopedia.com/articles/active-trading/031914/how-traders-can-utilize-cci-commodity-channel-index-trade-stock-trends.asp), watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price. When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend. Once this occurs, traders can watch for a [pullback](https://www.investopedia.com/terms/p/pullback.asp) in price followed by a rally in both price and the CCI to signal a buying opportunity. ![Image]() :max_bytes(150000):strip_icc()/dotdash_INV-final-Commodity-Channel-Index-CCI-June-2021-01-45a136bc81d746acbc178b6f4afc07c2.jpg) Image by Sabrina Jiang © Investopedia 2021 The same concept applies to an emerging [downtrend](https://www.investopedia.com/terms/d/downtrend.asp). When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting. This is a signal to get out of longs or to start watching for [shorting](https://www.investopedia.com/terms/s/short.asp) opportunities. ### Despite its name, the CCI can be used in any market and is not just for [commodities](https://www.investopedia.com/terms/c/commodity.asp). [Overbought](https://www.investopedia.com/terms/o/overbought.asp) or [oversold](https://www.investopedia.com/terms/o/oversold.asp) levels are not fixed since the indicator is unbound. Therefore, traders look at past readings on the indicator to get a sense of where the price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity, meanwhile, may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times. There are also [divergences](https://www.investopedia.com/terms/d/divergence.asp)—when the price is moving in the opposite direction of the indicator. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way, they can tighten [stop loss](https://www.investopedia.com/terms/s/stop-lossorder.asp) levels or hold off on taking new trades in the price trend direction. ## The Commodity Channel Index vs. the Stochastic Oscillator Both of these technical indicators are oscillators, but they are calculated quite differently. One of the main differences is that the [stochastic oscillator](https://www.investopedia.com/terms/s/stochasticoscillator.asp) is bound between zero and 100, while the CCI is unbounded. Due to the calculation differences, they will provide different signals at different times, such as overbought and oversold readings. ## Limitations of Using the Commodity Channel Index While often used to spot overbought and oversold conditions, [the CCI is highly subjective](https://www.investopedia.com/ask/answers/012015/what-are-differences-between-relative-strength-index-rsi-commodity-channel-index-cci.asp) in this regard. The indicator is unbound and, therefore, prior overbought and oversold levels may have little impact in the future. The indicator is also [lagging](https://www.investopedia.com/terms/l/laggingindicator.asp), which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to [correct](https://www.investopedia.com/terms/c/correction.asp) already. Such incidents are called [whipsaws](https://www.investopedia.com/terms/w/whipsaw.asp); a signal is provided by the indicator but the price doesn't follow through after that signal and money is lost on the trade. If not careful, whipsaws can occur frequently. Therefore, the indicator is best used in conjunction with [price analysis](https://www.investopedia.com/terms/p/price-action.asp) and other forms of technical analysis or indicators to help confirm or reject CCI signals.

What Is the Commodity Channel Index (CCI)? The Commodity Channel Index​ (CCI) is a momentum-based oscillator used to help determine when an investment vehicle is reaching a condition of being overbought or oversold. Developed by Donald Lambert, this technical indicator assesses price trend direction and strength, allowing traders to determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position. In this way, the indicator can be used to provide trade signals when it acts in a certain way. Key Takeaways The Commodity Channel Index (CCI) is a technical indicator that measures the difference between the current price and the historical average price.When the CCI is above zero, it indicates the price is above the historic average. Conversely, when the CCI is below zero, the price is below the historic average.The CCI is an unbounded oscillator, meaning it can go higher or lower indefinitely. For this reason, overbought and oversold levels are typically determined for each individual asset by looking at historical extreme CCI levels where the price reversed from. The Formula for the Commodity Channel Index (CCI) Is:  CCI = Typical Price − MA . 0 1 5 × Mean Deviation where: Typical Price = ∑ i = 1 P ( ( High + Low + Close ) ÷ 3 ) P = Number of periods MA = Moving Average Moving Average = ( ∑ i = 1 P Typical Price ) ÷ P Mean Deviation = ( ∑ i = 1 P ∣ Typical Price − MA ∣ ) ÷ P \begin{aligned} &\text{CCI} = \frac{ \text{Typical Price} - \text{MA} }{ .015 \times \text{Mean Deviation} } \\ &\textbf{where:}\\ &\text{Typical Price} = \textstyle{ \sum_{i=1}^{P} ( ( \text{High} + \text{Low} + \text{Close} ) \div 3 ) } \\ &P = \text{Number of periods} \\ &\text{MA} = \text{Moving Average} \\ &\text{Moving Average} = ( \textstyle{ \sum_{i=1}^{P} \text{Typical Price} } ) \div P \\ &\text{Mean Deviation} = ( \textstyle{ \sum_{i=1}^{P} \mid \text{Typical Price} - \text{MA} \mid } ) \div P \\ \end{aligned} ​CCI=.015×Mean DeviationTypical Price−MA​where:Typical Price=∑i=1P​((High+Low+Close)÷3)P=Number of periodsMA=Moving AverageMoving Average=(∑i=1P​Typical Price)÷PMean Deviation=(∑i=1P​∣Typical Price−MA∣)÷P​ How to Calculate the Commodity Channel Index Determine how many periods your CCI will analyze. Twenty is commonly used. Fewer periods result in a more volatile indicator, while more periods will make it smoother. For this calculation, we will assume 20 periods. Adjust the calculation if using a different number. In a spreadsheet, track the high, low, and close for 20 periods and compute the typical price. After 20 periods, compute the moving average (MA) of the typical price by summing the last 20 typical prices and dividing by 20. Calculate the mean deviation by subtracting the MA from the typical price for the last 20 periods. Sum the absolute values (ignore minus signs) of these figures and then divide by 20. Insert the most recent typical price, the MA, and the mean deviation into the formula to compute the current CCI reading. Repeat the process as each new period ends. What Does the Commodity Channel Index Tell You? The CCI is primarily used for spotting new trends, watching for overbought and oversold levels, and spotting weakness in trends when the indicator diverges with price. When the CCI moves from negative or near-zero territory to above 100, that may indicate the price is starting a new uptrend. Once this occurs, traders can watch for a pullback in price followed by a rally in both price and the CCI to signal a buying opportunity. Image by Sabrina Jiang © Investopedia 2021 The same concept applies to an emerging downtrend. When the indicator goes from positive or near-zero readings to below -100, then a downtrend may be starting. This is a signal to get out of longs or to start watching for shorting opportunities. Despite its name, the CCI can be used in any market and is not just for commodities. Overbought or oversold levels are not fixed since the indicator is unbound. Therefore, traders look at past readings on the indicator to get a sense of where the price reversed. For one stock, it may tend to reverse near +200 and -150. Another commodity, meanwhile, may tend to reverse near +325 and -350. Zoom out on the chart to see lots of price reversal points, and the CCI readings at those times. There are also divergences—when the price is moving in the opposite direction of the indicator. If the price is rising and the CCI is falling, this can indicate a weakness in the trend. While divergence is a poor trade signal, since it can last a long time and doesn't always result in a price reversal, it can be good for at least warning the trader that there is the possibility of a reversal. This way, they can tighten stop loss levels or hold off on taking new trades in the price trend direction. The Commodity Channel Index vs. the Stochastic Oscillator Both of these technical indicators are oscillators, but they are calculated quite differently. One of the main differences is that the stochastic oscillator is bound between zero and 100, while the CCI is unbounded. Due to the calculation differences, they will provide different signals at different times, such as overbought and oversold readings. Limitations of Using the Commodity Channel Index While often used to spot overbought and oversold conditions, the CCI is highly subjective in this regard. The indicator is unbound and, therefore, prior overbought and oversold levels may have little impact in the future. The indicator is also lagging, which means at times it will provide poor signals. A rally to 100 or -100 to signal a new trend may come too late, as the price has had its run and is starting to correct already. Such incidents are called whipsaws; a signal is provided by the indicator but the price doesn't follow through after that signal and money is lost on the trade. If not careful, whipsaws can occur frequently. Therefore, the indicator is best used in conjunction with price analysis and other forms of technical analysis or indicators to help confirm or reject CCI signals.

https://www.investopedia.com/articles/pf/09/help-family-members-trouble.asp

8 Ways to Help Family Members in Financial Trouble

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> During times of hardship, people often turn for help to a family member. Often, people get into financial difficulties if they lose a job, overuse credit cards, or incur expensive medical bills. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Unfortunately, many well-meaning family members have found themselves sucked into the financial abyss by the problems of a loved one. </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"> Let's take a look at a few options you can consider to help your family members in financial trouble without hurting yourself in the process. </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>When a loved one is struggling financially, take a pause before providing money and consider whether they have a plan for avoiding the same pitfalls in the future.</li><li>Make sure you have a clear agreement about the form of help, such as a loan or gift, and any terms for repayment.</li><li>If you want to give the person something outright, consider giving them cash, paying one of their bills directly, or providing them with non-cash assistance, like gift cards, or certain resources they need.</li><li>Consider providing them with a job, if you can, or help them to create a bill-paying plan, or to access local resources like career counseling and training programs.</li><li>If you want to help them with a loan, consider whether you want to make a personal loan or to co-sign a loan that they are seeking from a bank or other financial institution.</li></ul></div></div></div> <span class="heading-toc" id="toc-1-give-a-cash-gift"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> 1. Give a Cash Gift </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> If your loved one is having a short-term <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> problem, you may want to give an outright financial gift. </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"> Decide how much you can afford to give without putting yourself in financial jeopardy, and then either give the maximum amount all at once (and let your loved one know that's the case) or perhaps give smaller gifts on a periodic basis until the situation is resolved. </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"> Make sure it's clearly understood that the money is a gift and doesn't need to be repaid so you don't create an awkward situation for the gift recipient. </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"> Annual Exclusion </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> If you're considering giving them a substantial sum of money, you'll need to keep an eye on the annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gifttax.asp">gift tax</a> exclusion set each year by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp">Internal Revenue Service (IRS).</a> In tax year 2024, the exclusion is $18,000 per person.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <span class="heading-toc" id="toc-2-make-a-personal-loan"></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"> 2. Make a Personal Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Your family member may approach you and ask for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-small-personal-loans-4797188">short-term loan</a>. Talk frankly, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-write-personal-loan-agreement-7971691">put the terms of the loan on paper</a>, and have both parties sign. This will help ensure that each party is clear on the financial arrangement they're entering into. Some loan details you'll want to include are: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li>The amount of the loan</li> <li>Whether the loan will be a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lumpsumdistribution.asp">lump-sum payment</a>, or if it will be divided and paid out in installments upon meeting certain conditions (e.g., securing another job or paying down existing debt)</li> <li>The interest rate you will charge for making the loan and how it will be calculated (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compound</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/simple_interest.asp">simple interest</a>)</li> <li>Payment due dates (including the date of full <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayment</a> or final installment due)</li> <li>A <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recourse.asp">recourse</a> if the borrower doesn't make loan payments on time or in full (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action)</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If you are going to lend more than $10,000 and/or you're going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low-interest loans among family members. </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>When helping out a loved one in financial distress, there is a risk of getting sucked into a loop of loans and payments. To avoid this, make sure the terms and structure of the loan or gift are clearly defined in advance.</p></div></div></div> <span class="heading-toc" id="toc-3-co-sign-a-loan"></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"> 3. Co-Sign a Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Your loved one may be interested in obtaining a loan or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit (LOC)</a> to help with short-term financial needs, but what if their credit requires getting a co-signer? Would you be willing to co-sign a loan or LOC from a bank, credit union, or online lender? </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"> Potential Pitfalls </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Before saying "yes" and putting your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/good-credit.asp">good credit</a> reputation in the hands of someone else, it's important to realize there are legal and financial implications to co-signing on a loan. The most critical thing to understand is that you are legally obligating yourself to repay the loan if the other borrower fails to do so. </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 lender can take legal action against you and require that you pay the full amount, even if you had an agreement between you and your family member that you would not have to make payments. </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"> This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/delinquent.asp">delinquent</a> loan will also now affect your personal credit. So if your sister/brother/uncle fails to make payments on the loan on time and in full, the lender can report the negative account activity to the credit bureaus to file on your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a> which, in turn, can lower your credit score.  </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"> Consider the Risks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Co-signing a loan is serious business. The fact that your family member needs a loan co-signer means the lender considers them too great of a risk for the bank to take alone. If the bank isn't sure they'll repay the loan, what guarantees do you have that they will? </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"> It may also mean that you could have more difficulty getting a loan for yourself down the road since you are technically taking on this loan and its payment as well. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Before co-signing for a loan, make sure you: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <li>Ask for a copy of your family member's credit report, credit score, and monthly budget so you'll have an accurate picture of their finances and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ability-to-repay.asp">ability to repay</a> the loan.</li> <li>Meet with the lender in person (if possible) and be sure that you understand all the terms of the loan.</li> <li>Get copies of all documents related to the loan, including the repayment schedule.</li> <li>Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score.</li> </ul> <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-4-create-a-bill-paying-plan"></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"> 4. Create a Bill-Paying Plan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Often, people in a financial crisis simply aren't aware where their money is going. If you have experience using a budget to manage your own money, you may be able to help your family member to create and use a budget as well. To break the ice, offer to show them your budget and your bill-paying system and explain how it helps you make financial decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> As you work together to help them get a handle on their financial situation, you may find places where they can cut back on expenses or try to increase their income to better meet their financial obligations. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-5-provide-employment"></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"> 5. Provide Employment </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> If you're not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> This side job may go a long way toward helping them earn the money they need to pay their bills and help you finish up any jobs that you've been putting off. </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"> Treat the arrangement as you would with any other employee—spell out clearly the work that needs to be done, the deadlines, and the rate of pay. Be sure to include a provision about how you'll deal with poor or incomplete work. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_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 don't have cash to give a loved one, recognize that your time, patience, and ability to help them brainstorm and problem-solve are also valuable assets that you can provide.</p></div></div></div> <span class="heading-toc" id="toc-6-give-non-cash-assistance"></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"> 6. Give Non-Cash Assistance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> If you're uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gift-card.asp">gift cards</a> or gift certificates. You'll have more control over what your money may be used for, and you can easily buy gift cards in varying amounts at most stores. </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-7-prepay-bills"></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"> 7. Prepay Bills </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> You may want to consider prepaying one or more regular bills that your loved one receives (rent/mortgage, utility bills, or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance-premium.asp">insurance premiums</a>) to help them during their current financial crunch. Offering to do something, such as making their car payment, may help them avoid a short-term crisis and give them the extra time they need to work out of their situation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <span class="heading-toc" id="toc-8-help-find-local-resources"></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"> 8. Help Find Local Resources </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> You may not be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals who can steer them in the right direction, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <li>Career counselor and employment agencies</li><li>Welfare agencies and similar services</li><li>Credit and debt counselors</li><li>Lenders who can provide short-term solutions</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_72-0"><span class="heading-toc" id="toc-how-much-money-can-i-gift-before-the-gift-tax-applies"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Money Can I Gift Before the Gift Tax Applies?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>For tax year 2024, you can give up to $18,000 per person.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_74-0"><span class="heading-toc" id="toc-can-budgeting-apps-help-a-family-member"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Budgeting Apps Help a Family Member?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Budgeting apps can help, as long as your family member understands the value of a budget and uses the app regularly. Two well-regarded budget apps you might consider are YNAB (You Need a Budget) and Simplifi by Quicken.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="2"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-lending-money-to-family-members-a-good-idea"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Lending Money to Family Members a Good Idea?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It may or may not be. Making a loan can show that you care about your loved ones. But getting your money back is another thing. And making, or co-signing for, a loan may result in negative effects such as ill will and damage to your financial standing if it remains unpaid.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Family members and money aren't always a good mix. But, in tough economic times or when faced with unexpected emergencies, a loved one may truly need your financial assistance. Find out specifically what help they need to work their way out of their current situation. </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"> Before you commit to helping financially, be sure to think through what you can and can't afford to do. Remember, if your own resources are limited, there are other meaningful, effective, and creative ways to help your family members. </p></div>

During times of hardship, people often turn for help to a family member. Often, people get into financial difficulties if they lose a job, overuse credit cards, or incur expensive medical bills. Unfortunately, many well-meaning family members have found themselves sucked into the financial abyss by the problems of a loved one. Let's take a look at a few options you can consider to help your family members in financial trouble without hurting yourself in the process. ### Key Takeaways * When a loved one is struggling financially, take a pause before providing money and consider whether they have a plan for avoiding the same pitfalls in the future. * Make sure you have a clear agreement about the form of help, such as a loan or gift, and any terms for repayment. * If you want to give the person something outright, consider giving them cash, paying one of their bills directly, or providing them with non-cash assistance, like gift cards, or certain resources they need. * Consider providing them with a job, if you can, or help them to create a bill-paying plan, or to access local resources like career counseling and training programs. * If you want to help them with a loan, consider whether you want to make a personal loan or to co-sign a loan that they are seeking from a bank or other financial institution. ## 1. Give a Cash Gift If your loved one is having a short-term [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) problem, you may want to give an outright financial gift. Decide how much you can afford to give without putting yourself in financial jeopardy, and then either give the maximum amount all at once (and let your loved one know that's the case) or perhaps give smaller gifts on a periodic basis until the situation is resolved. Make sure it's clearly understood that the money is a gift and doesn't need to be repaid so you don't create an awkward situation for the gift recipient. ### Annual Exclusion If you're considering giving them a substantial sum of money, you'll need to keep an eye on the annual [gift tax](https://www.investopedia.com/terms/g/gifttax.asp) exclusion set each year by the [Internal Revenue Service (IRS).](https://www.investopedia.com/terms/i/irs.asp) In tax year 2024, the exclusion is $18,000 per person. ## 2. Make a Personal Loan Your family member may approach you and ask for a [short-term loan](https://www.investopedia.com/best-small-personal-loans-4797188). Talk frankly, [put the terms of the loan on paper](https://www.investopedia.com/how-write-personal-loan-agreement-7971691), and have both parties sign. This will help ensure that each party is clear on the financial arrangement they're entering into. Some loan details you'll want to include are: * The amount of the loan * Whether the loan will be a [lump-sum payment](https://www.investopedia.com/terms/l/lumpsumdistribution.asp), or if it will be divided and paid out in installments upon meeting certain conditions (e.g., securing another job or paying down existing debt) * The interest rate you will charge for making the loan and how it will be calculated ([compound](https://www.investopedia.com/terms/c/compounding.asp) or [simple interest](https://www.investopedia.com/terms/s/simple_interest.asp)) * Payment due dates (including the date of full [repayment](https://www.investopedia.com/terms/r/repayment.asp) or final installment due) * A [recourse](https://www.investopedia.com/terms/r/recourse.asp) if the borrower doesn't make loan payments on time or in full (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action) If you are going to lend more than $10,000 and/or you're going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low-interest loans among family members. ### When helping out a loved one in financial distress, there is a risk of getting sucked into a loop of loans and payments. To avoid this, make sure the terms and structure of the loan or gift are clearly defined in advance. ## 3. Co-Sign a Loan Your loved one may be interested in obtaining a loan or [line of credit (LOC)](https://www.investopedia.com/terms/l/lineofcredit.asp) to help with short-term financial needs, but what if their credit requires getting a co-signer? Would you be willing to co-sign a loan or LOC from a bank, credit union, or online lender? ### Potential Pitfalls Before saying "yes" and putting your [good credit](https://www.investopedia.com/terms/g/good-credit.asp) reputation in the hands of someone else, it's important to realize there are legal and financial implications to co-signing on a loan. The most critical thing to understand is that you are legally obligating yourself to repay the loan if the other borrower fails to do so. The lender can take legal action against you and require that you pay the full amount, even if you had an agreement between you and your family member that you would not have to make payments. This [delinquent](https://www.investopedia.com/terms/d/delinquent.asp) loan will also now affect your personal credit. So if your sister/brother/uncle fails to make payments on the loan on time and in full, the lender can report the negative account activity to the credit bureaus to file on your [credit report](https://www.investopedia.com/terms/c/creditreport.asp) which, in turn, can lower your credit score.  ### Consider the Risks Co-signing a loan is serious business. The fact that your family member needs a loan co-signer means the lender considers them too great of a risk for the bank to take alone. If the bank isn't sure they'll repay the loan, what guarantees do you have that they will? It may also mean that you could have more difficulty getting a loan for yourself down the road since you are technically taking on this loan and its payment as well. Before co-signing for a loan, make sure you: * Ask for a copy of your family member's credit report, credit score, and monthly budget so you'll have an accurate picture of their finances and [ability to repay](https://www.investopedia.com/terms/a/ability-to-repay.asp) the loan. * Meet with the lender in person (if possible) and be sure that you understand all the terms of the loan. * Get copies of all documents related to the loan, including the repayment schedule. * Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score. ## 4. Create a Bill-Paying Plan Often, people in a financial crisis simply aren't aware where their money is going. If you have experience using a budget to manage your own money, you may be able to help your family member to create and use a budget as well. To break the ice, offer to show them your budget and your bill-paying system and explain how it helps you make financial decisions. As you work together to help them get a handle on their financial situation, you may find places where they can cut back on expenses or try to increase their income to better meet their financial obligations. ## 5. Provide Employment If you're not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate. This side job may go a long way toward helping them earn the money they need to pay their bills and help you finish up any jobs that you've been putting off. Treat the arrangement as you would with any other employee—spell out clearly the work that needs to be done, the deadlines, and the rate of pay. Be sure to include a provision about how you'll deal with poor or incomplete work. ### If you don't have cash to give a loved one, recognize that your time, patience, and ability to help them brainstorm and problem-solve are also valuable assets that you can provide. ## 6. Give Non-Cash Assistance If you're uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as [gift cards](https://www.investopedia.com/terms/g/gift-card.asp) or gift certificates. You'll have more control over what your money may be used for, and you can easily buy gift cards in varying amounts at most stores. ## 7. Prepay Bills You may want to consider prepaying one or more regular bills that your loved one receives (rent/mortgage, utility bills, or [insurance premiums](https://www.investopedia.com/terms/i/insurance-premium.asp)) to help them during their current financial crunch. Offering to do something, such as making their car payment, may help them avoid a short-term crisis and give them the extra time they need to work out of their situation. ## 8. Help Find Local Resources You may not be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals who can steer them in the right direction, such as: * Career counselor and employment agencies * Welfare agencies and similar services * Credit and debt counselors * Lenders who can provide short-term solutions ## How Much Money Can I Gift Before the Gift Tax Applies? For tax year 2024, you can give up to $18,000 per person. ## Can Budgeting Apps Help a Family Member? Budgeting apps can help, as long as your family member understands the value of a budget and uses the app regularly. Two well-regarded budget apps you might consider are YNAB (You Need a Budget) and Simplifi by Quicken. ## Is Lending Money to Family Members a Good Idea? It may or may not be. Making a loan can show that you care about your loved ones. But getting your money back is another thing. And making, or co-signing for, a loan may result in negative effects such as ill will and damage to your financial standing if it remains unpaid. ## The Bottom Line Family members and money aren't always a good mix. But, in tough economic times or when faced with unexpected emergencies, a loved one may truly need your financial assistance. Find out specifically what help they need to work their way out of their current situation. Before you commit to helping financially, be sure to think through what you can and can't afford to do. Remember, if your own resources are limited, there are other meaningful, effective, and creative ways to help your family members.

During times of hardship, people often turn for help to a family member. Often, people get into financial difficulties if they lose a job, overuse credit cards, or incur expensive medical bills. Unfortunately, many well-meaning family members have found themselves sucked into the financial abyss by the problems of a loved one. Let's take a look at a few options you can consider to help your family members in financial trouble without hurting yourself in the process. Key Takeaways When a loved one is struggling financially, take a pause before providing money and consider whether they have a plan for avoiding the same pitfalls in the future.Make sure you have a clear agreement about the form of help, such as a loan or gift, and any terms for repayment.If you want to give the person something outright, consider giving them cash, paying one of their bills directly, or providing them with non-cash assistance, like gift cards, or certain resources they need.Consider providing them with a job, if you can, or help them to create a bill-paying plan, or to access local resources like career counseling and training programs.If you want to help them with a loan, consider whether you want to make a personal loan or to co-sign a loan that they are seeking from a bank or other financial institution. 1. Give a Cash Gift If your loved one is having a short-term cash flow problem, you may want to give an outright financial gift. Decide how much you can afford to give without putting yourself in financial jeopardy, and then either give the maximum amount all at once (and let your loved one know that's the case) or perhaps give smaller gifts on a periodic basis until the situation is resolved. Make sure it's clearly understood that the money is a gift and doesn't need to be repaid so you don't create an awkward situation for the gift recipient. Annual Exclusion If you're considering giving them a substantial sum of money, you'll need to keep an eye on the annual gift tax exclusion set each year by the Internal Revenue Service (IRS). In tax year 2024, the exclusion is $18,000 per person. 2. Make a Personal Loan Your family member may approach you and ask for a short-term loan. Talk frankly, put the terms of the loan on paper, and have both parties sign. This will help ensure that each party is clear on the financial arrangement they're entering into. Some loan details you'll want to include are: The amount of the loan Whether the loan will be a lump-sum payment, or if it will be divided and paid out in installments upon meeting certain conditions (e.g., securing another job or paying down existing debt) The interest rate you will charge for making the loan and how it will be calculated (compound or simple interest) Payment due dates (including the date of full repayment or final installment due) A recourse if the borrower doesn't make loan payments on time or in full (e.g., increasing interest charges, ceasing any further loan payments, or taking legal action) If you are going to lend more than $10,000 and/or you're going to charge an interest rate that is substantially different than the going rate for most borrowers, you may want to talk to a tax professional. There can be unique tax implications for low-interest loans among family members. When helping out a loved one in financial distress, there is a risk of getting sucked into a loop of loans and payments. To avoid this, make sure the terms and structure of the loan or gift are clearly defined in advance. 3. Co-Sign a Loan Your loved one may be interested in obtaining a loan or line of credit (LOC) to help with short-term financial needs, but what if their credit requires getting a co-signer? Would you be willing to co-sign a loan or LOC from a bank, credit union, or online lender? Potential Pitfalls Before saying "yes" and putting your good credit reputation in the hands of someone else, it's important to realize there are legal and financial implications to co-signing on a loan. The most critical thing to understand is that you are legally obligating yourself to repay the loan if the other borrower fails to do so. The lender can take legal action against you and require that you pay the full amount, even if you had an agreement between you and your family member that you would not have to make payments. This delinquent loan will also now affect your personal credit. So if your sister/brother/uncle fails to make payments on the loan on time and in full, the lender can report the negative account activity to the credit bureaus to file on your credit report which, in turn, can lower your credit score.  Consider the Risks Co-signing a loan is serious business. The fact that your family member needs a loan co-signer means the lender considers them too great of a risk for the bank to take alone. If the bank isn't sure they'll repay the loan, what guarantees do you have that they will? It may also mean that you could have more difficulty getting a loan for yourself down the road since you are technically taking on this loan and its payment as well. Before co-signing for a loan, make sure you: Ask for a copy of your family member's credit report, credit score, and monthly budget so you'll have an accurate picture of their finances and ability to repay the loan. Meet with the lender in person (if possible) and be sure that you understand all the terms of the loan. Get copies of all documents related to the loan, including the repayment schedule. Ask the lender to notify you in writing if your family member misses a payment or makes a late payment. Finding out about potential repayment problems sooner rather than later can help you take quick action and protect your own credit score. 4. Create a Bill-Paying Plan Often, people in a financial crisis simply aren't aware where their money is going. If you have experience using a budget to manage your own money, you may be able to help your family member to create and use a budget as well. To break the ice, offer to show them your budget and your bill-paying system and explain how it helps you make financial decisions. As you work together to help them get a handle on their financial situation, you may find places where they can cut back on expenses or try to increase their income to better meet their financial obligations. 5. Provide Employment If you're not comfortable making a loan or giving a cash gift, consider hiring your family member to assist with needed tasks at an agreed-upon rate. This side job may go a long way toward helping them earn the money they need to pay their bills and help you finish up any jobs that you've been putting off. Treat the arrangement as you would with any other employee—spell out clearly the work that needs to be done, the deadlines, and the rate of pay. Be sure to include a provision about how you'll deal with poor or incomplete work. If you don't have cash to give a loved one, recognize that your time, patience, and ability to help them brainstorm and problem-solve are also valuable assets that you can provide. 6. Give Non-Cash Assistance If you're uncomfortable or unwilling to give your family member cash, consider giving non-cash financial assistance, such as gift cards or gift certificates. You'll have more control over what your money may be used for, and you can easily buy gift cards in varying amounts at most stores. 7. Prepay Bills You may want to consider prepaying one or more regular bills that your loved one receives (rent/mortgage, utility bills, or insurance premiums) to help them during their current financial crunch. Offering to do something, such as making their car payment, may help them avoid a short-term crisis and give them the extra time they need to work out of their situation. 8. Help Find Local Resources You may not be able to provide your family member with financial assistance or hands-on help. But you can still play a key role by helping them find local professionals who can steer them in the right direction, such as: Career counselor and employment agenciesWelfare agencies and similar servicesCredit and debt counselorsLenders who can provide short-term solutions How Much Money Can I Gift Before the Gift Tax Applies? For tax year 2024, you can give up to $18,000 per person. Can Budgeting Apps Help a Family Member? Budgeting apps can help, as long as your family member understands the value of a budget and uses the app regularly. Two well-regarded budget apps you might consider are YNAB (You Need a Budget) and Simplifi by Quicken. Is Lending Money to Family Members a Good Idea? It may or may not be. Making a loan can show that you care about your loved ones. But getting your money back is another thing. And making, or co-signing for, a loan may result in negative effects such as ill will and damage to your financial standing if it remains unpaid. The Bottom Line Family members and money aren't always a good mix. But, in tough economic times or when faced with unexpected emergencies, a loved one may truly need your financial assistance. Find out specifically what help they need to work their way out of their current situation. Before you commit to helping financially, be sure to think through what you can and can't afford to do. Remember, if your own resources are limited, there are other meaningful, effective, and creative ways to help your family members.

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

Quantitative Analysis (QA): What It Is and How It's Used in Finance

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Quantitative analysis (QA) refers to methods used to understand the behavior of financial markets and make more informed investment or trading decisions. It involves the use of mathematical and statistical techniques to analyze financial data.<span class="ql-inline-citation" data-cite="1"></span> For instance, by examining past stock prices, earnings reports, and other information, quantitative analysts, often called “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financialcareers/08/quants-quantitative-analyst.asp">quants</a>,” aim to forecast where the market is headed.<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"> Unlike fundamental analysis that might focus on a company's management team or industry conditions, quantitative analysis relies chiefly on crunching numbers and complex computations to derive actionable insights. </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"> Quantitative analysis can be a powerful tool, especially in modern markets where data is abundant and computational tools are advanced, enabling a more precise examination of the financial landscape. However, many also believe that the raw numbers produced by quantitative analysis should be combined with the more in-depth understanding and nuance afforded by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualitativeanalysis.asp">qualitative analysis</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>Quantitative analysis (QA) is a set of techniques that use mathematical and statistical modeling, measurement, and research to understand behavior.</li><li>Quantitative analysis presents financial information in terms of a numerical value.</li><li>It's used for the evaluation of financial instruments and for predicting real-world events such as changes in GDP.</li><li>While powerful, quantitative analysis has some drawbacks that can be supplemented with qualitative analysis.</li></ul><p><br/></p></div></div></div> <span class="heading-toc" id="toc-understanding-quantitative-analysis"></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 Quantitative Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Quantitative analysis (QA) in finance refers to the use of mathematical and statistical techniques to analyze financial &amp; economic data and make trading, investing, and risk management decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> QA starts with data collection, where quants gather a vast amount of financial data that might affect the market. This data can include anything from stock prices and company earnings to economic indicators like inflation or unemployment rates. They then use various mathematical models and statistical techniques to analyze this data, looking for trends, patterns, and potential investment opportunities. The outcome of this analysis can help investors decide where to allocate their resources to maximize returns or minimize risks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Some key aspects of quantitative analysis in finance include:<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> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/statistics.asp"><strong>Statistical analysis</strong></a> - this aspect of quantitative analysis involves examining data to identify trends and relationships, build predictive models, and make forecasts. Techniques used can include <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regression.asp">regression analysis</a>, which helps in understanding relationships between variables; <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timeseries.asp">time series analysis</a>, which looks at data points collected or recorded at a specific time; and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/montecarlosimulation.asp">Monte Carlo simulations</a>, a mathematical technique that allows you to account for uncertainty in your analyses and forecasts. Through statistical analysis, quants can uncover insights that may not be immediately apparent, helping investors and financial analysts make more informed decisions.</li> <li><strong><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp">Algorithmic trading</a> </strong>- this entails using computer algorithms to automate the trading process. Algorithms can be programmed to carry out trades based on a variety of factors such as timing, price movements, liquidity changes, and other market signals. <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/high-frequency-trading.asp">High-frequency trading</a> (HFT), a type of algorithmic trading, involves making a large number of trades within fractions of a second to capitalize on small price movements. This automated approach to trading can lead to more efficient and often profitable trading strategies.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-analysis.asp">Risk modeling</a> </strong>- risk is an inherent part of financial markets. Risk modeling involves creating mathematical models to measure and quantify various risk exposures within a portfolio. Methods used in risk modeling include <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/var.asp">Value-at-Risk</a> (VaR) models, <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scenario_analysis.asp">scenario analysis</a>, and <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stresstesting.asp">stress testing</a>.<span class="ql-inline-citation" data-cite="5"></span> These tools help in understanding the potential downside and uncertainties associated with different investment scenarios, aiding in better risk management and mitigation strategies.</li> <li><strong>Derivatives pricing</strong> - <a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> are financial contracts whose value is derived from other underlying assets like stocks or bonds. Derivatives pricing involves creating mathematical models to evaluate these contracts and determine their fair prices and risk profiles. A well-known model used in this domain is the <a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blackscholes.asp">Black-Scholes model</a>, which helps in pricing <a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionscontract.asp">options contracts</a>.<span class="ql-inline-citation" data-cite="4"></span> Accurate derivatives pricing is crucial for investors and traders to make sound financial decisions regarding buying, selling, or hedging with derivatives.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Portfolio optimization</strong> - This is about constructing a portfolio in such a way that it yields the highest possible expected return for a given level of risk. Techniques like <a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp">Modern Portfolio Theory</a> (MPT) are employed to find the optimal allocation of assets within a portfolio.<span class="ql-inline-citation" data-cite="3"></span> By analyzing various asset classes and their expected returns, risks, and correlations, quants can suggest the best mix of investments to achieve specific financial goals while minimizing risk.</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"> The overall goal is to use data, math, statistics, and software to make more informed financial decisions, automate processes, and ultimately generate greater risk-adjusted returns. </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>Quantitative analysis is widely used in central banking, algorithmic trading, hedge fund management, and investment banking activities. Quantitative analysts, employ advanced skills in programming, statistics, calculus, linear algebra etc. to execute quantitative analysis.</p></div></div></div> <span class="heading-toc" id="toc-quantitative-analysis-vs-qualitative-analysis"></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"> Quantitative Analysis vs. Qualitative Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Quantitative analysis relies heavily on numerical data and mathematical models to make decisions regarding investments and financial strategies. It focuses on the measurable, objective data that can be gathered about a company or a financial instrument. </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 analysts also evaluate information that is not easily quantifiable or reduced to numeric values to get a better picture of a company's performance. This important qualitative data can include reputation, regulatory insights, or employee morale. Qualitative analysis thus focuses more on understanding the underlying qualities of a company or a financial instrument, which may not be immediately quantifiable. </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"> Quantitative isn't the opposite of qualitative analysis. They're different and often complementary philosophies. They each provide useful information for informed decisions. When used together. better decisions can be made than using either one in isolation.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Some common uses of qualitative analysis include:<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <li><strong>Management Evaluation:</strong> Qualitative analysis is often better at evaluating a company's management team, their experience, and their ability to lead the company toward growth. While quantifiable metrics are useful, they often cannot capture the full picture of management's ability and potential. For example, the leadership skills, vision, and corporate culture instilled by management are intangible factors that can significantly impact a company's success, yet are difficult to measure with numbers alone.</li><li><strong>Industry Analysis:</strong> It also includes an analysis of the industry in which the company operates, the competition, and market conditions. For instance, it can explore how changes in technology or societal behaviors could impact the industry. Qualitative approaches can also better identify barriers to entry or exit, which can affect the level of competition and profitability within the industry.</li><li><strong>Brand Value and Company Reputation:</strong> The reputation of a company, its brand value, and customer loyalty are also significant factors considered in qualitative analysis. Understanding how consumers perceive the brand, their level of trust, and satisfaction can provide insights into customer loyalty and the potential for sustained revenue. This can be done through focus groups, surveys, or interviews.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><li><strong>Regulatory Environment:</strong> The regulatory environment, potential legal issues, and other external factors that could impact a company are also analyzed qualitatively. Evaluating a company's compliance with relevant laws, regulations, and industry standards to ascertain its legal standing and the potential risk of legal issues. In addition, understanding a company's ethical practices and social responsibility initiatives, that can influence its relationship with stakeholders and the community at large.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_33-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">Quant vs. Qual </th> </tr> <tr> <th>Aspect</th> <th>Quantitative Analysis</th> <th>Qualitative Analysis</th> </tr> </thead> <tbody data-check="0"> <tr> <th>Data Type</th> <td>Numerical data, financial statistics</td> <td>Non-numerical information, subjective data</td> </tr> <tr> <th>Methodology</th> <td>Mathematical and statistical modeling</td> <td>Personal judgement, industry experience</td> </tr> <tr> <th>Focus</th> <td>Objective, measurable aspects</td> <td>Subjective, non-quantifiable aspects</td> </tr> <tr> <th>Outcome</th> <td>Predictive models, trading algorithms</td> <td>Insight into management, industry conditions, company reputation</td> </tr> <tr> <th>Tools Used</th> <td>Statistical software, algorithms</td> <td>Interviews, surveys, industry reports</td> </tr> <tr> <th>Typical Applications</th> <td>Investment decision-making, risk management, algorithmic trading</td> <td>Company valuation, management assessment, industry analysis</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-example-of-quantitative-analysis-in-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Example of Quantitative Analysis in Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Suppose you are interested in investing in a particular company, XYZ Inc. One way to evaluate its potential as an investment is by analyzing its past financial performance using quantitative analysis. Let's say, over the past five years, XYZ Inc. has been growing its revenue at an average rate of 8% per year. You decide to use regression analysis to forecast its future revenue growth. Regression analysis is a statistical method used to examine the relationship between variables.</p> <p>After collecting the necessary data, you run a simple linear regression with the year as the independent variable and the revenue as the dependent variable. The output gives you a regression equation, let's say, <span data-value="Revenue=100+8(Year)"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mrow> <mi> R </mi> <mi> e </mi> <mi> v </mi> <mi> e </mi> <mi> n </mi> <mi> u </mi> <mi> e </mi> <mo> = </mo> <mn> 100 </mn> <mo> + </mo> <mn> 8 </mn> <mo> ( </mo> <mi> Y </mi> <mi> e </mi> <mi> a </mi> <mi> r </mi> <mo> ) </mo> </mrow> <annotation encoding="application/x-tex"> Revenue=100+8(Year) </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord mathnormal">R</span><span class="mord mathnormal">e</span><span class="mord mathnormal">v</span><span class="mord mathnormal">e</span><span class="mord mathnormal">n</span><span class="mord mathnormal">u</span><span class="mord mathnormal">e</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">100</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">8</span><span class="mopen">(</span><span class="mord mathnormal">Y</span><span class="mord mathnormal">e</span><span class="mord mathnormal">a</span><span class="mord mathnormal">r</span><span class="mclose">)</span></span></span></span></span>. <span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>This equation suggests that for every year, the revenue of XYZ Inc. increases by $8 million, starting from a base of $100 million. This quantitative insight could be instrumental in helping you decide whether XYZ Inc. represents a good investment opportunity based on its historical revenue growth trend.</p> <p>However, while you can quantify revenue growth for the firm and make predictions, the reasons for why may not be apparent from quantitative number crunching. </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"> Augmenting with Qualitative Analysis </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Qualitative analysis can provide a more nuanced understanding of XYZ Inc.'s potential. You decide to delve into the company's management and industry reputation. Through interviews, reviews, and industry reports, you find that the management team at XYZ Inc. is highly regarded with a track record of successful ventures. Moreover, the company has a strong brand value and a loyal customer base. </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"> Additionally, you assess the industry in which XYZ Inc. operates and find it to be stable with a steady demand for the products that XYZ Inc. offers. The regulatory environment is also favorable, and the company has a good relationship with the local communities in which it operates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> By analyzing these qualitative factors, you obtain a more comprehensive understanding of the company's operational environment, the competence of its management team, and its reputation in the market. This qualitative insight complements the quantitative analysis, providing you with a well-rounded view of XYZ Inc.'s investment potential. </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"> Combining both quantitative and qualitative analyses could therefore lead to a more informed investment decision regarding XYZ Inc. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <span class="heading-toc" id="toc-drawbacks-and-limitations-of-quantitative-analaysis"></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"> Drawbacks and Limitations of Quantitative Analaysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Quantitative analysis, while powerful, comes with certain limitations: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li><strong>Data Dependency: </strong>Quantitative analysis is heavily dependent on the quality and availability of numerical data. If the data is inaccurate, outdated, or incomplete, the analysis and the subsequent conclusions drawn will be flawed. As they say, 'garbage-in, garbage-out'.</li> <li><strong>Complexity: </strong>The methods and models used in quantitative analysis can be very complex, requiring a high level of expertise to develop, interpret, and act upon. This complexity can also make it difficult to communicate findings to individuals who lack a quantitative background.</li> <li><strong>Lack of Subjectivity: </strong>Quantitative analysis often overlooks qualitative factors like management quality, brand reputation, and other subjective factors that can significantly affect a company's performance or a financial instrument's value. In other words, you may have the 'what' without the 'why' or 'how.' Qualitative analysis can augment this blind spot.</li> <li><strong>Assumption-based Modeling: </strong>Many quantitative models are built on assumptions that may not hold true in real-world situations. For example, assumptions about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/normaldistribution.asp">normal distribution</a> of returns or constant volatility may not reflect actual market conditions.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Over-reliance on Historical Data: </strong>Quantitative analysis often relies heavily on historical data to make predictions about the future. However, past performance is not always indicative of future results, especially in rapidly changing markets or unforeseen situations like economic crises.</li> <li><strong>Inability to Capture Human Emotion and Behavior: </strong>Markets are often influenced by human emotions and behaviors which can be erratic and hard to predict. Quantitative analysis, being number-driven, struggles to properly account for these human factors.</li> <li><strong>Cost and Time Intensive: </strong>Developing accurate and reliable quantitative models can be time-consuming and expensive. It requires skilled personnel, sophisticated software tools, and often, extensive computational resources.</li> <li><strong>Overfitting: </strong>There's a risk of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overfitting.asp">overfitting</a>, where a model might perform exceedingly well on past data but fails to predict future outcomes accurately because it's too tailored to past events.</li> <li><strong>Lack of Flexibility: </strong>Quantitative models may lack the flexibility to adapt to new information or changing market conditions quickly, which can lead to outdated or incorrect analysis.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Model Risk: </strong>There's inherent <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modelrisk.asp">model risk</a> involved where the model itself may have flaws or errors that can lead to incorrect analysis and potentially significant financial losses.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Understanding these drawbacks is crucial for analysts and decision-makers to interpret quantitative analysis results accurately and to balance them with qualitative insights for more holistic decision-making. </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-using-quantitative-finance-outside-of-finance"></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"> Using Quantitative Finance Outside of Finance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Quantitative analysis is a versatile tool that extends beyond the realm of finance into a variety of fields. In the domain of social sciences, for instance, it's used to analyze behavioral patterns, social trends, and the impact of policies on different demographics. Researchers employ statistical models to examine large datasets, enabling them to identify correlations, causations, and trends that can provide a deeper understanding of human behaviors and societal dynamics. Similarly, in the field of public policy, quantitative analysis plays a crucial role in evaluating the effectiveness of different policies, analyzing economic indicators, and forecasting the potential impacts of policy changes. By providing a method to measure and analyze data, it aids policymakers in making informed decisions based on empirical evidence. </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 the arena of healthcare, quantitative analysis is employed for clinical trials, genetic research, and epidemiological studies to name a few areas. It assists in analyzing patient data, evaluating treatment outcomes, and understanding disease spread and its determinants. Meanwhile, in engineering and manufacturing, it's used to optimize processes, improve quality control, and enhance operational efficiency. By analyzing data related to production processes, material properties, and operational performance, engineers can identify bottlenecks, optimize workflows, and ensure the reliability and quality of products. Additionally, in the field of marketing, quantitative analysis is fundamental for market segmentation, advertising effectiveness, and consumer satisfaction studies. It helps marketers understand consumer preferences, the impact of advertising campaigns, and the market potential for new products. Through these diverse applications, quantitative analysis serves as a bedrock for data-driven decision-making, enabling professionals across different fields to derive actionable insights from complex data. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-what-is-quantitative-analysis-used-for-in-finance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Quantitative Analysis Used for in Finance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quantitative analysis is used by governments, investors, and businesses (in areas such as finance, project management, production planning, and marketing) to study a certain situation or event, measure it, predict outcomes, and thus help in decision-making. In finance, it's widely used for assessing investment opportunities and risks. For instance, before venturing into investments, analysts rely on quantitative analysis to understand the performance metrics of different financial instruments such as stocks, bonds, and derivatives. By delving into historical data and employing mathematical and statistical models, they can forecast potential future performance and evaluate the underlying risks. This practice isn't just confined to individual assets; it's also essential for portfolio management. By examining the relationships between different assets and assessing their risk and return profiles, investors can construct portfolios that are optimized for the highest possible returns for a given level of risk.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-what-kind-of-education-do-you-need-to-be-a-quant"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Kind of Education Do You Need to Be a Quant?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Individuals pursuing a<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/111214/quants-what-they-do-and-how-theyve-evolved.asp"> career in quantitative analysis</a> usually have a strong educational background in quantitative fields like mathematics, statistics, computer science, finance, economics, or engineering. Advanced degrees (Master’s or Ph.D.) in quantitative disciplines are often preferred, and additional coursework or certifications in finance and programming can also be beneficial.</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-what-is-the-difference-between-quantitative-analysis-and-fundamental-analysis"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between Quantitative Analysis and Fundamental Analysis?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While both rely on the use of math and numbers, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp">fundamental analysis</a> takes a broader approach by examining the intrinsic value of a security. It dives into a company's financial statements, industry position, the competence of the management team, and the economic environment in which it operates. By evaluating factors like earnings, dividends, and the financial health of a company, fundamental analysts aim to ascertain the true value of a security and whether it is undervalued or overvalued in the market. This form of analysis is more holistic and requires a deep understanding of the company and the industry in which it operates.</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-does-artificial-intelligence-ai-influence-quantitative-analysis"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Artificial Intelligence (AI) Influence Quantitative Analysis?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quantitative analysis often intersects with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/machine-learning.asp">machine learning</a> (ML) and other forms of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence</a> (AI). ML and AI can be employed to develop predictive models and algorithms based on the quantitative data. These technologies can automate the analysis process, handle large datasets, and uncover complex patterns or trends that might be difficult to detect through traditional quantitative methods.</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"> Quantitative analysis is a mathematical approach that collects and evaluates measurable and verifiable data in order to evaluate performance, make better decisions, and predict trends. Unlike qualitative analysis, quantitative analysis uses numerical data to provide an explanation of "what" happened, but not "why" those events occurred. </p></div>

Quantitative analysis (QA) refers to methods used to understand the behavior of financial markets and make more informed investment or trading decisions. It involves the use of mathematical and statistical techniques to analyze financial data. For instance, by examining past stock prices, earnings reports, and other information, quantitative analysts, often called “[quants](https://www.investopedia.com/articles/financialcareers/08/quants-quantitative-analyst.asp),” aim to forecast where the market is headed. Unlike fundamental analysis that might focus on a company's management team or industry conditions, quantitative analysis relies chiefly on crunching numbers and complex computations to derive actionable insights. Quantitative analysis can be a powerful tool, especially in modern markets where data is abundant and computational tools are advanced, enabling a more precise examination of the financial landscape. However, many also believe that the raw numbers produced by quantitative analysis should be combined with the more in-depth understanding and nuance afforded by [qualitative analysis](https://www.investopedia.com/terms/q/qualitativeanalysis.asp). ### Key Takeaways * Quantitative analysis (QA) is a set of techniques that use mathematical and statistical modeling, measurement, and research to understand behavior. * Quantitative analysis presents financial information in terms of a numerical value. * It's used for the evaluation of financial instruments and for predicting real-world events such as changes in GDP. * While powerful, quantitative analysis has some drawbacks that can be supplemented with qualitative analysis. ## Understanding Quantitative Analysis Quantitative analysis (QA) in finance refers to the use of mathematical and statistical techniques to analyze financial & economic data and make trading, investing, and risk management decisions. QA starts with data collection, where quants gather a vast amount of financial data that might affect the market. This data can include anything from stock prices and company earnings to economic indicators like inflation or unemployment rates. They then use various mathematical models and statistical techniques to analyze this data, looking for trends, patterns, and potential investment opportunities. The outcome of this analysis can help investors decide where to allocate their resources to maximize returns or minimize risks. Some key aspects of quantitative analysis in finance include: * [**Statistical analysis**](https://www.investopedia.com/terms/s/statistics.asp) - this aspect of quantitative analysis involves examining data to identify trends and relationships, build predictive models, and make forecasts. Techniques used can include [regression analysis](https://www.investopedia.com/terms/r/regression.asp), which helps in understanding relationships between variables; [time series analysis](https://www.investopedia.com/terms/t/timeseries.asp), which looks at data points collected or recorded at a specific time; and [Monte Carlo simulations](https://www.investopedia.com/terms/m/montecarlosimulation.asp), a mathematical technique that allows you to account for uncertainty in your analyses and forecasts. Through statistical analysis, quants can uncover insights that may not be immediately apparent, helping investors and financial analysts make more informed decisions. * **[Algorithmic trading](https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp)** - this entails using computer algorithms to automate the trading process. Algorithms can be programmed to carry out trades based on a variety of factors such as timing, price movements, liquidity changes, and other market signals. [High-frequency trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp) (HFT), a type of algorithmic trading, involves making a large number of trades within fractions of a second to capitalize on small price movements. This automated approach to trading can lead to more efficient and often profitable trading strategies. * **[Risk modeling](https://www.investopedia.com/terms/r/risk-analysis.asp)** - risk is an inherent part of financial markets. Risk modeling involves creating mathematical models to measure and quantify various risk exposures within a portfolio. Methods used in risk modeling include [Value-at-Risk](https://www.investopedia.com/terms/v/var.asp) (VaR) models, [scenario analysis](https://www.investopedia.com/terms/s/scenario_analysis.asp), and [stress testing](https://www.investopedia.com/terms/s/stresstesting.asp). These tools help in understanding the potential downside and uncertainties associated with different investment scenarios, aiding in better risk management and mitigation strategies. * **Derivatives pricing** - [derivatives](https://www.investopedia.com/terms/d/derivative.asp) are financial contracts whose value is derived from other underlying assets like stocks or bonds. Derivatives pricing involves creating mathematical models to evaluate these contracts and determine their fair prices and risk profiles. A well-known model used in this domain is the [Black-Scholes model](https://www.investopedia.com/terms/b/blackscholes.asp), which helps in pricing [options contracts](https://www.investopedia.com/terms/o/optionscontract.asp). Accurate derivatives pricing is crucial for investors and traders to make sound financial decisions regarding buying, selling, or hedging with derivatives. * **Portfolio optimization** - This is about constructing a portfolio in such a way that it yields the highest possible expected return for a given level of risk. Techniques like [Modern Portfolio Theory](https://www.investopedia.com/terms/m/modernportfoliotheory.asp) (MPT) are employed to find the optimal allocation of assets within a portfolio. By analyzing various asset classes and their expected returns, risks, and correlations, quants can suggest the best mix of investments to achieve specific financial goals while minimizing risk. The overall goal is to use data, math, statistics, and software to make more informed financial decisions, automate processes, and ultimately generate greater risk-adjusted returns. ### Quantitative analysis is widely used in central banking, algorithmic trading, hedge fund management, and investment banking activities. Quantitative analysts, employ advanced skills in programming, statistics, calculus, linear algebra etc. to execute quantitative analysis. ## Quantitative Analysis vs. Qualitative Analysis Quantitative analysis relies heavily on numerical data and mathematical models to make decisions regarding investments and financial strategies. It focuses on the measurable, objective data that can be gathered about a company or a financial instrument. But analysts also evaluate information that is not easily quantifiable or reduced to numeric values to get a better picture of a company's performance. This important qualitative data can include reputation, regulatory insights, or employee morale. Qualitative analysis thus focuses more on understanding the underlying qualities of a company or a financial instrument, which may not be immediately quantifiable. Quantitative isn't the opposite of qualitative analysis. They're different and often complementary philosophies. They each provide useful information for informed decisions. When used together. better decisions can be made than using either one in isolation. Some common uses of qualitative analysis include: * **Management Evaluation:** Qualitative analysis is often better at evaluating a company's management team, their experience, and their ability to lead the company toward growth. While quantifiable metrics are useful, they often cannot capture the full picture of management's ability and potential. For example, the leadership skills, vision, and corporate culture instilled by management are intangible factors that can significantly impact a company's success, yet are difficult to measure with numbers alone. * **Industry Analysis:** It also includes an analysis of the industry in which the company operates, the competition, and market conditions. For instance, it can explore how changes in technology or societal behaviors could impact the industry. Qualitative approaches can also better identify barriers to entry or exit, which can affect the level of competition and profitability within the industry. * **Brand Value and Company Reputation:** The reputation of a company, its brand value, and customer loyalty are also significant factors considered in qualitative analysis. Understanding how consumers perceive the brand, their level of trust, and satisfaction can provide insights into customer loyalty and the potential for sustained revenue. This can be done through focus groups, surveys, or interviews. * **Regulatory Environment:** The regulatory environment, potential legal issues, and other external factors that could impact a company are also analyzed qualitatively. Evaluating a company's compliance with relevant laws, regulations, and industry standards to ascertain its legal standing and the potential risk of legal issues. In addition, understanding a company's ethical practices and social responsibility initiatives, that can influence its relationship with stakeholders and the community at large. | Quant vs. Qual | | | | --- | --- | --- | | Aspect | Quantitative Analysis | Qualitative Analysis | | Data Type | Numerical data, financial statistics | Non-numerical information, subjective data | | Methodology | Mathematical and statistical modeling | Personal judgement, industry experience | | Focus | Objective, measurable aspects | Subjective, non-quantifiable aspects | | Outcome | Predictive models, trading algorithms | Insight into management, industry conditions, company reputation | | Tools Used | Statistical software, algorithms | Interviews, surveys, industry reports | | Typical Applications | Investment decision-making, risk management, algorithmic trading | Company valuation, management assessment, industry analysis | ## Example of Quantitative Analysis in Finance Suppose you are interested in investing in a particular company, XYZ Inc. One way to evaluate its potential as an investment is by analyzing its past financial performance using quantitative analysis. Let's say, over the past five years, XYZ Inc. has been growing its revenue at an average rate of 8% per year. You decide to use regression analysis to forecast its future revenue growth. Regression analysis is a statistical method used to examine the relationship between variables. After collecting the necessary data, you run a simple linear regression with the year as the independent variable and the revenue as the dependent variable. The output gives you a regression equation, let's say, R e v e n u e = 100 + 8 ( Y e a r ) Revenue=100+8(Year) Revenue=100+8(Year). This equation suggests that for every year, the revenue of XYZ Inc. increases by $8 million, starting from a base of $100 million. This quantitative insight could be instrumental in helping you decide whether XYZ Inc. represents a good investment opportunity based on its historical revenue growth trend. However, while you can quantify revenue growth for the firm and make predictions, the reasons for why may not be apparent from quantitative number crunching. ### Augmenting with Qualitative Analysis Qualitative analysis can provide a more nuanced understanding of XYZ Inc.'s potential. You decide to delve into the company's management and industry reputation. Through interviews, reviews, and industry reports, you find that the management team at XYZ Inc. is highly regarded with a track record of successful ventures. Moreover, the company has a strong brand value and a loyal customer base. Additionally, you assess the industry in which XYZ Inc. operates and find it to be stable with a steady demand for the products that XYZ Inc. offers. The regulatory environment is also favorable, and the company has a good relationship with the local communities in which it operates. By analyzing these qualitative factors, you obtain a more comprehensive understanding of the company's operational environment, the competence of its management team, and its reputation in the market. This qualitative insight complements the quantitative analysis, providing you with a well-rounded view of XYZ Inc.'s investment potential. Combining both quantitative and qualitative analyses could therefore lead to a more informed investment decision regarding XYZ Inc. ## Drawbacks and Limitations of Quantitative Analaysis Quantitative analysis, while powerful, comes with certain limitations: * **Data Dependency:** Quantitative analysis is heavily dependent on the quality and availability of numerical data. If the data is inaccurate, outdated, or incomplete, the analysis and the subsequent conclusions drawn will be flawed. As they say, 'garbage-in, garbage-out'. * **Complexity:** The methods and models used in quantitative analysis can be very complex, requiring a high level of expertise to develop, interpret, and act upon. This complexity can also make it difficult to communicate findings to individuals who lack a quantitative background. * **Lack of Subjectivity:** Quantitative analysis often overlooks qualitative factors like management quality, brand reputation, and other subjective factors that can significantly affect a company's performance or a financial instrument's value. In other words, you may have the 'what' without the 'why' or 'how.' Qualitative analysis can augment this blind spot. * **Assumption-based Modeling:** Many quantitative models are built on assumptions that may not hold true in real-world situations. For example, assumptions about [normal distribution](https://www.investopedia.com/terms/n/normaldistribution.asp) of returns or constant volatility may not reflect actual market conditions. * **Over-reliance on Historical Data:** Quantitative analysis often relies heavily on historical data to make predictions about the future. However, past performance is not always indicative of future results, especially in rapidly changing markets or unforeseen situations like economic crises. * **Inability to Capture Human Emotion and Behavior:** Markets are often influenced by human emotions and behaviors which can be erratic and hard to predict. Quantitative analysis, being number-driven, struggles to properly account for these human factors. * **Cost and Time Intensive:** Developing accurate and reliable quantitative models can be time-consuming and expensive. It requires skilled personnel, sophisticated software tools, and often, extensive computational resources. * **Overfitting:** There's a risk of [overfitting](https://www.investopedia.com/terms/o/overfitting.asp), where a model might perform exceedingly well on past data but fails to predict future outcomes accurately because it's too tailored to past events. * **Lack of Flexibility:** Quantitative models may lack the flexibility to adapt to new information or changing market conditions quickly, which can lead to outdated or incorrect analysis. * **Model Risk:** There's inherent [model risk](https://www.investopedia.com/terms/m/modelrisk.asp) involved where the model itself may have flaws or errors that can lead to incorrect analysis and potentially significant financial losses. Understanding these drawbacks is crucial for analysts and decision-makers to interpret quantitative analysis results accurately and to balance them with qualitative insights for more holistic decision-making. ## Using Quantitative Finance Outside of Finance Quantitative analysis is a versatile tool that extends beyond the realm of finance into a variety of fields. In the domain of social sciences, for instance, it's used to analyze behavioral patterns, social trends, and the impact of policies on different demographics. Researchers employ statistical models to examine large datasets, enabling them to identify correlations, causations, and trends that can provide a deeper understanding of human behaviors and societal dynamics. Similarly, in the field of public policy, quantitative analysis plays a crucial role in evaluating the effectiveness of different policies, analyzing economic indicators, and forecasting the potential impacts of policy changes. By providing a method to measure and analyze data, it aids policymakers in making informed decisions based on empirical evidence. In the arena of healthcare, quantitative analysis is employed for clinical trials, genetic research, and epidemiological studies to name a few areas. It assists in analyzing patient data, evaluating treatment outcomes, and understanding disease spread and its determinants. Meanwhile, in engineering and manufacturing, it's used to optimize processes, improve quality control, and enhance operational efficiency. By analyzing data related to production processes, material properties, and operational performance, engineers can identify bottlenecks, optimize workflows, and ensure the reliability and quality of products. Additionally, in the field of marketing, quantitative analysis is fundamental for market segmentation, advertising effectiveness, and consumer satisfaction studies. It helps marketers understand consumer preferences, the impact of advertising campaigns, and the market potential for new products. Through these diverse applications, quantitative analysis serves as a bedrock for data-driven decision-making, enabling professionals across different fields to derive actionable insights from complex data. ## What Is Quantitative Analysis Used for in Finance? Quantitative analysis is used by governments, investors, and businesses (in areas such as finance, project management, production planning, and marketing) to study a certain situation or event, measure it, predict outcomes, and thus help in decision-making. In finance, it's widely used for assessing investment opportunities and risks. For instance, before venturing into investments, analysts rely on quantitative analysis to understand the performance metrics of different financial instruments such as stocks, bonds, and derivatives. By delving into historical data and employing mathematical and statistical models, they can forecast potential future performance and evaluate the underlying risks. This practice isn't just confined to individual assets; it's also essential for portfolio management. By examining the relationships between different assets and assessing their risk and return profiles, investors can construct portfolios that are optimized for the highest possible returns for a given level of risk. ## What Kind of Education Do You Need to Be a Quant? Individuals pursuing a [career in quantitative analysis](https://www.investopedia.com/articles/active-trading/111214/quants-what-they-do-and-how-theyve-evolved.asp) usually have a strong educational background in quantitative fields like mathematics, statistics, computer science, finance, economics, or engineering. Advanced degrees (Master’s or Ph.D.) in quantitative disciplines are often preferred, and additional coursework or certifications in finance and programming can also be beneficial. ## What Is the Difference Between Quantitative Analysis and Fundamental Analysis? While both rely on the use of math and numbers, [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) takes a broader approach by examining the intrinsic value of a security. It dives into a company's financial statements, industry position, the competence of the management team, and the economic environment in which it operates. By evaluating factors like earnings, dividends, and the financial health of a company, fundamental analysts aim to ascertain the true value of a security and whether it is undervalued or overvalued in the market. This form of analysis is more holistic and requires a deep understanding of the company and the industry in which it operates. ## How Does Artificial Intelligence (AI) Influence Quantitative Analysis? Quantitative analysis often intersects with [machine learning](https://www.investopedia.com/terms/m/machine-learning.asp) (ML) and other forms of [artificial intelligence](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) (AI). ML and AI can be employed to develop predictive models and algorithms based on the quantitative data. These technologies can automate the analysis process, handle large datasets, and uncover complex patterns or trends that might be difficult to detect through traditional quantitative methods. ## The Bottom Line Quantitative analysis is a mathematical approach that collects and evaluates measurable and verifiable data in order to evaluate performance, make better decisions, and predict trends. Unlike qualitative analysis, quantitative analysis uses numerical data to provide an explanation of "what" happened, but not "why" those events occurred.

Quantitative analysis (QA) refers to methods used to understand the behavior of financial markets and make more informed investment or trading decisions. It involves the use of mathematical and statistical techniques to analyze financial data. For instance, by examining past stock prices, earnings reports, and other information, quantitative analysts, often called “quants,” aim to forecast where the market is headed. Unlike fundamental analysis that might focus on a company's management team or industry conditions, quantitative analysis relies chiefly on crunching numbers and complex computations to derive actionable insights. Quantitative analysis can be a powerful tool, especially in modern markets where data is abundant and computational tools are advanced, enabling a more precise examination of the financial landscape. However, many also believe that the raw numbers produced by quantitative analysis should be combined with the more in-depth understanding and nuance afforded by qualitative analysis. Key Takeaways Quantitative analysis (QA) is a set of techniques that use mathematical and statistical modeling, measurement, and research to understand behavior.Quantitative analysis presents financial information in terms of a numerical value.It's used for the evaluation of financial instruments and for predicting real-world events such as changes in GDP.While powerful, quantitative analysis has some drawbacks that can be supplemented with qualitative analysis. Understanding Quantitative Analysis Quantitative analysis (QA) in finance refers to the use of mathematical and statistical techniques to analyze financial & economic data and make trading, investing, and risk management decisions. QA starts with data collection, where quants gather a vast amount of financial data that might affect the market. This data can include anything from stock prices and company earnings to economic indicators like inflation or unemployment rates. They then use various mathematical models and statistical techniques to analyze this data, looking for trends, patterns, and potential investment opportunities. The outcome of this analysis can help investors decide where to allocate their resources to maximize returns or minimize risks. Some key aspects of quantitative analysis in finance include: Statistical analysis - this aspect of quantitative analysis involves examining data to identify trends and relationships, build predictive models, and make forecasts. Techniques used can include regression analysis, which helps in understanding relationships between variables; time series analysis, which looks at data points collected or recorded at a specific time; and Monte Carlo simulations, a mathematical technique that allows you to account for uncertainty in your analyses and forecasts. Through statistical analysis, quants can uncover insights that may not be immediately apparent, helping investors and financial analysts make more informed decisions. Algorithmic trading - this entails using computer algorithms to automate the trading process. Algorithms can be programmed to carry out trades based on a variety of factors such as timing, price movements, liquidity changes, and other market signals. High-frequency trading (HFT), a type of algorithmic trading, involves making a large number of trades within fractions of a second to capitalize on small price movements. This automated approach to trading can lead to more efficient and often profitable trading strategies. Risk modeling - risk is an inherent part of financial markets. Risk modeling involves creating mathematical models to measure and quantify various risk exposures within a portfolio. Methods used in risk modeling include Value-at-Risk (VaR) models, scenario analysis, and stress testing. These tools help in understanding the potential downside and uncertainties associated with different investment scenarios, aiding in better risk management and mitigation strategies. Derivatives pricing - derivatives are financial contracts whose value is derived from other underlying assets like stocks or bonds. Derivatives pricing involves creating mathematical models to evaluate these contracts and determine their fair prices and risk profiles. A well-known model used in this domain is the Black-Scholes model, which helps in pricing options contracts. Accurate derivatives pricing is crucial for investors and traders to make sound financial decisions regarding buying, selling, or hedging with derivatives. Portfolio optimization - This is about constructing a portfolio in such a way that it yields the highest possible expected return for a given level of risk. Techniques like Modern Portfolio Theory (MPT) are employed to find the optimal allocation of assets within a portfolio. By analyzing various asset classes and their expected returns, risks, and correlations, quants can suggest the best mix of investments to achieve specific financial goals while minimizing risk. The overall goal is to use data, math, statistics, and software to make more informed financial decisions, automate processes, and ultimately generate greater risk-adjusted returns. Quantitative analysis is widely used in central banking, algorithmic trading, hedge fund management, and investment banking activities. Quantitative analysts, employ advanced skills in programming, statistics, calculus, linear algebra etc. to execute quantitative analysis. Quantitative Analysis vs. Qualitative Analysis Quantitative analysis relies heavily on numerical data and mathematical models to make decisions regarding investments and financial strategies. It focuses on the measurable, objective data that can be gathered about a company or a financial instrument. But analysts also evaluate information that is not easily quantifiable or reduced to numeric values to get a better picture of a company's performance. This important qualitative data can include reputation, regulatory insights, or employee morale. Qualitative analysis thus focuses more on understanding the underlying qualities of a company or a financial instrument, which may not be immediately quantifiable. Quantitative isn't the opposite of qualitative analysis. They're different and often complementary philosophies. They each provide useful information for informed decisions. When used together. better decisions can be made than using either one in isolation. Some common uses of qualitative analysis include: Management Evaluation: Qualitative analysis is often better at evaluating a company's management team, their experience, and their ability to lead the company toward growth. While quantifiable metrics are useful, they often cannot capture the full picture of management's ability and potential. For example, the leadership skills, vision, and corporate culture instilled by management are intangible factors that can significantly impact a company's success, yet are difficult to measure with numbers alone.Industry Analysis: It also includes an analysis of the industry in which the company operates, the competition, and market conditions. For instance, it can explore how changes in technology or societal behaviors could impact the industry. Qualitative approaches can also better identify barriers to entry or exit, which can affect the level of competition and profitability within the industry.Brand Value and Company Reputation: The reputation of a company, its brand value, and customer loyalty are also significant factors considered in qualitative analysis. Understanding how consumers perceive the brand, their level of trust, and satisfaction can provide insights into customer loyalty and the potential for sustained revenue. This can be done through focus groups, surveys, or interviews.Regulatory Environment: The regulatory environment, potential legal issues, and other external factors that could impact a company are also analyzed qualitatively. Evaluating a company's compliance with relevant laws, regulations, and industry standards to ascertain its legal standing and the potential risk of legal issues. In addition, understanding a company's ethical practices and social responsibility initiatives, that can influence its relationship with stakeholders and the community at large. Quant vs. Qual Aspect Quantitative Analysis Qualitative Analysis Data Type Numerical data, financial statistics Non-numerical information, subjective data Methodology Mathematical and statistical modeling Personal judgement, industry experience Focus Objective, measurable aspects Subjective, non-quantifiable aspects Outcome Predictive models, trading algorithms Insight into management, industry conditions, company reputation Tools Used Statistical software, algorithms Interviews, surveys, industry reports Typical Applications Investment decision-making, risk management, algorithmic trading Company valuation, management assessment, industry analysis Example of Quantitative Analysis in Finance Suppose you are interested in investing in a particular company, XYZ Inc. One way to evaluate its potential as an investment is by analyzing its past financial performance using quantitative analysis. Let's say, over the past five years, XYZ Inc. has been growing its revenue at an average rate of 8% per year. You decide to use regression analysis to forecast its future revenue growth. Regression analysis is a statistical method used to examine the relationship between variables. After collecting the necessary data, you run a simple linear regression with the year as the independent variable and the revenue as the dependent variable. The output gives you a regression equation, let's say, R e v e n u e = 100 + 8 ( Y e a r ) Revenue=100+8(Year) Revenue=100+8(Year). This equation suggests that for every year, the revenue of XYZ Inc. increases by $8 million, starting from a base of $100 million. This quantitative insight could be instrumental in helping you decide whether XYZ Inc. represents a good investment opportunity based on its historical revenue growth trend. However, while you can quantify revenue growth for the firm and make predictions, the reasons for why may not be apparent from quantitative number crunching. Augmenting with Qualitative Analysis Qualitative analysis can provide a more nuanced understanding of XYZ Inc.'s potential. You decide to delve into the company's management and industry reputation. Through interviews, reviews, and industry reports, you find that the management team at XYZ Inc. is highly regarded with a track record of successful ventures. Moreover, the company has a strong brand value and a loyal customer base. Additionally, you assess the industry in which XYZ Inc. operates and find it to be stable with a steady demand for the products that XYZ Inc. offers. The regulatory environment is also favorable, and the company has a good relationship with the local communities in which it operates. By analyzing these qualitative factors, you obtain a more comprehensive understanding of the company's operational environment, the competence of its management team, and its reputation in the market. This qualitative insight complements the quantitative analysis, providing you with a well-rounded view of XYZ Inc.'s investment potential. Combining both quantitative and qualitative analyses could therefore lead to a more informed investment decision regarding XYZ Inc. Drawbacks and Limitations of Quantitative Analaysis Quantitative analysis, while powerful, comes with certain limitations: Data Dependency: Quantitative analysis is heavily dependent on the quality and availability of numerical data. If the data is inaccurate, outdated, or incomplete, the analysis and the subsequent conclusions drawn will be flawed. As they say, 'garbage-in, garbage-out'. Complexity: The methods and models used in quantitative analysis can be very complex, requiring a high level of expertise to develop, interpret, and act upon. This complexity can also make it difficult to communicate findings to individuals who lack a quantitative background. Lack of Subjectivity: Quantitative analysis often overlooks qualitative factors like management quality, brand reputation, and other subjective factors that can significantly affect a company's performance or a financial instrument's value. In other words, you may have the 'what' without the 'why' or 'how.' Qualitative analysis can augment this blind spot. Assumption-based Modeling: Many quantitative models are built on assumptions that may not hold true in real-world situations. For example, assumptions about normal distribution of returns or constant volatility may not reflect actual market conditions. Over-reliance on Historical Data: Quantitative analysis often relies heavily on historical data to make predictions about the future. However, past performance is not always indicative of future results, especially in rapidly changing markets or unforeseen situations like economic crises. Inability to Capture Human Emotion and Behavior: Markets are often influenced by human emotions and behaviors which can be erratic and hard to predict. Quantitative analysis, being number-driven, struggles to properly account for these human factors. Cost and Time Intensive: Developing accurate and reliable quantitative models can be time-consuming and expensive. It requires skilled personnel, sophisticated software tools, and often, extensive computational resources. Overfitting: There's a risk of overfitting, where a model might perform exceedingly well on past data but fails to predict future outcomes accurately because it's too tailored to past events. Lack of Flexibility: Quantitative models may lack the flexibility to adapt to new information or changing market conditions quickly, which can lead to outdated or incorrect analysis. Model Risk: There's inherent model risk involved where the model itself may have flaws or errors that can lead to incorrect analysis and potentially significant financial losses. Understanding these drawbacks is crucial for analysts and decision-makers to interpret quantitative analysis results accurately and to balance them with qualitative insights for more holistic decision-making. Using Quantitative Finance Outside of Finance Quantitative analysis is a versatile tool that extends beyond the realm of finance into a variety of fields. In the domain of social sciences, for instance, it's used to analyze behavioral patterns, social trends, and the impact of policies on different demographics. Researchers employ statistical models to examine large datasets, enabling them to identify correlations, causations, and trends that can provide a deeper understanding of human behaviors and societal dynamics. Similarly, in the field of public policy, quantitative analysis plays a crucial role in evaluating the effectiveness of different policies, analyzing economic indicators, and forecasting the potential impacts of policy changes. By providing a method to measure and analyze data, it aids policymakers in making informed decisions based on empirical evidence. In the arena of healthcare, quantitative analysis is employed for clinical trials, genetic research, and epidemiological studies to name a few areas. It assists in analyzing patient data, evaluating treatment outcomes, and understanding disease spread and its determinants. Meanwhile, in engineering and manufacturing, it's used to optimize processes, improve quality control, and enhance operational efficiency. By analyzing data related to production processes, material properties, and operational performance, engineers can identify bottlenecks, optimize workflows, and ensure the reliability and quality of products. Additionally, in the field of marketing, quantitative analysis is fundamental for market segmentation, advertising effectiveness, and consumer satisfaction studies. It helps marketers understand consumer preferences, the impact of advertising campaigns, and the market potential for new products. Through these diverse applications, quantitative analysis serves as a bedrock for data-driven decision-making, enabling professionals across different fields to derive actionable insights from complex data. What Is Quantitative Analysis Used for in Finance? Quantitative analysis is used by governments, investors, and businesses (in areas such as finance, project management, production planning, and marketing) to study a certain situation or event, measure it, predict outcomes, and thus help in decision-making. In finance, it's widely used for assessing investment opportunities and risks. For instance, before venturing into investments, analysts rely on quantitative analysis to understand the performance metrics of different financial instruments such as stocks, bonds, and derivatives. By delving into historical data and employing mathematical and statistical models, they can forecast potential future performance and evaluate the underlying risks. This practice isn't just confined to individual assets; it's also essential for portfolio management. By examining the relationships between different assets and assessing their risk and return profiles, investors can construct portfolios that are optimized for the highest possible returns for a given level of risk. What Kind of Education Do You Need to Be a Quant? Individuals pursuing a career in quantitative analysis usually have a strong educational background in quantitative fields like mathematics, statistics, computer science, finance, economics, or engineering. Advanced degrees (Master’s or Ph.D.) in quantitative disciplines are often preferred, and additional coursework or certifications in finance and programming can also be beneficial. What Is the Difference Between Quantitative Analysis and Fundamental Analysis? While both rely on the use of math and numbers, fundamental analysis takes a broader approach by examining the intrinsic value of a security. It dives into a company's financial statements, industry position, the competence of the management team, and the economic environment in which it operates. By evaluating factors like earnings, dividends, and the financial health of a company, fundamental analysts aim to ascertain the true value of a security and whether it is undervalued or overvalued in the market. This form of analysis is more holistic and requires a deep understanding of the company and the industry in which it operates. How Does Artificial Intelligence (AI) Influence Quantitative Analysis? Quantitative analysis often intersects with machine learning (ML) and other forms of artificial intelligence (AI). ML and AI can be employed to develop predictive models and algorithms based on the quantitative data. These technologies can automate the analysis process, handle large datasets, and uncover complex patterns or trends that might be difficult to detect through traditional quantitative methods. The Bottom Line Quantitative analysis is a mathematical approach that collects and evaluates measurable and verifiable data in order to evaluate performance, make better decisions, and predict trends. Unlike qualitative analysis, quantitative analysis uses numerical data to provide an explanation of "what" happened, but not "why" those events occurred.

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

Amortized Loan: What It Is, How It Works, Loan Types, Example

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-amortized-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 Amortized Loan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp" rel="noopener noreferrer">principal</a> amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Common amortized loans include auto loans, home loans, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111815/6-biggest-banks-offering-personal-loans.asp" rel="noopener noreferrer">personal loans from a bank</a> for small projects or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtconsolidation.asp" rel="noopener noreferrer">debt consolidation</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>An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest.</li><li>An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount.</li><li>As the interest portion of the payments for an amortization loan decreases, the principal portion increases.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-an-amortized-loan-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How an Amortized Loan Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The interest on an amortized loan is calculated based on the most recent ending balance of the loan; the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan.<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"> An amortized loan is the result of a series of calculations. First, the current balance of the loan is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.) Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan, minus the amount of principal paid in the period, results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period. </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-amortized-loans-vs-balloon-loans-vs-revolving-debt-credit-cards"></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"> Amortized Loans vs. Balloon Loans vs. Revolving Debt (Credit Cards) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> While amortized loans, balloon loans, and revolving debt—specifically credit cards—are similar, they have important distinctions that consumers should be aware of before signing up for one of them. </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"> Amortized Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Amortized loans are generally paid off over an extended period of time, with equal amounts paid for each payment period. However, there is always the option to pay more, and thus, further reduce the principal owed. </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"> Balloon Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balloonloan.asp">Balloon loans</a> typically have a relatively short term, and only a portion of the loan's principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is generally large (at least double the amount of previous payments).<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"> Revolving Debt (Credit Cards)  </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Credit cards are the most well-known type of revolving debt. With revolving debt, you borrow against an established credit limit. As long as you haven't reached your credit limit, you can keep borrowing. Credit cards are different than amortized loans because they don't have set payment amounts or a fixed loan amount. </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>Amortized loans apply each payment to both interest and principal, initially paying more interest than principal until eventually that ratio is reversed.</p></div></div></div> <span class="heading-toc" id="toc-example-of-an-amortization-loan-table"></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"> Example of an Amortization Loan Table </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The calculations of an amortized loan may be displayed in an amortization table. The table lists relevant balances and dollar amounts for each period. In the example below, each period is a row in the table. The columns include the payment date, principal portion of the payment, interest portion of the payment, total interest paid to date, and ending outstanding balance. The following table excerpt is for the first year of a 30-year mortgage in the amount of $165,000 with an annual interest rate of 4.5% </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_30-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:60.1%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/uy_dXYeXKTe3Idpt-K0cbaa0CEY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/uy_dXYeXKTe3Idpt-K0cbaa0CEY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg" data-srcset="https://www.investopedia.com/thmb/P0UPCKSomNdkWCi95rC5t2qXtPc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg 750w" data-tracking-container="true" height="3710" id="mntl-sc-block-image_1-0" width="6167"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="3710" sizes="750px" src="https://www.investopedia.com/thmb/uy_dXYeXKTe3Idpt-K0cbaa0CEY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg" srcset="https://www.investopedia.com/thmb/P0UPCKSomNdkWCi95rC5t2qXtPc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg 750w" width="6167"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner">Image by Sabrina Jiang © Investopedia 2020</span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-can-i-pay-off-an-amortized-loan-early"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Pay Off an Amortized Loan Early?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/extra-payments-affect-future-personal-loan-payments-7973996">making extra payments</a> on the principal lowers the amount that can accrue interest. Check your loan agreement to see if you will be charged early payoff penalty fees before attempting this.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-how-can-i-see-how-much-of-my-payment-is-interest"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I See How Much of my Payment Is Interest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Most lenders will provide amortization tables that show how much of each payment is interest versus principle. You can also request this information from your lender.</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-do-i-pay-more-interest-in-the-beginning-of-my-loan-or-the-end"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Pay More Interest in the Beginning of my Loan or the End?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Amortized loans typically start with payments more heavily weighted toward interest payments.</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"> An amortized loan tackles both the projected amount of interest you'll owe and your principal simultaneously. You can make extra principal payments to lower your total loan amount if your loan allows. Try using an amortization calculator to see how much you'll pay in interest versus principal for potential loans.<br/> </p></div>

## What Is an Amortized Loan? An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's [principal](https://www.investopedia.com/terms/p/principal.asp) amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Common amortized loans include auto loans, home loans, and [personal loans from a bank](https://www.investopedia.com/articles/personal-finance/111815/6-biggest-banks-offering-personal-loans.asp) for small projects or [debt consolidation](https://www.investopedia.com/terms/d/debtconsolidation.asp). ### Key Takeaways * An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest. * An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount. * As the interest portion of the payments for an amortization loan decreases, the principal portion increases. ## How an Amortized Loan Works The interest on an amortized loan is calculated based on the most recent ending balance of the loan; the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan. An amortized loan is the result of a series of calculations. First, the current balance of the loan is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.) Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period. The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan, minus the amount of principal paid in the period, results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period. ## Amortized Loans vs. Balloon Loans vs. Revolving Debt (Credit Cards) While amortized loans, balloon loans, and revolving debt—specifically credit cards—are similar, they have important distinctions that consumers should be aware of before signing up for one of them. ### Amortized Loans Amortized loans are generally paid off over an extended period of time, with equal amounts paid for each payment period. However, there is always the option to pay more, and thus, further reduce the principal owed. ### Balloon Loans [Balloon loans](https://www.investopedia.com/terms/b/balloonloan.asp) typically have a relatively short term, and only a portion of the loan's principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is generally large (at least double the amount of previous payments). ### Revolving Debt (Credit Cards) Credit cards are the most well-known type of revolving debt. With revolving debt, you borrow against an established credit limit. As long as you haven't reached your credit limit, you can keep borrowing. Credit cards are different than amortized loans because they don't have set payment amounts or a fixed loan amount. ### Amortized loans apply each payment to both interest and principal, initially paying more interest than principal until eventually that ratio is reversed. ## Example of an Amortization Loan Table The calculations of an amortized loan may be displayed in an amortization table. The table lists relevant balances and dollar amounts for each period. In the example below, each period is a row in the table. The columns include the payment date, principal portion of the payment, interest portion of the payment, total interest paid to date, and ending outstanding balance. The following table excerpt is for the first year of a 30-year mortgage in the amount of $165,000 with an annual interest rate of 4.5% ![Image]() :max_bytes(150000):strip_icc()/dotdash_Final_Amortized_Loan_Oct_2020-01-3a606fa9285943098248ac92e8d03b40.jpg) Image by Sabrina Jiang © Investopedia 2020 ## Can I Pay Off an Amortized Loan Early? Yes. To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, [making extra payments](https://www.investopedia.com/extra-payments-affect-future-personal-loan-payments-7973996) on the principal lowers the amount that can accrue interest. Check your loan agreement to see if you will be charged early payoff penalty fees before attempting this. ## How Can I See How Much of my Payment Is Interest? Most lenders will provide amortization tables that show how much of each payment is interest versus principle. You can also request this information from your lender. ## Do I Pay More Interest in the Beginning of my Loan or the End? Amortized loans typically start with payments more heavily weighted toward interest payments. ## The Bottom Line An amortized loan tackles both the projected amount of interest you'll owe and your principal simultaneously. You can make extra principal payments to lower your total loan amount if your loan allows. Try using an amortization calculator to see how much you'll pay in interest versus principal for potential loans.

What Is an Amortized Loan? An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation. Key Takeaways An amortized loan is a type of loan that requires the borrower to make scheduled, periodic payments that are applied to both the principal and interest.An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount.As the interest portion of the payments for an amortization loan decreases, the principal portion increases. How an Amortized Loan Works The interest on an amortized loan is calculated based on the most recent ending balance of the loan; the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan. An amortized loan is the result of a series of calculations. First, the current balance of the loan is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.) Subtracting the interest due for the period from the total monthly payment results in the dollar amount of principal paid in the period. The amount of principal paid in the period is applied to the outstanding balance of the loan. Therefore, the current balance of the loan, minus the amount of principal paid in the period, results in the new outstanding balance of the loan. This new outstanding balance is used to calculate the interest for the next period. Amortized Loans vs. Balloon Loans vs. Revolving Debt (Credit Cards) While amortized loans, balloon loans, and revolving debt—specifically credit cards—are similar, they have important distinctions that consumers should be aware of before signing up for one of them. Amortized Loans Amortized loans are generally paid off over an extended period of time, with equal amounts paid for each payment period. However, there is always the option to pay more, and thus, further reduce the principal owed. Balloon Loans Balloon loans typically have a relatively short term, and only a portion of the loan's principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is generally large (at least double the amount of previous payments). Revolving Debt (Credit Cards)  Credit cards are the most well-known type of revolving debt. With revolving debt, you borrow against an established credit limit. As long as you haven't reached your credit limit, you can keep borrowing. Credit cards are different than amortized loans because they don't have set payment amounts or a fixed loan amount. Amortized loans apply each payment to both interest and principal, initially paying more interest than principal until eventually that ratio is reversed. Example of an Amortization Loan Table The calculations of an amortized loan may be displayed in an amortization table. The table lists relevant balances and dollar amounts for each period. In the example below, each period is a row in the table. The columns include the payment date, principal portion of the payment, interest portion of the payment, total interest paid to date, and ending outstanding balance. The following table excerpt is for the first year of a 30-year mortgage in the amount of $165,000 with an annual interest rate of 4.5% Image by Sabrina Jiang © Investopedia 2020 Can I Pay Off an Amortized Loan Early? Yes. To pay off an amortized loan early, you can make payments more frequently or make principal-only payments. Since the interest is charged on the principal, making extra payments on the principal lowers the amount that can accrue interest. Check your loan agreement to see if you will be charged early payoff penalty fees before attempting this. How Can I See How Much of my Payment Is Interest? Most lenders will provide amortization tables that show how much of each payment is interest versus principle. You can also request this information from your lender. Do I Pay More Interest in the Beginning of my Loan or the End? Amortized loans typically start with payments more heavily weighted toward interest payments. The Bottom Line An amortized loan tackles both the projected amount of interest you'll owe and your principal simultaneously. You can make extra principal payments to lower your total loan amount if your loan allows. Try using an amortization calculator to see how much you'll pay in interest versus principal for potential loans.

https://www.investopedia.com/personal-finance/banking-101/

Banking 101

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Whether you're just opening your first bank account—or your first American bank account—or have had one for years, you may never have thought about why it makes sense to have a bank account. You just opened one. </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"> Now that there are alternatives for getting cash and paying bills, that question becomes more interesting. Given the possible fees and annoyances of having a bank account, do you really need one? And which one is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-checking-accounts-5070332">best checking account</a> or <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</a> for you? Read on to explore this question and your options. </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>Banks are financial institutions that accept deposits and lend money.</li><li>Many people wonder, given the advances in technology today, if a traditional banking account is really necessary.</li><li>Online payment systems like PayPal can be used to send money, while prepaid debit cards are often used for online shopping or to withdraw money from ATMs.</li><li>Advantages of using bank accounts are security, convenience, and the potential availability of other investment options.</li><li>Some online-only banks charge less in fees and offer higher interest rates compared to traditional brick-and-mortar banks.</li></ul></div></div></div> <span class="heading-toc" id="toc-why-use-a-bank"></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 Use a Bank? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> If you are new to banking—or have lived in countries where the banking system is untrustworthy—you might be wondering why you would want to use 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> at all. It's certainly easier than ever to get by without a bank account. </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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp">Prepaid debit cards</a> make it possible to shop online and in stores—and even pay bills and withdraw money from ATMs—just like someone who has a bank account. The IRS will deposit your tax refund to a prepaid debit card and many employers will load your paycheck onto one (though this option has many drawbacks). </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"> Online services like PayPal and Venmo let you send and receive money without a bank account. You can also operate on an all-cash system by cashing your paycheck at Walmart or a check-cashing store, then paying your bills in person at a Walmart Money Center or at a check-cashing store. </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"> However, if you meet the basic qualifications to open a bank account, you might appreciate the many benefits of a bank, starting with keeping your money more secure. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-subheading__text"> 1. Bank Security </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Storing all your money in cash at home isn't safe. Your home could be burglarized. Someone who knows you and knows that you keep your money at home—a child, relative, or friend—could pilfer your stash. Burglars know most of the places people hide their money. Even worse, you could be robbed while you’re at home. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Another risk is that, if your house floods or catches on fire, your money will likely be destroyed, and homeowner's insurance covers just a limited amount of lost cash. If you bury it in the backyard, the container you put it in could become damaged or start decomposing and destroy your money. You could also simply forget all the places you've stashed your cash. Did you tape that $100 to the back of the family photo in your bedroom, slide it into your favorite book on page 52, or hide it in an oatmeal canister in the back of the pantry? Keeping all your money in prepaid debit cards is also less secure than keeping it in the bank. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> If you live paycheck to paycheck, the most you’re ever at risk of losing or having stolen is the amount of your last paycheck—a sum you clearly can’t afford to lose if money is tight. Keeping your money secure is paramount. And once you have more than a few hundred dollars to your name, you’ll want to protect your savings. </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"> While a prepaid debit card is more portable than cash, it can still be misplaced or stolen and very difficult to get back. </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 most secure place to put your money is a bank account. As long as you choose a legitimate bank that has <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> insurance (or a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a> that has <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua-insured-institution.asp">National Credit Union Association insurance</a>), any money you put in the bank (up to FDIC insurance limits) is protected. To date, the guarantee provided by the FDIC has proved to be completely reliable, even during times of financial crisis like the 2008 recession or the savings-and-loan crisis of the 1980s and 1990s.<span class="ql-inline-citation" data-cite="30"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> 2. Bank Convenience </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> When you have money in the bank, you can access it from anywhere—in person at your local branch, from the ATM at your grocery store, online, across town, even overseas. A checking account also makes it much easier and cheaper to pay bills—you'll no longer have to visit a store, check-cashing center, or service provider’s office to make payments, and you won't need to purchase a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashierscheck.asp">cashier's check</a> or pay a transfer fee to send those payments. </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"> Instead, you can use your bank’s free online bill-pay service or—if you prefer to do things the old-fashioned and less secure way—you can write a check and put it in the mail, which is also free except for the cost of postage. The benefits of using a bank to protect your money are similar to the benefits of using a credit union. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> 3. Saving and Investing </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Once you are earning more money than you need to get by each month, you'll want to go beyond a checking account and start saving and investing your money to give yourself more financial security. </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"> With money in savings, you can handle irregular expenses like car repairs even if they don’t fit into your monthly budget. A large enough emergency fund can tide you over during a period of unemployment. And once you have several months’ worth of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency savings</a>, you’ll want to transfer your extra savings into a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051613/how-start-saving-retirement.asp">retirement account</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> You simply can't take advantage of the opportunity to earn money in 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> or earn interest on deposits if you're only willing to keep your money under your mattress or on a prepaid debit card. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-how-to-choose-a-bank"></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"> How to Choose a Bank </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> With a little common sense, most people won't have any trouble <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1211/why-you-should-stick-with-the-big-banks.aspx">selecting a reputable bank</a>. It's true that even big-name <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-failure.asp">banks can fail</a> (like Washington Mutual did in 2008), but FDIC insurance will protect your money in those situations.<span class="ql-inline-citation" data-cite="3"></span> It provides $250,000 in coverage per owner, per account.<span class="ql-inline-citation" data-cite="38"></span> So if you have a joint account with a spouse, a balance of up to $500,000 would be covered. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> If you’ve come from a developing country that doesn’t have deposit insurance, where you couldn’t trust that your money was safe in the bank, the U.S. system should come as a big relief. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> It’s hard to make a major mistake when choosing where to bank, but some options are better than others in terms of convenience, fees, and interest rates. Here are the key criteria to consider when deciding where to open your checking account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Bank Legitimacy and Reputation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> First and foremost, you want to use a legitimate bank. Sticking with a large, widely known bank should be a safe bet. If you're considering a smaller institution—or if you just want to be extra safe—use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://research.fdic.gov">Bank Find tool</a> at the FDIC's website to make sure the bank is a member of the FDIC, which means that your deposits will be insured up to FDIC limits. </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"> Choosing a bank with a good reputation is a bit trickier. In 2016 Wells Fargo fired 5,300 employees who had opened 2 million unauthorized bank accounts for the bank’s customers in order to meet sales targets and earn bonuses.<span class="ql-inline-citation" data-cite="31"></span><span class="ql-inline-citation" data-cite="4"></span> Those customers then ended up paying fees on those accounts. The bank is now working to rebrand itself as "re-established."<span class="ql-inline-citation" data-cite="32"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Chase Bank has also paid hundreds of millions of dollars in fines and settlements in recent years related to bribing foreign officials, manipulating interest rates, and other misdeeds.<span class="ql-inline-citation" data-cite="5"></span> These aren’t the only banks that have misbehaved on a massive scale, but they are two of the best-known examples. In short, you may want to do your research on reputation before committing to a bank. </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"> Online Only vs. Brick-and-Mortar Banks </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> One of the biggest decisions you’ll need to make is whether to choose a bank that is entirely internet-based or one that has both a physical and online presence. Most banks nowadays have a strong online presence even if they started out as brick-and-mortar institutions, which means that regardless of which bank you choose, you will have access to features such as online bill pay, mobile check deposit, and apps that let you bank anytime, anywhere from your computer, tablet, or smartphone. </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"> What are the main differences between online-only banks and banks where you can walk into a branch and talk to a teller? Generally, it's fees and interest rates. Because online-only banks have much lower overhead, they can pass those savings on to consumers by not having monthly maintenance fees or minimum balance requirements, and they can afford to pay a higher interest rate on savings accounts and certificates of deposit. Some of the big names in online-only banking are Ally Bank, Discover Bank, and Capital One 360. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> That said, community banks sometimes offer the same lower-fee, higher-rate advantages that online-only banks do while also giving you the option to meet with a banker face to face. You may also find low-fee accounts at a large traditional bank, so don't count them out without checking. </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"> Consider what would make banking comfortable and convenient for you: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> <li>Do you prefer to talk to someone in person or interact with a machine?</li><li>Do you want to be able to write lots of checks or would you rather pay bills online?</li><li>Do you regularly deposit cash? (This is cumbersome to do with an online bank; you need a special ATM, money order, or other intermediaries.)</li><li>What time of day and day of the week is convenient for you to the bank?</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_64-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_65-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Different banks have different features, and even different checking accounts within the same bank are designed to appeal to different sets of needs. It pays to shop around before deciding on a bank and opening an account.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> Bank Location and Size </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Most people who want an account at a brick-and-mortar institution want to use a bank that has a branch close to where they live and/or work so that visiting a teller and making deposits and withdrawals is convenient. If you don’t travel frequently, this could be a large, national bank or a smaller regional or community bank. If you do travel frequently, you’ll want to do some research to see which banks have locations where you find yourself most often. You’ll want to have easy access to your money when you’re out of town, a real person to talk to face to face if you have any problems, and no service charges for using out-of-network ATMs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The other major consideration when it comes to size is that customer service may be better at smaller banks and that these banks take more of an interest in the local communities where they operate. There’s no universal rule, though, so if these factors are important to you, your best bet is to visit the bank in person and see what kind of experience you have. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> If you choose an online-only bank, you’ll typically have access to a network of fee-free ATMs nationwide. Your bank may also reimburse you for a certain number of out-of-network ATM fees per month. </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"> Banking Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Some banks are free to use as long as you keep your account balance positive, while others nickel-and-dime their customers with fees at every turn. Even small fees can add up over time and eat into your account balance, so look at a bank's fee schedule carefully and make sure you understand what you need to do to avoid them before you open an account there. </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"> This advice holds true even if you sign up with a bank that advertises free checking; there are always fees somewhere. You may encounter fees for letting your balance fall below a certain threshold, not having your paycheck directly deposited to your account, overdrawing your account, using an ATM, requesting paper statements, and even closing your account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <span class="heading-toc" id="toc-opening-a-checking-account"></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"> Opening a Checking Account </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> If you are mostly using your bank account as a source of ready cash and to pay bills, what you need is a checking account. (You might also need a savings account if you want to use your bank for money funds; see below.) Except for some specialized free or low-income accounts, checking accounts generally let you make unlimited deposits and withdrawals, unlike the rules that limit the number of monthly withdrawals from savings accounts. </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"> Before you spend too much time deciding on which bank to use, you should first make sure you qualify to open a checking account. Here's what banks generally need from customers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Opening Deposit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> The amount of money you’ll need for an opening deposit depends on the bank you choose and the type of account you want to open. Plenty of banks allow you to open an account with as little as $1, so if you don’t have much to deposit, shop around. You’re more likely to need a substantial opening deposit at a traditional brick-and-mortar bank than at an online bank.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_86-0"> <span class="mntl-sc-block-subheading__text"> Identification </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> To open an account in person, you’ll need to provide identification such as a Social Security card, birth certificate, passport, driver’s license, or state identification card. To open an account online, you’ll be asked to provide your date of birth, Social Security number, and possibly your driver’s license number, and the bank may follow up with requests for copies of supporting documents. If you are opening a bank account in the United States and are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060415/can-foreign-individual-open-savings-account-united-states.asp">not a U.S. resident</a>, you'll need one or two of the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> <li>A foreign passport with photo</li><li>A foreign driver's license with photo</li><li>A foreign state-issued ID</li><li>An employment ID with photo</li><li>A college ID with photo</li><li>An alien registration card with photo</li><li>A permanent resident card with photo<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> If you do not have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security Number (SSN)</a> you can open a bank account with an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-indentification-number-tin.asp">Individual Tax Identification Number (ITIN)</a>, which you can get from the Internal Revenue Service.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-subheading__text"> Contact Information </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> This will include your physical address (where you live), phone number, and email address. The reason banks ask for all this information is to comply with federal laws that require them to obtain and verify identifying information for every person who opens an account. </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"> Also, you have to be at least 18 years old (or the age of majority, which is higher in some states—19 in Alabama, for example) to open a bank account.<span class="ql-inline-citation" data-cite="44"></span> If you're younger, you may be able to open a joint account with a parent or legal guardian.  </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-6-ways-to-receive-deposits-to-your-account"></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"> 6 Ways to Receive Deposits to Your Account </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_99-0"> Making deposits is a key part of maintaining a checking account. If you don't make deposits, your checking account will run out of money. You won't be able to make payments or withdraw cash from it or buy anything using your debit card.<strong> </strong> </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"> There are several ways to make a deposit, whether you’re depositing a check or cash. But first, you’ll need to prepare your deposit. </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"> When you receive a check to deposit, flip it over. There are usually a few lines on one end of the check that says "Endorse Here." Sometimes you’ll also see “Do not write or stamp below this line.” Make sure to endorse the check above that wording, as shown here. You can sign your name first, or after you put in the other information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_105-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:64.7%;"> <img class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/E53MCgjAHtJGGHfkqJau3x-kMzI=/680x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/hg3pLXLOB50ozEPTzoLUGvvj-60=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332" data-srcset="https://www.investopedia.com/thmb/OY3EmeSAWBQ4PyF0IVqtOBGku3s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332 750w" data-tracking-container="true" height="440" id="mntl-sc-block-image_1-0" width="680"/> <noscript> <img class="img--noscript universal-image__image" height="440" sizes="750px" src="https://www.investopedia.com/thmb/hg3pLXLOB50ozEPTzoLUGvvj-60=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332" srcset="https://www.investopedia.com/thmb/OY3EmeSAWBQ4PyF0IVqtOBGku3s=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332 750w" width="680"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> Endorsing a check means signing your name on the back. The bank will reject any check you try to deposit that isn't endorsed. Depending on the bank and the deposit method, you may also need to write “For Deposit Only” and the number of the account in which you are depositing the check. If you’re depositing cash, be sure you note down how much you’re depositing. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_108-0"> <span class="mntl-sc-block-subheading__text"> 1. Making Deposits in Person at a Branch </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_109-0"> The old-fashioned way to deposit a check or cash is to visit a branch of your bank in person, wait in line, and present the money to the teller along with a deposit slip, which is usually available at a stand near where the line starts. If you have a checkbook, you may find deposit slips with your checks. Here's a sample:  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-low-res" id="mntl-sc-block_111-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:64.7%;"> <img class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/VGQrcByZ4L-SUFsW30uY4UTqKJ8=/680x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Jhr_vZr7TRB39ZfXUCglQz3UocA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f" data-srcset="https://www.investopedia.com/thmb/nIW4nrKHelYA_Mk7UhyCTDAirUU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f 750w" data-tracking-container="true" height="440" id="mntl-sc-block-image_2-0" width="680"/> <noscript> <img class="img--noscript universal-image__image" height="440" sizes="750px" src="https://www.investopedia.com/thmb/Jhr_vZr7TRB39ZfXUCglQz3UocA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f" srcset="https://www.investopedia.com/thmb/nIW4nrKHelYA_Mk7UhyCTDAirUU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f 750w" width="680"/> </noscript> </div> </div> </figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> Deposit slips available at the bank will not contain any of your account information, whereas the ones that come with your checkbook will, saving you the effort of filling in your information <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-fill-out-a-deposit-slip-8553226">on the bank’s generic deposit slip</a>. List each check by check number and amount where indicated on the deposit slip. If you’re depositing cash, list the total amount on the line designated for cash.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_114-0"> When you reach the teller, you may need to swipe your ATM card and/or present your photo ID. Then the teller will deposit your money into your account and, if you wish, give you a receipt. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_116-0"> <span class="mntl-sc-block-subheading__text"> 2. Making Deposits at an ATM </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> If you’re making a deposit at an ATM, the process for endorsing a check is the same, but you won’t need to fill out a deposit slip. And while you can withdraw money from any bank’s ATM, you’ll need to use one of your own bank’s ATMs to make a deposit. If you use an online-only bank, you may be able to make deposits at certain ATMs. You can generally deposit both checks and cash at ATMs. </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"> Insert your debit card in the machine and enter your personal identification number (PIN) to access your account. Follow the instructions on the screen to tell the system which account to deposit your money to. Next, you will usually key in the amount of your deposit. Some ATMs don’t require this step because they will read your checks or count your bills when you insert them, then ask you to verify the amount before finalizing your deposit. </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"> Depending on the ATM, you will then either put your deposit in an envelope before putting it into the ATM or you will put it directly into the ATM without an envelope. Get a receipt for your deposit in case there is a problem with the way it credits to your account—this is unlikely, but it’s better to be prepared. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_122-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_123-0"> <span class="mntl-sc-block-subheading__text"> 3. Making Deposits Online or by Smartphone </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> The most convenient and easiest way to deposit a check, once you get the hang of it, is to use your smartphone. Many banks have mobile apps that allow you to use your phone’s camera to snap a photo of the front and endorsed back of the check, type in the check amount, and tell the app which accounts to deposit the check to. </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"> Making deposits online follows a similar process, except that you’ll need to scan your checks or transfer photos of your checks from your camera or smartphone to your computer before you can upload them. Your bank will let you know how long you need to keep the paper checks. After that time has passed, you can shred them. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_127-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_128-0"> <span class="mntl-sc-block-subheading__text"> 4. Making Deposits by Mail </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_129-0"> If you can’t visit an ATM or a branch—and you don’t want to deposit your checks online or using your smartphone—you can deposit checks (but not cash) by mail. You’ll need to get your bank’s mailing address for deposits, endorse your check, and write “for deposit only” on the back to make it more difficult for someone to cash your check if they steal it from the mail. Enclose a completed deposit slip in your envelope. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_130-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_131-0"> Mailing deposits is the slowest way to gain access to your deposits since your check has to go through the mail before it can be processed by your bank and clear. There’s a reason they call it “snail mail.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_132-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_133-0"> <span class="mntl-sc-block-subheading__text"> 5. Receiving Direct Deposits </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_134-0"> You can also add money to your account via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp">direct deposit</a> of your paycheck if your employer offers this payment method. This arrangement can make life easier for both you and your employer.  </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"> If you are paid by direct deposit, the funds should be available to you on payday. You won’t experience the lag time that you would if you had to deposit a paper check. Some banks will waive monthly fees or offer other incentives if you have your paycheck deposited directly. Other types of payments that you can receive by direct deposit include annuity payments, dividend and interest payments, pensions, bonuses and commissions, Social Security benefits, child support payments, and Veterans Administration benefits. </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"> Direct deposits are conducted via <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 transfer</a>, more commonly known as an ACH transfer. This type of transaction is a way of sending money electronically. It often takes several days for the transaction to complete, but there are generally no fees involved. The sender can decide the date on which the payment will be available to the recipient—this is how you can get your money on payday without delay via direct deposit. To conduct an ACH transfer, you'll need to give your name, bank account routing number, and account number to the company or institution you want to receive money from. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_139-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_140-0"> <span class="mntl-sc-block-subheading__text"> 6. Transferring Funds Electronically from Another Account </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_141-0"> ACH transfers can also be used to transfer money between financial institutions. If you have a checking account with a particular bank and a brokerage account with a particular investment company, for example, you can use ACH transfer to send money from your checking account to your investment account (or vice versa). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_142-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_143-0"> Here's another example of how you might deposit money to your account electronically: Suppose you have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paypal.asp">PayPal</a> account connected to an eBay seller account, which you use to earn money by selling toys, clothes, and other items from your home that you no longer want. You might prefer to conduct all your banking activities from your primary checking account, so you first need to transfer the money you’ve earned from your PayPal account to your bank. You can do this online through the PayPal website or through the PayPal mobile app by providing your banking information. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_144-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_145-0"> You can also deposit money to your bank account after receiving money from friends, family, or people you work for through an online payment service like Venmo, PayPal, or Popmoney. Once the money is in that account, you can then transfer the money to your checking account. Sometimes there is a fee associated with these transactions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_146-0"></div> <span class="heading-toc" id="toc-funds-availability"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_147-0"> <span class="mntl-sc-block-heading__text"> Funds Availability </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_148-0"> As a general policy, banks place holds on customers' deposits to protect themselves from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-fraud-4689710">banking fraud</a>. When you look up your bank account balance at the ATM or online after making a deposit, you may see a difference between your account balance and your available balance. This lets you know that a deposit you've made hasn't cleared yet. It's extremely important to be aware of how your bank's deposit hold policy works so that you aren't penalized for trying to make a payment with money you don't yet have access to. The bank's hold policy will always apply to business days, not calendar days. A business day is any day that is not a Saturday, Sunday, or federal holiday. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_149-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_150-0"> How long you'll have to wait to access deposited funds varies. According to the U.S. Treasury's Office of the Comptroller of the Currency, a bank has some flexibility in the hold times it imposes on deposits: It can make them available immediately, or it can delay deposit availability up to the maximum length of time prescribed by law under federal regulation.<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_151-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_152-0"> There may also be cutoff times, which vary by bank, that affect when your deposited funds will become available. A bank might state, for example, that deposits must be received by 9:00 p.m. ET for same-day credit and funds will generally be available the next business day. The account agreement you receive when you open a checking account will explain your bank's rules on deposit holds, but here are some general guidelines. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_153-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_154-0"> <li>When you are a new customer who has had an account with the bank for 30 or fewer calendar days, the bank is allowed to hold your deposits longer under the Expedited Funds Availability Act.</li><li>Larger deposits, especially those over $5,525, usually take longer to credit to your account than smaller deposits. Banks can hold deposits in excess of $5,525 (as of 2021) for up to nine business days.</li><li>Cash deposits are generally available by the next business day. Cash may not be available immediately even if deposited with a teller.<span class="ql-inline-citation" data-cite="41"></span></li><li>Government checks deposited via teller will be available no later than the next business day.<span class="ql-inline-citation" data-cite="42"></span></li><li>Direct deposits become fully available to you the next business day following the deposit. (That’s why you might see your paycheck in your account late on Thursday night—so you can access the money on payday, Friday, instead of having to wait until Monday.)<span class="ql-inline-citation" data-cite="12"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_155-0"></div> <span class="heading-toc" id="toc-accounts-for-your-savings"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_156-0"> <span class="mntl-sc-block-heading__text"> Accounts for Your Savings </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_157-0"> After checking accounts, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings accounts</a> are the next offering most people think about when they think about banking. Having a savings account where you can securely store extra cash that you can access easily in an emergency—but not so easily that you'll spend the money on things you didn't intend to—is a key component of any good personal financial plan. While a checking account helps safeguard your money and facilitate bill paying, a simple savings account helps you set aside money for near-term goals like going on a vacation, paying a large upcoming bill, or establishing an emergency fund. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_158-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_159-0"> There are a number of different types of savings products that banks offer; ahead are the pros and cons of each. First, we will cover the two types of savings accounts.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_160-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_161-0"> <span class="mntl-sc-block-subheading__text"> Regular Savings Accounts  </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_162-0"> Almost all banks offer regular, basic savings account that you can sign up for in person, by phone, or online. This is the type of savings account you might get by default from a traditional brick-and-mortar bank. The difference between this account and a checking account is that it generally doesn't have check-writing privileges and it may have a higher opening deposit requirement and, possibly, a higher daily minimum balance requirement. This type of account may be called "Statement Savings," "Goal Savings," "Day-to-Day Savings," “Way2Save,” “Savings Plus,” or something else that the bank’s marketing department thought was clever. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_163-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_164-0"> A regular savings account is easy to set up and maintain. You can link it directly to your checking account at the same bank and quickly and easily move money between the two accounts. Having these two accounts linked can sometimes help you avoid overdraft charges and minimum balance fees from your checking account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_165-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_166-0"> The main disadvantage of this type of account is its often-pitiful interest rate. The national average savings account rate as of April 2024 is just 0.47%, according to the FDIC.<span class="ql-inline-citation" data-cite="13"></span> If you're serious about making your money work for you, you'll probably want to minimize the amount of money you keep in a regular savings account—if you use one at all—and opt for a more powerful savings vehicle instead. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_167-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_168-0"> <span class="mntl-sc-block-subheading__text"> Online Savings Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_169-0"> An online savings account differs from a regular savings account in that you deal with it exclusively through the internet (sometimes also by phone, but not in person) and it pays a higher interest rate. As of April 2024, for example, one of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">highest interest rates available</a> for a savings account was 5.50% APY for a Betterment account (conditions apply) . </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"> Some online savings accounts are offered by the same banks that provide regular checking and savings accounts, while others are offered by banks that don't have physical branches and exclusively offer online products. If you're comfortable with online banking, an online savings account may be a better choice than regular savings account because of its greater earning potential. Many online savings accounts also do not have a minimum deposit to open an account, minimum daily balance requirements, or a monthly maintenance fee, unlike many savings accounts associated with brick-and-mortar banks. </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"> With some types of savings accounts, both regular and online, the rate of interest the bank will pay you depends on how much money is in your account. These accounts are called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tiered-rate-account.asp">tiered-rate accounts</a>. Customers with higher balances will earn interest at a higher rate. </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"> Automatic Savings Plans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_176-0"> Many banks offer automatic savings plans, and these can be a great way to develop a regular habit of saving money. At some banks, establishing such a plan is also a way to obtain lower banking fees. </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"> An automatic savings plan is something you need to set up. It simply involves choosing a specific dollar amount that you're willing to have automatically transferred from your checking account to your savings account, usually once a month and on the same day every month (except when that day falls on a weekend or holiday). </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"> If you have an idea of how much money you generally have remaining after meeting your expenses each month, you can use this as the amount that you transfer automatically to your savings account. On the other hand, you may want to allocate your extra funds to several different places each month, such as a retirement account, investment account, and savings account. In this case, you'll want to choose a smaller amount. If you don't know how much money you can safely contribute to a savings account each month, creating a budget will help you figure it out. You can always start with a modest amount, such as $20, and increase it later. </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"> Although some people are nervous about the idea of committing to saving a certain amount automatically each month, most investment gurus say that paying yourself first is a key component of building wealth. The other major benefit of establishing an automatic savings plan is that you don't have to remember to set aside money for savings each month—your bank will do it for you. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_183-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_184-0"> <span class="mntl-sc-block-subheading__text"> Money Market Deposit Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_185-0"> The money market is a segment of the financial market where financial instruments with high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> and very short maturities are traded. It is considered a safe place to put money due to the highly liquid nature of the securities and their short maturities. While money market investment accounts are not without risk, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market deposit accounts</a> are virtually risk-free because they are FDIC insured, just like checking and savings accounts. Money market deposit accounts should not be confused with money market mutual funds, which are offered by investment companies and are not FDIC insured. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_186-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_187-0"><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_188-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">4,587</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The number of FDIC-insured financial institutions in 2023, according to the FDIC.<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_189-0"> Money market deposit accounts tend to have higher minimum balance requirements than regular or online savings accounts. This minimum usually ranges from $100 to $2,500. There may also be a monthly fee associated with this type of savings account. The interest paid will be higher than that on a regular savings account balance, but possibly less than an online savings account would pay. For example, as of April 2024, CIT Bank, an online-only bank, paid 1.55% APY on money market account balances and 0.25% APY on high-yield savings account balances.<span class="ql-inline-citation" data-cite="39"></span> From a functional standpoint, you may not notice much, if any, difference between a money market deposit account and a regular or online savings account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_190-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_191-0"> <span class="mntl-sc-block-subheading__text"> Certificates of Deposit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_192-0"> 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> is a savings certificate entitling the bearer to receive interest. In many ways, it is similar to a bond, except that instead of paying interest periodically over the life of the investment, it pays all its interest at once when it matures. Also, because CDs are a bank product, they come with FDIC insurance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_193-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_194-0"> A CD has a maturity date and a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years. The amount of interest a CD pays depends on its term, with longer terms generally paying higher rates. CDs, like savings accounts, will pay more or less depending on market conditions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_195-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_196-0"> In the low-interest rate environment the United States has experienced since 2008, CDs have paid little, but they often pay more than a regular savings account does, depending on which banks you’re comparing. The average 60-month (5-year) CD rate in April 2024 is 1.38%, significantly higher than the average savings account rate of 0.47%.<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_197-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_198-0"> Along with the higher interest rate you'll earn with a CD come restrictions on withdrawing your money before the CD matures. Do so and it will usually cost you money in the form of an early withdrawal penalty. If you're trying to keep your money accessible while it earns interest, a high-yield savings account may be a better option. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_199-0"></div> <span class="heading-toc" id="toc-federal-deposit-insurance-spread-out-your-money-to-be-safe"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_200-0"> <span class="mntl-sc-block-heading__text"> Federal Deposit Insurance: Spread Out Your Money to Be Safe </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_201-0"> Federal deposit insurance protects consumers’ bank account balances up to a certain amount as long as they're at a legitimate bank that is a member of the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, since its creation in 1933, “no depositor has ever lost even one penny of FDIC-insured funds."<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_202-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_203-0"> Under legislation passed during the financial crisis of 2008, FDIC insurance protection was expanded from $100,000 to $250,000 per depositor across all accounts of the same category.<span class="ql-inline-citation" data-cite="24"></span> If the amount of money you keep in bank accounts exceeds current federal deposit insurance limits, you'll need to do some planning so that if a bank fails, all of your money will be protected, not just the first $250,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_204-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_205-0"> There's nothing wrong with doing this—it's perfectly legal. If your account balance exceeds FDIC-insured limits and you want to make sure all your money will be safe, visit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www2.fdic.gov/EDIE/fdic_info.html">the FDIC's website</a> for more information. Ally Bank also has a helpful page explaining how you could achieve <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.ally.com/bank/fdic/" rel="nofollow">$2 million in FDIC coverage</a> at the same bank by using a variety of accounts. You can also, of course, keep your money in more than one bank to spread your risk. </p> <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"> Spreading your money across several accounts isn’t the only way to protect it. Whether or not you are banking online, you want to prevent unscrupulous individuals from stealing your identity and your funds. There are steps you can take, such as shredding bank statements and being on the lookout for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/skimming.asp">card skimmers</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_208-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_209-0"><span class="heading-toc" id="toc-how-do-i-open-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Open a Bank Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can open a bank account in person with some form of photo ID like a driver's license, passport, or state ID. You'll also need a Social Security number or ITIN for tax purposes. To open an account online, you'll need an SSN or ITIN and they'll also ask you a series of security questions to prove your identity since you won't be showing an ID.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_210-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_211-0"><span class="heading-toc" id="toc-do-you-have-to-be-a-us-citizen-to-open-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do You Have to be a U.S. Citizen to Open a Bank Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, you do not have to be a citizen to open a bank account and federal law prohibits banks from discriminating against non-citizens on the basis of natural origin.<span class="ql-inline-citation" data-cite="43"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_212-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_213-0"><span class="heading-toc" id="toc-how-old-do-you-have-to-be-to-open-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Old Do You Have to be to Open a Bank Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You have to be 18 to open your own bank account. If you're under 18 you'll need a parent or legal guardian to set up a custodial or joint bank account. They will remain on the account until you turn 18.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_214-0"></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_215-0"> <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_216-0"> Banks provide security and convenience for managing your money and sometimes allow you to make money by earning interest. Convenience and fees are two of the most important things to consider when choosing a bank, whether you are opening a checking, savings or money market account or putting funds into a certificate of deposit. Be sure to develop methods to stay on top of your account balances in order to avoid fees, declined transactions, and bounced payments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_217-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_218-0"> To protect your money from electronic theft, identity theft, and other forms of fraud, it's important to implement basic precautions such as having complex passwords, safeguarding your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-identification-number.asp">PIN</a>, and only conducting online and mobile banking through secure internet connections. </p></div>

Whether you're just opening your first bank account—or your first American bank account—or have had one for years, you may never have thought about why it makes sense to have a bank account. You just opened one. Now that there are alternatives for getting cash and paying bills, that question becomes more interesting. Given the possible fees and annoyances of having a bank account, do you really need one? And which one is the [best checking account](https://www.investopedia.com/best-high-yield-checking-accounts-5070332) or [best savings account](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) for you? Read on to explore this question and your options. ### Key Takeaways * Banks are financial institutions that accept deposits and lend money. * Many people wonder, given the advances in technology today, if a traditional banking account is really necessary. * Online payment systems like PayPal can be used to send money, while prepaid debit cards are often used for online shopping or to withdraw money from ATMs. * Advantages of using bank accounts are security, convenience, and the potential availability of other investment options. * Some online-only banks charge less in fees and offer higher interest rates compared to traditional brick-and-mortar banks. ## Why Use a Bank? If you are new to banking—or have lived in countries where the banking system is untrustworthy—you might be wondering why you would want to use a [bank](https://www.investopedia.com/terms/b/bank.asp) at all. It's certainly easier than ever to get by without a bank account. [Prepaid debit cards](https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp) make it possible to shop online and in stores—and even pay bills and withdraw money from ATMs—just like someone who has a bank account. The IRS will deposit your tax refund to a prepaid debit card and many employers will load your paycheck onto one (though this option has many drawbacks). Online services like PayPal and Venmo let you send and receive money without a bank account. You can also operate on an all-cash system by cashing your paycheck at Walmart or a check-cashing store, then paying your bills in person at a Walmart Money Center or at a check-cashing store. However, if you meet the basic qualifications to open a bank account, you might appreciate the many benefits of a bank, starting with keeping your money more secure. ### 1. Bank Security Storing all your money in cash at home isn't safe. Your home could be burglarized. Someone who knows you and knows that you keep your money at home—a child, relative, or friend—could pilfer your stash. Burglars know most of the places people hide their money. Even worse, you could be robbed while you’re at home. Another risk is that, if your house floods or catches on fire, your money will likely be destroyed, and homeowner's insurance covers just a limited amount of lost cash. If you bury it in the backyard, the container you put it in could become damaged or start decomposing and destroy your money. You could also simply forget all the places you've stashed your cash. Did you tape that $100 to the back of the family photo in your bedroom, slide it into your favorite book on page 52, or hide it in an oatmeal canister in the back of the pantry? Keeping all your money in prepaid debit cards is also less secure than keeping it in the bank. If you live paycheck to paycheck, the most you’re ever at risk of losing or having stolen is the amount of your last paycheck—a sum you clearly can’t afford to lose if money is tight. Keeping your money secure is paramount. And once you have more than a few hundred dollars to your name, you’ll want to protect your savings. While a prepaid debit card is more portable than cash, it can still be misplaced or stolen and very difficult to get back. The most secure place to put your money is a bank account. As long as you choose a legitimate bank that has [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) insurance (or a [credit union](https://www.investopedia.com/terms/c/creditunion.asp) that has [National Credit Union Association insurance](https://www.investopedia.com/terms/n/ncua-insured-institution.asp)), any money you put in the bank (up to FDIC insurance limits) is protected. To date, the guarantee provided by the FDIC has proved to be completely reliable, even during times of financial crisis like the 2008 recession or the savings-and-loan crisis of the 1980s and 1990s. ### 2. Bank Convenience When you have money in the bank, you can access it from anywhere—in person at your local branch, from the ATM at your grocery store, online, across town, even overseas. A checking account also makes it much easier and cheaper to pay bills—you'll no longer have to visit a store, check-cashing center, or service provider’s office to make payments, and you won't need to purchase a [cashier's check](https://www.investopedia.com/terms/c/cashierscheck.asp) or pay a transfer fee to send those payments. Instead, you can use your bank’s free online bill-pay service or—if you prefer to do things the old-fashioned and less secure way—you can write a check and put it in the mail, which is also free except for the cost of postage. The benefits of using a bank to protect your money are similar to the benefits of using a credit union. ### 3. Saving and Investing Once you are earning more money than you need to get by each month, you'll want to go beyond a checking account and start saving and investing your money to give yourself more financial security. With money in savings, you can handle irregular expenses like car repairs even if they don’t fit into your monthly budget. A large enough emergency fund can tide you over during a period of unemployment. And once you have several months’ worth of [emergency savings](https://www.investopedia.com/terms/e/emergency_fund.asp), you’ll want to transfer your extra savings into a [retirement account](https://www.investopedia.com/articles/personal-finance/051613/how-start-saving-retirement.asp). You simply can't take advantage of the opportunity to earn money in the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) or earn interest on deposits if you're only willing to keep your money under your mattress or on a prepaid debit card. ## How to Choose a Bank With a little common sense, most people won't have any trouble [selecting a reputable bank](https://www.investopedia.com/financial-edge/1211/why-you-should-stick-with-the-big-banks.aspx). It's true that even big-name [banks can fail](https://www.investopedia.com/terms/b/bank-failure.asp) (like Washington Mutual did in 2008), but FDIC insurance will protect your money in those situations. It provides $250,000 in coverage per owner, per account. So if you have a joint account with a spouse, a balance of up to $500,000 would be covered. If you’ve come from a developing country that doesn’t have deposit insurance, where you couldn’t trust that your money was safe in the bank, the U.S. system should come as a big relief. It’s hard to make a major mistake when choosing where to bank, but some options are better than others in terms of convenience, fees, and interest rates. Here are the key criteria to consider when deciding where to open your checking account. ### Bank Legitimacy and Reputation First and foremost, you want to use a legitimate bank. Sticking with a large, widely known bank should be a safe bet. If you're considering a smaller institution—or if you just want to be extra safe—use the [Bank Find tool](https://research.fdic.gov) at the FDIC's website to make sure the bank is a member of the FDIC, which means that your deposits will be insured up to FDIC limits. Choosing a bank with a good reputation is a bit trickier. In 2016 Wells Fargo fired 5,300 employees who had opened 2 million unauthorized bank accounts for the bank’s customers in order to meet sales targets and earn bonuses. Those customers then ended up paying fees on those accounts. The bank is now working to rebrand itself as "re-established." Chase Bank has also paid hundreds of millions of dollars in fines and settlements in recent years related to bribing foreign officials, manipulating interest rates, and other misdeeds. These aren’t the only banks that have misbehaved on a massive scale, but they are two of the best-known examples. In short, you may want to do your research on reputation before committing to a bank. ### Online Only vs. Brick-and-Mortar Banks One of the biggest decisions you’ll need to make is whether to choose a bank that is entirely internet-based or one that has both a physical and online presence. Most banks nowadays have a strong online presence even if they started out as brick-and-mortar institutions, which means that regardless of which bank you choose, you will have access to features such as online bill pay, mobile check deposit, and apps that let you bank anytime, anywhere from your computer, tablet, or smartphone. What are the main differences between online-only banks and banks where you can walk into a branch and talk to a teller? Generally, it's fees and interest rates. Because online-only banks have much lower overhead, they can pass those savings on to consumers by not having monthly maintenance fees or minimum balance requirements, and they can afford to pay a higher interest rate on savings accounts and certificates of deposit. Some of the big names in online-only banking are Ally Bank, Discover Bank, and Capital One 360. That said, community banks sometimes offer the same lower-fee, higher-rate advantages that online-only banks do while also giving you the option to meet with a banker face to face. You may also find low-fee accounts at a large traditional bank, so don't count them out without checking. Consider what would make banking comfortable and convenient for you: * Do you prefer to talk to someone in person or interact with a machine? * Do you want to be able to write lots of checks or would you rather pay bills online? * Do you regularly deposit cash? (This is cumbersome to do with an online bank; you need a special ATM, money order, or other intermediaries.) * What time of day and day of the week is convenient for you to the bank? ### Different banks have different features, and even different checking accounts within the same bank are designed to appeal to different sets of needs. It pays to shop around before deciding on a bank and opening an account. ### Bank Location and Size Most people who want an account at a brick-and-mortar institution want to use a bank that has a branch close to where they live and/or work so that visiting a teller and making deposits and withdrawals is convenient. If you don’t travel frequently, this could be a large, national bank or a smaller regional or community bank. If you do travel frequently, you’ll want to do some research to see which banks have locations where you find yourself most often. You’ll want to have easy access to your money when you’re out of town, a real person to talk to face to face if you have any problems, and no service charges for using out-of-network ATMs. The other major consideration when it comes to size is that customer service may be better at smaller banks and that these banks take more of an interest in the local communities where they operate. There’s no universal rule, though, so if these factors are important to you, your best bet is to visit the bank in person and see what kind of experience you have. If you choose an online-only bank, you’ll typically have access to a network of fee-free ATMs nationwide. Your bank may also reimburse you for a certain number of out-of-network ATM fees per month. ### Banking Fees Some banks are free to use as long as you keep your account balance positive, while others nickel-and-dime their customers with fees at every turn. Even small fees can add up over time and eat into your account balance, so look at a bank's fee schedule carefully and make sure you understand what you need to do to avoid them before you open an account there. This advice holds true even if you sign up with a bank that advertises free checking; there are always fees somewhere. You may encounter fees for letting your balance fall below a certain threshold, not having your paycheck directly deposited to your account, overdrawing your account, using an ATM, requesting paper statements, and even closing your account. ## Opening a Checking Account If you are mostly using your bank account as a source of ready cash and to pay bills, what you need is a checking account. (You might also need a savings account if you want to use your bank for money funds; see below.) Except for some specialized free or low-income accounts, checking accounts generally let you make unlimited deposits and withdrawals, unlike the rules that limit the number of monthly withdrawals from savings accounts. Before you spend too much time deciding on which bank to use, you should first make sure you qualify to open a checking account. Here's what banks generally need from customers. ### Opening Deposit The amount of money you’ll need for an opening deposit depends on the bank you choose and the type of account you want to open. Plenty of banks allow you to open an account with as little as $1, so if you don’t have much to deposit, shop around. You’re more likely to need a substantial opening deposit at a traditional brick-and-mortar bank than at an online bank. ### Identification To open an account in person, you’ll need to provide identification such as a Social Security card, birth certificate, passport, driver’s license, or state identification card. To open an account online, you’ll be asked to provide your date of birth, Social Security number, and possibly your driver’s license number, and the bank may follow up with requests for copies of supporting documents. If you are opening a bank account in the United States and are [not a U.S. resident](https://www.investopedia.com/ask/answers/060415/can-foreign-individual-open-savings-account-united-states.asp), you'll need one or two of the following: * A foreign passport with photo * A foreign driver's license with photo * A foreign state-issued ID * An employment ID with photo * A college ID with photo * An alien registration card with photo * A permanent resident card with photo If you do not have a [Social Security Number (SSN)](https://www.investopedia.com/terms/s/ssn.asp) you can open a bank account with an [Individual Tax Identification Number (ITIN)](https://www.investopedia.com/terms/t/tax-indentification-number-tin.asp), which you can get from the Internal Revenue Service. ### Contact Information This will include your physical address (where you live), phone number, and email address. The reason banks ask for all this information is to comply with federal laws that require them to obtain and verify identifying information for every person who opens an account. Also, you have to be at least 18 years old (or the age of majority, which is higher in some states—19 in Alabama, for example) to open a bank account. If you're younger, you may be able to open a joint account with a parent or legal guardian.  ## 6 Ways to Receive Deposits to Your Account Making deposits is a key part of maintaining a checking account. If you don't make deposits, your checking account will run out of money. You won't be able to make payments or withdraw cash from it or buy anything using your debit card. There are several ways to make a deposit, whether you’re depositing a check or cash. But first, you’ll need to prepare your deposit. When you receive a check to deposit, flip it over. There are usually a few lines on one end of the check that says "Endorse Here." Sometimes you’ll also see “Do not write or stamp below this line.” Make sure to endorse the check above that wording, as shown here. You can sign your name first, or after you put in the other information. ![]() :max_bytes(150000):strip_icc()/cropped-5bfd740f46e0fb005154a332) Endorsing a check means signing your name on the back. The bank will reject any check you try to deposit that isn't endorsed. Depending on the bank and the deposit method, you may also need to write “For Deposit Only” and the number of the account in which you are depositing the check. If you’re depositing cash, be sure you note down how much you’re depositing. ### 1. Making Deposits in Person at a Branch The old-fashioned way to deposit a check or cash is to visit a branch of your bank in person, wait in line, and present the money to the teller along with a deposit slip, which is usually available at a stand near where the line starts. If you have a checkbook, you may find deposit slips with your checks. Here's a sample:  ![]() :max_bytes(150000):strip_icc()/cropped-5bfd7411c9e77c0051bb3c0f) Deposit slips available at the bank will not contain any of your account information, whereas the ones that come with your checkbook will, saving you the effort of filling in your information [on the bank’s generic deposit slip](https://www.investopedia.com/how-to-fill-out-a-deposit-slip-8553226). List each check by check number and amount where indicated on the deposit slip. If you’re depositing cash, list the total amount on the line designated for cash.  When you reach the teller, you may need to swipe your ATM card and/or present your photo ID. Then the teller will deposit your money into your account and, if you wish, give you a receipt. ### 2. Making Deposits at an ATM If you’re making a deposit at an ATM, the process for endorsing a check is the same, but you won’t need to fill out a deposit slip. And while you can withdraw money from any bank’s ATM, you’ll need to use one of your own bank’s ATMs to make a deposit. If you use an online-only bank, you may be able to make deposits at certain ATMs. You can generally deposit both checks and cash at ATMs. Insert your debit card in the machine and enter your personal identification number (PIN) to access your account. Follow the instructions on the screen to tell the system which account to deposit your money to. Next, you will usually key in the amount of your deposit. Some ATMs don’t require this step because they will read your checks or count your bills when you insert them, then ask you to verify the amount before finalizing your deposit. Depending on the ATM, you will then either put your deposit in an envelope before putting it into the ATM or you will put it directly into the ATM without an envelope. Get a receipt for your deposit in case there is a problem with the way it credits to your account—this is unlikely, but it’s better to be prepared. ### 3. Making Deposits Online or by Smartphone The most convenient and easiest way to deposit a check, once you get the hang of it, is to use your smartphone. Many banks have mobile apps that allow you to use your phone’s camera to snap a photo of the front and endorsed back of the check, type in the check amount, and tell the app which accounts to deposit the check to. Making deposits online follows a similar process, except that you’ll need to scan your checks or transfer photos of your checks from your camera or smartphone to your computer before you can upload them. Your bank will let you know how long you need to keep the paper checks. After that time has passed, you can shred them. ### 4. Making Deposits by Mail If you can’t visit an ATM or a branch—and you don’t want to deposit your checks online or using your smartphone—you can deposit checks (but not cash) by mail. You’ll need to get your bank’s mailing address for deposits, endorse your check, and write “for deposit only” on the back to make it more difficult for someone to cash your check if they steal it from the mail. Enclose a completed deposit slip in your envelope. Mailing deposits is the slowest way to gain access to your deposits since your check has to go through the mail before it can be processed by your bank and clear. There’s a reason they call it “snail mail.” ### 5. Receiving Direct Deposits You can also add money to your account via [direct deposit](https://www.investopedia.com/terms/d/directdeposit.asp) of your paycheck if your employer offers this payment method. This arrangement can make life easier for both you and your employer.  If you are paid by direct deposit, the funds should be available to you on payday. You won’t experience the lag time that you would if you had to deposit a paper check. Some banks will waive monthly fees or offer other incentives if you have your paycheck deposited directly. Other types of payments that you can receive by direct deposit include annuity payments, dividend and interest payments, pensions, bonuses and commissions, Social Security benefits, child support payments, and Veterans Administration benefits. Direct deposits are conducted via [automated clearing house transfer](https://www.investopedia.com/terms/a/ach.asp), more commonly known as an ACH transfer. This type of transaction is a way of sending money electronically. It often takes several days for the transaction to complete, but there are generally no fees involved. The sender can decide the date on which the payment will be available to the recipient—this is how you can get your money on payday without delay via direct deposit. To conduct an ACH transfer, you'll need to give your name, bank account routing number, and account number to the company or institution you want to receive money from. ### 6. Transferring Funds Electronically from Another Account ACH transfers can also be used to transfer money between financial institutions. If you have a checking account with a particular bank and a brokerage account with a particular investment company, for example, you can use ACH transfer to send money from your checking account to your investment account (or vice versa). Here's another example of how you might deposit money to your account electronically: Suppose you have a [PayPal](https://www.investopedia.com/terms/p/paypal.asp) account connected to an eBay seller account, which you use to earn money by selling toys, clothes, and other items from your home that you no longer want. You might prefer to conduct all your banking activities from your primary checking account, so you first need to transfer the money you’ve earned from your PayPal account to your bank. You can do this online through the PayPal website or through the PayPal mobile app by providing your banking information. You can also deposit money to your bank account after receiving money from friends, family, or people you work for through an online payment service like Venmo, PayPal, or Popmoney. Once the money is in that account, you can then transfer the money to your checking account. Sometimes there is a fee associated with these transactions. ## Funds Availability As a general policy, banks place holds on customers' deposits to protect themselves from [banking fraud](https://www.investopedia.com/financial-fraud-4689710). When you look up your bank account balance at the ATM or online after making a deposit, you may see a difference between your account balance and your available balance. This lets you know that a deposit you've made hasn't cleared yet. It's extremely important to be aware of how your bank's deposit hold policy works so that you aren't penalized for trying to make a payment with money you don't yet have access to. The bank's hold policy will always apply to business days, not calendar days. A business day is any day that is not a Saturday, Sunday, or federal holiday. How long you'll have to wait to access deposited funds varies. According to the U.S. Treasury's Office of the Comptroller of the Currency, a bank has some flexibility in the hold times it imposes on deposits: It can make them available immediately, or it can delay deposit availability up to the maximum length of time prescribed by law under federal regulation. There may also be cutoff times, which vary by bank, that affect when your deposited funds will become available. A bank might state, for example, that deposits must be received by 9:00 p.m. ET for same-day credit and funds will generally be available the next business day. The account agreement you receive when you open a checking account will explain your bank's rules on deposit holds, but here are some general guidelines. * When you are a new customer who has had an account with the bank for 30 or fewer calendar days, the bank is allowed to hold your deposits longer under the Expedited Funds Availability Act. * Larger deposits, especially those over $5,525, usually take longer to credit to your account than smaller deposits. Banks can hold deposits in excess of $5,525 (as of 2021) for up to nine business days. * Cash deposits are generally available by the next business day. Cash may not be available immediately even if deposited with a teller. * Government checks deposited via teller will be available no later than the next business day. * Direct deposits become fully available to you the next business day following the deposit. (That’s why you might see your paycheck in your account late on Thursday night—so you can access the money on payday, Friday, instead of having to wait until Monday.) ## Accounts for Your Savings After checking accounts, [savings accounts](https://www.investopedia.com/terms/s/savingsaccount.asp) are the next offering most people think about when they think about banking. Having a savings account where you can securely store extra cash that you can access easily in an emergency—but not so easily that you'll spend the money on things you didn't intend to—is a key component of any good personal financial plan. While a checking account helps safeguard your money and facilitate bill paying, a simple savings account helps you set aside money for near-term goals like going on a vacation, paying a large upcoming bill, or establishing an emergency fund. There are a number of different types of savings products that banks offer; ahead are the pros and cons of each. First, we will cover the two types of savings accounts.  ### Regular Savings Accounts Almost all banks offer regular, basic savings account that you can sign up for in person, by phone, or online. This is the type of savings account you might get by default from a traditional brick-and-mortar bank. The difference between this account and a checking account is that it generally doesn't have check-writing privileges and it may have a higher opening deposit requirement and, possibly, a higher daily minimum balance requirement. This type of account may be called "Statement Savings," "Goal Savings," "Day-to-Day Savings," “Way2Save,” “Savings Plus,” or something else that the bank’s marketing department thought was clever. A regular savings account is easy to set up and maintain. You can link it directly to your checking account at the same bank and quickly and easily move money between the two accounts. Having these two accounts linked can sometimes help you avoid overdraft charges and minimum balance fees from your checking account. The main disadvantage of this type of account is its often-pitiful interest rate. The national average savings account rate as of April 2024 is just 0.47%, according to the FDIC. If you're serious about making your money work for you, you'll probably want to minimize the amount of money you keep in a regular savings account—if you use one at all—and opt for a more powerful savings vehicle instead. ### Online Savings Accounts An online savings account differs from a regular savings account in that you deal with it exclusively through the internet (sometimes also by phone, but not in person) and it pays a higher interest rate. As of April 2024, for example, one of the [highest interest rates available](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) for a savings account was 5.50% APY for a Betterment account (conditions apply) . Some online savings accounts are offered by the same banks that provide regular checking and savings accounts, while others are offered by banks that don't have physical branches and exclusively offer online products. If you're comfortable with online banking, an online savings account may be a better choice than regular savings account because of its greater earning potential. Many online savings accounts also do not have a minimum deposit to open an account, minimum daily balance requirements, or a monthly maintenance fee, unlike many savings accounts associated with brick-and-mortar banks. With some types of savings accounts, both regular and online, the rate of interest the bank will pay you depends on how much money is in your account. These accounts are called [tiered-rate accounts](https://www.investopedia.com/terms/t/tiered-rate-account.asp). Customers with higher balances will earn interest at a higher rate. ### Automatic Savings Plans Many banks offer automatic savings plans, and these can be a great way to develop a regular habit of saving money. At some banks, establishing such a plan is also a way to obtain lower banking fees. An automatic savings plan is something you need to set up. It simply involves choosing a specific dollar amount that you're willing to have automatically transferred from your checking account to your savings account, usually once a month and on the same day every month (except when that day falls on a weekend or holiday). If you have an idea of how much money you generally have remaining after meeting your expenses each month, you can use this as the amount that you transfer automatically to your savings account. On the other hand, you may want to allocate your extra funds to several different places each month, such as a retirement account, investment account, and savings account. In this case, you'll want to choose a smaller amount. If you don't know how much money you can safely contribute to a savings account each month, creating a budget will help you figure it out. You can always start with a modest amount, such as $20, and increase it later. Although some people are nervous about the idea of committing to saving a certain amount automatically each month, most investment gurus say that paying yourself first is a key component of building wealth. The other major benefit of establishing an automatic savings plan is that you don't have to remember to set aside money for savings each month—your bank will do it for you. ### Money Market Deposit Accounts The money market is a segment of the financial market where financial instruments with high [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) and very short maturities are traded. It is considered a safe place to put money due to the highly liquid nature of the securities and their short maturities. While money market investment accounts are not without risk, [money market deposit accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp) are virtually risk-free because they are FDIC insured, just like checking and savings accounts. Money market deposit accounts should not be confused with money market mutual funds, which are offered by investment companies and are not FDIC insured. ### 4,587 The number of FDIC-insured financial institutions in 2023, according to the FDIC. Money market deposit accounts tend to have higher minimum balance requirements than regular or online savings accounts. This minimum usually ranges from $100 to $2,500. There may also be a monthly fee associated with this type of savings account. The interest paid will be higher than that on a regular savings account balance, but possibly less than an online savings account would pay. For example, as of April 2024, CIT Bank, an online-only bank, paid 1.55% APY on money market account balances and 0.25% APY on high-yield savings account balances. From a functional standpoint, you may not notice much, if any, difference between a money market deposit account and a regular or online savings account. ### Certificates of Deposit A [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) is a savings certificate entitling the bearer to receive interest. In many ways, it is similar to a bond, except that instead of paying interest periodically over the life of the investment, it pays all its interest at once when it matures. Also, because CDs are a bank product, they come with FDIC insurance. A CD has a maturity date and a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years. The amount of interest a CD pays depends on its term, with longer terms generally paying higher rates. CDs, like savings accounts, will pay more or less depending on market conditions. In the low-interest rate environment the United States has experienced since 2008, CDs have paid little, but they often pay more than a regular savings account does, depending on which banks you’re comparing. The average 60-month (5-year) CD rate in April 2024 is 1.38%, significantly higher than the average savings account rate of 0.47%. Along with the higher interest rate you'll earn with a CD come restrictions on withdrawing your money before the CD matures. Do so and it will usually cost you money in the form of an early withdrawal penalty. If you're trying to keep your money accessible while it earns interest, a high-yield savings account may be a better option. ## Federal Deposit Insurance: Spread Out Your Money to Be Safe Federal deposit insurance protects consumers’ bank account balances up to a certain amount as long as they're at a legitimate bank that is a member of the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, since its creation in 1933, “no depositor has ever lost even one penny of FDIC-insured funds." Under legislation passed during the financial crisis of 2008, FDIC insurance protection was expanded from $100,000 to $250,000 per depositor across all accounts of the same category. If the amount of money you keep in bank accounts exceeds current federal deposit insurance limits, you'll need to do some planning so that if a bank fails, all of your money will be protected, not just the first $250,000. There's nothing wrong with doing this—it's perfectly legal. If your account balance exceeds FDIC-insured limits and you want to make sure all your money will be safe, visit [the FDIC's website](https://www2.fdic.gov/EDIE/fdic_info.html) for more information. Ally Bank also has a helpful page explaining how you could achieve [$2 million in FDIC coverage](https://www.ally.com/bank/fdic/) at the same bank by using a variety of accounts. You can also, of course, keep your money in more than one bank to spread your risk. Spreading your money across several accounts isn’t the only way to protect it. Whether or not you are banking online, you want to prevent unscrupulous individuals from stealing your identity and your funds. There are steps you can take, such as shredding bank statements and being on the lookout for [card skimmers](https://www.investopedia.com/terms/s/skimming.asp). ## How Do I Open a Bank Account? You can open a bank account in person with some form of photo ID like a driver's license, passport, or state ID. You'll also need a Social Security number or ITIN for tax purposes. To open an account online, you'll need an SSN or ITIN and they'll also ask you a series of security questions to prove your identity since you won't be showing an ID. ## Do You Have to be a U.S. Citizen to Open a Bank Account? No, you do not have to be a citizen to open a bank account and federal law prohibits banks from discriminating against non-citizens on the basis of natural origin. ## How Old Do You Have to be to Open a Bank Account? You have to be 18 to open your own bank account. If you're under 18 you'll need a parent or legal guardian to set up a custodial or joint bank account. They will remain on the account until you turn 18. ## The Bottom Line Banks provide security and convenience for managing your money and sometimes allow you to make money by earning interest. Convenience and fees are two of the most important things to consider when choosing a bank, whether you are opening a checking, savings or money market account or putting funds into a certificate of deposit. Be sure to develop methods to stay on top of your account balances in order to avoid fees, declined transactions, and bounced payments. To protect your money from electronic theft, identity theft, and other forms of fraud, it's important to implement basic precautions such as having complex passwords, safeguarding your [PIN](https://www.investopedia.com/terms/p/personal-identification-number.asp), and only conducting online and mobile banking through secure internet connections.

Whether you're just opening your first bank account—or your first American bank account—or have had one for years, you may never have thought about why it makes sense to have a bank account. You just opened one. Now that there are alternatives for getting cash and paying bills, that question becomes more interesting. Given the possible fees and annoyances of having a bank account, do you really need one? And which one is the best checking account or best savings account for you? Read on to explore this question and your options. Key Takeaways Banks are financial institutions that accept deposits and lend money.Many people wonder, given the advances in technology today, if a traditional banking account is really necessary.Online payment systems like PayPal can be used to send money, while prepaid debit cards are often used for online shopping or to withdraw money from ATMs.Advantages of using bank accounts are security, convenience, and the potential availability of other investment options.Some online-only banks charge less in fees and offer higher interest rates compared to traditional brick-and-mortar banks. Why Use a Bank? If you are new to banking—or have lived in countries where the banking system is untrustworthy—you might be wondering why you would want to use a bank at all. It's certainly easier than ever to get by without a bank account. Prepaid debit cards make it possible to shop online and in stores—and even pay bills and withdraw money from ATMs—just like someone who has a bank account. The IRS will deposit your tax refund to a prepaid debit card and many employers will load your paycheck onto one (though this option has many drawbacks). Online services like PayPal and Venmo let you send and receive money without a bank account. You can also operate on an all-cash system by cashing your paycheck at Walmart or a check-cashing store, then paying your bills in person at a Walmart Money Center or at a check-cashing store. However, if you meet the basic qualifications to open a bank account, you might appreciate the many benefits of a bank, starting with keeping your money more secure. 1. Bank Security Storing all your money in cash at home isn't safe. Your home could be burglarized. Someone who knows you and knows that you keep your money at home—a child, relative, or friend—could pilfer your stash. Burglars know most of the places people hide their money. Even worse, you could be robbed while you’re at home. Another risk is that, if your house floods or catches on fire, your money will likely be destroyed, and homeowner's insurance covers just a limited amount of lost cash. If you bury it in the backyard, the container you put it in could become damaged or start decomposing and destroy your money. You could also simply forget all the places you've stashed your cash. Did you tape that $100 to the back of the family photo in your bedroom, slide it into your favorite book on page 52, or hide it in an oatmeal canister in the back of the pantry? Keeping all your money in prepaid debit cards is also less secure than keeping it in the bank. If you live paycheck to paycheck, the most you’re ever at risk of losing or having stolen is the amount of your last paycheck—a sum you clearly can’t afford to lose if money is tight. Keeping your money secure is paramount. And once you have more than a few hundred dollars to your name, you’ll want to protect your savings. While a prepaid debit card is more portable than cash, it can still be misplaced or stolen and very difficult to get back. The most secure place to put your money is a bank account. As long as you choose a legitimate bank that has Federal Deposit Insurance Corporation (FDIC) insurance (or a credit union that has National Credit Union Association insurance), any money you put in the bank (up to FDIC insurance limits) is protected. To date, the guarantee provided by the FDIC has proved to be completely reliable, even during times of financial crisis like the 2008 recession or the savings-and-loan crisis of the 1980s and 1990s. 2. Bank Convenience When you have money in the bank, you can access it from anywhere—in person at your local branch, from the ATM at your grocery store, online, across town, even overseas. A checking account also makes it much easier and cheaper to pay bills—you'll no longer have to visit a store, check-cashing center, or service provider’s office to make payments, and you won't need to purchase a cashier's check or pay a transfer fee to send those payments. Instead, you can use your bank’s free online bill-pay service or—if you prefer to do things the old-fashioned and less secure way—you can write a check and put it in the mail, which is also free except for the cost of postage. The benefits of using a bank to protect your money are similar to the benefits of using a credit union. 3. Saving and Investing Once you are earning more money than you need to get by each month, you'll want to go beyond a checking account and start saving and investing your money to give yourself more financial security. With money in savings, you can handle irregular expenses like car repairs even if they don’t fit into your monthly budget. A large enough emergency fund can tide you over during a period of unemployment. And once you have several months’ worth of emergency savings, you’ll want to transfer your extra savings into a retirement account. You simply can't take advantage of the opportunity to earn money in the stock market or earn interest on deposits if you're only willing to keep your money under your mattress or on a prepaid debit card. How to Choose a Bank With a little common sense, most people won't have any trouble selecting a reputable bank. It's true that even big-name banks can fail (like Washington Mutual did in 2008), but FDIC insurance will protect your money in those situations. It provides $250,000 in coverage per owner, per account. So if you have a joint account with a spouse, a balance of up to $500,000 would be covered. If you’ve come from a developing country that doesn’t have deposit insurance, where you couldn’t trust that your money was safe in the bank, the U.S. system should come as a big relief. It’s hard to make a major mistake when choosing where to bank, but some options are better than others in terms of convenience, fees, and interest rates. Here are the key criteria to consider when deciding where to open your checking account. Bank Legitimacy and Reputation First and foremost, you want to use a legitimate bank. Sticking with a large, widely known bank should be a safe bet. If you're considering a smaller institution—or if you just want to be extra safe—use the Bank Find tool at the FDIC's website to make sure the bank is a member of the FDIC, which means that your deposits will be insured up to FDIC limits. Choosing a bank with a good reputation is a bit trickier. In 2016 Wells Fargo fired 5,300 employees who had opened 2 million unauthorized bank accounts for the bank’s customers in order to meet sales targets and earn bonuses. Those customers then ended up paying fees on those accounts. The bank is now working to rebrand itself as "re-established." Chase Bank has also paid hundreds of millions of dollars in fines and settlements in recent years related to bribing foreign officials, manipulating interest rates, and other misdeeds. These aren’t the only banks that have misbehaved on a massive scale, but they are two of the best-known examples. In short, you may want to do your research on reputation before committing to a bank. Online Only vs. Brick-and-Mortar Banks One of the biggest decisions you’ll need to make is whether to choose a bank that is entirely internet-based or one that has both a physical and online presence. Most banks nowadays have a strong online presence even if they started out as brick-and-mortar institutions, which means that regardless of which bank you choose, you will have access to features such as online bill pay, mobile check deposit, and apps that let you bank anytime, anywhere from your computer, tablet, or smartphone. What are the main differences between online-only banks and banks where you can walk into a branch and talk to a teller? Generally, it's fees and interest rates. Because online-only banks have much lower overhead, they can pass those savings on to consumers by not having monthly maintenance fees or minimum balance requirements, and they can afford to pay a higher interest rate on savings accounts and certificates of deposit. Some of the big names in online-only banking are Ally Bank, Discover Bank, and Capital One 360. That said, community banks sometimes offer the same lower-fee, higher-rate advantages that online-only banks do while also giving you the option to meet with a banker face to face. You may also find low-fee accounts at a large traditional bank, so don't count them out without checking. Consider what would make banking comfortable and convenient for you: Do you prefer to talk to someone in person or interact with a machine?Do you want to be able to write lots of checks or would you rather pay bills online?Do you regularly deposit cash? (This is cumbersome to do with an online bank; you need a special ATM, money order, or other intermediaries.)What time of day and day of the week is convenient for you to the bank? Different banks have different features, and even different checking accounts within the same bank are designed to appeal to different sets of needs. It pays to shop around before deciding on a bank and opening an account. Bank Location and Size Most people who want an account at a brick-and-mortar institution want to use a bank that has a branch close to where they live and/or work so that visiting a teller and making deposits and withdrawals is convenient. If you don’t travel frequently, this could be a large, national bank or a smaller regional or community bank. If you do travel frequently, you’ll want to do some research to see which banks have locations where you find yourself most often. You’ll want to have easy access to your money when you’re out of town, a real person to talk to face to face if you have any problems, and no service charges for using out-of-network ATMs. The other major consideration when it comes to size is that customer service may be better at smaller banks and that these banks take more of an interest in the local communities where they operate. There’s no universal rule, though, so if these factors are important to you, your best bet is to visit the bank in person and see what kind of experience you have. If you choose an online-only bank, you’ll typically have access to a network of fee-free ATMs nationwide. Your bank may also reimburse you for a certain number of out-of-network ATM fees per month. Banking Fees Some banks are free to use as long as you keep your account balance positive, while others nickel-and-dime their customers with fees at every turn. Even small fees can add up over time and eat into your account balance, so look at a bank's fee schedule carefully and make sure you understand what you need to do to avoid them before you open an account there. This advice holds true even if you sign up with a bank that advertises free checking; there are always fees somewhere. You may encounter fees for letting your balance fall below a certain threshold, not having your paycheck directly deposited to your account, overdrawing your account, using an ATM, requesting paper statements, and even closing your account. Opening a Checking Account If you are mostly using your bank account as a source of ready cash and to pay bills, what you need is a checking account. (You might also need a savings account if you want to use your bank for money funds; see below.) Except for some specialized free or low-income accounts, checking accounts generally let you make unlimited deposits and withdrawals, unlike the rules that limit the number of monthly withdrawals from savings accounts. Before you spend too much time deciding on which bank to use, you should first make sure you qualify to open a checking account. Here's what banks generally need from customers. Opening Deposit The amount of money you’ll need for an opening deposit depends on the bank you choose and the type of account you want to open. Plenty of banks allow you to open an account with as little as $1, so if you don’t have much to deposit, shop around. You’re more likely to need a substantial opening deposit at a traditional brick-and-mortar bank than at an online bank. Identification To open an account in person, you’ll need to provide identification such as a Social Security card, birth certificate, passport, driver’s license, or state identification card. To open an account online, you’ll be asked to provide your date of birth, Social Security number, and possibly your driver’s license number, and the bank may follow up with requests for copies of supporting documents. If you are opening a bank account in the United States and are not a U.S. resident, you'll need one or two of the following: A foreign passport with photoA foreign driver's license with photoA foreign state-issued IDAn employment ID with photoA college ID with photoAn alien registration card with photoA permanent resident card with photo If you do not have a Social Security Number (SSN) you can open a bank account with an Individual Tax Identification Number (ITIN), which you can get from the Internal Revenue Service. Contact Information This will include your physical address (where you live), phone number, and email address. The reason banks ask for all this information is to comply with federal laws that require them to obtain and verify identifying information for every person who opens an account. Also, you have to be at least 18 years old (or the age of majority, which is higher in some states—19 in Alabama, for example) to open a bank account. If you're younger, you may be able to open a joint account with a parent or legal guardian.  6 Ways to Receive Deposits to Your Account Making deposits is a key part of maintaining a checking account. If you don't make deposits, your checking account will run out of money. You won't be able to make payments or withdraw cash from it or buy anything using your debit card.  There are several ways to make a deposit, whether you’re depositing a check or cash. But first, you’ll need to prepare your deposit. When you receive a check to deposit, flip it over. There are usually a few lines on one end of the check that says "Endorse Here." Sometimes you’ll also see “Do not write or stamp below this line.” Make sure to endorse the check above that wording, as shown here. You can sign your name first, or after you put in the other information. Endorsing a check means signing your name on the back. The bank will reject any check you try to deposit that isn't endorsed. Depending on the bank and the deposit method, you may also need to write “For Deposit Only” and the number of the account in which you are depositing the check. If you’re depositing cash, be sure you note down how much you’re depositing. 1. Making Deposits in Person at a Branch The old-fashioned way to deposit a check or cash is to visit a branch of your bank in person, wait in line, and present the money to the teller along with a deposit slip, which is usually available at a stand near where the line starts. If you have a checkbook, you may find deposit slips with your checks. Here's a sample:  Deposit slips available at the bank will not contain any of your account information, whereas the ones that come with your checkbook will, saving you the effort of filling in your information on the bank’s generic deposit slip. List each check by check number and amount where indicated on the deposit slip. If you’re depositing cash, list the total amount on the line designated for cash.  When you reach the teller, you may need to swipe your ATM card and/or present your photo ID. Then the teller will deposit your money into your account and, if you wish, give you a receipt. 2. Making Deposits at an ATM If you’re making a deposit at an ATM, the process for endorsing a check is the same, but you won’t need to fill out a deposit slip. And while you can withdraw money from any bank’s ATM, you’ll need to use one of your own bank’s ATMs to make a deposit. If you use an online-only bank, you may be able to make deposits at certain ATMs. You can generally deposit both checks and cash at ATMs. Insert your debit card in the machine and enter your personal identification number (PIN) to access your account. Follow the instructions on the screen to tell the system which account to deposit your money to. Next, you will usually key in the amount of your deposit. Some ATMs don’t require this step because they will read your checks or count your bills when you insert them, then ask you to verify the amount before finalizing your deposit. Depending on the ATM, you will then either put your deposit in an envelope before putting it into the ATM or you will put it directly into the ATM without an envelope. Get a receipt for your deposit in case there is a problem with the way it credits to your account—this is unlikely, but it’s better to be prepared. 3. Making Deposits Online or by Smartphone The most convenient and easiest way to deposit a check, once you get the hang of it, is to use your smartphone. Many banks have mobile apps that allow you to use your phone’s camera to snap a photo of the front and endorsed back of the check, type in the check amount, and tell the app which accounts to deposit the check to. Making deposits online follows a similar process, except that you’ll need to scan your checks or transfer photos of your checks from your camera or smartphone to your computer before you can upload them. Your bank will let you know how long you need to keep the paper checks. After that time has passed, you can shred them. 4. Making Deposits by Mail If you can’t visit an ATM or a branch—and you don’t want to deposit your checks online or using your smartphone—you can deposit checks (but not cash) by mail. You’ll need to get your bank’s mailing address for deposits, endorse your check, and write “for deposit only” on the back to make it more difficult for someone to cash your check if they steal it from the mail. Enclose a completed deposit slip in your envelope. Mailing deposits is the slowest way to gain access to your deposits since your check has to go through the mail before it can be processed by your bank and clear. There’s a reason they call it “snail mail.” 5. Receiving Direct Deposits You can also add money to your account via direct deposit of your paycheck if your employer offers this payment method. This arrangement can make life easier for both you and your employer.  If you are paid by direct deposit, the funds should be available to you on payday. You won’t experience the lag time that you would if you had to deposit a paper check. Some banks will waive monthly fees or offer other incentives if you have your paycheck deposited directly. Other types of payments that you can receive by direct deposit include annuity payments, dividend and interest payments, pensions, bonuses and commissions, Social Security benefits, child support payments, and Veterans Administration benefits. Direct deposits are conducted via automated clearing house transfer, more commonly known as an ACH transfer. This type of transaction is a way of sending money electronically. It often takes several days for the transaction to complete, but there are generally no fees involved. The sender can decide the date on which the payment will be available to the recipient—this is how you can get your money on payday without delay via direct deposit. To conduct an ACH transfer, you'll need to give your name, bank account routing number, and account number to the company or institution you want to receive money from. 6. Transferring Funds Electronically from Another Account ACH transfers can also be used to transfer money between financial institutions. If you have a checking account with a particular bank and a brokerage account with a particular investment company, for example, you can use ACH transfer to send money from your checking account to your investment account (or vice versa). Here's another example of how you might deposit money to your account electronically: Suppose you have a PayPal account connected to an eBay seller account, which you use to earn money by selling toys, clothes, and other items from your home that you no longer want. You might prefer to conduct all your banking activities from your primary checking account, so you first need to transfer the money you’ve earned from your PayPal account to your bank. You can do this online through the PayPal website or through the PayPal mobile app by providing your banking information. You can also deposit money to your bank account after receiving money from friends, family, or people you work for through an online payment service like Venmo, PayPal, or Popmoney. Once the money is in that account, you can then transfer the money to your checking account. Sometimes there is a fee associated with these transactions. Funds Availability As a general policy, banks place holds on customers' deposits to protect themselves from banking fraud. When you look up your bank account balance at the ATM or online after making a deposit, you may see a difference between your account balance and your available balance. This lets you know that a deposit you've made hasn't cleared yet. It's extremely important to be aware of how your bank's deposit hold policy works so that you aren't penalized for trying to make a payment with money you don't yet have access to. The bank's hold policy will always apply to business days, not calendar days. A business day is any day that is not a Saturday, Sunday, or federal holiday. How long you'll have to wait to access deposited funds varies. According to the U.S. Treasury's Office of the Comptroller of the Currency, a bank has some flexibility in the hold times it imposes on deposits: It can make them available immediately, or it can delay deposit availability up to the maximum length of time prescribed by law under federal regulation. There may also be cutoff times, which vary by bank, that affect when your deposited funds will become available. A bank might state, for example, that deposits must be received by 9:00 p.m. ET for same-day credit and funds will generally be available the next business day. The account agreement you receive when you open a checking account will explain your bank's rules on deposit holds, but here are some general guidelines. When you are a new customer who has had an account with the bank for 30 or fewer calendar days, the bank is allowed to hold your deposits longer under the Expedited Funds Availability Act.Larger deposits, especially those over $5,525, usually take longer to credit to your account than smaller deposits. Banks can hold deposits in excess of $5,525 (as of 2021) for up to nine business days.Cash deposits are generally available by the next business day. Cash may not be available immediately even if deposited with a teller.Government checks deposited via teller will be available no later than the next business day.Direct deposits become fully available to you the next business day following the deposit. (That’s why you might see your paycheck in your account late on Thursday night—so you can access the money on payday, Friday, instead of having to wait until Monday.) Accounts for Your Savings After checking accounts, savings accounts are the next offering most people think about when they think about banking. Having a savings account where you can securely store extra cash that you can access easily in an emergency—but not so easily that you'll spend the money on things you didn't intend to—is a key component of any good personal financial plan. While a checking account helps safeguard your money and facilitate bill paying, a simple savings account helps you set aside money for near-term goals like going on a vacation, paying a large upcoming bill, or establishing an emergency fund. There are a number of different types of savings products that banks offer; ahead are the pros and cons of each. First, we will cover the two types of savings accounts.  Regular Savings Accounts  Almost all banks offer regular, basic savings account that you can sign up for in person, by phone, or online. This is the type of savings account you might get by default from a traditional brick-and-mortar bank. The difference between this account and a checking account is that it generally doesn't have check-writing privileges and it may have a higher opening deposit requirement and, possibly, a higher daily minimum balance requirement. This type of account may be called "Statement Savings," "Goal Savings," "Day-to-Day Savings," “Way2Save,” “Savings Plus,” or something else that the bank’s marketing department thought was clever. A regular savings account is easy to set up and maintain. You can link it directly to your checking account at the same bank and quickly and easily move money between the two accounts. Having these two accounts linked can sometimes help you avoid overdraft charges and minimum balance fees from your checking account. The main disadvantage of this type of account is its often-pitiful interest rate. The national average savings account rate as of April 2024 is just 0.47%, according to the FDIC. If you're serious about making your money work for you, you'll probably want to minimize the amount of money you keep in a regular savings account—if you use one at all—and opt for a more powerful savings vehicle instead. Online Savings Accounts An online savings account differs from a regular savings account in that you deal with it exclusively through the internet (sometimes also by phone, but not in person) and it pays a higher interest rate. As of April 2024, for example, one of the highest interest rates available for a savings account was 5.50% APY for a Betterment account (conditions apply) . Some online savings accounts are offered by the same banks that provide regular checking and savings accounts, while others are offered by banks that don't have physical branches and exclusively offer online products. If you're comfortable with online banking, an online savings account may be a better choice than regular savings account because of its greater earning potential. Many online savings accounts also do not have a minimum deposit to open an account, minimum daily balance requirements, or a monthly maintenance fee, unlike many savings accounts associated with brick-and-mortar banks. With some types of savings accounts, both regular and online, the rate of interest the bank will pay you depends on how much money is in your account. These accounts are called tiered-rate accounts. Customers with higher balances will earn interest at a higher rate. Automatic Savings Plans Many banks offer automatic savings plans, and these can be a great way to develop a regular habit of saving money. At some banks, establishing such a plan is also a way to obtain lower banking fees. An automatic savings plan is something you need to set up. It simply involves choosing a specific dollar amount that you're willing to have automatically transferred from your checking account to your savings account, usually once a month and on the same day every month (except when that day falls on a weekend or holiday). If you have an idea of how much money you generally have remaining after meeting your expenses each month, you can use this as the amount that you transfer automatically to your savings account. On the other hand, you may want to allocate your extra funds to several different places each month, such as a retirement account, investment account, and savings account. In this case, you'll want to choose a smaller amount. If you don't know how much money you can safely contribute to a savings account each month, creating a budget will help you figure it out. You can always start with a modest amount, such as $20, and increase it later. Although some people are nervous about the idea of committing to saving a certain amount automatically each month, most investment gurus say that paying yourself first is a key component of building wealth. The other major benefit of establishing an automatic savings plan is that you don't have to remember to set aside money for savings each month—your bank will do it for you. Money Market Deposit Accounts The money market is a segment of the financial market where financial instruments with high liquidity and very short maturities are traded. It is considered a safe place to put money due to the highly liquid nature of the securities and their short maturities. While money market investment accounts are not without risk, money market deposit accounts are virtually risk-free because they are FDIC insured, just like checking and savings accounts. Money market deposit accounts should not be confused with money market mutual funds, which are offered by investment companies and are not FDIC insured. 4,587 The number of FDIC-insured financial institutions in 2023, according to the FDIC. Money market deposit accounts tend to have higher minimum balance requirements than regular or online savings accounts. This minimum usually ranges from $100 to $2,500. There may also be a monthly fee associated with this type of savings account. The interest paid will be higher than that on a regular savings account balance, but possibly less than an online savings account would pay. For example, as of April 2024, CIT Bank, an online-only bank, paid 1.55% APY on money market account balances and 0.25% APY on high-yield savings account balances. From a functional standpoint, you may not notice much, if any, difference between a money market deposit account and a regular or online savings account. Certificates of Deposit A certificate of deposit (CD) is a savings certificate entitling the bearer to receive interest. In many ways, it is similar to a bond, except that instead of paying interest periodically over the life of the investment, it pays all its interest at once when it matures. Also, because CDs are a bank product, they come with FDIC insurance. A CD has a maturity date and a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years. The amount of interest a CD pays depends on its term, with longer terms generally paying higher rates. CDs, like savings accounts, will pay more or less depending on market conditions. In the low-interest rate environment the United States has experienced since 2008, CDs have paid little, but they often pay more than a regular savings account does, depending on which banks you’re comparing. The average 60-month (5-year) CD rate in April 2024 is 1.38%, significantly higher than the average savings account rate of 0.47%. Along with the higher interest rate you'll earn with a CD come restrictions on withdrawing your money before the CD matures. Do so and it will usually cost you money in the form of an early withdrawal penalty. If you're trying to keep your money accessible while it earns interest, a high-yield savings account may be a better option. Federal Deposit Insurance: Spread Out Your Money to Be Safe Federal deposit insurance protects consumers’ bank account balances up to a certain amount as long as they're at a legitimate bank that is a member of the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, since its creation in 1933, “no depositor has ever lost even one penny of FDIC-insured funds." Under legislation passed during the financial crisis of 2008, FDIC insurance protection was expanded from $100,000 to $250,000 per depositor across all accounts of the same category. If the amount of money you keep in bank accounts exceeds current federal deposit insurance limits, you'll need to do some planning so that if a bank fails, all of your money will be protected, not just the first $250,000. There's nothing wrong with doing this—it's perfectly legal. If your account balance exceeds FDIC-insured limits and you want to make sure all your money will be safe, visit the FDIC's website for more information. Ally Bank also has a helpful page explaining how you could achieve $2 million in FDIC coverage at the same bank by using a variety of accounts. You can also, of course, keep your money in more than one bank to spread your risk. Spreading your money across several accounts isn’t the only way to protect it. Whether or not you are banking online, you want to prevent unscrupulous individuals from stealing your identity and your funds. There are steps you can take, such as shredding bank statements and being on the lookout for card skimmers. How Do I Open a Bank Account? You can open a bank account in person with some form of photo ID like a driver's license, passport, or state ID. You'll also need a Social Security number or ITIN for tax purposes. To open an account online, you'll need an SSN or ITIN and they'll also ask you a series of security questions to prove your identity since you won't be showing an ID. Do You Have to be a U.S. Citizen to Open a Bank Account? No, you do not have to be a citizen to open a bank account and federal law prohibits banks from discriminating against non-citizens on the basis of natural origin. How Old Do You Have to be to Open a Bank Account? You have to be 18 to open your own bank account. If you're under 18 you'll need a parent or legal guardian to set up a custodial or joint bank account. They will remain on the account until you turn 18. The Bottom Line Banks provide security and convenience for managing your money and sometimes allow you to make money by earning interest. Convenience and fees are two of the most important things to consider when choosing a bank, whether you are opening a checking, savings or money market account or putting funds into a certificate of deposit. Be sure to develop methods to stay on top of your account balances in order to avoid fees, declined transactions, and bounced payments. To protect your money from electronic theft, identity theft, and other forms of fraud, it's important to implement basic precautions such as having complex passwords, safeguarding your PIN, and only conducting online and mobile banking through secure internet connections.

https://www.investopedia.com/articles/basics/10/investing-or-gambling.asp

Are You Investing or Gambling?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Gambling is defined as staking something on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contingency.asp">contingency</a> — wagering money on something that has an uncertain and potentially negative outcome. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trader.asp">traders</a> are gambling without even knowing it <em>— </em>trading in a way, or for a reason that is completely dichotomous with success in the markets. </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 this article, we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place. </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>There are two common traits in those who exhibit gambling tendencies when trading.</li><li>If a person trades for excitement or social proofing reasons, rather than in a methodical way, they are likely trading in a gambling style.</li><li>If a person trades only to win, they are likely gambling. Traders with a "must-win" attitude will often fail to recognize a losing trade and exit their positions.</li></ul></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-subheading__text"> Hidden Gambling Tendencies </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. Yet discovering the underlying motives behind our actions can help us change the way we make decisions in the future. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Before delving into gambling tendencies when actually trading, one tendency is apparent in many people before trading even takes place. This same motivator <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/052413/what-type-trader-are-you.asp">continues to impact traders</a> as they gain experience and become regular market participants. </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-social-proofing"></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"> Social Proofing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Some people may not even have an interest in trading or investing in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-market.asp">financial markets</a>, but social pressure induces them to trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bullmarket.asp">bull market</a>). People feel pressure to fall in line with their social circle. Thus they invest so as not to disrespect or disregard others' beliefs or feel left out. </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"> Making some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. However, entering into a financial <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transaction</a> without a solid <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment.asp">investment</a> understanding is gambling. Such people lack the knowledge to exert control over the profitability of their choices. </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 variables in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market.asp">market</a>, and misinformation among <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If you or someone you know has a gambling problem, call the National Council on Problem Gambling Helpline at 1-800-522-4700, or visit NCPGambling.org/Chat to chat with a helpline specialist.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div> <span class="heading-toc" id="toc-contributing-gambling-factors"></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"> Contributing Gambling Factors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Once someone is involved in the financial markets, there is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/learning-curve.asp">learning curve</a>, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. How the person approaches the market will determine whether they become a successful trader or remain a perpetual gambler in the financial markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The following two traits (among many) are easily overlooked but contribute to gambling tendencies in traders. </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-gambling-trading-for-excitement"></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"> Gambling (Trading) for Excitement </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money.asp">money</a> in the markets, losing money on a trade will allow that person to enter the conversation with their own story. </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 a person trades for excitement or social proofing reasons, it is likely they are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading-4427765">trading in a gambling style</a>, rather than in a methodical and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/test.asp">tested</a> way. Trading the markets is exciting<em>—</em>it links the person into a global network of traders and investors with different ideas, backgrounds, and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows, is likely to detract from acting in a systematic and methodical way. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_31-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_32-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculation.asp">Speculation</a> involves making a risky investment, but one with a positive <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expectedreturn.asp">expected return</a>. The expected return for gambling is always negative for the player, even though some may get lucky and win in the short run.</p></div></div></div> <span class="heading-toc" id="toc-trading-to-win-and-not-trading-a-system"></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"> Trading to Win, and Not Trading a System </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Trading in a methodical and systematic way is important in any odds-based scenario. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out: </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"> Taylor buys a stock they feel is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oversold.asp">oversold</a>. The stock continues to fall, placing Taylor in a negative position. Instead of realizing the stock is not simply oversold and something else must be going on, Taylor continues to hold, hoping the stock will come back so they can win (or at least <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breakevenpoint.asp">break even</a>) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions, because to do so would be to admit they lost. </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"> Good traders take many losses<em>—</em>they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/position.asp">positions</a> after original entry <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/051915/how-does-insurance-sector-work.asp">conditions</a> have changed or turned negative means the trader is now gambling and no longer using sound trading methods (if they ever were). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-is-investing-basically-gambling"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Investing Basically Gambling?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Investing is the act of committing capital to an asset like a stock, with the expectation of generating income or profit. Gambling, on the other hand, is wagering money on an uncertain outcome, that statistically is likely to be negative. A gambler owns nothing, while an investor owns a share of the underlying company. </p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_44-0"><span class="heading-toc" id="toc-is-gambling-a-smart-way-to-make-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Gambling a Smart Way to Make Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Statistically, gambling is not a smart way to make money. The odds are against the gambler, with the house having a built-in mathematical advantage that grows over time. While it is possible to win a big payout, or to mitigate risk through selective playing based on research and odds, overall, most gamblers will end up losing money. </p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-is-it-better-to-invest-than-gamble"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is It Better to Invest Than Gamble?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While both involve minimizing risk to reap rewards, an investor's odds are generally better than that of a gambler. That's because with gambling, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110415/why-does-house-always-win-look-casino-profitability.asp">house has an edge</a>, a statistical advantage over the gambler that grows the longer the person is playing. A gambler can still strike it big, but it's more likely the person will ultimately lose. Investing can yield great losses, but the stock market generally appreciates over time, and if you keep investing, the odds are generally in your favor, certainly more so than for a gambler.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_48-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted, which results in taking action in a field one knows little about. </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"> Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, relying on emotion or a must-win attitude to create <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp">profits</a><em>—</em>rather than trading in a methodical and tested system<em>—</em>indicates the person is gambling in the markets and unlikely to succeed over the course of many trades. </p></div>

Gambling is defined as staking something on a [contingency](https://www.investopedia.com/terms/c/contingency.asp) — wagering money on something that has an uncertain and potentially negative outcome. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many [traders](https://www.investopedia.com/terms/t/trader.asp) are gambling without even knowing it *—* trading in a way, or for a reason that is completely dichotomous with success in the markets. In this article, we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place. ### Key Takeaways * There are two common traits in those who exhibit gambling tendencies when trading. * If a person trades for excitement or social proofing reasons, rather than in a methodical way, they are likely trading in a gambling style. * If a person trades only to win, they are likely gambling. Traders with a "must-win" attitude will often fail to recognize a losing trade and exit their positions. ### Hidden Gambling Tendencies It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. Yet discovering the underlying motives behind our actions can help us change the way we make decisions in the future. Before delving into gambling tendencies when actually trading, one tendency is apparent in many people before trading even takes place. This same motivator [continues to impact traders](https://www.investopedia.com/articles/investing/052413/what-type-trader-are-you.asp) as they gain experience and become regular market participants. ## Social Proofing Some people may not even have an interest in trading or investing in the [financial markets](https://www.investopedia.com/terms/f/financial-market.asp), but social pressure induces them to trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a [bull market](https://www.investopedia.com/terms/b/bullmarket.asp)). People feel pressure to fall in line with their social circle. Thus they invest so as not to disrespect or disregard others' beliefs or feel left out. Making some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. However, entering into a financial [transaction](https://www.investopedia.com/terms/t/transaction.asp) without a solid [investment](https://www.investopedia.com/terms/i/investment.asp) understanding is gambling. Such people lack the knowledge to exert control over the profitability of their choices. There are many variables in the [market](https://www.investopedia.com/terms/m/market.asp), and misinformation among [investors](https://www.investopedia.com/terms/i/investor.asp) or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs. ### If you or someone you know has a gambling problem, call the National Council on Problem Gambling Helpline at 1-800-522-4700, or visit NCPGambling.org/Chat to chat with a helpline specialist. ## Contributing Gambling Factors Once someone is involved in the financial markets, there is a [learning curve](https://www.investopedia.com/terms/l/learning-curve.asp), which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. How the person approaches the market will determine whether they become a successful trader or remain a perpetual gambler in the financial markets. The following two traits (among many) are easily overlooked but contribute to gambling tendencies in traders. ## Gambling (Trading) for Excitement Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing [money](https://www.investopedia.com/terms/m/money.asp) in the markets, losing money on a trade will allow that person to enter the conversation with their own story. When a person trades for excitement or social proofing reasons, it is likely they are [trading in a gambling style](https://www.investopedia.com/trading-4427765), rather than in a methodical and [tested](https://www.investopedia.com/terms/t/test.asp) way. Trading the markets is exciting*—*it links the person into a global network of traders and investors with different ideas, backgrounds, and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows, is likely to detract from acting in a systematic and methodical way. ### [Speculation](https://www.investopedia.com/terms/s/speculation.asp) involves making a risky investment, but one with a positive [expected return](https://www.investopedia.com/terms/e/expectedreturn.asp). The expected return for gambling is always negative for the player, even though some may get lucky and win in the short run. ## Trading to Win, and Not Trading a System Trading in a methodical and systematic way is important in any odds-based scenario. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out: Taylor buys a stock they feel is [oversold](https://www.investopedia.com/terms/o/oversold.asp). The stock continues to fall, placing Taylor in a negative position. Instead of realizing the stock is not simply oversold and something else must be going on, Taylor continues to hold, hoping the stock will come back so they can win (or at least [break even](https://www.investopedia.com/terms/b/breakevenpoint.asp)) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions, because to do so would be to admit they lost. Good traders take many losses*—*they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing [positions](https://www.investopedia.com/terms/p/position.asp) after original entry [conditions](https://www.investopedia.com/ask/answers/051915/how-does-insurance-sector-work.asp) have changed or turned negative means the trader is now gambling and no longer using sound trading methods (if they ever were). ## Is Investing Basically Gambling? Investing is the act of committing capital to an asset like a stock, with the expectation of generating income or profit. Gambling, on the other hand, is wagering money on an uncertain outcome, that statistically is likely to be negative. A gambler owns nothing, while an investor owns a share of the underlying company.  ## Is Gambling a Smart Way to Make Money? Statistically, gambling is not a smart way to make money. The odds are against the gambler, with the house having a built-in mathematical advantage that grows over time. While it is possible to win a big payout, or to mitigate risk through selective playing based on research and odds, overall, most gamblers will end up losing money.  ## Is It Better to Invest Than Gamble? While both involve minimizing risk to reap rewards, an investor's odds are generally better than that of a gambler. That's because with gambling, the [house has an edge](https://www.investopedia.com/articles/personal-finance/110415/why-does-house-always-win-look-casino-profitability.asp), a statistical advantage over the gambler that grows the longer the person is playing. A gambler can still strike it big, but it's more likely the person will ultimately lose. Investing can yield great losses, but the stock market generally appreciates over time, and if you keep investing, the odds are generally in your favor, certainly more so than for a gambler. ## The Bottom Line Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted, which results in taking action in a field one knows little about. Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, relying on emotion or a must-win attitude to create [profits](https://www.investopedia.com/terms/p/profit.asp)*—*rather than trading in a methodical and tested system*—*indicates the person is gambling in the markets and unlikely to succeed over the course of many trades.

Gambling is defined as staking something on a contingency — wagering money on something that has an uncertain and potentially negative outcome. However, when trading is considered, gambling takes on a much more complex dynamic than the definition presents. Many traders are gambling without even knowing it — trading in a way, or for a reason that is completely dichotomous with success in the markets. In this article, we will look at the hidden ways in which gambling creeps into trading practices, as well as the stimulus that may drive an individual to trade (and possibly gamble) in the first place. Key Takeaways There are two common traits in those who exhibit gambling tendencies when trading.If a person trades for excitement or social proofing reasons, rather than in a methodical way, they are likely trading in a gambling style.If a person trades only to win, they are likely gambling. Traders with a "must-win" attitude will often fail to recognize a losing trade and exit their positions. Hidden Gambling Tendencies It is quite likely that anyone who believes they don't have gambling tendencies will not happily admit to having them if it turns out they are in fact acting on gambling impulses. Yet discovering the underlying motives behind our actions can help us change the way we make decisions in the future. Before delving into gambling tendencies when actually trading, one tendency is apparent in many people before trading even takes place. This same motivator continues to impact traders as they gain experience and become regular market participants. Social Proofing Some people may not even have an interest in trading or investing in the financial markets, but social pressure induces them to trade or invest anyway. This is especially common when large numbers of people are talking about investing in the markets (often during the final phase of a bull market). People feel pressure to fall in line with their social circle. Thus they invest so as not to disrespect or disregard others' beliefs or feel left out. Making some trades to appease social forces is not gambling in and of itself if people actually know what they are doing. However, entering into a financial transaction without a solid investment understanding is gambling. Such people lack the knowledge to exert control over the profitability of their choices. There are many variables in the market, and misinformation among investors or traders creates a gambling scenario. Until knowledge has been developed that allows people to overcome the odds of losing, gambling is taking place with each transaction that occurs. If you or someone you know has a gambling problem, call the National Council on Problem Gambling Helpline at 1-800-522-4700, or visit NCPGambling.org/Chat to chat with a helpline specialist. Contributing Gambling Factors Once someone is involved in the financial markets, there is a learning curve, which based on the social proofing discussion above may seem like it is gambling. This may or may not be true based on the individual. How the person approaches the market will determine whether they become a successful trader or remain a perpetual gambler in the financial markets. The following two traits (among many) are easily overlooked but contribute to gambling tendencies in traders. Gambling (Trading) for Excitement Even a losing trade can stir emotions and a sense of power or satisfaction, especially when related to social proofing. If everyone in a person's social circle is losing money in the markets, losing money on a trade will allow that person to enter the conversation with their own story. When a person trades for excitement or social proofing reasons, it is likely they are trading in a gambling style, rather than in a methodical and tested way. Trading the markets is exciting—it links the person into a global network of traders and investors with different ideas, backgrounds, and beliefs. Yet getting caught up in the "idea" of trading, the excitement, or emotional highs and lows, is likely to detract from acting in a systematic and methodical way. Speculation involves making a risky investment, but one with a positive expected return. The expected return for gambling is always negative for the player, even though some may get lucky and win in the short run. Trading to Win, and Not Trading a System Trading in a methodical and systematic way is important in any odds-based scenario. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden detrimental flaw when it comes to this belief and trading. While making money is the desired overall result, trading to win can actually drive us further away from making money. If winning is our prime motivator, the following scenario is likely to play out: Taylor buys a stock they feel is oversold. The stock continues to fall, placing Taylor in a negative position. Instead of realizing the stock is not simply oversold and something else must be going on, Taylor continues to hold, hoping the stock will come back so they can win (or at least break even) on the trade. The focus on winning has forced the trader into the position where they don't get out of bad positions, because to do so would be to admit they lost. Good traders take many losses—they admit they are wrong and keep the damage small. Not having to win on every trade and taking losses when conditions indicate they should is what allows them to be profitable over many trades. Holding losing positions after original entry conditions have changed or turned negative means the trader is now gambling and no longer using sound trading methods (if they ever were). Is Investing Basically Gambling? Investing is the act of committing capital to an asset like a stock, with the expectation of generating income or profit. Gambling, on the other hand, is wagering money on an uncertain outcome, that statistically is likely to be negative. A gambler owns nothing, while an investor owns a share of the underlying company.  Is Gambling a Smart Way to Make Money? Statistically, gambling is not a smart way to make money. The odds are against the gambler, with the house having a built-in mathematical advantage that grows over time. While it is possible to win a big payout, or to mitigate risk through selective playing based on research and odds, overall, most gamblers will end up losing money.  Is It Better to Invest Than Gamble? While both involve minimizing risk to reap rewards, an investor's odds are generally better than that of a gambler. That's because with gambling, the house has an edge, a statistical advantage over the gambler that grows the longer the person is playing. A gambler can still strike it big, but it's more likely the person will ultimately lose. Investing can yield great losses, but the stock market generally appreciates over time, and if you keep investing, the odds are generally in your favor, certainly more so than for a gambler. The Bottom Line Gambling tendencies run far deeper than most people initially perceive and well beyond the standard definitions. Gambling can take the form of needing to socially prove one's self, or acting in a way to be socially accepted, which results in taking action in a field one knows little about. Gambling in the markets is often evident in people who do it mostly for the emotional high they receive from the excitement and action of the markets. Finally, relying on emotion or a must-win attitude to create profits—rather than trading in a methodical and tested system—indicates the person is gambling in the markets and unlikely to succeed over the course of many trades.

https://www.investopedia.com/ant-group-set-to-be-world-s-largest-ipo-ever-5084457

Ant Group Set to Be World's Largest IPO Ever

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Ant Group, a fintech affiliate of Alibaba, expects to raise $35 billion</li><li>Market value set to rise to $313 billion before greenshoe option</li><li>Jack Ma will become 11th richest person in the world after IPO</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"> China’s Ant Group is poised to raise almost $35 billion next week in what looks set to be a record-breaking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp" rel="noopener noreferrer">initial public offering (IPO)</a>. In order to make history, it needs to eclipse Saudi Aramco's $29.4 billion IPO earlier this year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The fintech company affiliated with e-commerce giant Alibaba Group will go public via a dual-listing in Shanghai and Hong Kong on Nov. 5. In each location, the Hong Kong Stock Exchange and Shanghai's Star Market, 1.67 billion new shares will be issued. This translates to 11% of the company. Ant is expected to have a market value of around $313 billion, as per the share prices chosen. </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"> Reports say investor response has been sensational, and the amount raised could increase by $5.2 billion if a 15% over-allotment or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/greenshoe.asp" rel="noopener noreferrer">greenshoe option</a> is exercised. According to CNN Business, Ant is closing its Hong Kong institutional book building on Wednesday, a day earlier than scheduled, because of strong demand from global institutional investors.<span class="ql-inline-citation" data-cite="1"></span> The Hong Kong shares were oversubscribed within the first hour of pricing. </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"> Alibaba founder Jack Ma's 8.8% stake in Ant will make him the 11th richest person in the world and solidify his position as the richest man in China with a net worth of $71.1 billion, according to Bloomberg.<span class="ql-inline-citation" data-cite="2"></span> As of Oct. 26, he was in the 17th position globally, having added $14 billion to his fortune so far in 2020. </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"> Ant has reportedly raised some $20 billion since 2015, which represents more than a third of VC investment in China-based fintechs over the period, according to PitchBook data.<span class="ql-inline-citation" data-cite="3"></span> Almost 40% of its revenue comes from its consumer credit business and 36% from digital payments. </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>

### * Ant Group, a fintech affiliate of Alibaba, expects to raise $35 billion * Market value set to rise to $313 billion before greenshoe option * Jack Ma will become 11th richest person in the world after IPO China’s Ant Group is poised to raise almost $35 billion next week in what looks set to be a record-breaking [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp). In order to make history, it needs to eclipse Saudi Aramco's $29.4 billion IPO earlier this year. The fintech company affiliated with e-commerce giant Alibaba Group will go public via a dual-listing in Shanghai and Hong Kong on Nov. 5. In each location, the Hong Kong Stock Exchange and Shanghai's Star Market, 1.67 billion new shares will be issued. This translates to 11% of the company. Ant is expected to have a market value of around $313 billion, as per the share prices chosen. Reports say investor response has been sensational, and the amount raised could increase by $5.2 billion if a 15% over-allotment or [greenshoe option](https://www.investopedia.com/terms/g/greenshoe.asp) is exercised. According to CNN Business, Ant is closing its Hong Kong institutional book building on Wednesday, a day earlier than scheduled, because of strong demand from global institutional investors. The Hong Kong shares were oversubscribed within the first hour of pricing. Alibaba founder Jack Ma's 8.8% stake in Ant will make him the 11th richest person in the world and solidify his position as the richest man in China with a net worth of $71.1 billion, according to Bloomberg. As of Oct. 26, he was in the 17th position globally, having added $14 billion to his fortune so far in 2020. Ant has reportedly raised some $20 billion since 2015, which represents more than a third of VC investment in China-based fintechs over the period, according to PitchBook data. Almost 40% of its revenue comes from its consumer credit business and 36% from digital payments. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Ant Group, a fintech affiliate of Alibaba, expects to raise $35 billionMarket value set to rise to $313 billion before greenshoe optionJack Ma will become 11th richest person in the world after IPO China’s Ant Group is poised to raise almost $35 billion next week in what looks set to be a record-breaking initial public offering (IPO). In order to make history, it needs to eclipse Saudi Aramco's $29.4 billion IPO earlier this year. The fintech company affiliated with e-commerce giant Alibaba Group will go public via a dual-listing in Shanghai and Hong Kong on Nov. 5. In each location, the Hong Kong Stock Exchange and Shanghai's Star Market, 1.67 billion new shares will be issued. This translates to 11% of the company. Ant is expected to have a market value of around $313 billion, as per the share prices chosen. Reports say investor response has been sensational, and the amount raised could increase by $5.2 billion if a 15% over-allotment or greenshoe option is exercised. According to CNN Business, Ant is closing its Hong Kong institutional book building on Wednesday, a day earlier than scheduled, because of strong demand from global institutional investors. The Hong Kong shares were oversubscribed within the first hour of pricing. Alibaba founder Jack Ma's 8.8% stake in Ant will make him the 11th richest person in the world and solidify his position as the richest man in China with a net worth of $71.1 billion, according to Bloomberg. As of Oct. 26, he was in the 17th position globally, having added $14 billion to his fortune so far in 2020. Ant has reportedly raised some $20 billion since 2015, which represents more than a third of VC investment in China-based fintechs over the period, according to PitchBook data. Almost 40% of its revenue comes from its consumer credit business and 36% from digital payments. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/terms/e/equity-linkednote.asp

Equity-Linked Note (ELN) Definition and Features

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-equity-linked-note-eln"></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 Equity-Linked Note (ELN)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An equity-linked note (ELN) is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity. ELNs can be structured in many different ways, but the vanilla version works like a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stripbond.asp">strip bond</a> combined with a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/calloption.asp">call option</a> on a specific security, a basket of securities or an index like the S&amp;P 500 or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">DJIA</a>. In the case of a note linked to an equity index, the security would typically be called an equity index-linked note. </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-equity-linked-notes"></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 Equity-Linked Notes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped. Even in the worst-case scenario, most equity-linked notes offer full principal protection. That is what makes this type of a structured product appealing to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskaverse.asp">risk-averse</a> investors who nevertheless have a bullish outlook on the market. That said, equity-linked notes only pay on maturity, so there is an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/opportunitycost.asp">opportunity cost</a> for locking in that money if only the principal is returned in the end. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-how-eln-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> How ELN Work </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In the simplest form, a $1,000 5-year equity-linked note could be structured to use $800 of the fund to buy a 5-year strip bond with a 4.5% yield-to-maturity and then invest and reinvest the other $200 in call options for the S&amp;P 500 over the 5-year life of the note. There is a chance that the options will expire worthless, in which case the investor gets back the $1,000 initially put in. If, however, the options appreciate in value with the S&amp;P 500, those returns are added to the $1,000 that will eventually be returned to the investor. </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-equity-linked-note-caps-participation-rates-and-leverage"></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"> Equity Linked Note Caps, Participation Rates, and Leverage </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In practice, an equity-linked note will have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/participationrate.asp">participation rate</a>, which is the percentage amount that the investor in the note participates in the appreciation of the underlying equity.<span class="ql-inline-citation" data-cite="1"></span> If the participation rate is 100%, then a 5% increase in the underlying is a 5% increase for the eventual payout on the note. However, the cost of structuring the ELN and managing it can lower the participation rate. In the case of a 75% participation rate, for example, a 5% appreciation in the underlying is only worth 3.75% to the investor.  </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"> Equity-linked notes can also use different structures and features. Some will use an averaging formula to smooth out returns on the equity-linked portion or a periodic cap that limits the ELN’s upside by realizing returns at a particular level on a regular basis. There are also types of equity-linked notes that use dynamic hedging instead of options, deploying leverage to increase returns from the underlying equity. Overall, equity-linked notes can be a powerful tool for investors who want to protect their principle while still having the potential upside of an equity investment. </p></div>

## What Is an Equity-Linked Note (ELN)? An equity-linked note (ELN) is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity. ELNs can be structured in many different ways, but the vanilla version works like a [strip bond](https://www.investopedia.com/terms/s/stripbond.asp) combined with a [call option](https://www.investopedia.com/terms/c/calloption.asp) on a specific security, a basket of securities or an index like the S&P 500 or [DJIA](https://www.investopedia.com/terms/d/djia.asp). In the case of a note linked to an equity index, the security would typically be called an equity index-linked note. ## Understanding Equity-Linked Notes Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped. Even in the worst-case scenario, most equity-linked notes offer full principal protection. That is what makes this type of a structured product appealing to [risk-averse](https://www.investopedia.com/terms/r/riskaverse.asp) investors who nevertheless have a bullish outlook on the market. That said, equity-linked notes only pay on maturity, so there is an [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) for locking in that money if only the principal is returned in the end. ## How ELN Work In the simplest form, a $1,000 5-year equity-linked note could be structured to use $800 of the fund to buy a 5-year strip bond with a 4.5% yield-to-maturity and then invest and reinvest the other $200 in call options for the S&P 500 over the 5-year life of the note. There is a chance that the options will expire worthless, in which case the investor gets back the $1,000 initially put in. If, however, the options appreciate in value with the S&P 500, those returns are added to the $1,000 that will eventually be returned to the investor. ## Equity Linked Note Caps, Participation Rates, and Leverage In practice, an equity-linked note will have a [participation rate](https://www.investopedia.com/terms/p/participationrate.asp), which is the percentage amount that the investor in the note participates in the appreciation of the underlying equity. If the participation rate is 100%, then a 5% increase in the underlying is a 5% increase for the eventual payout on the note. However, the cost of structuring the ELN and managing it can lower the participation rate. In the case of a 75% participation rate, for example, a 5% appreciation in the underlying is only worth 3.75% to the investor.  Equity-linked notes can also use different structures and features. Some will use an averaging formula to smooth out returns on the equity-linked portion or a periodic cap that limits the ELN’s upside by realizing returns at a particular level on a regular basis. There are also types of equity-linked notes that use dynamic hedging instead of options, deploying leverage to increase returns from the underlying equity. Overall, equity-linked notes can be a powerful tool for investors who want to protect their principle while still having the potential upside of an equity investment.

What Is an Equity-Linked Note (ELN)? An equity-linked note (ELN) is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity. ELNs can be structured in many different ways, but the vanilla version works like a strip bond combined with a call option on a specific security, a basket of securities or an index like the S&P 500 or DJIA. In the case of a note linked to an equity index, the security would typically be called an equity index-linked note. Understanding Equity-Linked Notes Equity-linked notes provide a way for investors to protect their capital while also getting the potential for an above-average return compared to regular bonds. In theory, the upside potential for returns in an equity-linked note is unlimited, whereas the downside risk is capped. Even in the worst-case scenario, most equity-linked notes offer full principal protection. That is what makes this type of a structured product appealing to risk-averse investors who nevertheless have a bullish outlook on the market. That said, equity-linked notes only pay on maturity, so there is an opportunity cost for locking in that money if only the principal is returned in the end. How ELN Work In the simplest form, a $1,000 5-year equity-linked note could be structured to use $800 of the fund to buy a 5-year strip bond with a 4.5% yield-to-maturity and then invest and reinvest the other $200 in call options for the S&P 500 over the 5-year life of the note. There is a chance that the options will expire worthless, in which case the investor gets back the $1,000 initially put in. If, however, the options appreciate in value with the S&P 500, those returns are added to the $1,000 that will eventually be returned to the investor. Equity Linked Note Caps, Participation Rates, and Leverage In practice, an equity-linked note will have a participation rate, which is the percentage amount that the investor in the note participates in the appreciation of the underlying equity. If the participation rate is 100%, then a 5% increase in the underlying is a 5% increase for the eventual payout on the note. However, the cost of structuring the ELN and managing it can lower the participation rate. In the case of a 75% participation rate, for example, a 5% appreciation in the underlying is only worth 3.75% to the investor.  Equity-linked notes can also use different structures and features. Some will use an averaging formula to smooth out returns on the equity-linked portion or a periodic cap that limits the ELN’s upside by realizing returns at a particular level on a regular basis. There are also types of equity-linked notes that use dynamic hedging instead of options, deploying leverage to increase returns from the underlying equity. Overall, equity-linked notes can be a powerful tool for investors who want to protect their principle while still having the potential upside of an equity investment.

https://www.investopedia.com/personal-financial-management-pfm-5181311

What Is Personal Finance Management (PFM), How Is It Used?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-personal-financial-management-pfm"></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 Personal Financial Management (PFM)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> While the moniker “personal financial management” is often used to refer to ways of managing 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>, it is also an actual term often known by its acronym, PFM, and refers to the type of software used for personal finance apps. PFM has been around since 1983 when Intuit co-founder Scott Cook grew tired of watching his wife struggle with all the paperwork involved in paying bills by hand.<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_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> He started to explore how to simplify, or automate, the process. On his way to hang a notice seeking a programmer at Stanford University, he fortuitously ran into Tom Proulx, who had done some programming and agreed to write a simple check-balancing program for Cook that became an early version of the personal finance software program Quicken. </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"> And that’s how Intuit (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTU">INTU</a>) was born. The company started by building out Quicken, but it was a crowded field. Cook and Proulx weren’t the only ones seeking a solution to the frustration of juggling all that bill-paying paperwork.<span class="ql-inline-citation" data-cite="13"></span> When Quicken launched, there were already 46 other personal finance products out there, but many were clunky and not easy to use.<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_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Quicken’s biggest selling point was its ease of use. Because it literally mimicked a paper check, the software became widely accessible to anyone who ever had to pay a bill by check. What finally pushed Quicken to the front of the pack was a combination of positive reviews of its Apple version, a direct marketing approach, and stellar customer service. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Personal financial management, or PFM, is the term used to describe the software that powers many different personal finance and mobile banking tools.</li><li>Since it first took off in 1983, the software has evolved and expanded beyond its initial purpose to declutter and simplify bill paying.</li><li>As customer behavior and customer needs evolve, so will PFM software and the apps that it powers.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-personal-financial-management-pfm"></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 Personal Financial Management (PFM) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Creating a software product that mimicked a hard-copy product allowed Quicken to draw in customers, and tuning into other ways that customers were using the product allowed it to keep evolving. That was a critical key to its success. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> For example, once the company found that a third of its customers were using the software for business expenses, Intuit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/031215/quickbooks-vs-quicken.asp">pushed out what has become today’s Quickbooks</a>—a version of Quicken that focuses on tracking those expenses. It also created a feature that allowed customers to download their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage</a> statements and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/your-annual-financial-planning-check-list.asp">incorporate them into financial planning</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"> That set the stage for other PFM products to become part of a growing abundance of personal finance tools available today. They include ones focused on tracking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a> (think Credit Karma), ones that allow individual investors to trade for their own account (think Robinhood), and ones focused on tracking spending and bill paying (think Prism). PFM is the software that powers these apps, as well as many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mobile-banking.asp">mobile banking</a> tools. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Quickbooks integrates with TurboTax, allowing those who are self-employed to import their financial information to file their taxes.</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_21-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Banking and finance apps may share PFM software, but they are not all built the same. It’s important to define what your needs are to ensure that you are using the right system. Some of these apps have free versions, although many have subscriptions to access more advanced features. Some are built for Windows, some are built for Macs, and some live in the cloud. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> While mobile banking can help with bill paying, tracking deposits/withdrawals, and transferring funds between accounts, personal finance apps are often built with more comprehensive money management tools and a greater ability to personalize features. Many not only allow you to pay bills and track deposits/withdrawals but also include broader options that give you the flexibility to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/040115/do-i-need-personal-accountant.asp">take more control of your financial management goals</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">Personal finance apps</a> have evolved to become much more user friendly and targeted to customers’ needs. Overall, these apps will allow you to be more organized with your finances. At the simplest level, they will help you track your budget/spending and ensure that you pay your bills on time. If you have broader needs, then there are most likely apps for them, too—or soon will be. </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"> This list is by no means exhaustive, but it provides an overview of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.thebalancemoney.com:443/best-personal-finance-software-4171938" rel="nofollow">top eight personal finance apps</a> as ranked by Investopedia sister site The Balance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li>Best Overall: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.quicken.com/" rel="sponsored nofollow">Quicken</a></li> <li>Best for Budgeting: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.mint.com/" rel="sponsored nofollow">Mint</a></li> <li>Best for Habit Building: <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.youneedabudget.com/" rel="sponsored nofollow">YNAB</a></li> <li>Best for Zero-Based Budgeting: <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.mvelopes.com/" rel="sponsored nofollow">Mvelopes</a></li> <li>Best for Taxes: <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://turbotax.intuit.com/" rel="sponsored nofollow">TurboTax</a></li> <li>Best for Investing: <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.futureadvisor.com/" rel="sponsored nofollow">FutureAdvisor</a></li> <li>Best for Investment Advice: <a data-affiliate-link-rewriter="subid1=${DOC_ID}&amp;subid2=${REQUEST_ID}" data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://personalcapital.sjv.io/c/328256/2034698/13439" rel="sponsored nofollow">Empower (Formerly Personal Capital)</a></li> <li>Best for Spreadsheet Management: <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="externalLink" href="https://www.tillerhq.com/">Tiller Money</a></li> </ul></div>

## What Is Personal Financial Management (PFM)? While the moniker “personal financial management” is often used to refer to ways of managing your [personal finances](https://www.investopedia.com/terms/p/personalfinance.asp), it is also an actual term often known by its acronym, PFM, and refers to the type of software used for personal finance apps. PFM has been around since 1983 when Intuit co-founder Scott Cook grew tired of watching his wife struggle with all the paperwork involved in paying bills by hand. He started to explore how to simplify, or automate, the process. On his way to hang a notice seeking a programmer at Stanford University, he fortuitously ran into Tom Proulx, who had done some programming and agreed to write a simple check-balancing program for Cook that became an early version of the personal finance software program Quicken. And that’s how Intuit ([INTU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTU)) was born. The company started by building out Quicken, but it was a crowded field. Cook and Proulx weren’t the only ones seeking a solution to the frustration of juggling all that bill-paying paperwork. When Quicken launched, there were already 46 other personal finance products out there, but many were clunky and not easy to use. Quicken’s biggest selling point was its ease of use. Because it literally mimicked a paper check, the software became widely accessible to anyone who ever had to pay a bill by check. What finally pushed Quicken to the front of the pack was a combination of positive reviews of its Apple version, a direct marketing approach, and stellar customer service. ### Key Takeaways * Personal financial management, or PFM, is the term used to describe the software that powers many different personal finance and mobile banking tools. * Since it first took off in 1983, the software has evolved and expanded beyond its initial purpose to declutter and simplify bill paying. * As customer behavior and customer needs evolve, so will PFM software and the apps that it powers. ## Understanding Personal Financial Management (PFM) Creating a software product that mimicked a hard-copy product allowed Quicken to draw in customers, and tuning into other ways that customers were using the product allowed it to keep evolving. That was a critical key to its success. For example, once the company found that a third of its customers were using the software for business expenses, Intuit [pushed out what has become today’s Quickbooks](https://www.investopedia.com/articles/personal-finance/031215/quickbooks-vs-quicken.asp)—a version of Quicken that focuses on tracking those expenses. It also created a feature that allowed customers to download their [brokerage](https://www.investopedia.com/terms/b/brokerage-company.asp) statements and [incorporate them into financial planning](https://www.investopedia.com/articles/personal-finance/your-annual-financial-planning-check-list.asp). That set the stage for other PFM products to become part of a growing abundance of personal finance tools available today. They include ones focused on tracking [credit scores](https://www.investopedia.com/terms/c/credit_score.asp) (think Credit Karma), ones that allow individual investors to trade for their own account (think Robinhood), and ones focused on tracking spending and bill paying (think Prism). PFM is the software that powers these apps, as well as many [mobile banking](https://www.investopedia.com/terms/m/mobile-banking.asp) tools. ### Quickbooks integrates with TurboTax, allowing those who are self-employed to import their financial information to file their taxes. ## Special Considerations Banking and finance apps may share PFM software, but they are not all built the same. It’s important to define what your needs are to ensure that you are using the right system. Some of these apps have free versions, although many have subscriptions to access more advanced features. Some are built for Windows, some are built for Macs, and some live in the cloud. While mobile banking can help with bill paying, tracking deposits/withdrawals, and transferring funds between accounts, personal finance apps are often built with more comprehensive money management tools and a greater ability to personalize features. Many not only allow you to pay bills and track deposits/withdrawals but also include broader options that give you the flexibility to [take more control of your financial management goals](https://www.investopedia.com/articles/personal-finance/040115/do-i-need-personal-accountant.asp). [Personal finance apps](https://www.investopedia.com/best-budgeting-apps-5085405) have evolved to become much more user friendly and targeted to customers’ needs. Overall, these apps will allow you to be more organized with your finances. At the simplest level, they will help you track your budget/spending and ensure that you pay your bills on time. If you have broader needs, then there are most likely apps for them, too—or soon will be. This list is by no means exhaustive, but it provides an overview of the [top eight personal finance apps](https://www.thebalancemoney.com:443/best-personal-finance-software-4171938) as ranked by Investopedia sister site The Balance. * Best Overall: [Quicken](https://www.quicken.com/) * Best for Budgeting: [Mint](https://www.mint.com/) * Best for Habit Building: [YNAB](https://www.youneedabudget.com/) * Best for Zero-Based Budgeting: [Mvelopes](https://www.mvelopes.com/) * Best for Taxes: [TurboTax](https://turbotax.intuit.com/) * Best for Investing: [FutureAdvisor](https://www.futureadvisor.com/) * Best for Investment Advice: [Empower (Formerly Personal Capital)](https://personalcapital.sjv.io/c/328256/2034698/13439) * Best for Spreadsheet Management: [Tiller Money](https://www.tillerhq.com/)

What Is Personal Financial Management (PFM)? While the moniker “personal financial management” is often used to refer to ways of managing your personal finances, it is also an actual term often known by its acronym, PFM, and refers to the type of software used for personal finance apps. PFM has been around since 1983 when Intuit co-founder Scott Cook grew tired of watching his wife struggle with all the paperwork involved in paying bills by hand. He started to explore how to simplify, or automate, the process. On his way to hang a notice seeking a programmer at Stanford University, he fortuitously ran into Tom Proulx, who had done some programming and agreed to write a simple check-balancing program for Cook that became an early version of the personal finance software program Quicken. And that’s how Intuit (INTU) was born. The company started by building out Quicken, but it was a crowded field. Cook and Proulx weren’t the only ones seeking a solution to the frustration of juggling all that bill-paying paperwork. When Quicken launched, there were already 46 other personal finance products out there, but many were clunky and not easy to use. Quicken’s biggest selling point was its ease of use. Because it literally mimicked a paper check, the software became widely accessible to anyone who ever had to pay a bill by check. What finally pushed Quicken to the front of the pack was a combination of positive reviews of its Apple version, a direct marketing approach, and stellar customer service. Key Takeaways Personal financial management, or PFM, is the term used to describe the software that powers many different personal finance and mobile banking tools.Since it first took off in 1983, the software has evolved and expanded beyond its initial purpose to declutter and simplify bill paying.As customer behavior and customer needs evolve, so will PFM software and the apps that it powers. Understanding Personal Financial Management (PFM) Creating a software product that mimicked a hard-copy product allowed Quicken to draw in customers, and tuning into other ways that customers were using the product allowed it to keep evolving. That was a critical key to its success. For example, once the company found that a third of its customers were using the software for business expenses, Intuit pushed out what has become today’s Quickbooks—a version of Quicken that focuses on tracking those expenses. It also created a feature that allowed customers to download their brokerage statements and incorporate them into financial planning. That set the stage for other PFM products to become part of a growing abundance of personal finance tools available today. They include ones focused on tracking credit scores (think Credit Karma), ones that allow individual investors to trade for their own account (think Robinhood), and ones focused on tracking spending and bill paying (think Prism). PFM is the software that powers these apps, as well as many mobile banking tools. Quickbooks integrates with TurboTax, allowing those who are self-employed to import their financial information to file their taxes. Special Considerations Banking and finance apps may share PFM software, but they are not all built the same. It’s important to define what your needs are to ensure that you are using the right system. Some of these apps have free versions, although many have subscriptions to access more advanced features. Some are built for Windows, some are built for Macs, and some live in the cloud. While mobile banking can help with bill paying, tracking deposits/withdrawals, and transferring funds between accounts, personal finance apps are often built with more comprehensive money management tools and a greater ability to personalize features. Many not only allow you to pay bills and track deposits/withdrawals but also include broader options that give you the flexibility to take more control of your financial management goals. Personal finance apps have evolved to become much more user friendly and targeted to customers’ needs. Overall, these apps will allow you to be more organized with your finances. At the simplest level, they will help you track your budget/spending and ensure that you pay your bills on time. If you have broader needs, then there are most likely apps for them, too—or soon will be. This list is by no means exhaustive, but it provides an overview of the top eight personal finance apps as ranked by Investopedia sister site The Balance. Best Overall: Quicken Best for Budgeting: Mint Best for Habit Building: YNAB Best for Zero-Based Budgeting: Mvelopes Best for Taxes: TurboTax Best for Investing: FutureAdvisor Best for Investment Advice: Empower (Formerly Personal Capital) Best for Spreadsheet Management: Tiller Money

https://www.investopedia.com/investing/introduction-to-money-market-mutual-funds/

Introduction To Money Market Mutual 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"><span class="heading-toc" id="toc-what-is-a-money-market-mutual-fund"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is a Money Market Mutual Fund? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Investors interested in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp" rel="noopener noreferrer">money market</a> can access it most easily through money market mutual funds. However, smaller investors still need a rudimentary understanding of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp" rel="noopener noreferrer">Treasury bills</a>, commercial paper, bankers' acceptances, repurchase agreements, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp" rel="noopener noreferrer">certificates of deposit</a> (CDs) that make up the bulk of money market mutual fund portfolios. In this article, we show you how money market funds work and how they can benefit you. </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 money market mutual fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents.</li><li>Though not exactly as safe as cash, money market funds are considered extremely low risk on the investment spectrum and thus carry close to the risk-free rate of return.</li><li>A money market fund generates income (taxable or tax-free, depending on its portfolio) but little capital appreciation.</li><li>Money market funds invest in a variety of similar instruments, while money market accounts exist in a single offering held at a bank or credit union and insured by the FDIC.<span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-money-market-mutual-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding Money Market Mutual Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> An important delineation to understand is the difference between money market funds and money market accounts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-subheading__text"> Money Market Funds vs. Money Market Accounts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Unlike cash and even <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cds-vs-mutual-funds-5225344">typical CDs</a>, money market mutual funds are not insured by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation</a> (FDIC). There is always a risk, though extremely small, that the investor could lose money. Put another way, the crucial difference between money market funds and money market accounts is that the former is sponsored by fund companies and carry no guarantee of principal. Money market accounts, on the other hand, are interest-earning savings accounts that offer limited transaction privileges and are offered by financial institutions insured up to a certain limit.<span class="ql-inline-citation" data-cite="1"></span>  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Money market accounts usually pay a higher interest rate than a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp">passbook savings account</a> but generally a slightly lower interest rate than a CD or the total return of a money market fund. Money market accounts also tend to restrict the accessibility of account balances through check writing while money market fund withdrawals are typically available on demand.  </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"> Money market funds are often called "money funds" or "money market <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>" and should, therefore, not be confused with the similar-sounding money market deposit accounts offered by banks in the United States. The major difference is that money market funds are assets held by a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">brokerage</a>, or possibly a bank, whereas money market deposit accounts are liabilities for a bank. The bank can invest the money at its discretion and potentially in (riskier) investments other than money market securities. In a money market fund, investors are buying securities, and the brokerage is holding them. In a money market deposit account, investors are depositing money in the bank, and the bank is investing that money for itself and paying the investor the agreed-upon return.<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"> The Purpose of Money Market Mutual Funds for Investors </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There are three instances when money market mutual funds, because of their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>, are particularly suitable investments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> <li>Money market mutual funds offer a convenient parking place for cash reserves when an investor is not quite ready to invest or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. This means that investors will have an expected sum of cash at the very moment that they need it.</li> <li>An investor holding a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basket.asp">basket</a> of mutual funds from a single fund company may occasionally want to transfer assets from one fund to another. If, however, the investor wants to sell a fund before deciding on another fund to purchase, a money market mutual fund offered by the same fund company may be a wise place to park the sale proceeds. Then, at the appropriate time, the investor may exchange their money market mutual fund holdings for shares of the other funds in the fund family.</li> <li>To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments.</li> </ol> <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-operational-details-of-money-market-mutual-funds"></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"> Operational Details of Money Market Mutual Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Money market mutual funds are designed to offer features suited to the needs of small investors. Minimum initial investments generally range from $500 to $5,000. </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"> Investors can purchase shares in money market mutual funds directly from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp" rel="noopener noreferrer">brokerage companies</a> or mutual fund firms, just as they would purchase shares in a stock or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityfund.asp" rel="noopener noreferrer">equity mutual fund</a>. As investment advisors, some banks also sell money market funds, and some even have their own proprietary funds that offer money market investment opportunities. </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"> Money market mutual funds also offer some simplified withdrawal features that are more generally associated with bank or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp" rel="noopener noreferrer">trust</a> accounts. For example, money market funds allow investors to withdraw assets by writing checks, with a typical minimum amount of $500 per check. If the investor does not want to write a check as a means of withdrawing funds, they can easily redeem shares by requesting payment by mail or by remittance via <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wiretransfer.asp" rel="noopener noreferrer">wire transfer</a> to their bank account. </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"> Categories of Money Market Mutual Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Money market mutual funds may contain a specific type of money market <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> or a combination of securities across a wide spectrum: </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>One particular type of fund limits its asset purchases to U.S. Treasury securities.</li> <li>Another class of money market funds purchases both U.S. government securities and investments in various <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agencysecurities.asp">government-sponsored enterprises</a> (GSEs).</li> <li>The third and largest class of money market mutual funds invests in a variety of money market instruments that offer the highest degree of security.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Another important <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071615/what-are-some-examples-money-market-funds.asp">categorization for money market mutual funds</a> relates to their taxable or tax-exempt status. Taxable funds invest in securities such as Treasury bills and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialpaper.asp">commercial paper</a>, the interest income on which is subject to federal taxation. Tax-exempt funds invest exclusively in securities issued by state and local governments and, therefore, are exempt from federal taxation. Tax-exempt funds appeal to investors in higher federal <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxbracket.asp">tax brackets</a> who seek tax savings on the interest income generated by their portfolios. </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"> Tax-exempt money market mutual funds can offer a triple-whammy tax reprieve for some investors. Some tax-exempt funds purchase only securities issued by governments within a particular state. If an investor can find such a fund for their home state, their interest income may be exempt from federal, state, and perhaps even local income taxes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_37-0"> <span class="mntl-sc-block-subheading__text"> Cash vs. Money Market Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Most analysts treat money market accounts like cash. When calculating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-ratios-4689817" rel="noopener noreferrer">financial ratios</a>, money market securities and fund balances are added to cash balances. This is because the financial instruments that make up money market funds are considered highly liquid, meaning that they can be converted into cash quickly. In addition to being highly liquid, money market funds exhibit less volatility and are less prone to market fluctuations and interest rate risk than other investments.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_40-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_41-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$1</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The target par value of a share of most money market mutual funds.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Money market funds seek stability and security with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/invest-for-short-term-and-long-term-goals-8347417">the goal of never losing money</a> and keeping <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset value</a> (NAV) at $1. This one-buck NAV baseline gives rise to the phrase <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breaking-the-buck.asp">break the buck</a>, meaning that if the value falls below the $1 NAV level, some of the original investment is gone, and investors will lose money. </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"> This only happens very rarely, but because money market funds are not FDIC-insured, they can lose money.<span class="ql-inline-citation" data-cite="1"></span> For instance, at the height of the 2008 market crash, several money market funds traded for less than $1 per share. The day after Lehman Brothers filed for bankruptcy, <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">one money market fund fell to 97 cents</a> after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck.<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_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"> Special Considerations: Money Market Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Just as equity and fixed-income mutual funds have greatly simplified the world of investing, money market mutual funds have made money market investing accessible to individual retail investors. Money market mutual funds are among the safest and most liquid generally available <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstrument.asp" rel="noopener noreferrer">financial instruments</a>. Moreover, money market funds offer modest initial investment requirements and provide simple procedures for withdrawing funds by check or transfer to a bank account. Finally, if they <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/042516/3-best-government-money-market-funds-cpfxx-spaxx.asp" rel="noopener noreferrer">choose carefully</a>, purchasers of certain tax-exempt money market funds may also enjoy relief from federal, state, and even local taxes. </p></div>

## What Is a Money Market Mutual Fund? Investors interested in the [money market](https://www.investopedia.com/terms/m/moneymarket.asp) can access it most easily through money market mutual funds. However, smaller investors still need a rudimentary understanding of the [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), commercial paper, bankers' acceptances, repurchase agreements, and [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CDs) that make up the bulk of money market mutual fund portfolios. In this article, we show you how money market funds work and how they can benefit you. ### Key Takeaways * A money market mutual fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. * Though not exactly as safe as cash, money market funds are considered extremely low risk on the investment spectrum and thus carry close to the risk-free rate of return. * A money market fund generates income (taxable or tax-free, depending on its portfolio) but little capital appreciation. * Money market funds invest in a variety of similar instruments, while money market accounts exist in a single offering held at a bank or credit union and insured by the FDIC. ## Understanding Money Market Mutual Funds An important delineation to understand is the difference between money market funds and money market accounts. ### Money Market Funds vs. Money Market Accounts Unlike cash and even [typical CDs](https://www.investopedia.com/cds-vs-mutual-funds-5225344), money market mutual funds are not insured by the [Federal Deposit Insurance Corporation](https://www.investopedia.com/terms/f/fdic.asp) (FDIC). There is always a risk, though extremely small, that the investor could lose money. Put another way, the crucial difference between money market funds and money market accounts is that the former is sponsored by fund companies and carry no guarantee of principal. Money market accounts, on the other hand, are interest-earning savings accounts that offer limited transaction privileges and are offered by financial institutions insured up to a certain limit.  Money market accounts usually pay a higher interest rate than a [passbook savings account](https://www.investopedia.com/articles/personal-finance/090314/4-savings-accounts-investors.asp) but generally a slightly lower interest rate than a CD or the total return of a money market fund. Money market accounts also tend to restrict the accessibility of account balances through check writing while money market fund withdrawals are typically available on demand.  Money market funds are often called "money funds" or "money market [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp)" and should, therefore, not be confused with the similar-sounding money market deposit accounts offered by banks in the United States. The major difference is that money market funds are assets held by a [brokerage](https://www.investopedia.com/terms/b/broker.asp), or possibly a bank, whereas money market deposit accounts are liabilities for a bank. The bank can invest the money at its discretion and potentially in (riskier) investments other than money market securities. In a money market fund, investors are buying securities, and the brokerage is holding them. In a money market deposit account, investors are depositing money in the bank, and the bank is investing that money for itself and paying the investor the agreed-upon return. ### The Purpose of Money Market Mutual Funds for Investors There are three instances when money market mutual funds, because of their [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), are particularly suitable investments. 1. Money market mutual funds offer a convenient parking place for cash reserves when an investor is not quite ready to invest or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. This means that investors will have an expected sum of cash at the very moment that they need it. 2. An investor holding a [basket](https://www.investopedia.com/terms/b/basket.asp) of mutual funds from a single fund company may occasionally want to transfer assets from one fund to another. If, however, the investor wants to sell a fund before deciding on another fund to purchase, a money market mutual fund offered by the same fund company may be a wise place to park the sale proceeds. Then, at the appropriate time, the investor may exchange their money market mutual fund holdings for shares of the other funds in the fund family. 3. To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments. ## Operational Details of Money Market Mutual Funds Money market mutual funds are designed to offer features suited to the needs of small investors. Minimum initial investments generally range from $500 to $5,000. Investors can purchase shares in money market mutual funds directly from [brokerage companies](https://www.investopedia.com/terms/b/brokerage-company.asp) or mutual fund firms, just as they would purchase shares in a stock or [equity mutual fund](https://www.investopedia.com/terms/e/equityfund.asp). As investment advisors, some banks also sell money market funds, and some even have their own proprietary funds that offer money market investment opportunities. Money market mutual funds also offer some simplified withdrawal features that are more generally associated with bank or [trust](https://www.investopedia.com/terms/t/trust.asp) accounts. For example, money market funds allow investors to withdraw assets by writing checks, with a typical minimum amount of $500 per check. If the investor does not want to write a check as a means of withdrawing funds, they can easily redeem shares by requesting payment by mail or by remittance via [wire transfer](https://www.investopedia.com/terms/w/wiretransfer.asp) to their bank account. ### Categories of Money Market Mutual Funds Money market mutual funds may contain a specific type of money market [security](https://www.investopedia.com/terms/s/security.asp) or a combination of securities across a wide spectrum: * One particular type of fund limits its asset purchases to U.S. Treasury securities. * Another class of money market funds purchases both U.S. government securities and investments in various [government-sponsored enterprises](https://www.investopedia.com/terms/a/agencysecurities.asp) (GSEs). * The third and largest class of money market mutual funds invests in a variety of money market instruments that offer the highest degree of security. Another important [categorization for money market mutual funds](https://www.investopedia.com/ask/answers/071615/what-are-some-examples-money-market-funds.asp) relates to their taxable or tax-exempt status. Taxable funds invest in securities such as Treasury bills and [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp), the interest income on which is subject to federal taxation. Tax-exempt funds invest exclusively in securities issued by state and local governments and, therefore, are exempt from federal taxation. Tax-exempt funds appeal to investors in higher federal [tax brackets](https://www.investopedia.com/terms/t/taxbracket.asp) who seek tax savings on the interest income generated by their portfolios. Tax-exempt money market mutual funds can offer a triple-whammy tax reprieve for some investors. Some tax-exempt funds purchase only securities issued by governments within a particular state. If an investor can find such a fund for their home state, their interest income may be exempt from federal, state, and perhaps even local income taxes. ### Cash vs. Money Market Funds Most analysts treat money market accounts like cash. When calculating [financial ratios](https://www.investopedia.com/financial-ratios-4689817), money market securities and fund balances are added to cash balances. This is because the financial instruments that make up money market funds are considered highly liquid, meaning that they can be converted into cash quickly. In addition to being highly liquid, money market funds exhibit less volatility and are less prone to market fluctuations and interest rate risk than other investments.  ### $1 The target par value of a share of most money market mutual funds. Money market funds seek stability and security with [the goal of never losing money](https://www.investopedia.com/invest-for-short-term-and-long-term-goals-8347417) and keeping [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) at $1. This one-buck NAV baseline gives rise to the phrase [break the buck](https://www.investopedia.com/terms/b/breaking-the-buck.asp), meaning that if the value falls below the $1 NAV level, some of the original investment is gone, and investors will lose money. This only happens very rarely, but because money market funds are not FDIC-insured, they can lose money. For instance, at the height of the 2008 market crash, several money market funds traded for less than $1 per share. The day after Lehman Brothers filed for bankruptcy, [one money market fund fell to 97 cents](https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp) after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck. ### Special Considerations: Money Market Funds Just as equity and fixed-income mutual funds have greatly simplified the world of investing, money market mutual funds have made money market investing accessible to individual retail investors. Money market mutual funds are among the safest and most liquid generally available [financial instruments](https://www.investopedia.com/terms/f/financialinstrument.asp). Moreover, money market funds offer modest initial investment requirements and provide simple procedures for withdrawing funds by check or transfer to a bank account. Finally, if they [choose carefully](https://www.investopedia.com/articles/investing/042516/3-best-government-money-market-funds-cpfxx-spaxx.asp), purchasers of certain tax-exempt money market funds may also enjoy relief from federal, state, and even local taxes.

What Is a Money Market Mutual Fund? Investors interested in the money market can access it most easily through money market mutual funds. However, smaller investors still need a rudimentary understanding of the Treasury bills, commercial paper, bankers' acceptances, repurchase agreements, and certificates of deposit (CDs) that make up the bulk of money market mutual fund portfolios. In this article, we show you how money market funds work and how they can benefit you. Key Takeaways A money market mutual fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents.Though not exactly as safe as cash, money market funds are considered extremely low risk on the investment spectrum and thus carry close to the risk-free rate of return.A money market fund generates income (taxable or tax-free, depending on its portfolio) but little capital appreciation.Money market funds invest in a variety of similar instruments, while money market accounts exist in a single offering held at a bank or credit union and insured by the FDIC. Understanding Money Market Mutual Funds An important delineation to understand is the difference between money market funds and money market accounts. Money Market Funds vs. Money Market Accounts Unlike cash and even typical CDs, money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC). There is always a risk, though extremely small, that the investor could lose money. Put another way, the crucial difference between money market funds and money market accounts is that the former is sponsored by fund companies and carry no guarantee of principal. Money market accounts, on the other hand, are interest-earning savings accounts that offer limited transaction privileges and are offered by financial institutions insured up to a certain limit.  Money market accounts usually pay a higher interest rate than a passbook savings account but generally a slightly lower interest rate than a CD or the total return of a money market fund. Money market accounts also tend to restrict the accessibility of account balances through check writing while money market fund withdrawals are typically available on demand.  Money market funds are often called "money funds" or "money market mutual funds" and should, therefore, not be confused with the similar-sounding money market deposit accounts offered by banks in the United States. The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank. The bank can invest the money at its discretion and potentially in (riskier) investments other than money market securities. In a money market fund, investors are buying securities, and the brokerage is holding them. In a money market deposit account, investors are depositing money in the bank, and the bank is investing that money for itself and paying the investor the agreed-upon return. The Purpose of Money Market Mutual Funds for Investors There are three instances when money market mutual funds, because of their liquidity, are particularly suitable investments. Money market mutual funds offer a convenient parking place for cash reserves when an investor is not quite ready to invest or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. This means that investors will have an expected sum of cash at the very moment that they need it. An investor holding a basket of mutual funds from a single fund company may occasionally want to transfer assets from one fund to another. If, however, the investor wants to sell a fund before deciding on another fund to purchase, a money market mutual fund offered by the same fund company may be a wise place to park the sale proceeds. Then, at the appropriate time, the investor may exchange their money market mutual fund holdings for shares of the other funds in the fund family. To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments. Operational Details of Money Market Mutual Funds Money market mutual funds are designed to offer features suited to the needs of small investors. Minimum initial investments generally range from $500 to $5,000. Investors can purchase shares in money market mutual funds directly from brokerage companies or mutual fund firms, just as they would purchase shares in a stock or equity mutual fund. As investment advisors, some banks also sell money market funds, and some even have their own proprietary funds that offer money market investment opportunities. Money market mutual funds also offer some simplified withdrawal features that are more generally associated with bank or trust accounts. For example, money market funds allow investors to withdraw assets by writing checks, with a typical minimum amount of $500 per check. If the investor does not want to write a check as a means of withdrawing funds, they can easily redeem shares by requesting payment by mail or by remittance via wire transfer to their bank account. Categories of Money Market Mutual Funds Money market mutual funds may contain a specific type of money market security or a combination of securities across a wide spectrum: One particular type of fund limits its asset purchases to U.S. Treasury securities. Another class of money market funds purchases both U.S. government securities and investments in various government-sponsored enterprises (GSEs). The third and largest class of money market mutual funds invests in a variety of money market instruments that offer the highest degree of security. Another important categorization for money market mutual funds relates to their taxable or tax-exempt status. Taxable funds invest in securities such as Treasury bills and commercial paper, the interest income on which is subject to federal taxation. Tax-exempt funds invest exclusively in securities issued by state and local governments and, therefore, are exempt from federal taxation. Tax-exempt funds appeal to investors in higher federal tax brackets who seek tax savings on the interest income generated by their portfolios. Tax-exempt money market mutual funds can offer a triple-whammy tax reprieve for some investors. Some tax-exempt funds purchase only securities issued by governments within a particular state. If an investor can find such a fund for their home state, their interest income may be exempt from federal, state, and perhaps even local income taxes. Cash vs. Money Market Funds Most analysts treat money market accounts like cash. When calculating financial ratios, money market securities and fund balances are added to cash balances. This is because the financial instruments that make up money market funds are considered highly liquid, meaning that they can be converted into cash quickly. In addition to being highly liquid, money market funds exhibit less volatility and are less prone to market fluctuations and interest rate risk than other investments.  $1 The target par value of a share of most money market mutual funds. Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase break the buck, meaning that if the value falls below the $1 NAV level, some of the original investment is gone, and investors will lose money. This only happens very rarely, but because money market funds are not FDIC-insured, they can lose money. For instance, at the height of the 2008 market crash, several money market funds traded for less than $1 per share. The day after Lehman Brothers filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck. Special Considerations: Money Market Funds Just as equity and fixed-income mutual funds have greatly simplified the world of investing, money market mutual funds have made money market investing accessible to individual retail investors. Money market mutual funds are among the safest and most liquid generally available financial instruments. Moreover, money market funds offer modest initial investment requirements and provide simple procedures for withdrawing funds by check or transfer to a bank account. Finally, if they choose carefully, purchasers of certain tax-exempt money market funds may also enjoy relief from federal, state, and even local taxes.

https://www.investopedia.com/chase-bank-review-4845620

Chase Bank Review

<div class="comp mntl-external-basic-sublayout-content sc-ad-container article-content" id="mntl-external-basic-sublayout-content_1-0"><div class="loc content-body"> <span class="comp external-content mntl-external-component" id="external-content_1-0"><div class="comp product-review-content product-review-content--finance product-review--base" id="product-review-content--finance_1-0"> <div class="comp js-toc-appear article-container article-intro mntl-block" id="article-intro_1-0"> <div class="comp product-card" data-tracking-container="true" data-tracking-id="product-card" id="product-card_1-0" style="--imgWidth: 0px"> <div class="product-card__content"> <div class="product-card__intro expert-content"> <figure class="comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image" id="product-card__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Chase Bank" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/UocAM9QVs7xMBu8_xOw2CRtlOKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEgAEAPMAAB0dHR8fHyAgICEhISIiIgB9zwB70QB70wB61AB90ZWVlZaWlpycnJ2dnf///x0dHSwAAAAAEgAEAEMIMgAdKHBAsKCDBQsaMGDg4AACBwIMOggQgOCAigQLODAAQGIAAgUxOkiwUaJJgwcOOAgIADs=')" width="1500"/> <noscript> <img alt="Chase Bank" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/UocAM9QVs7xMBu8_xOw2CRtlOKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg" width="1500"/> </noscript> </div> </div> <figcaption class="comp primary-image__figcap mntl-figure-caption figure-article-caption" id="primary-image__figcap_1-0"> <span class="figure-article-caption-owner"><p>Chase Bank</p></span> </figcaption><!-- end: comp primary-image__figcap mntl-figure-caption figure-article-caption --> </figure><!-- end: comp figure-article figure-2x1 product-card__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp js-sticky-riser-show product-card__cta commerce-block mntl-block" id="product-card__cta_1-0"> <a class="commerce-button mntl-text-link" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-tracking-container="false" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=942342.138&amp;type=3&amp;subid=0" id="commerce-button_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp js-sticky-riser-show product-card__cta commerce-block mntl-block --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0"> Chase Bank is a full-service bank with more than 4,700 branches and 16,000 ATMs. Its roots date back to 1799 in New York City when it was founded to supply drinking water to the city’s population. A small provision in its charter allowed for banking operations with surplus capital, and within five months, it opened a bank as the Bank of Manhattan Company. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_1-0-1"> In its long history, more than 1,200 institutions have come together to form the largest financial institution in the U.S. with $2.6 trillion in assets worldwide. This in-depth review of the online banking giant can help you decide if its deposit accounts are right for you. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> </div> <div class="tabbed-sc-block" data-click-action="Product Tab Click" data-tracking-container="true" data-tracking-id="Full Product Review"> <ul class="tabbed-sc-block__tabs"> <li class="tabbed-sc-block__tab js-tabbed-tab is-active is-initial-load" data-tab-index="1"><span class="tabbed-sc-block__title">Pros &amp; Cons</span></li> <li class="tabbed-sc-block__tab js-tabbed-tab" data-tab-index="2"><span class="tabbed-sc-block__title">Company Overview</span></li> </ul> <div class="tabbed-sc-block__heading js-tabbed-tab is-active is-initial-load js-single-tab-control" data-tab-index="1"> <span class="tabbed-sc-block__text">Pros &amp; Cons</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content is-active is-initial-load" data-tab-index="1"> <div class="comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist" id="mntl-sc-block_1-0-3"> <div class="prm-sc-block-comparisonlist__wrapper mntl-sc-block-comparisonlist__wrapper"> <span class="prm-sc-block-comparisonlist__heading mntl-sc-block-comparisonlist__heading">Pros</span> <ul class="prm-sc-block-comparisonlist__list mntl-sc-block-comparisonlist__list"> <li><p>Large footprint to service your banking needs</p></li> <li><p>Ability to waive checking fees</p></li> <li><p>Popular rewards credit cards with well-known brands</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>A limited number of branches in some states</p></li> <li><p>Minimum daily balance to waive fees</p></li> <li><p>Chase 5/24 Rule for credit cards</p></li> </ul> </div> </div><!-- end: comp mntl-sc-block prm-sc-block-comparisonlist mntl-sc-block-comparisonlist --> </div> <div class="tabbed-sc-block__heading js-tabbed-tab js-single-tab-control" data-tab-index="2"> <span class="tabbed-sc-block__text">Company Overview</span> </div> <div class="tabbed-sc-block__content js-tabbed-content expert-content" data-tab-index="2"> <div class="comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block" id="mntl-sc-block_1-0-5"> <div class="comp product-spec-tool definition-list" id="product-spec-tool_1-0"> <ul class="definition-list__container"> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Year Founded</span> <span class="definition-list__item-content definition-list__item-content-0"> 1799 </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.chase.com </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Banking Product Offerings</span> <span class="definition-list__item-content definition-list__item-content-2"> Savings, checking, CDs, credit cards, and much more </span> </span> </li> <li class="definition-list__item"> <span class="definition-list__item-content-container"> <span class="definition-list__item-title">Customer Service</span> <span class="definition-list__item-content definition-list__item-content-3"> Phone: hours and number vary with department. Account access online or via app 24/7. </span> </span> </li> </ul> </div><!-- end: comp product-spec-tool definition-list --> </div><!-- end: comp mntl-sc-block--product-spec-tool mntl-sc-block prm-sc-block-tool mntl-sc-block-tool mntl-block --> </div> </div> </div> </div><!-- end: comp product-card --> </div><!-- end: comp js-toc-appear article-container article-intro mntl-block --> <div class="loc body-content article-container"> <div class="comp article-body article-content mntl-block" id="article-content_1-0"> <div class="comp left-nav js-sticky-container product-review__left-nav mntl-block" id="product-review__left-nav_1-0"> <div class="comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block" data-desktop-bp="54em" data-tracking-container="true" id="product-review__toc_1-0"> <div class="comp sticky-toc-widget__product-container mntl-block" id="sticky-toc-widget__product-container_1-0"> <figure class="comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image" id="sticky-toc-widget__image_1-0"> <div class="primary-image__media"> <div class="img-placeholder" style="padding-bottom:50.0%;"> <img alt="Chase Bank" class="primary-image__image mntl-primary-image--blurry" height="750" onload="(function(e){e.classList.add('loaded')})(this)" src="https://www.investopedia.com/thmb/UocAM9QVs7xMBu8_xOw2CRtlOKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg" style="--blurry: url('data:image/gif;charset=utf-8;base64,R0lGODlhEgAEAPMAAB0dHR8fHyAgICEhISIiIgB9zwB70QB70wB61AB90ZWVlZaWlpycnJ2dnf///x0dHSwAAAAAEgAEAEMIMgAdKHBAsKCDBQsaMGDg4AACBwIMOggQgOCAigQLODAAQGIAAgUxOkiwUaJJgwcOOAgIADs=')" width="1500"/> <noscript> <img alt="Chase Bank" class="loaded primary-img--noscript primary-image__image mntl-primary-image--blurry" height="750" src="https://www.investopedia.com/thmb/UocAM9QVs7xMBu8_xOw2CRtlOKc=/fit-in/1500x750/filters:format(png):fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg" width="1500"/> </noscript> </div> </div> <figcaption class="comp primary-image__figcap mntl-figure-caption figure-article-caption" id="primary-image__figcap_2-0"> <span class="figure-article-caption-owner"><p>Chase Bank</p></span> </figcaption><!-- end: comp primary-image__figcap mntl-figure-caption figure-article-caption --> </figure><!-- end: comp figure-article sticky-toc-widget__image litho-figure-article mntl-universal-primary-image primary-image --> <div class="comp sticky-toc-widget__cta commerce-block mntl-block" id="sticky-toc-widget__cta_1-0"> <a class="commerce-button mntl-text-link" data-affiliate-link-rewriter="u1=${REQUEST_ID}-${DOC_ID}" data-tracking-container="false" href="https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&amp;offerid=942342.138&amp;type=3&amp;subid=0" id="commerce-button_2-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open Account</span></a><!-- end: commerce-button mntl-text-link --> </div><!-- end: comp sticky-toc-widget__cta commerce-block mntl-block --> </div><!-- end: comp sticky-toc-widget__product-container mntl-block --> <div class="comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block" data-chop-desktop="false" data-chop-mobile="false" data-desktop-bp="54em" data-tracking-container="true" id="sticky-toc-widget__toc_3-0"> <div class="comp toc-wrapper mntl-toc mntl-block" data-chop-mobile="true" data-offset="60" data-tracking-container="true" id="toc-wrapper_3-0"> <div class="comp mntl-toc__inner mntl-block" id="mntl-toc__inner_3-0"> <div class="comp js-toc-toggle mntl-toc__heading mntl-block" data-click-tracked="true" id="mntl-toc__heading_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_5-0"> Table of Contents</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> <div class="comp mntl-toc-toggle mntl-block" id="mntl-toc-toggle_3-0"> <button class="comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block" data-collapsed-text="Expand" data-expanded-text="View All" id="mntl-toc-toggle__btn_3-0"> View All</button><!-- end: comp js-mntl-toc-toggle mntl-toc-toggle__btn mntl-text-block --> </div><!-- end: comp mntl-toc-toggle mntl-block --> </div><!-- end: comp js-toc-toggle mntl-toc__heading mntl-block --> <div class="comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block" data-click-action="OnPageClick-Chase Bank Review" data-click-tracked="true" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" id="mntl-toc__mobile-toggle_3-0"> <span class="comp mntl-toc__heading-text mntl-text-block" id="mntl-toc__heading-text_6-0"> Chase Bank Review</span><!-- end: comp mntl-toc__heading-text mntl-text-block --> </div><!-- end: comp js-sticky-toggle mntl-toc__mobile-toggle mntl-block --> <ul class="comp mntl-toc__list-heading expert-content mntl-toc__list" id="mntl-toc__list_3-0"> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Pros Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-pros-explained" id="mntl-toc__list-item-link_3-0" rel="nocaes"><span class="link__wrapper">Pros Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-1"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-1"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Cons Explained" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-cons-explained" id="mntl-toc__list-item-link_3-0-1" rel="nocaes"><span class="link__wrapper">Cons Explained</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-2"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-2"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Best for" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-who-is-chase-bank-best-for" id="mntl-toc__list-item-link_3-0-2" rel="nocaes"><span class="link__wrapper">Best for</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-3"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-3"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Bank Offerings" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-what-does-chase-offer" id="mntl-toc__list-item-link_3-0-3" rel="nocaes"><span class="link__wrapper">Bank Offerings</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-4"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-4"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Other Products" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-other-financial-products-offered-by-chase-bank" id="mntl-toc__list-item-link_3-0-4" rel="nocaes"><span class="link__wrapper">Other Products</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-5"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-5"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Customer Service" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-chase-bank-customer-service" id="mntl-toc__list-item-link_3-0-5" rel="nocaes"><span class="link__wrapper">Customer Service</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-6"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-6"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-How to Bank" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-how-to-bank-with-chase-bank" id="mntl-toc__list-item-link_3-0-6" rel="nocaes"><span class="link__wrapper">How to Bank</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-7"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-7"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Final Verdict" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-final-verdict" id="mntl-toc__list-item-link_3-0-7" rel="nocaes"><span class="link__wrapper">Final Verdict</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> <li class="comp mntl-toc__list-item mntl-block" id="mntl-toc__list-item_3-0-8"> <div class="comp mntl-toc__list-item-heading mntl-block" id="mntl-toc__list-item-heading_3-0-8"> <a class="mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link" data-click-action="OnPageClick-Methodology" data-tracking-container="true" data-tracking-id="PRM Roundup | Table of Contents" href="#toc-methodology" id="mntl-toc__list-item-link_3-0-8" rel="nocaes"><span class="link__wrapper">Methodology</span></a><!-- end: mntl-toc__list-item-link mntl-text-link mntl-toc__list-item-link js-mntl-toc-link --> </div><!-- end: comp mntl-toc__list-item-heading mntl-block --> </li><!-- end: comp mntl-toc__list-item mntl-block --> </ul><!-- end: comp mntl-toc__list-heading expert-content mntl-toc__list --> </div><!-- end: comp mntl-toc__inner mntl-block --> </div><!-- end: comp toc-wrapper mntl-toc mntl-block --> </div><!-- end: comp sticky-toc-widget sticky-toc-widget__toc sticky-toc--finance sticky-toc--base mntl-sticky-toc mntl-block --> </div><!-- end: comp mntl-sticky-toc product-review__toc--finance product-review__toc sticky-toc-widget mntl-block --> </div><!-- end: comp left-nav js-sticky-container product-review__left-nav mntl-block --> <div class="comp mntl-sc-page--commerce expert-content product-review__content prm-sc-page mntl-sc-page mntl-block" data-tracking-container="true" id="product-review__content_1-0"> <span class="heading-toc" id="toc-pros-explained"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0"> <span class="mntl-sc-block-heading__text"> Pros Explained </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-1"> <li><strong>Large footprint to service your banking needs:</strong> Chase Bank has more than 4,700 retail branch locations throughout the United States. Additionally, customers may access 16,000 Chase Bank ATMs at no additional charge. If a Chase Bank branch or ATM is not nearby, customers can access their accounts online or through its mobile app.</li><li><strong>Ability to waive checking monthly fees:</strong> Customers can waive the monthly maintenance fee for a checking account by either depositing $500 into the account that month, or, maintaining a $1,500 minimum balance, or, having a combined beginning average balance of $5,000 in all linked Chase accounts.</li><li><strong>Popular rewards credit cards with well-known brands:</strong> Chase offers a total of 35 rewards credit cards from which to choose—26 personal and nine for small businesses. There are credit card options to meet your goal of cash back, travel rewards, or balance transfers.</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>A limited number of branches in some states: </strong>Some states are underserved by Chase Bank. Mississippi has only four branches, Vermont and Wyoming have two each, while Alaska has none.</li><li><strong>Minimum daily balance to waive fees:</strong> This may be harder to maintain compared with an average daily balance. If your balance falls below this minimum amount for one day during the month, you may be charged the monthly fee.</li><li><strong>5/24 Rule for credit cards:</strong> Chase Bank has an unwritten rule for credit card approvals that is one of the strictest in the industry. If you’ve opened more than five new credit cards at any bank in the past 24 months, you will not be approved for most of its credit cards.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-who-is-chase-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 Chase 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"> Chase Bank may be ideal for those who: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-6"> <li>Live in states where the bank has clusters of branches</li><li>Want a variety of deposit, lending, and investment options from one financial services company</li><li>Are able to maintain the minimum daily balance or complete qualifying activities to waive fees</li><li>Want to earn valuable rewards or cash back from their credit card purchases</li><li>Desire a bank relationship that can grow with them and offers premium features</li><li>Want the security of a large financial institution that has many branches and ATMs across the U.S.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <div class="comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_2-0-7"> <iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/ApSob/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Chase Bank Branches by State"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block --> </div><!-- end: comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block --> <span class="heading-toc" id="toc-what-does-chase-offer"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-8"> <span class="mntl-sc-block-heading__text"> What Does Chase 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_2-0-9"> As you might expect from a depository institution of its size, Chase Bank offers an extensive menu of accounts and services. Customers have access to multiple checking accounts, savings accounts, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificates of deposit (CDs)</a>, credit cards, and other lending products to meet their needs. The bank rewards customers who have multiple Chase products with better pricing and the ability to combine balances to waive fees. </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_2-0-10"> <span class="mntl-sc-block-subheading__text"> Checking Accounts </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11"> Customers have several checking account options with Chase Bank. Each account has monthly maintenance fees unless you meet the criteria to waive them. The three most common accounts are Chase Total Checking, Chase Premier Plus Checking, and Chase Sapphire Banking. </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"> The Premier Plus Checking account waives the non-Chase ATM fee charged by Chase up to four times each statement cycle. However, any fees charged by the ATM owner still apply. The Sapphire Banking account waives non-Chase ATM fees and reimburses the fees charged by other banks (with no frequency limit). </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13"> <strong>Chase also offers niche checking accounts that cater to specific audiences:</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-14"> <li>The Chase Secure Banking checking account has no minimum deposit, no paper checks, and does not charge for money orders or cashier’s checks.</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-student-bank-accounts-4799707">College students can get a free account</a> for up to five years while in school with the Chase College Checking account, and it is only $12 per month after that if you don’t waive the fee with qualifying activities.</li> <li>Active and veteran members of the military can open a Chase Premier Plus Checking account with no fees or minimum balance requirements.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15"> Certain customers may be interested in Chase Private Client. To qualify, you’ll need an average daily balance of $150,000 combined among your qualifying personal and business deposits and investments. Benefits include no membership fees, monthly service charges, ATM fees, wire fees, and more. Additionally, you’ll receive higher limits on Chase QuickDeposit, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/zelle-new-p2p-payment-app-pypl/">Zelle</a> payments, daily ATM withdrawals, and debit card purchases. </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_2-0-16"> <span class="mntl-sc-block-subheading__text"> Checking Account Fee Waivers </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_2-0-17"> Chase gives consumers a few ways to waive their monthly checking account fees. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-18"> <li><strong>Chase Total Checking:</strong> Make a direct deposit of $500 or more each month, or keep a daily beginning balance of at least $1,500, or maintain an average beginning day balance of at least $5,000 in this account and eligible linked accounts. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.</li><li><strong>Chase Premier Plus Checking:</strong> Maintain an average beginning day balance of at least $15,000 in this account and eligible linked accounts or a qualifying linked Chase mortgage enrolled in automatic payments from this account.</li><li><strong>Chase College Checking:</strong> No fees for five years while in college, then make a direct deposit each month or have an average ending day balance of at least $5,000. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.</li><li><strong>Chase Secure Banking:</strong> Mandatory monthly fee. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.</li><li><strong>Chase Sapphire Banking:</strong> Maintain an average beginning day balance of at least $75,000 across this account and eligible linked accounts. </li><li><strong>Chase Private Client Checking:</strong> Maintain an average beginning day balance of at least $150,000 across this account and eligible linked accounts.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-19"> <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">Chase Bank Checking Accounts</th> </tr> <tr> <th>Account Name</th> <th>Required Opening Deposit</th> <th>Monthly Fee</th> <th>Average Percentage Yield (APY)</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Chase Total Checking</td> <td>$0</td> <td>$12</td> <td>None</td> </tr> <tr> <td>Chase Premier Plus Checking</td> <td>$0</td> <td>$25</td> <td>0.01%</td> </tr> <tr> <td>Chase College Checking</td> <td>$0</td> <td>$12</td> <td>None</td> </tr> <tr> <td>Chase Secure Banking</td> <td>$0</td> <td>$4.95</td> <td>None</td> </tr> <tr> <td>Chase Sapphire Banking</td> <td>$0</td> <td>$25</td> <td>0.01%</td> </tr> <tr> <td>Chase Private Client Checking</td> <td>$0</td> <td>$35</td> <td>0.01%</td> </tr> </tbody> </table> <figcaption>As of March 18, 2024. Source: Chase Bank</figcaption> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-20"> <span class="mntl-sc-block-subheading__text"> Savings Accounts </span> </h3><!-- end: comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-21"> Chase Bank offers two traditional savings accounts. The Chase Savings account has only one interest rate for all balances, while the Chase Premier Savings account provides higher relationship rates for clients with larger balances. Customers who qualify for Chase Private Client status have access to the Chase Private Client Savings account, which also provides <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tiered-rate-account.asp">tiered interest rates</a> based on the balance in your account. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-22"> Chase gives consumers a few ways to waive their monthly savings account fees. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-23"> <li><strong>Chase Savings:</strong> Maintain a daily beginning balance of at least $300, maintain a monthly autosave of at least $25 from a Chase checking account, have the account linked to a Chase College Checking account (for overdraft protection), have the account linked to an eligible Chase checking account, or be 17 or younger.</li><li><strong>Chase Premier Savings:</strong> Maintain a daily beginning balance of at least $15,000 or be linked to a Chase Premier Plus or Sapphire checking account.</li><li><strong>Chase Private Client Savings:</strong> No monthly fees to waive because this account is only available to Chase Private Client members who have already met requirements related to the checking account and Chase Private Client.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-24"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="5">Chase Bank Savings Accounts</th> </tr> <tr> <th>Account Name</th> <th>Min. Opening Deposit</th> <th>Monthly Fee</th> <th>Annual Percentage Yield (APY)</th> <th>Relationship Pricing APY</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Chase Savings</td> <td>$0</td> <td>$5</td> <td>0.01%</td> <td>0.01%</td> </tr> <tr> <td>Chase Premier Savings</td> <td>$0</td> <td>$25</td> <td>0.01%</td> <td>0.02%</td> </tr> <tr> <td>Chase Private Client Savings</td> <td>$0</td> <td>None</td> <td>0.01%</td> <td>0.02%</td> </tr> </tbody> </table> <figcaption>As of March 18, 2024. Source: Chase Bank</figcaption> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-25"> <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_2-0-26"> Chase Bank offers multiple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-invest-with-cds-4795661">CD terms</a> ranging from one month to 10 years. Larger deposits may provide higher interest rates. Customers may choose to have their CD interest paid monthly, quarterly, semiannually, annually, or at maturity. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27"> To open a CD, a $1,000 minimum deposit is required. CDs may be opened online or in a branch. However, if you’d like to open a CD with a balance of $1 million or more, you must visit a branch and speak with a banker. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-28"> If you close your CD before the maturity date, you may incur a penalty: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29"> <li>For CDs with a term of less than six months, the early withdrawal penalty is 90 days of interest. </li><li>For CDs with terms of six months to less than 24 months, the penalty is 180 days of interest. </li><li>For CDs with terms of 24 months or more, the penalty is 365 days of interest. </li><li>For all terms, the penalty is not more than the interest earned during the current term of the CD. </li><li>The minimum penalty is seven days’ interest.</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <figure class="comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table" data-tracking-container="true" data-tracking-id="table-block" id="mntl-sc-block_2-0-30"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 109px;"></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">Chase Certificates Of Deposit Relationship Rates</th> </tr> <tr> <th>Term (Months)</th> <th>$1,000–$9,999</th> <th>$10,000–$24,999</th> <th>$100,000—$249,999</th> </tr> </thead> <tbody data-check="0"> <tr> <td>1-Month CDs</td> <td>0.02%</td> <td>0.02%</td> <td>0.02%</td> </tr> <tr> <td>3-Month CD to 12 Month CDs</td> <td>2.00%</td> <td>2.00%</td> <td>2.00%</td> </tr> <tr> <td>15-Month to 21-Month CDs</td> <td>2.50%</td> <td>2.50%</td> <td>2.50%</td> </tr> <tr> <td>24-Month CD</td> <td>2.50%</td> <td>2.50%</td> <td>2.50%</td> </tr> <tr> <td>30-Month CD</td> <td>2.50%</td> <td>2.50%</td> <td>2.50%</td> </tr> <tr> <td>36-Month CD</td> <td>2.50%</td> <td>2.50%</td> <td>2.50%</td> </tr> <tr> <td>42-Month to 120-Month CDs</td> <td>2.50%</td> <td>2.50%</td> <td>2.50%</td> </tr> </tbody> </table> <figcaption>As of March 18, 2024. Linked Chase personal checking account required. Source: Chase Bank</figcaption> </div></figure><!-- end: comp js-table-scroll sc-block-table--base sc-block-table--finance mntl-sc-block prm-sc-block-table--finance prm-sc-block-table mntl-sc-block-table --> <h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_2-0-31"> <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_2-0-32"> Chase Bank offers a wide range of credit cards to suit customers’ goals. Choices include cash-back and points-earning <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/credit-card-4689721">rewards credit cards</a> for personal accounts and small <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-business-banking-review-7556495">business customers</a>. The rewards credit cards include numerous co-branded options with airlines, hotels, and other partners. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-33"> Additionally, Chase offers its own proprietary rewards program: Chase Ultimate Rewards. You can redeem these points for travel or cash back, transfer them to airline and hotel partners, and more. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-34"> Here are the rewards cards available from Chase Bank: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-35"> <strong>General Travel Rewards Cards (Ultimate Rewards)</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-36"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-sapphire-preferred-credit-card-review-4795917">Chase Sapphire Preferred</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-sapphire-reserve-credit-card-review-4796328">Chase Sapphire Reserve</a></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-37"> <strong>Co-Branded Rewards Credit Cards</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-38"> <li>Aer Lingus Visa Signature</li> <li>Aeroplan® Card</li> <li>Amazon Prime Rewards Visa Card</li> <li>Amazon Rewards Visa Card</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/british-airways-visa-signature-credit-card-review-4799592">British Airways Visa Signature</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/disney-premier-visa-review-4845148">Disney Premier Visa</a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/disney-visa-card-review-4800342">Disney Visa Card</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/iberia-visa-signature-card-review-4843546">Iberia Visa Signature</a></li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ihg-rewards-club-premier-credit-card-review-4796369">IHG Rewards Premier </a></li> <li>IHG Rewards Traveler</li> <li>Instacart Mastercard</li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/marriott-bonvoy-bold-credit-card-review-4843670">Marriott Bonvoy Bold</a></li> <li><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/marriott-bonvoy-boundless-credit-card-review-4799590">Marriott Bonvoy Boundless</a></li> <li>Marriot Bonvoy Bountiful</li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/southwest-rapid-rewards-plus-credit-card-review-4799646">Southwest Rapid Rewards Plus</a></li> <li><a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/southwest-airlines-rapid-rewards-premier-credit-card-review-4799029">Southwest Rapid Rewards Premier</a></li> <li><a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/southwest-rapid-rewards-priority-credit-card-review-4796414">Southwest Rapid Rewards Priority</a></li> <li><a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-club-card-review-4798980">United Club Infinite</a></li> <li>United Gateway</li> <li><a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-explorer-card-review-4796332">United Explorer</a></li> <li>United Quest</li> <li>United Infinite<br/></li> <li><a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/world-of-hyatt-credit-card-review-4796392">World of Hyatt Credit Card</a></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-39"> <strong>Cash-Back Credit Cards</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-40"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-freedom-student-credit-card-review-4799596">Chase Freedom Student</a> (must apply in-branch)</li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-freedom-unlimited-credit-card-review-4798757">Chase Freedom Unlimited</a></li> <li>Chase Freedom Flex</li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-41"> <strong>Business Credit Cards</strong> </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-42"> <li>IHG Rewards Premier Business</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-ink-business-cash-review-4801584">Ink Business Cash</a></li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-ink-business-preferred-review-4800979">Ink Business Preferred </a></li> <li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-ink-business-unlimited-review-4801593">Ink Business Unlimited</a></li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/southwest-rapid-rewards-performance-business-credit-card-review-4802625">Southwest Rapid Rewards Performance Business</a></li> <li>Southwest Rapid Rewards Premier Business</li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/united-business-card-review-4801527">United Business</a></li> <li>United Club Business</li> <li><a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://creditcards.chase.com/business-credit-cards/world-of-hyatt/hyatt-business-card?iCELL=61GK" rel="sponsored nofollow">World of Hyatt Business Credit Card</a></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-other-financial-products-offered-by-chase-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-43"> <span class="mntl-sc-block-heading__text"> Other Financial Products Offered by Chase 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_2-0-44"> In addition to the products listed above, Chase Bank has a wide range of other offerings to meet your needs: </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-45"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-auto-loans-review-7972436">Car Loans</a></li> <li>Purchase Mortgages</li> <li>Refinance Mortgages</li> <li>Home Equity Lines of Credit (HELOCs)</li> <li>Individual Retirement Accounts (IRAs)</li> <li>Self-Directed Trading</li> <li>Managed Investment Portfolios</li> <li>Private Banking</li> <li>Financial Advisors</li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-business-loan-review-7507442">Business Loans</a></li> </ul><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-chase-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_2-0-46"> <span class="mntl-sc-block-heading__text"> Chase 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_2-0-47"> Customers can discuss their accounts with Chase bankers in person at more than 4,700 branches. Branch hours may vary from state to state. You can locate the branch nearest to you with the bank’s online branch locator. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-48"> Additionally, you can access your account over the phone, online, or through the mobile app outside of normal business hours. You can send secure messages to customer service 24/7 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_2-0-49"> Telephone support hours vary based on which department you are calling. For personal banking and credit card inquiries, call 1-800-935-9935. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-50"> The Chase Bank mobile app provides a consolidated view of your relationship with the bank. It offers the security features of facial recognition and fingerprint sign-in, account activity details, and the ability to block credit card transactions instantly if you’ve misplaced your card. You can also send and receive money through Zelle, pay bills, and deposit checks. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-how-to-bank-with-chase-bank"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-51"> <span class="mntl-sc-block-heading__text"> How to Bank With Chase 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_2-0-52"> If you’re ready to open a Chase Bank account, you can do so online or in one of the many branches across the U.S. For customers who already have a Chase account, you can open another account with the bank's mobile app. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-final-verdict"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-53"> <span class="mntl-sc-block-heading__text"> Final Verdict </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-54"> Chase Bank offers a generous variety of banking, lending, and investment products to its clients. It is the largest bank in the U.S., an achievement exemplified by the choice of products and access that it provides clients.<span class="ql-inline-citation" data-cite="1"></span> Chase Bank is suitable for a broad spectrum of clients, from students to military veterans and from the average household to high-income private banking consumers. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-55"> Although its presence may not be robust in every state, customers can open and service accounts online or through its mobile app. There are several choices of checking and savings accounts. Fees can be waived by meeting minimum balance requirements or by linking qualifying accounts. Premium checking accounts earn interest and automatically waive some banking fees. </p><!-- end: comp mntl-sc-block mntl-sc-block-html --> <span class="heading-toc" id="toc-methodology"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_2-0-56"> <span class="mntl-sc-block-heading__text"> Methodology </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading --> <p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-57"> Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. 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"<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.federalreserve.gov/releases/lbr/current/">Large Commercial Banks</a>."</p></li> </ol> </div> </div></div> <div class="comp prm-recirc related-recirc-section--articles mntl-block" data-tracking-container="true" id="prm-recirc_1-0"><section class="comp related-articles" data-tracking-container="true" id="related-articles_1-0"> <span class="related-articles__header type--camel"> Related Articles </span> <div class="loc recirc-content"><div class="comp related-articles__card-list-1 card-list--related-articles mntl-document-card-list mntl-card-list mntl-block" data-chunk="36" id="related-articles__card-list-1_1-0"><a class="comp mntl-card-list-items mntl-document-card mntl-card related-articles__link card" data-cta="Read Now ▸" data-doc-id="7099363" data-ordinal="1" data-tax-levels="" href="https://www.investopedia.com/chase-bank-promotions-7099363" id="mntl-card-list-items_1-0"> 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:fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg) :fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg) Chase Bank [Open Account](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) Chase Bank is a full-service bank with more than 4,700 branches and 16,000 ATMs. Its roots date back to 1799 in New York City when it was founded to supply drinking water to the city’s population. A small provision in its charter allowed for banking operations with surplus capital, and within five months, it opened a bank as the Bank of Manhattan Company. In its long history, more than 1,200 institutions have come together to form the largest financial institution in the U.S. with $2.6 trillion in assets worldwide. This in-depth review of the online banking giant can help you decide if its deposit accounts are right for you. * Pros & Cons * Company Overview Pros & Cons Pros * Large footprint to service your banking needs * Ability to waive checking fees * Popular rewards credit cards with well-known brands Cons * A limited number of branches in some states * Minimum daily balance to waive fees * Chase 5/24 Rule for credit cards Company Overview * Year Founded 1799 * Official Website www.chase.com * Banking Product Offerings Savings, checking, CDs, credit cards, and much more * Customer Service Phone: hours and number vary with department. Account access online or via app 24/7. :fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg) :fill(white):max_bytes(150000):strip_icc()/Chase-f3805357266b4fbe824b328e0e24d2cb.jpg) Chase Bank [Open Account](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) Table of Contents View All Chase Bank Review * [Pros Explained](#toc-pros-explained) * [Cons Explained](#toc-cons-explained) * [Best for](#toc-who-is-chase-bank-best-for) * [Bank Offerings](#toc-what-does-chase-offer) * [Other Products](#toc-other-financial-products-offered-by-chase-bank) * [Customer Service](#toc-chase-bank-customer-service) * [How to Bank](#toc-how-to-bank-with-chase-bank) * [Final Verdict](#toc-final-verdict) * [Methodology](#toc-methodology) ## Pros Explained * **Large footprint to service your banking needs:** Chase Bank has more than 4,700 retail branch locations throughout the United States. Additionally, customers may access 16,000 Chase Bank ATMs at no additional charge. If a Chase Bank branch or ATM is not nearby, customers can access their accounts online or through its mobile app. * **Ability to waive checking monthly fees:** Customers can waive the monthly maintenance fee for a checking account by either depositing $500 into the account that month, or, maintaining a $1,500 minimum balance, or, having a combined beginning average balance of $5,000 in all linked Chase accounts. * **Popular rewards credit cards with well-known brands:** Chase offers a total of 35 rewards credit cards from which to choose—26 personal and nine for small businesses. There are credit card options to meet your goal of cash back, travel rewards, or balance transfers. ## Cons Explained * **A limited number of branches in some states:** Some states are underserved by Chase Bank. Mississippi has only four branches, Vermont and Wyoming have two each, while Alaska has none. * **Minimum daily balance to waive fees:** This may be harder to maintain compared with an average daily balance. If your balance falls below this minimum amount for one day during the month, you may be charged the monthly fee. * **5/24 Rule for credit cards:** Chase Bank has an unwritten rule for credit card approvals that is one of the strictest in the industry. If you’ve opened more than five new credit cards at any bank in the past 24 months, you will not be approved for most of its credit cards. ## Who Is Chase Bank Best for? Chase Bank may be ideal for those who: * Live in states where the bank has clusters of branches * Want a variety of deposit, lending, and investment options from one financial services company * Are able to maintain the minimum daily balance or complete qualifying activities to waive fees * Want to earn valuable rewards or cash back from their credit card purchases * Desire a bank relationship that can grow with them and offers premium features * Want the security of a large financial institution that has many branches and ATMs across the U.S. ## What Does Chase Offer? As you might expect from a depository institution of its size, Chase Bank offers an extensive menu of accounts and services. Customers have access to multiple checking accounts, savings accounts, [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp), credit cards, and other lending products to meet their needs. The bank rewards customers who have multiple Chase products with better pricing and the ability to combine balances to waive fees. ### Checking Accounts Customers have several checking account options with Chase Bank. Each account has monthly maintenance fees unless you meet the criteria to waive them. The three most common accounts are Chase Total Checking, Chase Premier Plus Checking, and Chase Sapphire Banking. The Premier Plus Checking account waives the non-Chase ATM fee charged by Chase up to four times each statement cycle. However, any fees charged by the ATM owner still apply. The Sapphire Banking account waives non-Chase ATM fees and reimburses the fees charged by other banks (with no frequency limit). **Chase also offers niche checking accounts that cater to specific audiences:** * The Chase Secure Banking checking account has no minimum deposit, no paper checks, and does not charge for money orders or cashier’s checks. * [College students can get a free account](https://www.investopedia.com/best-student-bank-accounts-4799707) for up to five years while in school with the Chase College Checking account, and it is only $12 per month after that if you don’t waive the fee with qualifying activities. * Active and veteran members of the military can open a Chase Premier Plus Checking account with no fees or minimum balance requirements. Certain customers may be interested in Chase Private Client. To qualify, you’ll need an average daily balance of $150,000 combined among your qualifying personal and business deposits and investments. Benefits include no membership fees, monthly service charges, ATM fees, wire fees, and more. Additionally, you’ll receive higher limits on Chase QuickDeposit, [Zelle](https://www.investopedia.com/news/zelle-new-p2p-payment-app-pypl/) payments, daily ATM withdrawals, and debit card purchases. ### Checking Account Fee Waivers Chase gives consumers a few ways to waive their monthly checking account fees. * **Chase Total Checking:** Make a direct deposit of $500 or more each month, or keep a daily beginning balance of at least $1,500, or maintain an average beginning day balance of at least $5,000 in this account and eligible linked accounts. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. * **Chase Premier Plus Checking:** Maintain an average beginning day balance of at least $15,000 in this account and eligible linked accounts or a qualifying linked Chase mortgage enrolled in automatic payments from this account. * **Chase College Checking:** No fees for five years while in college, then make a direct deposit each month or have an average ending day balance of at least $5,000. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. * **Chase Secure Banking:** Mandatory monthly fee. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. * **Chase Sapphire Banking:** Maintain an average beginning day balance of at least $75,000 across this account and eligible linked accounts. * **Chase Private Client Checking:** Maintain an average beginning day balance of at least $150,000 across this account and eligible linked accounts. | Chase Bank Checking Accounts | | | | | --- | --- | --- | --- | | Account Name | Required Opening Deposit | Monthly Fee | Average Percentage Yield (APY) | | Chase Total Checking | $0 | $12 | None | | Chase Premier Plus Checking | $0 | $25 | 0.01% | | Chase College Checking | $0 | $12 | None | | Chase Secure Banking | $0 | $4.95 | None | | Chase Sapphire Banking | $0 | $25 | 0.01% | | Chase Private Client Checking | $0 | $35 | 0.01% | As of March 18, 2024. Source: Chase Bank ### Savings Accounts Chase Bank offers two traditional savings accounts. The Chase Savings account has only one interest rate for all balances, while the Chase Premier Savings account provides higher relationship rates for clients with larger balances. Customers who qualify for Chase Private Client status have access to the Chase Private Client Savings account, which also provides [tiered interest rates](https://www.investopedia.com/terms/t/tiered-rate-account.asp) based on the balance in your account. Chase gives consumers a few ways to waive their monthly savings account fees. * **Chase Savings:** Maintain a daily beginning balance of at least $300, maintain a monthly autosave of at least $25 from a Chase checking account, have the account linked to a Chase College Checking account (for overdraft protection), have the account linked to an eligible Chase checking account, or be 17 or younger. * **Chase Premier Savings:** Maintain a daily beginning balance of at least $15,000 or be linked to a Chase Premier Plus or Sapphire checking account. * **Chase Private Client Savings:** No monthly fees to waive because this account is only available to Chase Private Client members who have already met requirements related to the checking account and Chase Private Client. | Chase Bank Savings Accounts | | | | | | --- | --- | --- | --- | --- | | Account Name | Min. Opening Deposit | Monthly Fee | Annual Percentage Yield (APY) | Relationship Pricing APY | | Chase Savings | $0 | $5 | 0.01% | 0.01% | | Chase Premier Savings | $0 | $25 | 0.01% | 0.02% | | Chase Private Client Savings | $0 | None | 0.01% | 0.02% | As of March 18, 2024. Source: Chase Bank ### CDs Chase Bank offers multiple [CD terms](https://www.investopedia.com/how-to-invest-with-cds-4795661) ranging from one month to 10 years. Larger deposits may provide higher interest rates. Customers may choose to have their CD interest paid monthly, quarterly, semiannually, annually, or at maturity. To open a CD, a $1,000 minimum deposit is required. CDs may be opened online or in a branch. However, if you’d like to open a CD with a balance of $1 million or more, you must visit a branch and speak with a banker. If you close your CD before the maturity date, you may incur a penalty: * For CDs with a term of less than six months, the early withdrawal penalty is 90 days of interest. * For CDs with terms of six months to less than 24 months, the penalty is 180 days of interest. * For CDs with terms of 24 months or more, the penalty is 365 days of interest. * For all terms, the penalty is not more than the interest earned during the current term of the CD. * The minimum penalty is seven days’ interest. | Chase Certificates Of Deposit Relationship Rates | | | | | --- | --- | --- | --- | | Term (Months) | $1,000–$9,999 | $10,000–$24,999 | $100,000—$249,999 | | 1-Month CDs | 0.02% | 0.02% | 0.02% | | 3-Month CD to 12 Month CDs | 2.00% | 2.00% | 2.00% | | 15-Month to 21-Month CDs | 2.50% | 2.50% | 2.50% | | 24-Month CD | 2.50% | 2.50% | 2.50% | | 30-Month CD | 2.50% | 2.50% | 2.50% | | 36-Month CD | 2.50% | 2.50% | 2.50% | | 42-Month to 120-Month CDs | 2.50% | 2.50% | 2.50% | As of March 18, 2024. Linked Chase personal checking account required. Source: Chase Bank ### Credit Cards Chase Bank offers a wide range of credit cards to suit customers’ goals. Choices include cash-back and points-earning [rewards credit cards](https://www.investopedia.com/credit-card-4689721) for personal accounts and small [business customers](https://www.investopedia.com/chase-business-banking-review-7556495). The rewards credit cards include numerous co-branded options with airlines, hotels, and other partners. Additionally, Chase offers its own proprietary rewards program: Chase Ultimate Rewards. You can redeem these points for travel or cash back, transfer them to airline and hotel partners, and more. Here are the rewards cards available from Chase Bank: **General Travel Rewards Cards (Ultimate Rewards)** * [Chase Sapphire Preferred](https://www.investopedia.com/chase-sapphire-preferred-credit-card-review-4795917) * [Chase Sapphire Reserve](https://www.investopedia.com/chase-sapphire-reserve-credit-card-review-4796328) **Co-Branded Rewards Credit Cards** * Aer Lingus Visa Signature * Aeroplan® Card * Amazon Prime Rewards Visa Card * Amazon Rewards Visa Card * [British Airways Visa Signature](https://www.investopedia.com/british-airways-visa-signature-credit-card-review-4799592) * [Disney Premier Visa](https://www.investopedia.com/disney-premier-visa-review-4845148) * [Disney Visa Card](https://www.investopedia.com/disney-visa-card-review-4800342) * [Iberia Visa Signature](https://www.investopedia.com/iberia-visa-signature-card-review-4843546) * [IHG Rewards Premier](https://www.investopedia.com/ihg-rewards-club-premier-credit-card-review-4796369) * IHG Rewards Traveler * Instacart Mastercard * [Marriott Bonvoy Bold](https://www.investopedia.com/marriott-bonvoy-bold-credit-card-review-4843670) * [Marriott Bonvoy Boundless](https://www.investopedia.com/marriott-bonvoy-boundless-credit-card-review-4799590) * Marriot Bonvoy Bountiful * [Southwest Rapid Rewards Plus](https://www.investopedia.com/southwest-rapid-rewards-plus-credit-card-review-4799646) * [Southwest Rapid Rewards Premier](https://www.investopedia.com/southwest-airlines-rapid-rewards-premier-credit-card-review-4799029) * [Southwest Rapid Rewards Priority](https://www.investopedia.com/southwest-rapid-rewards-priority-credit-card-review-4796414) * [United Club Infinite](https://www.investopedia.com/united-club-card-review-4798980) * United Gateway * [United Explorer](https://www.investopedia.com/united-explorer-card-review-4796332) * United Quest * United Infinite * [World of Hyatt Credit Card](https://www.investopedia.com/world-of-hyatt-credit-card-review-4796392) **Cash-Back Credit Cards** * [Chase Freedom Student](https://www.investopedia.com/chase-freedom-student-credit-card-review-4799596) (must apply in-branch) * [Chase Freedom Unlimited](https://www.investopedia.com/chase-freedom-unlimited-credit-card-review-4798757) * Chase Freedom Flex **Business Credit Cards** * IHG Rewards Premier Business * [Ink Business Cash](https://www.investopedia.com/chase-ink-business-cash-review-4801584) * [Ink Business Preferred](https://www.investopedia.com/chase-ink-business-preferred-review-4800979) * [Ink Business Unlimited](https://www.investopedia.com/chase-ink-business-unlimited-review-4801593) * [Southwest Rapid Rewards Performance Business](https://www.investopedia.com/southwest-rapid-rewards-performance-business-credit-card-review-4802625) * Southwest Rapid Rewards Premier Business * [United Business](https://www.investopedia.com/united-business-card-review-4801527) * United Club Business * [World of Hyatt Business Credit Card](https://creditcards.chase.com/business-credit-cards/world-of-hyatt/hyatt-business-card?iCELL=61GK) ## Other Financial Products Offered by Chase Bank In addition to the products listed above, Chase Bank has a wide range of other offerings to meet your needs: * [Car Loans](https://www.investopedia.com/chase-auto-loans-review-7972436) * Purchase Mortgages * Refinance Mortgages * Home Equity Lines of Credit (HELOCs) * Individual Retirement Accounts (IRAs) * Self-Directed Trading * Managed Investment Portfolios * Private Banking * Financial Advisors * [Business Loans](https://www.investopedia.com/chase-business-loan-review-7507442) ## Chase Bank Customer Service Customers can discuss their accounts with Chase bankers in person at more than 4,700 branches. Branch hours may vary from state to state. You can locate the branch nearest to you with the bank’s online branch locator. Additionally, you can access your account over the phone, online, or through the mobile app outside of normal business hours. You can send secure messages to customer service 24/7 online. Telephone support hours vary based on which department you are calling. For personal banking and credit card inquiries, call 1-800-935-9935. The Chase Bank mobile app provides a consolidated view of your relationship with the bank. It offers the security features of facial recognition and fingerprint sign-in, account activity details, and the ability to block credit card transactions instantly if you’ve misplaced your card. You can also send and receive money through Zelle, pay bills, and deposit checks. ## How to Bank With Chase Bank If you’re ready to open a Chase Bank account, you can do so online or in one of the many branches across the U.S. For customers who already have a Chase account, you can open another account with the bank's mobile app. ## Final Verdict Chase Bank offers a generous variety of banking, lending, and investment products to its clients. It is the largest bank in the U.S., an achievement exemplified by the choice of products and access that it provides clients. Chase Bank is suitable for a broad spectrum of clients, from students to military veterans and from the average household to high-income private banking consumers. Although its presence may not be robust in every state, customers can open and service accounts online or through its mobile app. There are several choices of checking and savings accounts. Fees can be waived by meeting minimum balance requirements or by linking qualifying accounts. Premium checking accounts earn interest and automatically waive some banking fees. ## 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://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=942342.138&type=3&subid=0) Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. Federal Reserve. "[Large Commercial Banks](https://www.federalreserve.gov/releases/lbr/current/)." 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Chase Bank Open Account Chase Bank is a full-service bank with more than 4,700 branches and 16,000 ATMs. Its roots date back to 1799 in New York City when it was founded to supply drinking water to the city’s population. A small provision in its charter allowed for banking operations with surplus capital, and within five months, it opened a bank as the Bank of Manhattan Company. In its long history, more than 1,200 institutions have come together to form the largest financial institution in the U.S. with $2.6 trillion in assets worldwide. This in-depth review of the online banking giant can help you decide if its deposit accounts are right for you. Pros & Cons Company Overview Pros & Cons Pros Large footprint to service your banking needs Ability to waive checking fees Popular rewards credit cards with well-known brands Cons A limited number of branches in some states Minimum daily balance to waive fees Chase 5/24 Rule for credit cards Company Overview Year Founded 1799 Official Website www.chase.com Banking Product Offerings Savings, checking, CDs, credit cards, and much more Customer Service Phone: hours and number vary with department. Account access online or via app 24/7. Chase Bank Open Account Table of Contents View All Chase Bank Review Pros Explained Cons Explained Best for Bank Offerings Other Products Customer Service How to Bank Final Verdict Methodology Pros Explained Large footprint to service your banking needs: Chase Bank has more than 4,700 retail branch locations throughout the United States. Additionally, customers may access 16,000 Chase Bank ATMs at no additional charge. If a Chase Bank branch or ATM is not nearby, customers can access their accounts online or through its mobile app.Ability to waive checking monthly fees: Customers can waive the monthly maintenance fee for a checking account by either depositing $500 into the account that month, or, maintaining a $1,500 minimum balance, or, having a combined beginning average balance of $5,000 in all linked Chase accounts.Popular rewards credit cards with well-known brands: Chase offers a total of 35 rewards credit cards from which to choose—26 personal and nine for small businesses. There are credit card options to meet your goal of cash back, travel rewards, or balance transfers. Cons Explained A limited number of branches in some states: Some states are underserved by Chase Bank. Mississippi has only four branches, Vermont and Wyoming have two each, while Alaska has none.Minimum daily balance to waive fees: This may be harder to maintain compared with an average daily balance. If your balance falls below this minimum amount for one day during the month, you may be charged the monthly fee.5/24 Rule for credit cards: Chase Bank has an unwritten rule for credit card approvals that is one of the strictest in the industry. If you’ve opened more than five new credit cards at any bank in the past 24 months, you will not be approved for most of its credit cards. Who Is Chase Bank Best for? Chase Bank may be ideal for those who: Live in states where the bank has clusters of branchesWant a variety of deposit, lending, and investment options from one financial services companyAre able to maintain the minimum daily balance or complete qualifying activities to waive feesWant to earn valuable rewards or cash back from their credit card purchasesDesire a bank relationship that can grow with them and offers premium featuresWant the security of a large financial institution that has many branches and ATMs across the U.S. What Does Chase Offer? As you might expect from a depository institution of its size, Chase Bank offers an extensive menu of accounts and services. Customers have access to multiple checking accounts, savings accounts, certificates of deposit (CDs), credit cards, and other lending products to meet their needs. The bank rewards customers who have multiple Chase products with better pricing and the ability to combine balances to waive fees. Checking Accounts Customers have several checking account options with Chase Bank. Each account has monthly maintenance fees unless you meet the criteria to waive them. The three most common accounts are Chase Total Checking, Chase Premier Plus Checking, and Chase Sapphire Banking. The Premier Plus Checking account waives the non-Chase ATM fee charged by Chase up to four times each statement cycle. However, any fees charged by the ATM owner still apply. The Sapphire Banking account waives non-Chase ATM fees and reimburses the fees charged by other banks (with no frequency limit). Chase also offers niche checking accounts that cater to specific audiences: The Chase Secure Banking checking account has no minimum deposit, no paper checks, and does not charge for money orders or cashier’s checks. College students can get a free account for up to five years while in school with the Chase College Checking account, and it is only $12 per month after that if you don’t waive the fee with qualifying activities. Active and veteran members of the military can open a Chase Premier Plus Checking account with no fees or minimum balance requirements. Certain customers may be interested in Chase Private Client. To qualify, you’ll need an average daily balance of $150,000 combined among your qualifying personal and business deposits and investments. Benefits include no membership fees, monthly service charges, ATM fees, wire fees, and more. Additionally, you’ll receive higher limits on Chase QuickDeposit, Zelle payments, daily ATM withdrawals, and debit card purchases. Checking Account Fee Waivers Chase gives consumers a few ways to waive their monthly checking account fees. Chase Total Checking: Make a direct deposit of $500 or more each month, or keep a daily beginning balance of at least $1,500, or maintain an average beginning day balance of at least $5,000 in this account and eligible linked accounts. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.Chase Premier Plus Checking: Maintain an average beginning day balance of at least $15,000 in this account and eligible linked accounts or a qualifying linked Chase mortgage enrolled in automatic payments from this account.Chase College Checking: No fees for five years while in college, then make a direct deposit each month or have an average ending day balance of at least $5,000. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.Chase Secure Banking: Mandatory monthly fee. $3 fee per withdrawal at a non-Chase ATM in the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply. $5 fee per withdrawal at a non-Chase ATM outside of the U.S., Puerto Rico and the U.S. Virgin Islands. Surcharge Fees from the ATM owner/network still apply.Chase Sapphire Banking: Maintain an average beginning day balance of at least $75,000 across this account and eligible linked accounts. Chase Private Client Checking: Maintain an average beginning day balance of at least $150,000 across this account and eligible linked accounts. Chase Bank Checking Accounts Account Name Required Opening Deposit Monthly Fee Average Percentage Yield (APY) Chase Total Checking $0 $12 None Chase Premier Plus Checking $0 $25 0.01% Chase College Checking $0 $12 None Chase Secure Banking $0 $4.95 None Chase Sapphire Banking $0 $25 0.01% Chase Private Client Checking $0 $35 0.01% As of March 18, 2024. Source: Chase Bank Savings Accounts Chase Bank offers two traditional savings accounts. The Chase Savings account has only one interest rate for all balances, while the Chase Premier Savings account provides higher relationship rates for clients with larger balances. Customers who qualify for Chase Private Client status have access to the Chase Private Client Savings account, which also provides tiered interest rates based on the balance in your account. Chase gives consumers a few ways to waive their monthly savings account fees. Chase Savings: Maintain a daily beginning balance of at least $300, maintain a monthly autosave of at least $25 from a Chase checking account, have the account linked to a Chase College Checking account (for overdraft protection), have the account linked to an eligible Chase checking account, or be 17 or younger.Chase Premier Savings: Maintain a daily beginning balance of at least $15,000 or be linked to a Chase Premier Plus or Sapphire checking account.Chase Private Client Savings: No monthly fees to waive because this account is only available to Chase Private Client members who have already met requirements related to the checking account and Chase Private Client. Chase Bank Savings Accounts Account Name Min. Opening Deposit Monthly Fee Annual Percentage Yield (APY) Relationship Pricing APY Chase Savings $0 $5 0.01% 0.01% Chase Premier Savings $0 $25 0.01% 0.02% Chase Private Client Savings $0 None 0.01% 0.02% As of March 18, 2024. Source: Chase Bank CDs Chase Bank offers multiple CD terms ranging from one month to 10 years. Larger deposits may provide higher interest rates. Customers may choose to have their CD interest paid monthly, quarterly, semiannually, annually, or at maturity. To open a CD, a $1,000 minimum deposit is required. CDs may be opened online or in a branch. However, if you’d like to open a CD with a balance of $1 million or more, you must visit a branch and speak with a banker. If you close your CD before the maturity date, you may incur a penalty: For CDs with a term of less than six months, the early withdrawal penalty is 90 days of interest. For CDs with terms of six months to less than 24 months, the penalty is 180 days of interest. For CDs with terms of 24 months or more, the penalty is 365 days of interest. For all terms, the penalty is not more than the interest earned during the current term of the CD. The minimum penalty is seven days’ interest. Chase Certificates Of Deposit Relationship Rates Term (Months) $1,000–$9,999 $10,000–$24,999 $100,000—$249,999 1-Month CDs 0.02% 0.02% 0.02% 3-Month CD to 12 Month CDs 2.00% 2.00% 2.00% 15-Month to 21-Month CDs 2.50% 2.50% 2.50% 24-Month CD 2.50% 2.50% 2.50% 30-Month CD 2.50% 2.50% 2.50% 36-Month CD 2.50% 2.50% 2.50% 42-Month to 120-Month CDs 2.50% 2.50% 2.50% As of March 18, 2024. Linked Chase personal checking account required. Source: Chase Bank Credit Cards Chase Bank offers a wide range of credit cards to suit customers’ goals. Choices include cash-back and points-earning rewards credit cards for personal accounts and small business customers. The rewards credit cards include numerous co-branded options with airlines, hotels, and other partners. Additionally, Chase offers its own proprietary rewards program: Chase Ultimate Rewards. You can redeem these points for travel or cash back, transfer them to airline and hotel partners, and more. Here are the rewards cards available from Chase Bank: General Travel Rewards Cards (Ultimate Rewards) Chase Sapphire Preferred Chase Sapphire Reserve Co-Branded Rewards Credit Cards Aer Lingus Visa Signature Aeroplan® Card Amazon Prime Rewards Visa Card Amazon Rewards Visa Card British Airways Visa Signature Disney Premier Visa Disney Visa Card Iberia Visa Signature IHG Rewards Premier IHG Rewards Traveler Instacart Mastercard Marriott Bonvoy Bold Marriott Bonvoy Boundless Marriot Bonvoy Bountiful Southwest Rapid Rewards Plus Southwest Rapid Rewards Premier Southwest Rapid Rewards Priority United Club Infinite United Gateway United Explorer United Quest United Infinite World of Hyatt Credit Card Cash-Back Credit Cards Chase Freedom Student (must apply in-branch) Chase Freedom Unlimited Chase Freedom Flex Business Credit Cards IHG Rewards Premier Business Ink Business Cash Ink Business Preferred Ink Business Unlimited Southwest Rapid Rewards Performance Business Southwest Rapid Rewards Premier Business United Business United Club Business World of Hyatt Business Credit Card Other Financial Products Offered by Chase Bank In addition to the products listed above, Chase Bank has a wide range of other offerings to meet your needs: Car Loans Purchase Mortgages Refinance Mortgages Home Equity Lines of Credit (HELOCs) Individual Retirement Accounts (IRAs) Self-Directed Trading Managed Investment Portfolios Private Banking Financial Advisors Business Loans Chase Bank Customer Service Customers can discuss their accounts with Chase bankers in person at more than 4,700 branches. Branch hours may vary from state to state. You can locate the branch nearest to you with the bank’s online branch locator. Additionally, you can access your account over the phone, online, or through the mobile app outside of normal business hours. You can send secure messages to customer service 24/7 online. Telephone support hours vary based on which department you are calling. For personal banking and credit card inquiries, call 1-800-935-9935. The Chase Bank mobile app provides a consolidated view of your relationship with the bank. It offers the security features of facial recognition and fingerprint sign-in, account activity details, and the ability to block credit card transactions instantly if you’ve misplaced your card. You can also send and receive money through Zelle, pay bills, and deposit checks. How to Bank With Chase Bank If you’re ready to open a Chase Bank account, you can do so online or in one of the many branches across the U.S. For customers who already have a Chase account, you can open another account with the bank's mobile app. Final Verdict Chase Bank offers a generous variety of banking, lending, and investment products to its clients. It is the largest bank in the U.S., an achievement exemplified by the choice of products and access that it provides clients. Chase Bank is suitable for a broad spectrum of clients, from students to military veterans and from the average household to high-income private banking consumers. Although its presence may not be robust in every state, customers can open and service accounts online or through its mobile app. There are several choices of checking and savings accounts. Fees can be waived by meeting minimum balance requirements or by linking qualifying accounts. Premium checking accounts earn interest and automatically waive some banking fees. Methodology Investopedia is dedicated to providing consumers with unbiased, comprehensive reviews of banks. We collected over 20 data points across more than 80 banks—including products available, interest rates, fees, and accessibility—to ensure that our content helps users make the right decision for their savings and banking needs. Open Account Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Federal Reserve. "Large Commercial Banks." Related Articles Chase Bank Promotions: May 2024 Regions Bank Review 2024 Best Student Bank Accounts for 2024 Chase Savings Account Interest Rates: May 2024 Best Bank Bonuses KeyBank Review 2024

https://www.investopedia.com/terms/r/ruleof78.asp

Rule of 78: Definition, How Lenders Use It, and Calculation

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-rule-of-78"></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 Rule of 78? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Rule of 78 is a method used by some lenders to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/126.asp">calculate interest charges</a> on a loan. The Rule of 78 requires the borrower to pay a greater portion of interest in the earlier part of a loan cycle, which decreases the potential savings for the borrower in paying off their loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Rule of 78 is a method used by some lenders to calculate interest charges on a loan.</li><li>The Rule of 78 allocates pre-calculated interest charges that favor the lender over the borrower for short-term loans or if a loan is paid off early.</li><li>The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan, so a greater portion of interest is paid earlier.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-rule-of-78"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding the Rule of 78 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The Rule of 78 gives greater weight to months in the earlier part of a borrower’s loan cycle when calculating interest, which increases the profit for the lender. This type of interest calculation schedule is primarily used on fixed-rate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolving-account.asp">non-revolving loans</a>. The Rule of 78 is an important consideration for borrowers who potentially intend to pay off their loans early. </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-important" 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>The Rule of 78 holds that the borrower must pay a greater portion of the interest rate in the earlier part of the loan cycle, which means the borrower will pay more than they would with a regular loan.</p></div></div></div> <span class="heading-toc" id="toc-calculating-rule-of-78-loan-interest"></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"> Calculating Rule of 78 Loan Interest </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The Rule of 78 loan interest methodology is more complex than a simple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apy.asp">annual percentage rate</a> (APR) loan. In both types of loans, however, the borrower will pay the same amount of interest on the loan if they make payments for the full loan cycle with no pre-payment. </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 Rule of 78 methodology gives added weight to months in the earlier cycle of a loan. It is often used by short-term installment lenders who provide loans to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime-borrower.asp">subprime borrowers</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In the case of a 12-month loan, a lender would sum the number of digits through 12 months in the following calculation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <li>1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78. For a two year loan, the total sum of the digits would be 300. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months. For a one-year <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loan</a>, the weighting factor would be 12/78 of the total interest in the first month, 11/78 in the second month, 10/78 in the third month, etc. For a two-year loan, the weighting factor would be 24/300 in the first month, 23/300 in the second month, 22/300 in the third month, etc. </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-rule-of-78-vs-simple-interest"></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"> Rule of 78 vs. Simple Interest </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> When paying off a loan, the repayments are composed of two parts: the principal and the interest charged. The Rule of 78 weights the earlier payments with more interest than the later payments. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. </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"> However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying slightly more interest overall. </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 1992, the legislation made this type of financing illegal for loans in the United States with a duration of greater than 61 months. Certain states have adopted more stringent restrictions for loans less than 61 months in duration, while some states have outlawed the practice completely for any loan duration. Check with your state's Attorney General's office prior to entering into a loan agreement with a Rule of 78 provision if you are unsure. </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 difference in savings from early prepayment on a Rule of 78 loan versus <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/simple_interest_mortgage.asp">a simple interest loan</a> is not significantly substantial in the case of shorter-term loans. For example, a borrower with a two-year $10,000 loan at a 5% fixed rate would pay total interest of $529.13 over the entire loan cycle for both a Rule of 78 and a simple interest loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> In the first month of the Rule of 78 loan, the borrower would pay $42.33. In the first month of a simple interest loan, the interest is calculated as a percent of the outstanding <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>, and the borrower would pay $41.67. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/co_borrowers.asp">borrower</a> who would like to pay the loan off after 12 months would be required to pay $5,124.71 for the simple interest loan and $5,126.98 for the Rule of 78 loan. </p></div>

## What Is the Rule of 78? The Rule of 78 is a method used by some lenders to [calculate interest charges](https://www.investopedia.com/ask/answers/126.asp) on a loan. The Rule of 78 requires the borrower to pay a greater portion of interest in the earlier part of a loan cycle, which decreases the potential savings for the borrower in paying off their loan. ### Key Takeaways * The Rule of 78 is a method used by some lenders to calculate interest charges on a loan. * The Rule of 78 allocates pre-calculated interest charges that favor the lender over the borrower for short-term loans or if a loan is paid off early. * The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan, so a greater portion of interest is paid earlier. ## Understanding the Rule of 78 The Rule of 78 gives greater weight to months in the earlier part of a borrower’s loan cycle when calculating interest, which increases the profit for the lender. This type of interest calculation schedule is primarily used on fixed-rate [non-revolving loans](https://www.investopedia.com/terms/r/revolving-account.asp). The Rule of 78 is an important consideration for borrowers who potentially intend to pay off their loans early. ### The Rule of 78 holds that the borrower must pay a greater portion of the interest rate in the earlier part of the loan cycle, which means the borrower will pay more than they would with a regular loan. ## Calculating Rule of 78 Loan Interest The Rule of 78 loan interest methodology is more complex than a simple [annual percentage rate](https://www.investopedia.com/terms/a/apy.asp) (APR) loan. In both types of loans, however, the borrower will pay the same amount of interest on the loan if they make payments for the full loan cycle with no pre-payment. The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan. It is often used by short-term installment lenders who provide loans to [subprime borrowers](https://www.investopedia.com/terms/s/subprime-borrower.asp). In the case of a 12-month loan, a lender would sum the number of digits through 12 months in the following calculation: * 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78 For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78. For a two year loan, the total sum of the digits would be 300. With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months. For a one-year [loan](https://www.investopedia.com/terms/l/loan.asp), the weighting factor would be 12/78 of the total interest in the first month, 11/78 in the second month, 10/78 in the third month, etc. For a two-year loan, the weighting factor would be 24/300 in the first month, 23/300 in the second month, 22/300 in the third month, etc. ## Rule of 78 vs. Simple Interest When paying off a loan, the repayments are composed of two parts: the principal and the interest charged. The Rule of 78 weights the earlier payments with more interest than the later payments. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying slightly more interest overall. In 1992, the legislation made this type of financing illegal for loans in the United States with a duration of greater than 61 months. Certain states have adopted more stringent restrictions for loans less than 61 months in duration, while some states have outlawed the practice completely for any loan duration. Check with your state's Attorney General's office prior to entering into a loan agreement with a Rule of 78 provision if you are unsure. The difference in savings from early prepayment on a Rule of 78 loan versus [a simple interest loan](https://www.investopedia.com/terms/s/simple_interest_mortgage.asp) is not significantly substantial in the case of shorter-term loans. For example, a borrower with a two-year $10,000 loan at a 5% fixed rate would pay total interest of $529.13 over the entire loan cycle for both a Rule of 78 and a simple interest loan. In the first month of the Rule of 78 loan, the borrower would pay $42.33. In the first month of a simple interest loan, the interest is calculated as a percent of the outstanding [principal](https://www.investopedia.com/terms/p/principal.asp), and the borrower would pay $41.67. A [borrower](https://www.investopedia.com/terms/c/co_borrowers.asp) who would like to pay the loan off after 12 months would be required to pay $5,124.71 for the simple interest loan and $5,126.98 for the Rule of 78 loan.

What Is the Rule of 78? The Rule of 78 is a method used by some lenders to calculate interest charges on a loan. The Rule of 78 requires the borrower to pay a greater portion of interest in the earlier part of a loan cycle, which decreases the potential savings for the borrower in paying off their loan. Key Takeaways The Rule of 78 is a method used by some lenders to calculate interest charges on a loan.The Rule of 78 allocates pre-calculated interest charges that favor the lender over the borrower for short-term loans or if a loan is paid off early.The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan, so a greater portion of interest is paid earlier. Understanding the Rule of 78 The Rule of 78 gives greater weight to months in the earlier part of a borrower’s loan cycle when calculating interest, which increases the profit for the lender. This type of interest calculation schedule is primarily used on fixed-rate non-revolving loans. The Rule of 78 is an important consideration for borrowers who potentially intend to pay off their loans early. The Rule of 78 holds that the borrower must pay a greater portion of the interest rate in the earlier part of the loan cycle, which means the borrower will pay more than they would with a regular loan. Calculating Rule of 78 Loan Interest The Rule of 78 loan interest methodology is more complex than a simple annual percentage rate (APR) loan. In both types of loans, however, the borrower will pay the same amount of interest on the loan if they make payments for the full loan cycle with no pre-payment. The Rule of 78 methodology gives added weight to months in the earlier cycle of a loan. It is often used by short-term installment lenders who provide loans to subprime borrowers. In the case of a 12-month loan, a lender would sum the number of digits through 12 months in the following calculation: 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78 For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78. For a two year loan, the total sum of the digits would be 300. With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months. For a one-year loan, the weighting factor would be 12/78 of the total interest in the first month, 11/78 in the second month, 10/78 in the third month, etc. For a two-year loan, the weighting factor would be 24/300 in the first month, 23/300 in the second month, 22/300 in the third month, etc. Rule of 78 vs. Simple Interest When paying off a loan, the repayments are composed of two parts: the principal and the interest charged. The Rule of 78 weights the earlier payments with more interest than the later payments. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying slightly more interest overall. In 1992, the legislation made this type of financing illegal for loans in the United States with a duration of greater than 61 months. Certain states have adopted more stringent restrictions for loans less than 61 months in duration, while some states have outlawed the practice completely for any loan duration. Check with your state's Attorney General's office prior to entering into a loan agreement with a Rule of 78 provision if you are unsure. The difference in savings from early prepayment on a Rule of 78 loan versus a simple interest loan is not significantly substantial in the case of shorter-term loans. For example, a borrower with a two-year $10,000 loan at a 5% fixed rate would pay total interest of $529.13 over the entire loan cycle for both a Rule of 78 and a simple interest loan. In the first month of the Rule of 78 loan, the borrower would pay $42.33. In the first month of a simple interest loan, the interest is calculated as a percent of the outstanding principal, and the borrower would pay $41.67. A borrower who would like to pay the loan off after 12 months would be required to pay $5,124.71 for the simple interest loan and $5,126.98 for the Rule of 78 loan.

https://www.investopedia.com/ask/answers/102814/it-possible-have-credit-limit-thats-too-high.asp

Is it Possible to Have a Credit Limit That’s too High?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 higher credit limit has advantages like providing more financing and improving your credit utilization ratio if your spending remains the same. But it can also work against you, especially if you change your spending habits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> You may try to improve your credit score by trying to increase the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_limit.asp">credit limit</a> on your credit cards because a key factor in your score on a credit report is your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a>. However, higher limits have both pros and cons to consider. Learn about the ways to boost your credit limit with various strategies that will be to your benefit.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <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>High scores are better than lower credit scores because they show lenders you are a reliable borrower.</li><li>While higher scores are better, some ways of raising your credit score can cause more financial harm, such as opening new credit to improve your credit utilization ratio.</li><li>With higher credit scores, you are more likely to get approved for a loan and with better terms.</li><li>You can increase your credit score by making payments on time and reducing your debt. </li></ul></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-subheading__text"> Advantages of Having a High Credit Limit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In general, raising your credit score and having a high credit score will <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0212/6-benefits-to-increasing-your-credit-limit.aspx">benefit your finances</a> and financial opportunities. And one way to do that is by raising your credit limit. </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 your ratio of debt to credit is lower, the credit utilization factor that goes into calculating your credit score will improve your credit score. Essentially, when you show lenders you don't need to use your full credit line, you are providing a sign of a responsible borrower. </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 benefit to having a higher credit limit is that if you have a rewards card, a higher limit can give you more opportunity to earn more rewards. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_14-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_15-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">Note</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Having a higher credit limit can also give you additional financial resources to use, such as in case of an emergency.</p></div></div></div> <span class="heading-toc" id="toc-disadvantages-of-having-a-high-credit-limit"></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"> Disadvantages of Having a High Credit Limit </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The downsides of having a high credit limit include the potential for you to go further into debt as well as the fact that applying for new credit can lower your credit score. </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 having a higher credit limit may boost your credit score, be cautious when raising credit limits. Essentially, how you use the higher credit limit will determine the ultimate impact on your credit score. </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 most obvious reason to avoid having too much credit available is that you could spend more, further increasing debt and actually hurting your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> if you can't repay the loan. Think carefully about taking on a higher credit limit just to raise your credit score.<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_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> One way to raise your credit limit is to apply for a new credit card. However, when you apply for loans, even revolving loans like with credit cards, you lender make a hard inquiry, which is reflected in your credit report. This hard inquiry allows them to see your credit history, so they can determine whether to approve you, for what amount, and under what terms. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_26-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>A hard inquiry can negatively impact your credit score, although the impact will be temporary. Having too many hard inquiries on your credit history shows lenders you may be desperate for cash.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div> <span class="heading-toc" id="toc-when-to-ask-for-a-credit-limit-increase"></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"> When to Ask for a Credit Limit Increase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> You can ask for a credit limit increase from your current card provider at any time, but the best times to ask are when:<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li>Your income increases</li><li>You establish yourself as a borrower who makes payments on time</li><li>Your credit score increases</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The amount of increase you request is up to you and you can base it on your personal budget and goals. But remember, there are no guarantees your credit card issuer will increase your credit limit by the amount you request, if they increase it at all.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-how-do-you-qualify-for-a-higher-credit-limit"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Qualify for a Higher Credit Limit?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can qualify for a higher credit limit in several ways, including by raising your credit score, by paying down your debts and by making payments on time. You can also request a credit line increase after you have proven to make payments on time with your current credit card.<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_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-does-closing-a-credit-card-hurt-your-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Closing a Credit Card Hurt Your Credit Score?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>When you close a credit card, you can negatively impact your credit score because it could affect the length of your credit history, or amount of time you've had credit. It could also affect your credit utilization ratio, which is the proportion of the credit you've used compared to the amount available to you.<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_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-how-many-credit-cards-are-too-many"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Credit Cards Are Too Many?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The right amount of credit cards for you will depend on a number of factors, but in general it's best to have two to three credit cards to avoid overspending and to maximize rewards. Having more than one credit card can provide an additional source of funds in an emergency and provide a payment option if one card is not accepted by a retailer.<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_39-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> In general, it is good to have a higher credit limit because a higher credit limit improves your credit utilization ratio, which benefits your credit score. But if you don't use your higher credit limit wisely, it could work against you by increasing your debt load. If you're considering taking on more credit, ensure you are prepare to use it wisely by making all of the minimum payments on time and keeping your credit utilization ratio low.<br/> </p></div>

Having a higher credit limit has advantages like providing more financing and improving your credit utilization ratio if your spending remains the same. But it can also work against you, especially if you change your spending habits. You may try to improve your credit score by trying to increase the [credit limit](https://www.investopedia.com/terms/c/credit_limit.asp) on your credit cards because a key factor in your score on a credit report is your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp). However, higher limits have both pros and cons to consider. Learn about the ways to boost your credit limit with various strategies that will be to your benefit. ### Key Takeaways * High scores are better than lower credit scores because they show lenders you are a reliable borrower. * While higher scores are better, some ways of raising your credit score can cause more financial harm, such as opening new credit to improve your credit utilization ratio. * With higher credit scores, you are more likely to get approved for a loan and with better terms. * You can increase your credit score by making payments on time and reducing your debt. ### Advantages of Having a High Credit Limit In general, raising your credit score and having a high credit score will [benefit your finances](https://www.investopedia.com/financial-edge/0212/6-benefits-to-increasing-your-credit-limit.aspx) and financial opportunities. And one way to do that is by raising your credit limit. If your ratio of debt to credit is lower, the credit utilization factor that goes into calculating your credit score will improve your credit score. Essentially, when you show lenders you don't need to use your full credit line, you are providing a sign of a responsible borrower. Another benefit to having a higher credit limit is that if you have a rewards card, a higher limit can give you more opportunity to earn more rewards. ### Note Having a higher credit limit can also give you additional financial resources to use, such as in case of an emergency. ## Disadvantages of Having a High Credit Limit The downsides of having a high credit limit include the potential for you to go further into debt as well as the fact that applying for new credit can lower your credit score. While having a higher credit limit may boost your credit score, be cautious when raising credit limits. Essentially, how you use the higher credit limit will determine the ultimate impact on your credit score. The most obvious reason to avoid having too much credit available is that you could spend more, further increasing debt and actually hurting your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) if you can't repay the loan. Think carefully about taking on a higher credit limit just to raise your credit score. One way to raise your credit limit is to apply for a new credit card. However, when you apply for loans, even revolving loans like with credit cards, you lender make a hard inquiry, which is reflected in your credit report. This hard inquiry allows them to see your credit history, so they can determine whether to approve you, for what amount, and under what terms. ### A hard inquiry can negatively impact your credit score, although the impact will be temporary. Having too many hard inquiries on your credit history shows lenders you may be desperate for cash. ## When to Ask for a Credit Limit Increase You can ask for a credit limit increase from your current card provider at any time, but the best times to ask are when: * Your income increases * You establish yourself as a borrower who makes payments on time * Your credit score increases The amount of increase you request is up to you and you can base it on your personal budget and goals. But remember, there are no guarantees your credit card issuer will increase your credit limit by the amount you request, if they increase it at all. ## How Do You Qualify for a Higher Credit Limit? You can qualify for a higher credit limit in several ways, including by raising your credit score, by paying down your debts and by making payments on time. You can also request a credit line increase after you have proven to make payments on time with your current credit card. ## Does Closing a Credit Card Hurt Your Credit Score? When you close a credit card, you can negatively impact your credit score because it could affect the length of your credit history, or amount of time you've had credit. It could also affect your credit utilization ratio, which is the proportion of the credit you've used compared to the amount available to you. ## How Many Credit Cards Are Too Many? The right amount of credit cards for you will depend on a number of factors, but in general it's best to have two to three credit cards to avoid overspending and to maximize rewards. Having more than one credit card can provide an additional source of funds in an emergency and provide a payment option if one card is not accepted by a retailer. ## The Bottom Line In general, it is good to have a higher credit limit because a higher credit limit improves your credit utilization ratio, which benefits your credit score. But if you don't use your higher credit limit wisely, it could work against you by increasing your debt load. If you're considering taking on more credit, ensure you are prepare to use it wisely by making all of the minimum payments on time and keeping your credit utilization ratio low.

Having a higher credit limit has advantages like providing more financing and improving your credit utilization ratio if your spending remains the same. But it can also work against you, especially if you change your spending habits. You may try to improve your credit score by trying to increase the credit limit on your credit cards because a key factor in your score on a credit report is your credit utilization ratio. However, higher limits have both pros and cons to consider. Learn about the ways to boost your credit limit with various strategies that will be to your benefit. Key Takeaways High scores are better than lower credit scores because they show lenders you are a reliable borrower.While higher scores are better, some ways of raising your credit score can cause more financial harm, such as opening new credit to improve your credit utilization ratio.With higher credit scores, you are more likely to get approved for a loan and with better terms.You can increase your credit score by making payments on time and reducing your debt. Advantages of Having a High Credit Limit In general, raising your credit score and having a high credit score will benefit your finances and financial opportunities. And one way to do that is by raising your credit limit. If your ratio of debt to credit is lower, the credit utilization factor that goes into calculating your credit score will improve your credit score. Essentially, when you show lenders you don't need to use your full credit line, you are providing a sign of a responsible borrower. Another benefit to having a higher credit limit is that if you have a rewards card, a higher limit can give you more opportunity to earn more rewards. Note Having a higher credit limit can also give you additional financial resources to use, such as in case of an emergency. Disadvantages of Having a High Credit Limit The downsides of having a high credit limit include the potential for you to go further into debt as well as the fact that applying for new credit can lower your credit score. While having a higher credit limit may boost your credit score, be cautious when raising credit limits. Essentially, how you use the higher credit limit will determine the ultimate impact on your credit score. The most obvious reason to avoid having too much credit available is that you could spend more, further increasing debt and actually hurting your credit score if you can't repay the loan. Think carefully about taking on a higher credit limit just to raise your credit score. One way to raise your credit limit is to apply for a new credit card. However, when you apply for loans, even revolving loans like with credit cards, you lender make a hard inquiry, which is reflected in your credit report. This hard inquiry allows them to see your credit history, so they can determine whether to approve you, for what amount, and under what terms. A hard inquiry can negatively impact your credit score, although the impact will be temporary. Having too many hard inquiries on your credit history shows lenders you may be desperate for cash. When to Ask for a Credit Limit Increase You can ask for a credit limit increase from your current card provider at any time, but the best times to ask are when: Your income increasesYou establish yourself as a borrower who makes payments on timeYour credit score increases The amount of increase you request is up to you and you can base it on your personal budget and goals. But remember, there are no guarantees your credit card issuer will increase your credit limit by the amount you request, if they increase it at all. How Do You Qualify for a Higher Credit Limit? You can qualify for a higher credit limit in several ways, including by raising your credit score, by paying down your debts and by making payments on time. You can also request a credit line increase after you have proven to make payments on time with your current credit card. Does Closing a Credit Card Hurt Your Credit Score? When you close a credit card, you can negatively impact your credit score because it could affect the length of your credit history, or amount of time you've had credit. It could also affect your credit utilization ratio, which is the proportion of the credit you've used compared to the amount available to you. How Many Credit Cards Are Too Many? The right amount of credit cards for you will depend on a number of factors, but in general it's best to have two to three credit cards to avoid overspending and to maximize rewards. Having more than one credit card can provide an additional source of funds in an emergency and provide a payment option if one card is not accepted by a retailer. The Bottom Line In general, it is good to have a higher credit limit because a higher credit limit improves your credit utilization ratio, which benefits your credit score. But if you don't use your higher credit limit wisely, it could work against you by increasing your debt load. If you're considering taking on more credit, ensure you are prepare to use it wisely by making all of the minimum payments on time and keeping your credit utilization ratio low.

https://www.investopedia.com/what-you-need-to-know-ahead-of-ethereum-dencun-update-wednesday-8607518

What You Need To Know Ahead of Ethereum's Dencun Update Wednesday

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Ethereum's next major network update, known as "Dencun," is scheduled for Wednesday.</li><li>Dencun is expected to lower transaction fees on the many Layer 2 networks built on top of the base Ethereum blockchain.</li><li>This update is part of a major push by Ethereum developers to head toward mass scalability via Layer 2 blockchains.</li><li>Reports from digital asset managers Grayscale and Fidelity Digital Assets indicate the update could be a boon for scaling the overall Ethereum userbase.</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"> Ethereum is scheduled to undergo a network update called the Deneb-Cancun, or Dencun, on Wednesday, aimed at improving user experience and lowering transaction fees for some users on the the network's Layer 2 blockchains. </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"> 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>), the native coin of the Ethereum blockchain, soared past $4,000 early Wednesday, but gave up some of those gains to trade a shade under that threshold at 10:30 a.m. Eastern. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-what-is-the-dencun-ethereum-update"></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 the Dencun Ethereum Update? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The Dencun update prioritizes scalability, efficiency, and security through the implementation of various Ethereum Improvement Proposals (EIPs). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> According to the Ethereum Foundation, the most notable change is EIP-4844 for proto-danksharding, which seeks to optimize gas fees for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-are-layer-1-and-layer-2-blockchain-scaling-solutions-7104877">Layer 2 network</a> (L2) data and enhance the network's ability to handle greater transaction volumes via those secondary layers.<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"> Exchanges may face delays in processing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a> transactions on Wednesday as the update rolls out. 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>) said Monday that it expects disruption due to the update to last for at least an hour on or around 9:45 a.m. Eastern time, although that could change.<span class="ql-inline-citation" data-cite="9"></span> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/what-kraken/">Kraken</a>, meanwhile, is budgeting for about 15 mins of delay for maintenance around 4:00 a.m. Eastern time and recommends users "not to place or cancel orders during this timeframe."<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_13-0"></div> <span class="heading-toc" id="toc-blobs-rollups-gas-what-is-changing"></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"> Blobs, Rollups, Gas: What Is Changing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Layer 2 networks, such as rollups, are secondary <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchains</a> built on top of the base Ethereum network. In a bid to scale transaction volumes, rollups compress transactions by bundling them. The initial verification for those transactions happens off the chain, but the transactions are settled on the main Ethereum blockchain. </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, even with the compression, nodes processing transactions hold on to Layer 2 data forever, expanding their hardware requirements, which are then passed on to users via higher transaction or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gas-ethereum.asp">gas fees</a>.<span class="ql-inline-citation" data-cite="7"></span> More than 90% of the fees paid by users on rollups are because of this data storage.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The Dencun upgrade will alter that, allowing information related to Layer 2 networks to be added to the base Ethereum blockchain via temporary, more efficiently stored "blobs" rather than as permanent data. As of this writing, blob data will be available for 18 days.<span class="ql-inline-citation" data-cite="7"></span> This is intended to lower costs. </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"> "Each byte of data that L2s store on Ethereum costs roughly 16 gas. The introduction of blobs and a new fee market designed for blob data drops the gas cost down to 1 per byte of data stored," noted Fidelity Digital Assets in a report about the upgrade. "This is a maximum gas cost reduction of 94%!"<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> However, it is important to note that Ethereum users on the main blockchain or Layer 1 users won't stand to benefit much from the lower fees found on Layer 2 networks after the upgrade. </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-more-accessible-and-competitive-ethereum"></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"> More Accessible and Competitive Ethereum? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> "Currently, Ethereum’s performance is hindered by its slow transaction speed, low <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/throughput.asp">throughput</a>, and high costs for users. With average transaction fees of $2.3 as of February 22nd, Ethereum is significantly more expensive versus alternatives like <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/solana-5210472">Solana</a>. This threatens to drive away end users to other chains," said crypto asset manager Grayscale in a report. </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 Dencun upgrade "could help Ethereum compete in terms of scalability with faster chains," the Grayscale report said. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Fidelity also points out that in addition to differentiating it from competitors, the latest changes to the Ethereum network could help transition from being a general-purpose blockchain to a global database for Layer 2 networks. The best way to gauge the success of the Dencun upgrade will be to track the number of Layer 2 users via a metric such as active addresses," Fidelity said.<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_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> (<em>Update—March 13, 2024: This story has been updated with more recent ETH price information.</em>) </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

### Key Takeaways * Ethereum's next major network update, known as "Dencun," is scheduled for Wednesday. * Dencun is expected to lower transaction fees on the many Layer 2 networks built on top of the base Ethereum blockchain. * This update is part of a major push by Ethereum developers to head toward mass scalability via Layer 2 blockchains. * Reports from digital asset managers Grayscale and Fidelity Digital Assets indicate the update could be a boon for scaling the overall Ethereum userbase. Ethereum is scheduled to undergo a network update called the Deneb-Cancun, or Dencun, on Wednesday, aimed at improving user experience and lowering transaction fees for some users on the the network's Layer 2 blockchains. Ether ([ETH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ETHUSD)), the native coin of the Ethereum blockchain, soared past $4,000 early Wednesday, but gave up some of those gains to trade a shade under that threshold at 10:30 a.m. Eastern. ## What is the Dencun Ethereum Update? The Dencun update prioritizes scalability, efficiency, and security through the implementation of various Ethereum Improvement Proposals (EIPs). According to the Ethereum Foundation, the most notable change is EIP-4844 for proto-danksharding, which seeks to optimize gas fees for [Layer 2 network](https://www.investopedia.com/what-are-layer-1-and-layer-2-blockchain-scaling-solutions-7104877) (L2) data and enhance the network's ability to handle greater transaction volumes via those secondary layers. Exchanges may face delays in processing [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp) transactions on Wednesday as the update rolls out. Coinbase ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COIN)) said Monday that it expects disruption due to the update to last for at least an hour on or around 9:45 a.m. Eastern time, although that could change. [Kraken](https://www.investopedia.com/tech/what-kraken/), meanwhile, is budgeting for about 15 mins of delay for maintenance around 4:00 a.m. Eastern time and recommends users "not to place or cancel orders during this timeframe." ## Blobs, Rollups, Gas: What Is Changing? Layer 2 networks, such as rollups, are secondary [blockchains](https://www.investopedia.com/terms/b/blockchain.asp) built on top of the base Ethereum network. In a bid to scale transaction volumes, rollups compress transactions by bundling them. The initial verification for those transactions happens off the chain, but the transactions are settled on the main Ethereum blockchain. However, even with the compression, nodes processing transactions hold on to Layer 2 data forever, expanding their hardware requirements, which are then passed on to users via higher transaction or [gas fees](https://www.investopedia.com/terms/g/gas-ethereum.asp). More than 90% of the fees paid by users on rollups are because of this data storage. The Dencun upgrade will alter that, allowing information related to Layer 2 networks to be added to the base Ethereum blockchain via temporary, more efficiently stored "blobs" rather than as permanent data. As of this writing, blob data will be available for 18 days. This is intended to lower costs. "Each byte of data that L2s store on Ethereum costs roughly 16 gas. The introduction of blobs and a new fee market designed for blob data drops the gas cost down to 1 per byte of data stored," noted Fidelity Digital Assets in a report about the upgrade. "This is a maximum gas cost reduction of 94%!" However, it is important to note that Ethereum users on the main blockchain or Layer 1 users won't stand to benefit much from the lower fees found on Layer 2 networks after the upgrade. ## More Accessible and Competitive Ethereum? "Currently, Ethereum’s performance is hindered by its slow transaction speed, low [throughput](https://www.investopedia.com/terms/t/throughput.asp), and high costs for users. With average transaction fees of $2.3 as of February 22nd, Ethereum is significantly more expensive versus alternatives like [Solana](https://www.investopedia.com/solana-5210472). This threatens to drive away end users to other chains," said crypto asset manager Grayscale in a report. The Dencun upgrade "could help Ethereum compete in terms of scalability with faster chains," the Grayscale report said. Fidelity also points out that in addition to differentiating it from competitors, the latest changes to the Ethereum network could help transition from being a general-purpose blockchain to a global database for Layer 2 networks. The best way to gauge the success of the Dencun upgrade will be to track the number of Layer 2 users via a metric such as active addresses," Fidelity said. (*Update—March 13, 2024: This story has been updated with more recent ETH price information.*) Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways Ethereum's next major network update, known as "Dencun," is scheduled for Wednesday.Dencun is expected to lower transaction fees on the many Layer 2 networks built on top of the base Ethereum blockchain.This update is part of a major push by Ethereum developers to head toward mass scalability via Layer 2 blockchains.Reports from digital asset managers Grayscale and Fidelity Digital Assets indicate the update could be a boon for scaling the overall Ethereum userbase. Ethereum is scheduled to undergo a network update called the Deneb-Cancun, or Dencun, on Wednesday, aimed at improving user experience and lowering transaction fees for some users on the the network's Layer 2 blockchains. Ether (ETH), the native coin of the Ethereum blockchain, soared past $4,000 early Wednesday, but gave up some of those gains to trade a shade under that threshold at 10:30 a.m. Eastern. What is the Dencun Ethereum Update? The Dencun update prioritizes scalability, efficiency, and security through the implementation of various Ethereum Improvement Proposals (EIPs). According to the Ethereum Foundation, the most notable change is EIP-4844 for proto-danksharding, which seeks to optimize gas fees for Layer 2 network (L2) data and enhance the network's ability to handle greater transaction volumes via those secondary layers. Exchanges may face delays in processing Ethereum transactions on Wednesday as the update rolls out. Coinbase (COIN) said Monday that it expects disruption due to the update to last for at least an hour on or around 9:45 a.m. Eastern time, although that could change. Kraken, meanwhile, is budgeting for about 15 mins of delay for maintenance around 4:00 a.m. Eastern time and recommends users "not to place or cancel orders during this timeframe." Blobs, Rollups, Gas: What Is Changing? Layer 2 networks, such as rollups, are secondary blockchains built on top of the base Ethereum network. In a bid to scale transaction volumes, rollups compress transactions by bundling them. The initial verification for those transactions happens off the chain, but the transactions are settled on the main Ethereum blockchain. However, even with the compression, nodes processing transactions hold on to Layer 2 data forever, expanding their hardware requirements, which are then passed on to users via higher transaction or gas fees. More than 90% of the fees paid by users on rollups are because of this data storage. The Dencun upgrade will alter that, allowing information related to Layer 2 networks to be added to the base Ethereum blockchain via temporary, more efficiently stored "blobs" rather than as permanent data. As of this writing, blob data will be available for 18 days. This is intended to lower costs. "Each byte of data that L2s store on Ethereum costs roughly 16 gas. The introduction of blobs and a new fee market designed for blob data drops the gas cost down to 1 per byte of data stored," noted Fidelity Digital Assets in a report about the upgrade. "This is a maximum gas cost reduction of 94%!" However, it is important to note that Ethereum users on the main blockchain or Layer 1 users won't stand to benefit much from the lower fees found on Layer 2 networks after the upgrade. More Accessible and Competitive Ethereum? "Currently, Ethereum’s performance is hindered by its slow transaction speed, low throughput, and high costs for users. With average transaction fees of $2.3 as of February 22nd, Ethereum is significantly more expensive versus alternatives like Solana. This threatens to drive away end users to other chains," said crypto asset manager Grayscale in a report. The Dencun upgrade "could help Ethereum compete in terms of scalability with faster chains," the Grayscale report said. Fidelity also points out that in addition to differentiating it from competitors, the latest changes to the Ethereum network could help transition from being a general-purpose blockchain to a global database for Layer 2 networks. The best way to gauge the success of the Dencun upgrade will be to track the number of Layer 2 users via a metric such as active addresses," Fidelity said. (Update—March 13, 2024: This story has been updated with more recent ETH price information.) Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/nordson-stock-tumbles-after-trimming-annual-sales-and-earnings-guidance-8651585

Nordson Stock Tumbles After Company Trims Sales and Earnings 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>Nordson shares traded sharply lower ahead of Tuesday's opening bell after the industrial equipment maker trimmed its annual sales and earnings outlook.</li><li>The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance.</li><li>Nordson shares find support around $230 from a horizontal line linking a series of price action over the past 20 months that sits in close proximity to a golden cross pattern that formed in late last year.</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"> Nordson (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ndsn">NDSN</a>) shares fell sharply in premarket trading Tuesday morning after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/agricultural-etfs-8425680">agricultural</a> challenges in Europe.<span class="ql-inline-citation" data-cite="1"></span> </p> <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 Westlake, Ohio-based company said it now expects full-year fiscal 2024 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netsales.asp">net sales</a> growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/year-over-year.asp">year-over-year (YOY)</a> growth of around 5%. </p> <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"> Nordson also downwardly revised its full-year <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bottomline.asp">bottom line</a> guidance, saying it now projects <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.">adjusted earnings</a> of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share.<span class="ql-inline-citation" data-cite="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_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Shares of the company were down 8.7% at $245.00 about two hours before the opening bell. </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-weakness-in-electronic-end-markets-orders"></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"> Weakness in Electronic End Markets Orders </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance. </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 we move into the second half of fiscal 2024, the positive indicators in the electronics end markets have not yet converted into orders needed to meet our previously issued guidance, Nordson CEO Sundaram Nagarajan said in the company’s earnings release. “We are also experiencing increased pressure from the agriculture cycle in Europe, which is causing OEMs to slow investments in spray implement purchases,” he added.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> For the quarter ending April 30, Nordson's fiscal second quarter, the company posted an adjusted profit of $2.34 per share, nudging past expectations of $2.32 a share. Revenue in the period of $650.6 million came in essentially flat from a year earlier and fell short of the $661.1 million modeled by analysts.<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"> In particular, the company’s advanced technology solutions <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/segment.asp#:~:text=A%20segment%20is%20a%20component,to%20as%20%22business%20segments.%22">segment</a>, which provides automated dispensing systems, weighed down the <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>, with the unit reporting a 22% YOY decline in sales amid broad weakness within the division.<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-monitor-this-chart-level-amid-ongoing-selling"></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"> Monitor This Chart Level Amid Ongoing Selling </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The Nordson share price has tracked mostly higher since breaking out from a multi-month <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradingrange.asp">trading range</a> in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  </p> <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 selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.">horizontal line</a> linking a series of price action over the past 20 months that sits in close proximity to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldencross.asp">golden cross</a> pattern that formed in late last year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer">warranty and liability disclaimer</a> for more info.</em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <em>As of the date this article was written, the author does not own any of the above securities.</em><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

### Key Takeaways * Nordson shares traded sharply lower ahead of Tuesday's opening bell after the industrial equipment maker trimmed its annual sales and earnings outlook. * The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance. * Nordson shares find support around $230 from a horizontal line linking a series of price action over the past 20 months that sits in close proximity to a golden cross pattern that formed in late last year. Nordson ([NDSN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ndsn)) shares fell sharply in premarket trading Tuesday morning after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and [agricultural](https://www.investopedia.com/agricultural-etfs-8425680) challenges in Europe. The Westlake, Ohio-based company said it now expects full-year fiscal 2024 [net sales](https://www.investopedia.com/terms/n/netsales.asp) growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing [year-over-year (YOY)](https://www.investopedia.com/terms/y/year-over-year.asp) growth of around 5%. Nordson also downwardly revised its full-year [bottom line](https://www.investopedia.com/terms/b/bottomline.asp) guidance, saying it now projects [adjusted earnings](https://www.investopedia.com/terms/a/adjusted-earnings.asp#:~:text=Adjusted%20earnings%20is%20a%20metric,to%20the%20current%20time%20period.) of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share. Shares of the company were down 8.7% at $245.00 about two hours before the opening bell. ## Weakness in Electronic End Markets Orders The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance. “As we move into the second half of fiscal 2024, the positive indicators in the electronics end markets have not yet converted into orders needed to meet our previously issued guidance, Nordson CEO Sundaram Nagarajan said in the company’s earnings release. “We are also experiencing increased pressure from the agriculture cycle in Europe, which is causing OEMs to slow investments in spray implement purchases,” he added. For the quarter ending April 30, Nordson's fiscal second quarter, the company posted an adjusted profit of $2.34 per share, nudging past expectations of $2.32 a share. Revenue in the period of $650.6 million came in essentially flat from a year earlier and fell short of the $661.1 million modeled by analysts. In particular, the company’s advanced technology solutions [segment](https://www.investopedia.com/terms/s/segment.asp#:~:text=A%20segment%20is%20a%20component,to%20as%20%22business%20segments.%22), which provides automated dispensing systems, weighed down the [top line](https://www.investopedia.com/terms/t/topline.asp), with the unit reporting a 22% YOY decline in sales amid broad weakness within the division. ## Monitor This Chart Level Amid Ongoing Selling The Nordson share price has tracked mostly higher since breaking out from a multi-month [trading range](https://www.investopedia.com/terms/t/tradingrange.asp) in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  If selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a [horizontal line](https://www.investopedia.com/terms/h/horizontal-line.asp#:~:text=Horizontal%20lines%20are%20commonly%20used,to%20fall%20on%20prior%20occasions.) linking a series of price action over the past 20 months that sits in close proximity to a [golden cross](https://www.investopedia.com/terms/g/goldencross.asp) pattern that formed in late last year. *The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info.* *As of the date this article was written, the author does not own any of the above securities.* Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways Nordson shares traded sharply lower ahead of Tuesday's opening bell after the industrial equipment maker trimmed its annual sales and earnings outlook.The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance.Nordson shares find support around $230 from a horizontal line linking a series of price action over the past 20 months that sits in close proximity to a golden cross pattern that formed in late last year. Nordson (NDSN) shares fell sharply in premarket trading Tuesday morning after the industrial equipment maker trimmed its annual sales and earnings outlook amid weakness in electronics orders and agricultural challenges in Europe. The Westlake, Ohio-based company said it now expects full-year fiscal 2024 net sales growth to come in between flat and up 2%, significantly below its prior forecast of 4% to 7% growth. Analysts had been looking for annual revenue to reach $2.77 billion, representing year-over-year (YOY) growth of around 5%. Nordson also downwardly revised its full-year bottom line guidance, saying it now projects adjusted earnings of $9.35 to $9.75 per share, below its earlier forecast range of $10.00 to $10.50 a share. Shares of the company were down 8.7% at $245.00 about two hours before the opening bell. Weakness in Electronic End Markets Orders The company cited weakness in electronic end markets orders and challenges from the agriculture cycle in Europe for its softer-than-expected guidance. “As we move into the second half of fiscal 2024, the positive indicators in the electronics end markets have not yet converted into orders needed to meet our previously issued guidance, Nordson CEO Sundaram Nagarajan said in the company’s earnings release. “We are also experiencing increased pressure from the agriculture cycle in Europe, which is causing OEMs to slow investments in spray implement purchases,” he added. For the quarter ending April 30, Nordson's fiscal second quarter, the company posted an adjusted profit of $2.34 per share, nudging past expectations of $2.32 a share. Revenue in the period of $650.6 million came in essentially flat from a year earlier and fell short of the $661.1 million modeled by analysts. In particular, the company’s advanced technology solutions segment, which provides automated dispensing systems, weighed down the top line, with the unit reporting a 22% YOY decline in sales amid broad weakness within the division. Monitor This Chart Level Amid Ongoing Selling The Nordson share price has tracked mostly higher since breaking out from a multi-month trading range in mid-December last year. However, the stock sits poised to fall back to the mid portion of the range on Tuesday following the company’s soft guidance.  If selling intensifies in coming trading sessions, investors should keep an eye on the $230 level, an area where buyers may step in near a horizontal line linking a series of price action over the past 20 months that sits in close proximity to a golden cross pattern that formed in late last year. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own any of the above securities. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/articles/personal-finance/051315/will-vs-trust-difference-between-two.asp

Will vs. Trust: What’s the Difference?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-will-vs-trust-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Will vs. Trust: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A will is a legal document that provides instructions on distributing property to beneficiaries after death. Trusts are legal structures that protect assets and direct their use and disposition by their owners’ intentions and are managed by a trustee. </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 will takes effect upon death but trusts can be used both during the lives and after the deaths of the grantor, or creator. Wills and trusts can provide effective estate planning when used separately or together. </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 will is a legal document that defines how affairs are handled and assets distributed after death.</li><li>A trust is an arrangement whereby a grantor, also called a trustor, gives a trustee the right to hold and manage assets for the benefit of a specific purpose or person.</li><li>Trusts can have a limited term such as the duration of the grantor’s lifetime or can continue to hold assets and distribute them after the grantor’s death.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-a-will"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> What Is a Will? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/writing-a-simple-will-5214270">will</a> directs the distribution of assets to designated heirs and beneficiaries after death. It provides <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/next-of-kin.asp">survivors</a> with guidance for handling an estate and lessens the possibility of disputes. A will may include instructions for decisions after death like the appointment of an executor of the will, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/inheritance-for-children.asp">guardians</a> for minor children, or directions for a funeral and burial. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> A will must be signed and witnessed as required by state law. It is filed with a probate court in the local jurisdiction and carried out by the designated executor.<span class="ql-inline-citation" data-cite="20"></span> The document is publicly available in the records of the probate court that oversees its execution and has jurisdiction over any disputes.<span class="ql-inline-citation" data-cite="21"></span> Individuals can revise a will multiple times as personal or financial situations evolve or change. </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"> Individuals who die without a will are subject to their state's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intestacy.asp">intestacy</a> laws. Intestacy entails probate court processes, time, and professional fees that could be lesser if you die leaving a will and a well-designed estate plan.<span class="ql-inline-citation" data-cite="20"></span> A probate court will appoint an administrator to manage the estate and distribution of assets. Following common law, the property commonly goes to a surviving spouse first, then to children, extended family, and descendants. If no family exists, the property typically reverts to the state. </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-tip" 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 will can also direct an executor to create a trust and appoint a trustee to hold assets for the benefit of particular persons such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/custodialaccount.asp">minor children</a> until they reach majority or a specified age.<span class="ql-inline-citation" data-cite="20"></span></p></div></div></div> <span class="heading-toc" id="toc-what-is-a-trust"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> What Is a Trust? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp">Trusts</a> are legal structures that provide for the transfer of assets from their owner, called the grantor or trustor, to a trustee and eventually to beneficiaries. Trusts define the management of the assets, distributions to designated beneficiaries, and the ultimate disposition of the assets. The trustee is a fiduciary obligated to handle the trust assets by the terms of the trust document and solely in the best interests of its beneficiaries.<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_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> A “living trust” can be created during a grantor’s lifetime. A “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/testamentarytrust.asp">testamentary trust</a>” is established after death following directives in the decedent-grantor’s will.<span class="ql-inline-citation" data-cite="22"></span> Living trusts created during the grantor's lifetime facilitate the transfer of assets to heirs without the cost and publicity of probate. </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"> Trust transfers enable grantors to maintain privacy concerning the nature and value of their assets. Trusts ensure privacy for family businesses and real estate held through entities not publicly identified with their owners. Creating a trust to avoid probate may not be beneficial and more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/010915/what-are-typical-trust-fund-management-fees.asp">expensive</a> than it's worth to create and manage if the value of an estate isn't significant or assets are limited. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Establishing a revocable trust to hold and distribute assets doesn't protect the assets from estate taxation if the estate's value exceeds the federal estate tax exemption. It's set at $13.61 million for an individual decedent in 2024 but it's indexed for inflation so it can increase a little each year.<span class="ql-inline-citation" data-cite="31"></span><br/><br/></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-subheading__text"> Types of Trusts </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li><strong>Revocable Trust:</strong> Revocable trusts can be altered, amended, or terminated during a grantor's lifetime. The grantor effectively continues as the owner of the trust assets for tax purposes. The trust document can also name a successor trustee to take over upon a grantor-trustee’s death or disability. Assets in a revocable trust pass outside of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp">probate</a> but are included in the grantor’s taxable estate.<span class="ql-inline-citation" data-cite="23"></span></li> <li><strong>Irrevocable Trust:</strong> Grantors give up their ownership rights to assets when they transfer them to an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/010716/life-estate-vs-irrevocable-trust-which-better-you.asp">irrevocable trust</a>. Irrevocable trusts are managed by a trustee who is not the grantor. The income from the trust assets isn't included in the grantor’s taxable income or the grantor’s estate. The transfer of assets from the grantor to the irrevocable trust may protect the assets from the grantor’s creditors.<span class="ql-inline-citation" data-cite="24"></span></li> <li><strong>Charitable Trust:</strong> Tax law provides special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries.<span class="ql-inline-citation" data-cite="17"></span>A charitable remainder trust is an irrevocable trust that provides current income to the grantor or noncharitable beneficiaries and a partial tax deduction based on the valuation of the contributed assets. The contributed assets are distributed to charities upon expiration of the trust's term which may be no more than 20 years or a term based on the life of one or more noncharitable beneficiaries.<span class="ql-inline-citation" data-cite="18"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Special Needs Trust:</strong> A <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/special-needs-trust-vs-able-account-5217834">special needs trust</a> is a legal arrangements that enable individuals with disabilities to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs, such as <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssi.asp">Supplemental Security Income (SSI)</a> and other benefits.<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_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_29-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Natural or adopted children have a statutory right to inherit but a will allows parents to disinherit a child. Provisions for disinheritance must comply with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inheritance-laws-by-state-5113616">state laws</a>. Detailed rules also enable a person to disinherit a spouse whether in a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/common-law.asp">common law</a> state, a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/which-states-are-community-property-states/">community property</a> state, or an <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equitable-division.asp">equitable distribution</a> state.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div> <span class="heading-toc" id="toc-designating-beneficiaries"></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"> Designating Beneficiaries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Other legal arrangements can facilitate transferring assets directly to heirs like beneficiary designations for retirement and other financial accounts, and gifts of funds and other assets during a lifetime. These arrangements transfer property without probate after death. </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"> Account holders can designate their beneficiaries for IRA and 401(k) retirement funds. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented.<span class="ql-inline-citation" data-cite="15"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <span class="heading-toc" id="toc-using-both-a-will-and-a-trust"></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"> Using Both a Will and a Trust </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> A will may be the least expensive and most efficient choice for small estates with easily transferred assets and simple bequests. A trust without a will can present problems concerning assets outside the trust that become subject to intestacy laws. Larger and more complex estates may benefit by using both arrangements. </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"> It's usually advisable to have a carefully drafted will even if most assets are held in ways that avoid probate. A will and a trust can complement each other, allow swift asset transfers, maintain confidentiality concerning sensitive assets and directives, and prevent intestacy concerning estate assets whose disposition isn't governed by a trust or other arrangement for individuals of means and those with privacy concerns. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <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"> <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">Wills vs. Trusts</th> </tr> <tr> <th><b>Trusts vs. Wills</b></th> <th>Names Guardians for Minor Children</th> <th>Probate Court</th> <th>Can Be Revised</th> <th>Private or Public Record</th> <th>Tax Benefits</th> <th>Creditor Protection</th> </tr> </thead> <tbody data-check="0"> <tr> <th>Trusts</th> <td>No</td> <td>No</td> <td>Yes, if it's a revocable trust</td> <td>Private</td> <td>Yes, if it's an irrevocable trust</td> <td>Yes, if it's an irrevocable trust</td> </tr> <tr> <th>Wills </th> <td>Yes</td> <td>Yes</td> <td>Yes</td> <td>Public record</td> <td>No</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_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-why-is-a-will-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is a Will Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Leaving clearly explained directions for distributing assets may prevent potential <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/wealth-management/022916/tips-help-siblings-resolve-estate-battle.asp">disputes among heirs</a>, children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly.<span class="ql-inline-citation" data-cite="11"></span> Many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-will-makers-4843732">online willmakers</a> offer tools for generating legal forms and documents but individuals should consult legal counsel and other appropriate experts as necessary.</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-are-wills-or-trusts-needed-if-beneficiaries-are-designated-on-an-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Many assets such as IRA and 401(k) retirement funds can be transferred outside probate. Individuals can designate beneficiaries for such accounts with their bank, investment adviser, or employer during their lifetime. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented.<span class="ql-inline-citation" data-cite="15"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-does-transferring-property-to-a-trust-protect-it-from-creditors"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Transferring Property to a Trust Protect It From Creditors?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The vulnerability of trust assets to the claims of a grantor’s creditors is largely determined by state law. Courts will usually treat the assets as being beyond the reach of the grantor’s creditors if a grantor transfers assets to an irrevocable trust for the benefit of third parties or purposes and has relinquished all control, rights, and benefits concerning the assets. The trust is unlikely to insulate the assets from the creditors’ claims if assets are transferred to a trust to avoid creditors or under circumstances that indicate that it would be reasonable to assume that creditors would seek the assets.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-how-does-estate-planning-affect-unmarried-lgbtq-couples"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Estate Planning Affect Unmarried LGBTQ+ Couples?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Estate planning is the same for an LGBTQ+ legally married couple. Estate planning for unmarried couples, LGBTQ+ or straight, is essential, especially for long-term partners. State laws may favor blood relatives over partners.<span class="ql-inline-citation" data-cite="32"></span> The goal is to ensure the surviving partner can access all the legal benefits despite not being legally married. It's critical to list guardianship provisions if an individual has underage children but a spouse hasn't legally adopted them. The courts may decide who raises them otherwise.<span class="ql-inline-citation" data-cite="26"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> It's important to establish an estate plan earlier rather than later. Careful use of wills, trusts, or both can ensure that assets and possessions are distributed as intended. Making an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/wealth-management/122915/4-reasons-estate-planning-so-important.asp">estate plan a priority</a> can save money and time later and help loved ones avoid potential financial hardship and conflicts. </p></div>

## Will vs. Trust: An Overview A will is a legal document that provides instructions on distributing property to beneficiaries after death. Trusts are legal structures that protect assets and direct their use and disposition by their owners’ intentions and are managed by a trustee. A will takes effect upon death but trusts can be used both during the lives and after the deaths of the grantor, or creator. Wills and trusts can provide effective estate planning when used separately or together. ### Key Takeaways * A will is a legal document that defines how affairs are handled and assets distributed after death. * A trust is an arrangement whereby a grantor, also called a trustor, gives a trustee the right to hold and manage assets for the benefit of a specific purpose or person. * Trusts can have a limited term such as the duration of the grantor’s lifetime or can continue to hold assets and distribute them after the grantor’s death. ## What Is a Will? A [will](https://www.investopedia.com/writing-a-simple-will-5214270) directs the distribution of assets to designated heirs and beneficiaries after death. It provides [survivors](https://www.investopedia.com/terms/n/next-of-kin.asp) with guidance for handling an estate and lessens the possibility of disputes. A will may include instructions for decisions after death like the appointment of an executor of the will, [guardians](https://www.investopedia.com/articles/pf/08/inheritance-for-children.asp) for minor children, or directions for a funeral and burial. A will must be signed and witnessed as required by state law. It is filed with a probate court in the local jurisdiction and carried out by the designated executor. The document is publicly available in the records of the probate court that oversees its execution and has jurisdiction over any disputes. Individuals can revise a will multiple times as personal or financial situations evolve or change. Individuals who die without a will are subject to their state's [intestacy](https://www.investopedia.com/terms/i/intestacy.asp) laws. Intestacy entails probate court processes, time, and professional fees that could be lesser if you die leaving a will and a well-designed estate plan. A probate court will appoint an administrator to manage the estate and distribution of assets. Following common law, the property commonly goes to a surviving spouse first, then to children, extended family, and descendants. If no family exists, the property typically reverts to the state. ### A will can also direct an executor to create a trust and appoint a trustee to hold assets for the benefit of particular persons such as [minor children](https://www.investopedia.com/terms/c/custodialaccount.asp) until they reach majority or a specified age. ## What Is a Trust? [Trusts](https://www.investopedia.com/terms/t/trust.asp) are legal structures that provide for the transfer of assets from their owner, called the grantor or trustor, to a trustee and eventually to beneficiaries. Trusts define the management of the assets, distributions to designated beneficiaries, and the ultimate disposition of the assets. The trustee is a fiduciary obligated to handle the trust assets by the terms of the trust document and solely in the best interests of its beneficiaries. A “living trust” can be created during a grantor’s lifetime. A “[testamentary trust](https://www.investopedia.com/terms/t/testamentarytrust.asp)” is established after death following directives in the decedent-grantor’s will. Living trusts created during the grantor's lifetime facilitate the transfer of assets to heirs without the cost and publicity of probate. Trust transfers enable grantors to maintain privacy concerning the nature and value of their assets. Trusts ensure privacy for family businesses and real estate held through entities not publicly identified with their owners. Creating a trust to avoid probate may not be beneficial and more [expensive](https://www.investopedia.com/ask/answers/010915/what-are-typical-trust-fund-management-fees.asp) than it's worth to create and manage if the value of an estate isn't significant or assets are limited. ### Establishing a revocable trust to hold and distribute assets doesn't protect the assets from estate taxation if the estate's value exceeds the federal estate tax exemption. It's set at $13.61 million for an individual decedent in 2024 but it's indexed for inflation so it can increase a little each year. ### Types of Trusts * **Revocable Trust:** Revocable trusts can be altered, amended, or terminated during a grantor's lifetime. The grantor effectively continues as the owner of the trust assets for tax purposes. The trust document can also name a successor trustee to take over upon a grantor-trustee’s death or disability. Assets in a revocable trust pass outside of [probate](https://www.investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp) but are included in the grantor’s taxable estate. * **Irrevocable Trust:** Grantors give up their ownership rights to assets when they transfer them to an [irrevocable trust](https://www.investopedia.com/articles/investing/010716/life-estate-vs-irrevocable-trust-which-better-you.asp). Irrevocable trusts are managed by a trustee who is not the grantor. The income from the trust assets isn't included in the grantor’s taxable income or the grantor’s estate. The transfer of assets from the grantor to the irrevocable trust may protect the assets from the grantor’s creditors. * **Charitable Trust:** Tax law provides special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries.A charitable remainder trust is an irrevocable trust that provides current income to the grantor or noncharitable beneficiaries and a partial tax deduction based on the valuation of the contributed assets. The contributed assets are distributed to charities upon expiration of the trust's term which may be no more than 20 years or a term based on the life of one or more noncharitable beneficiaries. * **Special Needs Trust:** A [special needs trust](https://www.investopedia.com/special-needs-trust-vs-able-account-5217834) is a legal arrangements that enable individuals with disabilities to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs, such as [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp) and other benefits. ### Natural or adopted children have a statutory right to inherit but a will allows parents to disinherit a child. Provisions for disinheritance must comply with [state laws](https://www.investopedia.com/inheritance-laws-by-state-5113616). Detailed rules also enable a person to disinherit a spouse whether in a [common law](https://www.investopedia.com/terms/c/common-law.asp) state, a [community property](https://www.investopedia.com/personal-finance/which-states-are-community-property-states/) state, or an [equitable distribution](https://www.investopedia.com/terms/e/equitable-division.asp) state. ## Designating Beneficiaries Other legal arrangements can facilitate transferring assets directly to heirs like beneficiary designations for retirement and other financial accounts, and gifts of funds and other assets during a lifetime. These arrangements transfer property without probate after death. Account holders can designate their beneficiaries for IRA and 401(k) retirement funds. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented. ## Using Both a Will and a Trust A will may be the least expensive and most efficient choice for small estates with easily transferred assets and simple bequests. A trust without a will can present problems concerning assets outside the trust that become subject to intestacy laws. Larger and more complex estates may benefit by using both arrangements. It's usually advisable to have a carefully drafted will even if most assets are held in ways that avoid probate. A will and a trust can complement each other, allow swift asset transfers, maintain confidentiality concerning sensitive assets and directives, and prevent intestacy concerning estate assets whose disposition isn't governed by a trust or other arrangement for individuals of means and those with privacy concerns. | Wills vs. Trusts | | | | | | | | --- | --- | --- | --- | --- | --- | --- | | **Trusts vs. Wills** | Names Guardians for Minor Children | Probate Court | Can Be Revised | Private or Public Record | Tax Benefits | Creditor Protection | | Trusts | No | No | Yes, if it's a revocable trust | Private | Yes, if it's an irrevocable trust | Yes, if it's an irrevocable trust | | Wills | Yes | Yes | Yes | Public record | No | No | ## Why Is a Will Important? Leaving clearly explained directions for distributing assets may prevent potential [disputes among heirs](https://www.investopedia.com/articles/wealth-management/022916/tips-help-siblings-resolve-estate-battle.asp), children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly. Many [online willmakers](https://www.investopedia.com/best-online-will-makers-4843732) offer tools for generating legal forms and documents but individuals should consult legal counsel and other appropriate experts as necessary. ## Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account? Many assets such as IRA and 401(k) retirement funds can be transferred outside probate. Individuals can designate beneficiaries for such accounts with their bank, investment adviser, or employer during their lifetime. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented. ## Does Transferring Property to a Trust Protect It From Creditors? The vulnerability of trust assets to the claims of a grantor’s creditors is largely determined by state law. Courts will usually treat the assets as being beyond the reach of the grantor’s creditors if a grantor transfers assets to an irrevocable trust for the benefit of third parties or purposes and has relinquished all control, rights, and benefits concerning the assets. The trust is unlikely to insulate the assets from the creditors’ claims if assets are transferred to a trust to avoid creditors or under circumstances that indicate that it would be reasonable to assume that creditors would seek the assets. ## How Does Estate Planning Affect Unmarried LGBTQ+ Couples? Estate planning is the same for an LGBTQ+ legally married couple. Estate planning for unmarried couples, LGBTQ+ or straight, is essential, especially for long-term partners. State laws may favor blood relatives over partners. The goal is to ensure the surviving partner can access all the legal benefits despite not being legally married. It's critical to list guardianship provisions if an individual has underage children but a spouse hasn't legally adopted them. The courts may decide who raises them otherwise. ## The Bottom Line It's important to establish an estate plan earlier rather than later. Careful use of wills, trusts, or both can ensure that assets and possessions are distributed as intended. Making an [estate plan a priority](https://www.investopedia.com/articles/wealth-management/122915/4-reasons-estate-planning-so-important.asp) can save money and time later and help loved ones avoid potential financial hardship and conflicts.

Will vs. Trust: An Overview A will is a legal document that provides instructions on distributing property to beneficiaries after death. Trusts are legal structures that protect assets and direct their use and disposition by their owners’ intentions and are managed by a trustee. A will takes effect upon death but trusts can be used both during the lives and after the deaths of the grantor, or creator. Wills and trusts can provide effective estate planning when used separately or together. Key Takeaways A will is a legal document that defines how affairs are handled and assets distributed after death.A trust is an arrangement whereby a grantor, also called a trustor, gives a trustee the right to hold and manage assets for the benefit of a specific purpose or person.Trusts can have a limited term such as the duration of the grantor’s lifetime or can continue to hold assets and distribute them after the grantor’s death. What Is a Will? A will directs the distribution of assets to designated heirs and beneficiaries after death. It provides survivors with guidance for handling an estate and lessens the possibility of disputes. A will may include instructions for decisions after death like the appointment of an executor of the will, guardians for minor children, or directions for a funeral and burial. A will must be signed and witnessed as required by state law. It is filed with a probate court in the local jurisdiction and carried out by the designated executor. The document is publicly available in the records of the probate court that oversees its execution and has jurisdiction over any disputes. Individuals can revise a will multiple times as personal or financial situations evolve or change. Individuals who die without a will are subject to their state's intestacy laws. Intestacy entails probate court processes, time, and professional fees that could be lesser if you die leaving a will and a well-designed estate plan. A probate court will appoint an administrator to manage the estate and distribution of assets. Following common law, the property commonly goes to a surviving spouse first, then to children, extended family, and descendants. If no family exists, the property typically reverts to the state. A will can also direct an executor to create a trust and appoint a trustee to hold assets for the benefit of particular persons such as minor children until they reach majority or a specified age. What Is a Trust? Trusts are legal structures that provide for the transfer of assets from their owner, called the grantor or trustor, to a trustee and eventually to beneficiaries. Trusts define the management of the assets, distributions to designated beneficiaries, and the ultimate disposition of the assets. The trustee is a fiduciary obligated to handle the trust assets by the terms of the trust document and solely in the best interests of its beneficiaries. A “living trust” can be created during a grantor’s lifetime. A “testamentary trust” is established after death following directives in the decedent-grantor’s will. Living trusts created during the grantor's lifetime facilitate the transfer of assets to heirs without the cost and publicity of probate. Trust transfers enable grantors to maintain privacy concerning the nature and value of their assets. Trusts ensure privacy for family businesses and real estate held through entities not publicly identified with their owners. Creating a trust to avoid probate may not be beneficial and more expensive than it's worth to create and manage if the value of an estate isn't significant or assets are limited. Establishing a revocable trust to hold and distribute assets doesn't protect the assets from estate taxation if the estate's value exceeds the federal estate tax exemption. It's set at $13.61 million for an individual decedent in 2024 but it's indexed for inflation so it can increase a little each year. Types of Trusts Revocable Trust: Revocable trusts can be altered, amended, or terminated during a grantor's lifetime. The grantor effectively continues as the owner of the trust assets for tax purposes. The trust document can also name a successor trustee to take over upon a grantor-trustee’s death or disability. Assets in a revocable trust pass outside of probate but are included in the grantor’s taxable estate. Irrevocable Trust: Grantors give up their ownership rights to assets when they transfer them to an irrevocable trust. Irrevocable trusts are managed by a trustee who is not the grantor. The income from the trust assets isn't included in the grantor’s taxable income or the grantor’s estate. The transfer of assets from the grantor to the irrevocable trust may protect the assets from the grantor’s creditors. Charitable Trust: Tax law provides special benefits for certain irrevocable trusts that benefit charities while providing some economic return to their grantor or beneficiaries.A charitable remainder trust is an irrevocable trust that provides current income to the grantor or noncharitable beneficiaries and a partial tax deduction based on the valuation of the contributed assets. The contributed assets are distributed to charities upon expiration of the trust's term which may be no more than 20 years or a term based on the life of one or more noncharitable beneficiaries. Special Needs Trust: A special needs trust is a legal arrangements that enable individuals with disabilities to receive financial support from the trust for particular purposes without jeopardizing their eligibility for federal and state public assistance programs, such as Supplemental Security Income (SSI) and other benefits. Natural or adopted children have a statutory right to inherit but a will allows parents to disinherit a child. Provisions for disinheritance must comply with state laws. Detailed rules also enable a person to disinherit a spouse whether in a common law state, a community property state, or an equitable distribution state. Designating Beneficiaries Other legal arrangements can facilitate transferring assets directly to heirs like beneficiary designations for retirement and other financial accounts, and gifts of funds and other assets during a lifetime. These arrangements transfer property without probate after death. Account holders can designate their beneficiaries for IRA and 401(k) retirement funds. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented. Using Both a Will and a Trust A will may be the least expensive and most efficient choice for small estates with easily transferred assets and simple bequests. A trust without a will can present problems concerning assets outside the trust that become subject to intestacy laws. Larger and more complex estates may benefit by using both arrangements. It's usually advisable to have a carefully drafted will even if most assets are held in ways that avoid probate. A will and a trust can complement each other, allow swift asset transfers, maintain confidentiality concerning sensitive assets and directives, and prevent intestacy concerning estate assets whose disposition isn't governed by a trust or other arrangement for individuals of means and those with privacy concerns. Wills vs. Trusts Trusts vs. Wills Names Guardians for Minor Children Probate Court Can Be Revised Private or Public Record Tax Benefits Creditor Protection Trusts No No Yes, if it's a revocable trust Private Yes, if it's an irrevocable trust Yes, if it's an irrevocable trust Wills  Yes Yes Yes Public record No No Why Is a Will Important? Leaving clearly explained directions for distributing assets may prevent potential disputes among heirs, children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly. Many online willmakers offer tools for generating legal forms and documents but individuals should consult legal counsel and other appropriate experts as necessary. Are Wills or Trusts Needed If Beneficiaries Are Designated on an Account? Many assets such as IRA and 401(k) retirement funds can be transferred outside probate. Individuals can designate beneficiaries for such accounts with their bank, investment adviser, or employer during their lifetime. Married couples' joint ownership of bank accounts and real estate can provide a right of survivorship that doesn't require probate if they're properly structured and documented. Does Transferring Property to a Trust Protect It From Creditors? The vulnerability of trust assets to the claims of a grantor’s creditors is largely determined by state law. Courts will usually treat the assets as being beyond the reach of the grantor’s creditors if a grantor transfers assets to an irrevocable trust for the benefit of third parties or purposes and has relinquished all control, rights, and benefits concerning the assets. The trust is unlikely to insulate the assets from the creditors’ claims if assets are transferred to a trust to avoid creditors or under circumstances that indicate that it would be reasonable to assume that creditors would seek the assets. How Does Estate Planning Affect Unmarried LGBTQ+ Couples? Estate planning is the same for an LGBTQ+ legally married couple. Estate planning for unmarried couples, LGBTQ+ or straight, is essential, especially for long-term partners. State laws may favor blood relatives over partners. The goal is to ensure the surviving partner can access all the legal benefits despite not being legally married. It's critical to list guardianship provisions if an individual has underage children but a spouse hasn't legally adopted them. The courts may decide who raises them otherwise. The Bottom Line It's important to establish an estate plan earlier rather than later. Careful use of wills, trusts, or both can ensure that assets and possessions are distributed as intended. Making an estate plan a priority can save money and time later and help loved ones avoid potential financial hardship and conflicts.

https://www.investopedia.com/terms/e/earnedpremium.asp

What Is an Earned Premium? Process and How It Works in 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"><span class="heading-toc" id="toc-what-is-an-earned-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 Earned Premium? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term earned premium refers to the premium collected by an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance.asp">insurance</a> company for the portion of a policy that has expired. It is what the insured party has paid for a portion of time in which the insurance policy was in effect, but has since expired. Since the insurance company covers the risk during that time, it considers the associated premium payments it takes from the insured party as unearned. Once the time has expired, it can then record it as earned or as a profit. </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-earned-premiums"></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 Earned Premiums </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> An earned insurance premium is commonly used in the insurance industry. Because policyholders pay premiums in advance, insurers don't immediately consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/premium.asp">premiums</a> paid for an insurance contract 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>. While the policyholder meets their financial obligation and receives the benefits, an insurer's obligation begins when it receives the premium. </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"> When the premium is paid, it is considered an unearned premium—not a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit.asp">profit</a>. That's because, as mentioned above, the insurance company still has an obligation to fulfill. The insurer can change the status of the premium from unearned to earned only when the entire premium is considered profit. </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-important" 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>The earned premium for a full year policy, paid up front and in effect for 90 days, would be for those 90 days.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Say the insurance company records the premium as an earning, and the time period hasn't elapsed. But the insured party files a claim during that time period. The insurance company will have to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reconciliation.asp">reconcile</a> its books to unwind the transaction listing the premium as an earning. So it makes more sense to hold off on recording it as an earning in the event that a claim is filed. </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-whatyouneedtoknow" 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">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><ul><li>An earned premium is the premium used for the time period in which the insurance policy was in effect.</li><li>Insurance companies can record earned premiums as revenue after the premium's coverage period expires.</li><li>Earned premiums can be calculated by using the accounting method and the exposure method.</li></ul></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"> There are two different ways to calculate earned premiums: The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountingmethod.asp">accounting method</a> and the exposure method. </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 accounting method is the most commonly used. This method is the one used to show earned premium on the majority of insurers' corporate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incomestatement.asp">income statements</a>. The calculation used in this method involves dividing the total premium by 365 and multiplying the result by the number of elapsed days. For example, an insurer who receives a $1,000 premium on a policy that has been in effect for 100 days would have an earned premium of $273.97 ($1,000 ÷ 365 x 100). </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 exposure method does not take into account the date a premium is booked. Instead, it looks at how premiums are exposed to losses over a given period of time. It is a complicated method and involves examining the portion of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unearned-premium.asp">unearned premium</a> exposed to loss during the period being calculated. The exposure method involves the examination of different risk scenarios using historical data that may occur over a period of time—from high-risk to low-risk scenarios—and applies the resulting exposure to premiums earned. </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-earned-vs-unearned-premiums"></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"> Earned vs. Unearned Premiums </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> While earned premiums refers to any premiums paid in advance that are earned and belong to the insurer, unearned premiums are different. These are premiums collected in advance by insurance companies who are required to give them back to policyholders if coverage is terminated before the period covered by the premium is over. </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"> Say, for example, you take out an automobile insurance policy and prepay for a six-month term. If you get into a car crash and total your vehicle in the second month of the policy, the insurance company keeps the premiums paid for the first two months. These are the company's earned premiums. But the remaining four months' worth of premiums are returned to the insured party. Because they are unused, they are called unearned premiums. Similarly, if a policyholder pays $200 per month for a 12-month insurance policy and decides to terminate coverage after three months, the insurance company keeps $600 as earned premiums and refunds $1,800 to the policyholder as unearned premiums. </p></div>

## What Is an Earned Premium? The term earned premium refers to the premium collected by an [insurance](https://www.investopedia.com/terms/i/insurance.asp) company for the portion of a policy that has expired. It is what the insured party has paid for a portion of time in which the insurance policy was in effect, but has since expired. Since the insurance company covers the risk during that time, it considers the associated premium payments it takes from the insured party as unearned. Once the time has expired, it can then record it as earned or as a profit. ## Understanding Earned Premiums An earned insurance premium is commonly used in the insurance industry. Because policyholders pay premiums in advance, insurers don't immediately consider [premiums](https://www.investopedia.com/terms/p/premium.asp) paid for an insurance contract as [earnings](https://www.investopedia.com/terms/e/earnings.asp). While the policyholder meets their financial obligation and receives the benefits, an insurer's obligation begins when it receives the premium. When the premium is paid, it is considered an unearned premium—not a [profit](https://www.investopedia.com/terms/p/profit.asp). That's because, as mentioned above, the insurance company still has an obligation to fulfill. The insurer can change the status of the premium from unearned to earned only when the entire premium is considered profit. ### The earned premium for a full year policy, paid up front and in effect for 90 days, would be for those 90 days. Say the insurance company records the premium as an earning, and the time period hasn't elapsed. But the insured party files a claim during that time period. The insurance company will have to [reconcile](https://www.investopedia.com/terms/r/reconciliation.asp) its books to unwind the transaction listing the premium as an earning. So it makes more sense to hold off on recording it as an earning in the event that a claim is filed. ### Key Takeaways * An earned premium is the premium used for the time period in which the insurance policy was in effect. * Insurance companies can record earned premiums as revenue after the premium's coverage period expires. * Earned premiums can be calculated by using the accounting method and the exposure method. ## Special Considerations There are two different ways to calculate earned premiums: The [accounting method](https://www.investopedia.com/terms/a/accountingmethod.asp) and the exposure method. The accounting method is the most commonly used. This method is the one used to show earned premium on the majority of insurers' corporate [income statements](https://www.investopedia.com/terms/i/incomestatement.asp). The calculation used in this method involves dividing the total premium by 365 and multiplying the result by the number of elapsed days. For example, an insurer who receives a $1,000 premium on a policy that has been in effect for 100 days would have an earned premium of $273.97 ($1,000 ÷ 365 x 100). The exposure method does not take into account the date a premium is booked. Instead, it looks at how premiums are exposed to losses over a given period of time. It is a complicated method and involves examining the portion of [unearned premium](https://www.investopedia.com/terms/u/unearned-premium.asp) exposed to loss during the period being calculated. The exposure method involves the examination of different risk scenarios using historical data that may occur over a period of time—from high-risk to low-risk scenarios—and applies the resulting exposure to premiums earned. ## Earned vs. Unearned Premiums While earned premiums refers to any premiums paid in advance that are earned and belong to the insurer, unearned premiums are different. These are premiums collected in advance by insurance companies who are required to give them back to policyholders if coverage is terminated before the period covered by the premium is over. Say, for example, you take out an automobile insurance policy and prepay for a six-month term. If you get into a car crash and total your vehicle in the second month of the policy, the insurance company keeps the premiums paid for the first two months. These are the company's earned premiums. But the remaining four months' worth of premiums are returned to the insured party. Because they are unused, they are called unearned premiums. Similarly, if a policyholder pays $200 per month for a 12-month insurance policy and decides to terminate coverage after three months, the insurance company keeps $600 as earned premiums and refunds $1,800 to the policyholder as unearned premiums.

What Is an Earned Premium? The term earned premium refers to the premium collected by an insurance company for the portion of a policy that has expired. It is what the insured party has paid for a portion of time in which the insurance policy was in effect, but has since expired. Since the insurance company covers the risk during that time, it considers the associated premium payments it takes from the insured party as unearned. Once the time has expired, it can then record it as earned or as a profit. Understanding Earned Premiums An earned insurance premium is commonly used in the insurance industry. Because policyholders pay premiums in advance, insurers don't immediately consider premiums paid for an insurance contract as earnings. While the policyholder meets their financial obligation and receives the benefits, an insurer's obligation begins when it receives the premium. When the premium is paid, it is considered an unearned premium—not a profit. That's because, as mentioned above, the insurance company still has an obligation to fulfill. The insurer can change the status of the premium from unearned to earned only when the entire premium is considered profit. The earned premium for a full year policy, paid up front and in effect for 90 days, would be for those 90 days. Say the insurance company records the premium as an earning, and the time period hasn't elapsed. But the insured party files a claim during that time period. The insurance company will have to reconcile its books to unwind the transaction listing the premium as an earning. So it makes more sense to hold off on recording it as an earning in the event that a claim is filed. Key Takeaways An earned premium is the premium used for the time period in which the insurance policy was in effect.Insurance companies can record earned premiums as revenue after the premium's coverage period expires.Earned premiums can be calculated by using the accounting method and the exposure method. Special Considerations There are two different ways to calculate earned premiums: The accounting method and the exposure method. The accounting method is the most commonly used. This method is the one used to show earned premium on the majority of insurers' corporate income statements. The calculation used in this method involves dividing the total premium by 365 and multiplying the result by the number of elapsed days. For example, an insurer who receives a $1,000 premium on a policy that has been in effect for 100 days would have an earned premium of $273.97 ($1,000 ÷ 365 x 100). The exposure method does not take into account the date a premium is booked. Instead, it looks at how premiums are exposed to losses over a given period of time. It is a complicated method and involves examining the portion of unearned premium exposed to loss during the period being calculated. The exposure method involves the examination of different risk scenarios using historical data that may occur over a period of time—from high-risk to low-risk scenarios—and applies the resulting exposure to premiums earned. Earned vs. Unearned Premiums While earned premiums refers to any premiums paid in advance that are earned and belong to the insurer, unearned premiums are different. These are premiums collected in advance by insurance companies who are required to give them back to policyholders if coverage is terminated before the period covered by the premium is over. Say, for example, you take out an automobile insurance policy and prepay for a six-month term. If you get into a car crash and total your vehicle in the second month of the policy, the insurance company keeps the premiums paid for the first two months. These are the company's earned premiums. But the remaining four months' worth of premiums are returned to the insured party. Because they are unused, they are called unearned premiums. Similarly, if a policyholder pays $200 per month for a 12-month insurance policy and decides to terminate coverage after three months, the insurance company keeps $600 as earned premiums and refunds $1,800 to the policyholder as unearned premiums.

https://www.investopedia.com/investors-expect-the-best-from-nvidia-earnings-what-that-could-mean-for-the-stock-8651022

Investors Expect the Best From Nvidia Earnings—What That Could Mean for the Stock

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><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>Nvidia shares rose Monday ahead of the company's high-stakes first-quarter earnings report, which will come after markets close on Wednesday.</li><li>Consensus estimates showed analysts revised expectations higher ahead of the report.</li><li>Bullish investors are expecting the chipmaker's revenue and guidance to beat analysts' estimates by more than $1 billion.</li><li>Analysts suggested investors' expectations may be too high and could contribute to a big move in Nvidia's stock price after the company's earnings announcement.</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"> 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>) shares gained in intraday trading Monday ahead of the chipmaker's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-q1-fy-2025-earnings-preview-8643286">highly anticipated first-quarter earnings report</a> due after the bell on Wednesday. </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"> Analysts lifted their estimates ahead of Wednesday's report, though some raised concerns that investors' expectations of the chipmaker could be even higher, potentially leading to a big move in Nvidia's stock price after the company's earnings announcement. </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"> Nvidia shares were up 2.4% to $947.10 around 1:40 p.m. ET Monday, and have nearly doubled in value since the start of the year. </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-rising-estimates-and-price-targets"></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"> Rising Estimates and Price Targets </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Ahead of Nvidia's earnings announcement Wednesday, analysts lifted their expectations of the chipmaker, according to consensus estimates compiled by Visible Alpha. Analysts indicated they now anticipate Nvidia's revenue to come in at $24.74 billion, while net income is seen at $12.91 billion or $5.19 per share, with all three figures up slightly from last week's projections. </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"> Higher expectations for Nvidia's results have led some analysts to raise their price targets for the stock as well, with Barclays analysts on Monday bumping their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pricetarget.asp">price target</a> for the stock to $1,100 from $850, saying their checks suggest an upside of more than $1 billion for the first quarter and a $2 billion upside in the July quarter.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Stifel analysts also increased their price objective to $1,085 from $910, calling the chipmaker a “top pick relative to the AI infrastructure investment theme.”<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_15-0"></div> <span class="heading-toc" id="toc-investors-expectations-could-be-even-higher"></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"> Investors' Expectations Could Be Even Higher </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Bank of America analysts reported that based on talks with investors, "expectations seem well-above consensus estimates as usual."<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"> They said bullish investors expect first-quarter revenue of $26 billion, ahead of analysts' estimates, and for guidance to be close to $28 billion for the July quarter. In comparison, consensus estimates compiled by Visible Alpha show analysts project second-quarter revenue of $26.96 billion. </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-significant-stock-move-could-follow-earnings"></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"> Significant Stock Move Could Follow Earnings </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Given investors' high expectations, analysts raised concerns that an earnings beat alone might not be enough to impress investors. "Even if NVDA were to potentially deliver on these bullish expectations, the stock could still react unfavorably," Bank of America analysts wrote. </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"> Susquehanna analysts indicated that while they expect "another strong report" from the chipmaker, they noted due to "elevated expectations as the sell-side has ratcheted July/2024 estimates," Nvidia could need "at least a $1.5B beat" for a muted reaction.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Pricing in the options market suggests traders are expecting shares could move around 10% in either direction.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Significant movement before and after an earnings report has been the norm for Nvidia in recent quarters. Nvidia shares had <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-drops-ahead-of-high-stakes-earnings-8597865">dropped</a> ahead of the company's earnings report in February, and gained more than 9% in extended trading after results <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-q4-fy2024-earnings-8598026">beat estimates</a>. The earnings announcement sent Nvidia's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a> above <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-market-cap-tops-usd2-trillion-8599196">$2 trillion</a> in the following days.<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 * Nvidia shares rose Monday ahead of the company's high-stakes first-quarter earnings report, which will come after markets close on Wednesday. * Consensus estimates showed analysts revised expectations higher ahead of the report. * Bullish investors are expecting the chipmaker's revenue and guidance to beat analysts' estimates by more than $1 billion. * Analysts suggested investors' expectations may be too high and could contribute to a big move in Nvidia's stock price after the company's earnings announcement. Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) shares gained in intraday trading Monday ahead of the chipmaker's [highly anticipated first-quarter earnings report](https://www.investopedia.com/nvidia-q1-fy-2025-earnings-preview-8643286) due after the bell on Wednesday. Analysts lifted their estimates ahead of Wednesday's report, though some raised concerns that investors' expectations of the chipmaker could be even higher, potentially leading to a big move in Nvidia's stock price after the company's earnings announcement. Nvidia shares were up 2.4% to $947.10 around 1:40 p.m. ET Monday, and have nearly doubled in value since the start of the year. ## Rising Estimates and Price Targets Ahead of Nvidia's earnings announcement Wednesday, analysts lifted their expectations of the chipmaker, according to consensus estimates compiled by Visible Alpha. Analysts indicated they now anticipate Nvidia's revenue to come in at $24.74 billion, while net income is seen at $12.91 billion or $5.19 per share, with all three figures up slightly from last week's projections. Higher expectations for Nvidia's results have led some analysts to raise their price targets for the stock as well, with Barclays analysts on Monday bumping their [price target](https://www.investopedia.com/terms/p/pricetarget.asp) for the stock to $1,100 from $850, saying their checks suggest an upside of more than $1 billion for the first quarter and a $2 billion upside in the July quarter. Stifel analysts also increased their price objective to $1,085 from $910, calling the chipmaker a “top pick relative to the AI infrastructure investment theme.” ## Investors' Expectations Could Be Even Higher Bank of America analysts reported that based on talks with investors, "expectations seem well-above consensus estimates as usual." They said bullish investors expect first-quarter revenue of $26 billion, ahead of analysts' estimates, and for guidance to be close to $28 billion for the July quarter. In comparison, consensus estimates compiled by Visible Alpha show analysts project second-quarter revenue of $26.96 billion. ## Significant Stock Move Could Follow Earnings Given investors' high expectations, analysts raised concerns that an earnings beat alone might not be enough to impress investors. "Even if NVDA were to potentially deliver on these bullish expectations, the stock could still react unfavorably," Bank of America analysts wrote. Susquehanna analysts indicated that while they expect "another strong report" from the chipmaker, they noted due to "elevated expectations as the sell-side has ratcheted July/2024 estimates," Nvidia could need "at least a $1.5B beat" for a muted reaction. Pricing in the options market suggests traders are expecting shares could move around 10% in either direction. Significant movement before and after an earnings report has been the norm for Nvidia in recent quarters. Nvidia shares had [dropped](https://www.investopedia.com/nvidia-drops-ahead-of-high-stakes-earnings-8597865) ahead of the company's earnings report in February, and gained more than 9% in extended trading after results [beat estimates](https://www.investopedia.com/nvidia-q4-fy2024-earnings-8598026). The earnings announcement sent Nvidia's [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) above [$2 trillion](https://www.investopedia.com/nvidia-market-cap-tops-usd2-trillion-8599196) in the following days. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways Nvidia shares rose Monday ahead of the company's high-stakes first-quarter earnings report, which will come after markets close on Wednesday.Consensus estimates showed analysts revised expectations higher ahead of the report.Bullish investors are expecting the chipmaker's revenue and guidance to beat analysts' estimates by more than $1 billion.Analysts suggested investors' expectations may be too high and could contribute to a big move in Nvidia's stock price after the company's earnings announcement. Nvidia (NVDA) shares gained in intraday trading Monday ahead of the chipmaker's highly anticipated first-quarter earnings report due after the bell on Wednesday. Analysts lifted their estimates ahead of Wednesday's report, though some raised concerns that investors' expectations of the chipmaker could be even higher, potentially leading to a big move in Nvidia's stock price after the company's earnings announcement. Nvidia shares were up 2.4% to $947.10 around 1:40 p.m. ET Monday, and have nearly doubled in value since the start of the year. Rising Estimates and Price Targets Ahead of Nvidia's earnings announcement Wednesday, analysts lifted their expectations of the chipmaker, according to consensus estimates compiled by Visible Alpha. Analysts indicated they now anticipate Nvidia's revenue to come in at $24.74 billion, while net income is seen at $12.91 billion or $5.19 per share, with all three figures up slightly from last week's projections. Higher expectations for Nvidia's results have led some analysts to raise their price targets for the stock as well, with Barclays analysts on Monday bumping their price target for the stock to $1,100 from $850, saying their checks suggest an upside of more than $1 billion for the first quarter and a $2 billion upside in the July quarter. Stifel analysts also increased their price objective to $1,085 from $910, calling the chipmaker a “top pick relative to the AI infrastructure investment theme.” Investors' Expectations Could Be Even Higher Bank of America analysts reported that based on talks with investors, "expectations seem well-above consensus estimates as usual." They said bullish investors expect first-quarter revenue of $26 billion, ahead of analysts' estimates, and for guidance to be close to $28 billion for the July quarter. In comparison, consensus estimates compiled by Visible Alpha show analysts project second-quarter revenue of $26.96 billion. Significant Stock Move Could Follow Earnings Given investors' high expectations, analysts raised concerns that an earnings beat alone might not be enough to impress investors. "Even if NVDA were to potentially deliver on these bullish expectations, the stock could still react unfavorably," Bank of America analysts wrote. Susquehanna analysts indicated that while they expect "another strong report" from the chipmaker, they noted due to "elevated expectations as the sell-side has ratcheted July/2024 estimates," Nvidia could need "at least a $1.5B beat" for a muted reaction. Pricing in the options market suggests traders are expecting shares could move around 10% in either direction. Significant movement before and after an earnings report has been the norm for Nvidia in recent quarters. Nvidia shares had dropped ahead of the company's earnings report in February, and gained more than 9% in extended trading after results beat estimates. The earnings announcement sent Nvidia's market capitalization above $2 trillion in the following days. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

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

Affidavit of Loss Explanation and Use Cases

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-affidavit-of-loss"></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 Affidavit of Loss? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An affidavit of loss is a document declaring the loss 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> usually through theft or destruction. The affidavit contains all the details regarding the loss, such as the owner's name and any information pertaining to the security. That information may include a serial number or the security’s date of issue. After the statement has been made, a letter of indemnity can be issued requesting the replacement of the security. </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 affidavit of loss is a document declaring that a security, such as a stock certificate, is lost or destroyed.</li><li>The security issuer requires an affidavit in order to indemnify the holder or replace the certificate.</li><li>Individuals can file affidavits of loss for other types of document, such as a passport or diploma. </li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-affidavit-of-loss"></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 Affidavit of Loss </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> There is always the possibility that a physical record of a security such as a stock certificate may be lost. If the record is stolen, misplaced, or destroyed, the owner is required to swear an affidavit pertaining to the loss of the item. This is an oath outlining that to the best of the person's knowledge the record is truly gone. If the lost copy appears after the owner receives a replacement security, the original record must be forwarded to the company for disposal. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-subheading__text"> Other Uses </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> There are comparable statements for missing financial documents that are not securities. An affidavit of lost note is filed when a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/promissorynote.asp">promissory note</a> or another record of indebtedness is destroyed or lost. This type of affidavit would include the name of the debtor, the outstanding balance, the interest rate on the debt, details on the repayment history and listing of any property that was put up as security. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> An affidavit of loss can be filed for other types of document, such as those related to ownership of a house, a passport, a diploma, or even an ATM card. Missing marriage licenses may require such a document. </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"> Anytime an individual loses a record that cannot be immediately replaced with a copy, they may need to file an affidavit of loss. For example, 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>, registration, or plates to a vehicle could be destroyed, stolen, or defaced to the extent they can no longer be used. Some states require an affidavit to record their loss. The owner or title holder must provide such information as the make, model and vehicle identification number for the vehicle associated with the missing documents. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The rules and requirements regarding information required when filing an affidavit of loss vary by jurisdiction. Some require an affidavit of loss <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-notary-services-5085059">to be notarized</a>. </p></div>

## What Is Affidavit of Loss? An affidavit of loss is a document declaring the loss of a [security](https://www.investopedia.com/terms/s/security.asp) usually through theft or destruction. The affidavit contains all the details regarding the loss, such as the owner's name and any information pertaining to the security. That information may include a serial number or the security’s date of issue. After the statement has been made, a letter of indemnity can be issued requesting the replacement of the security. ### Key Takeaways * An affidavit of loss is a document declaring that a security, such as a stock certificate, is lost or destroyed. * The security issuer requires an affidavit in order to indemnify the holder or replace the certificate. * Individuals can file affidavits of loss for other types of document, such as a passport or diploma. ## Understanding Affidavit of Loss There is always the possibility that a physical record of a security such as a stock certificate may be lost. If the record is stolen, misplaced, or destroyed, the owner is required to swear an affidavit pertaining to the loss of the item. This is an oath outlining that to the best of the person's knowledge the record is truly gone. If the lost copy appears after the owner receives a replacement security, the original record must be forwarded to the company for disposal. ### Other Uses There are comparable statements for missing financial documents that are not securities. An affidavit of lost note is filed when a [promissory note](https://www.investopedia.com/terms/p/promissorynote.asp) or another record of indebtedness is destroyed or lost. This type of affidavit would include the name of the debtor, the outstanding balance, the interest rate on the debt, details on the repayment history and listing of any property that was put up as security. An affidavit of loss can be filed for other types of document, such as those related to ownership of a house, a passport, a diploma, or even an ATM card. Missing marriage licenses may require such a document. Anytime an individual loses a record that cannot be immediately replaced with a copy, they may need to file an affidavit of loss. For example, the [title](https://www.investopedia.com/terms/t/title.asp), registration, or plates to a vehicle could be destroyed, stolen, or defaced to the extent they can no longer be used. Some states require an affidavit to record their loss. The owner or title holder must provide such information as the make, model and vehicle identification number for the vehicle associated with the missing documents. The rules and requirements regarding information required when filing an affidavit of loss vary by jurisdiction. Some require an affidavit of loss [to be notarized](https://www.investopedia.com/best-online-notary-services-5085059).

What Is Affidavit of Loss? An affidavit of loss is a document declaring the loss of a security usually through theft or destruction. The affidavit contains all the details regarding the loss, such as the owner's name and any information pertaining to the security. That information may include a serial number or the security’s date of issue. After the statement has been made, a letter of indemnity can be issued requesting the replacement of the security. Key Takeaways An affidavit of loss is a document declaring that a security, such as a stock certificate, is lost or destroyed.The security issuer requires an affidavit in order to indemnify the holder or replace the certificate.Individuals can file affidavits of loss for other types of document, such as a passport or diploma. Understanding Affidavit of Loss There is always the possibility that a physical record of a security such as a stock certificate may be lost. If the record is stolen, misplaced, or destroyed, the owner is required to swear an affidavit pertaining to the loss of the item. This is an oath outlining that to the best of the person's knowledge the record is truly gone. If the lost copy appears after the owner receives a replacement security, the original record must be forwarded to the company for disposal. Other Uses There are comparable statements for missing financial documents that are not securities. An affidavit of lost note is filed when a promissory note or another record of indebtedness is destroyed or lost. This type of affidavit would include the name of the debtor, the outstanding balance, the interest rate on the debt, details on the repayment history and listing of any property that was put up as security. An affidavit of loss can be filed for other types of document, such as those related to ownership of a house, a passport, a diploma, or even an ATM card. Missing marriage licenses may require such a document. Anytime an individual loses a record that cannot be immediately replaced with a copy, they may need to file an affidavit of loss. For example, the title, registration, or plates to a vehicle could be destroyed, stolen, or defaced to the extent they can no longer be used. Some states require an affidavit to record their loss. The owner or title holder must provide such information as the make, model and vehicle identification number for the vehicle associated with the missing documents. The rules and requirements regarding information required when filing an affidavit of loss vary by jurisdiction. Some require an affidavit of loss to be notarized.

https://www.investopedia.com/how-we-shop-now-5184434

How COVID-19 Changed Consumer Shopping Behavior

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 COVID-19 pandemic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-the-coronavirus-stimulus-bills-affect-you-4800404">affected nearly every phase of American life</a>, and shopping is no exception. It has wrought changes in what we buy, how we buy it, and how we pay for 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"> Let’s look at some areas where the coronavirus crisis been especially influential: purchase methods such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/buy-now-pay-later-5182291">buy now, pay later (BNPL)</a>; home and car buying; and the operations of physical stores and their relationship with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecommerce.asp">e-commerce</a>. We’ll examine the trends and evaluate which seem likely to stay, marking a fundamental shift in shopping habits. </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 COVID-19 pandemic has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-shopping-habits-changed-due-to-covid-5186278">altered how we buy and sell things</a> in America.</li> <li>Buy now, pay later (BNPL) services have seen their customers multiply by nearly 50%.<span class="ql-inline-citation" data-cite="1"></span></li> <li>The purchasing of homes and cars online has significantly increased.</li> <li>Online spending grew, with multichannelling—the combination of on-site and online purchases—becoming more and more popular.</li> </ul></div></div></div> <span class="heading-toc" id="toc-buy-now-pay-later-bnpl"></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"> Buy Now, Pay Later (BNPL) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> BNPL is a type of short-term financing tool that allows consumers to make purchases and pay for them in installments, often without charging any interest. You apply at the checkout point, and you’re usually approved in seconds by the lender the merchant has signed up with. Affirm, Afterpay, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/121316/how-klarna-lets-you-pay-later-no-interest.asp">Klarna are some of the leading BNPL companies</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> BNPL isn’t new—many of the firms offering it have been around since 2012—“but it’s particularly well-suited to e-commerce,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.creditcards.com/credit-card-news/authors/ted-rossman/" rel="nofollow">Ted Rossman</a>, senior industry analyst for Creditcards.com. It has certainly benefitted from the pandemic-induced surge in online buying: A March 2021 survey of 2,000 Americans by the Ascent, the research arm of the Motley Fool, found that 55.8% used a BNPL service, up from 37.65% in July 2020—an increase of almost 50% in less than one 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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Rossman says that BNPL offers “an enticing mix of instant gratification and financing,” making it especially popular among younger consumers in the coveted 18-to-44 age group for a discretionary big buy. “If you split it into installments, it feels more affordable,” he continues, but it doesn’t incur massive, ongoing debt. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_14-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_15-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">$1 trillion</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The potential amount in BNPL transactions by 2025, according to Bank of America, up from $66 billion currently. Its December 2020 report predicts that the BNPL market will grow 10 to 15 times in five years.</p></div></div></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"> Will Buy Now, Pay Later Last? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> BNPL does look like it’s here to stay. Those who try it like it. Repeat customers and the retention rates reported by many of the companies are “astonishingly high,” an extensive BNPL study by the Strawhecker Group noted.<span class="ql-inline-citation" data-cite="4"></span> In addition, 79% of consumers would use it more often if more merchants offered it, and 83% wish more merchants did.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The merchants, who pay the BNPL firms a fee, also “love it because it seems people spend more when they use BNPL,” says Rossman. “It also encourages people to come back to the retailer’s website." </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"> Whether BNPL will become as entrenched as credit cards is another question. Right now it’s flourishing in online purchases, but growth might slow as people return to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brickandmortar.asp">brick-and-mortar</a> stores (where it often isn’t offered or as convenient to use). The Strawhecker Group report also delineates some skepticism about BNPL among older consumers and concern about a saturation point among the millennial and Gen Z consumers who could “begin viewing their helpful new app as exploitative and predatory”—especially if there’s bad press about <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late-payment fees</a>, unexpected interest rates, and <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> damage. </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"> Also, according to both Rossman and the Strawhecker Group, with 10-odd companies offering services now, there are too many in the space. Given that consumers aren’t loyal to any particular BNPL provider, a shakeout seems likely, especially since PayPal joined the fray in 2020 with its Pay in 4 plan.<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_24-0"></div> <span class="heading-toc" id="toc-homebuying-online"></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"> Homebuying Online </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Buying a home without ever walking through it—sounds crazy, no? But in the pandemic year of 2020, it happened a lot. Some 63% of homebuyers made an offer on a residence they’d never visited, according to a survey by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/100215/5-best-alternatives-zillow-trulia.asp">the online real estate brokerage Redfin</a>. In November 2019 only 32% had ever done so.<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_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> For years, with the advent of public <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp">multiple listing services </a>and real estate aggregators such as StreetEasy, people have been looking at homes online. Now, however, they’re also buying them online as the final step in a speeded-up and enhanced virtual process born out of COVID-19–induced lockdowns, travel restrictions, health protocols, and inventory shortages. </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"> “Before the pandemic, [a sight-unseen sale] was an interesting anecdotal story that happened from time to time—we didn’t even track it because it was so infrequent,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.corcoran.com/nyc/AboutUs/Display/8511">Ryan Schleis</a>, senior vice president of research and analytics at the Corcoran Group, a New York-based realty firm. However, in the last year Corcoran Sunshine, its new-properties division, did 50 “totally virtual” deals, about 10% of all its annual transactions. And almost all of the company’s deals started digitally, says Schleis—such as with a client taking a virtual tour of the property. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_32-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_33-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">97%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The percentage of prospective homebuyers in 2020 who used the internet to search for residences—an all-time high, according to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/national-association-of-realtors.asp">National Association of Realtors</a>.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Such visual enhancements are the new normal in residential real estate and a crucial part of helping online sales happen. Innovations include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <li>Three-dimensional walkthroughs that take you room by room through the residence (Monthly views of these virtual tours have increased 563% on Redfin.com since the pandemic, the company says.)<span class="ql-inline-citation" data-cite="6"></span></li><li>Videos of the property, with cinematic features such as slow pans or speeded-up day-into-night views</li><li>Drone shots that show the view from above and the surrounding neighborhood</li><li>Virtual open houses via Zoom or Facetime with an agent who traverses every inch of the property, even flushing toilets or driving around the neighborhood</li><li>Virtual staging, showing rooms with and without furnishings</li><li>Development and optimization of imagery for social media apps and channels</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Many of these features had been showcased in listings before, especially for luxury homes, but their presence increased dramatically in 2020—and at all price points. For Corcoran’s New York City listings, virtual/video tours of homes for sale doubled, from 8.7% of listings in 2019 to 17.6% in 2020; for rentals, they jumped from 0.6% to 6.7% year-over-year, the company told Investopedia via email. </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"> Corcoran moved fast to upgrade its site in other ways: “Specific iconography denoted listings with virtual or 3D tours, and we also added functionality…that allows consumers to search virtual tours across all of our regions with just the click of a button. Finally, we quickly enabled agents to schedule a virtual open house remotely,” says Vice President of Product and Tech Support <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.corcoran.com/nyc/AboutUs/Display/383">Alisande Heriyanto</a>. </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"> It helps that various legal and financial aspects of deals can be digitized as well. People can apply for mortgages or other financing via online lenders such as QuickenLoans or Rocket Mortgage. They can furnish down payments or key money through banking or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-transfer-apps-5180183">money transfer apps such as Venmo and Zelle</a>, and they can sign contracts via services such as DocuSign. A number of states passed emergency measures during the COVID-19 pandemic that allow for remote closings or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/notarize.asp">notarizations</a>, and 34 states have remote online notary laws on the books as of July 15, 2021.<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_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 Outlook for Online Homebuying </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Is online homebuying here to stay? Some aspects of it certainly are—like the snazzy visual features. Once people have gotten to expect those, it’s hard to go back to the stilted stills and obviously stretched-out photos of old. Viewing residences virtually can also be a significant time-saver, as Schleis points out. </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"> In fact, the whole home search process averaged eight weeks in 2020, compared with the 10 weeks it had averaged in the previous five years, according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/brandi-snowden/">Brandi Snowden</a>, the National Association of Realtors’ director of member and consumer survey research.<span class="ql-inline-citation" data-cite="9"></span> The streamlined online approach seems to suit folks, she adds. Customers like being able to find everything that’s available for themselves—instead of waiting for an agent to bring them more options—and moving fast if they see a house they want. </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"> Still, seeing things in person remains important. At Redfin the requests for video-chat viewings with an agent surged to one-third of all tours at the start of the pandemic, but they have since leveled off at 10% (albeit significantly higher than the 1% they represented in the pre-virus days).<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> And there probably will be a backing-off on the actual buying. The sight-unseen phenomenon resulted from the unique conundrum of people having the need or “the urge to move—especially since they could work remotely—with it being harder to travel and search,” says Redfin Chief Economist <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.redfin.com/news/author/darylfairweather/" rel="nofollow">Daryl Fairweather</a>. As the pandemic recedes, so will that problem. At the end of 2020, she predicted that the majority of 2021 buyers would make an offer before setting foot in the home.<span class="ql-inline-citation" data-cite="10"></span> However, in May 2021 she thought it more likely that “sight-unseen offers will drop back, closer to 48% of all homebuyers.” </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-car-buying-online"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> Car Buying Online </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> The April 2019 issue of Dismal Science, a business publication of the City University of New York’s graduate journalism school, ran a story headlined “Buying a Car Online … Remains a Distant Reality.”<span class="ql-inline-citation" data-cite="11"></span> What a difference a pandemic year makes. </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"> Online auto buying is an accelerating trend. Sure, people had been digitally researching their dream wheels for a while, but actual purchasing was more the province of the used-car market. No more. Online sales spiked to unprecedented levels in 2020, according to Automotive News,<em> </em>and 30% of new car sales were completed online in 2020, versus just 2% in 2019, according to automotive retail consultancy Haig Partners, as reported by ABC News.<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_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The difference—and the big deal—lies with the auto dealerships. In 2020 these longtime retail dinosaurs embraced digital technology. In a January 2021 survey by Cox Automotive, 69% of dealers surveyed said they added online retailing tools in the past year—all the better to deal with both the constraints of the pandemic and nontraditional, high-tech savvy car providers such as Tesla and Walmart’s CarSaver network.<span class="ql-inline-citation" data-cite="24"></span> In 2020 Cox itself provided its dealerships with a Dealer Home Services package to steer the car-buying experience into the 21st century. Some 13,000 dealers signed up for it, says Cox Automotive Research Senior Manager <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/rachelle-petusky/">Rachelle Petusky</a>—4,000 of them in the first few days. </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"> What does the online experience involve? As with real estate, auto websites and listings now feature better, higher-quality images. There are live chats and expert advice tabs. Increasingly common are video walk-arounds of the vehicle—both prerecorded and live—in which a tablet-armed rep climbs in and out of the car while highlighting features and kicking the tires. Negotiating the price, finessing the options and add-ons, applying for financing, appraising trade-in value of old cars, and the rest of the paperwork all can get done virtually as well, without the client ever setting foot in the showroom. Finally, the car can be delivered right to your home. </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"> It doesn’t have to be a sight-unseen purchase, either. Another new wrinkle is the at-home test drive: A tester model is delivered to you that you can try out for at least 24 hours. Other inducements “to assuage online buying concerns” include expanded warranty periods and longer money-back guarantee return periods—sometimes as far out as 30 days, says Petusky. </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-tip" 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_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>In January 2020 a prescient Cars.com introduced “Home Delivery” and “Virtual Appointments” badges to its auto listings. The marketplace site advertises that more than two million vehicles are available for a virtual appointment or home delivery.<span class="ql-inline-citation" data-cite="14"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> The Outlook for Online Car Buying </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> The future of online car buying looks bright. It eliminates many of the annoyances people had with the auto purchase experience. “Consider my mind blown,” writes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.cars.com/about/">Joe Bruzek</a>, managing editor of the editorial department of Cars.com, in an article describing his virtual adventure in buying a Volkswagen Atlas from an out-of-state dealer. “I’ve been spoiled” by the whole experience, from the easy, emailed price negotiation with the sales rep to the pickup of the disinfected and plastic-wrapped vehicle. Perhaps the best part: not having to spend hours at the dealership waiting on the finance manager—a particular pet peeve of shoppers.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Consumers had wanted many of these things for years, “but the industry was reluctant,” says Petusky. “2020 gave us a push.” According to another Cox survey, 64% of consumers want to complete more of their buys digitally, and 76% are open to the idea of buying a vehicle completely online. Meanwhile, 80% of Cox’s dealers say they plan to keep and/or augment their digital services, predicting that, by 2025, four out of 10 shoppers will purchase their car entirely online.<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_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> It’s possible some enthusiasm could wane if the at-home test drives or longer return policies go. But not much, Petusky thinks: “If you can finance a home online, why shouldn’t you buy the car of your dreams from your couch?” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-e-commerce-and-online-stores"></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"> E-Commerce and Online Stores </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> E-commerce took a leap forward in the pandemic. According to research by Rakuten, the app that offers cash back with digital purchases, 66% of consumers increased their online spending during the pandemic, and the average order value rose 20% to 40%, says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://theorg.com/org/rakuten/team/kristen-gall">Kristen Gall</a>, president of Rakuten Rewards. </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"> With physical stores closed or off limits, new types of retailers started selling or beefing up their presence: Especially notable, says Gall, has been the success of small, independent brands offering their products directly to consumers—such as shoemaker M. Gemi, eyeglass manufacturer Warby Parker, resale clothier the Real Real, Casper Mattress, and food delivery services. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/buy-sell-online.asp">New generations of people started buying online</a> out of necessity but continued out of enjoyment. In Raydiant’s The State of Consumer Behavior 2021 Report, only 46% of respondents said that given the choice, they prefer to shop in person rather than <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/is-having-a-smartphone-a-requirement-in-2021-5190186">online</a>—a 9% decline from the retail management platform builder’s 2020 report.<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_79-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Still, reports of brick-and-mortar stores’ death may have been greatly exaggerated. While e-commerce definitely spiked in April 2020, representing 21% of all U.S. retail sales at the height of the lockdown, it declined to 17.5% in June, a mere two months later, according to a report by research firm GlobalData. And by Feb. 2021 it was down to 15% of retail sales—only 2.5% higher than before the pandemic, says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://nrf.com/about-us/nrf-staff/katherine-cullen" rel="nofollow">Katherine Cullen</a>, the National Retail Federation’s senior director of industry and consumer insights. What’s more, 79% of U.S. consumers told GlobalData that they missed the social interaction of physical stores during the lockdown.<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_81-0"></div> <span class="heading-toc" id="toc-brick-and-mortar-stores"></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"> Brick-and-Mortar Stores </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> When you walk into a store today, the shopping experience is a little different. Though the Centers for Disease Control and Prevention (CDC) lifted mask-wearing restrictions on fully vaccinated individuals in public indoor settings in May, the sudden rise of the Delta variant led the CDC to reimpose them in July for fully vaccinated people in areas of substantial or high transmission.<span class="ql-inline-citation" data-cite="32"></span><span class="ql-inline-citation" data-cite="30"></span> As of Aug. 19, 2021, that is the whole country.<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_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Many states and cities are also requiring retailers to maintain their social distancing and sanitation protocols. Among them: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> <li>Limiting the number of customers inside at any one time</li> <li>Restricting walk-ins, requiring customers to make appointments first</li> <li>Taking temperature checks at the door</li> <li>Requiring employees and customers to wear masks and refusing entry to those who don’t</li> <li>Hand sanitizers everywhere throughout the store</li> <li>Cordoning off seating areas or every other fitting room</li> <li>Frequent cleaning of high-touch surfaces</li> <li>Plastic barriers around the checkout counters</li> <li>Adopting <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contactless-payment.asp">contactless payment</a> methods</li> </ul> <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"> Except for contact-free paying—which was already getting popular before COVID-19—these restrictions aren’t likely to last. They “are all annoying and, outside of a pandemic, serve no real purpose,” says <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.linkedin.com/in/neilretail/">Neil Saunders</a>, managing director and retail analyst at GlobalData. </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-the-multichanneling-approach"></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 Multichanneling Approach </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> What is likely to last is what GlobalData calls “multichannelling”: the blending of brick-and-mortar retail and online retail. Retailers are getting smarter about their use of technology, employing it in ways to provide the best of both personal and virtual shopping experiences. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> One key innovation is click and collect: Customers make a purchase online but pick it up in the store or at curbside. While some big brands already provided “find at a store near you” services, click and collect blossomed during the pandemic, and it seems to have staying power: 68% of U.S. shoppers say that they are going to make more use of drive-up curbside collection facilities at stores in the future, and almost 60% say they will make greater use of collect-from-inside store services, according to GlobalData’s survey.<span class="ql-inline-citation" data-cite="18"></span> Other stores are offering next-day or even same-day delivery after you order online. According to Cullen, smaller retailers in particular say that this allows them to differentiate themselves. </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"> If you can’t get to the store, the store can come to you—via virtual concierge or personal shopper services. At retailers Saks Fifth Avenue and Ralph Lauren, for example, sales reps will set up Zoom chats with clients, showing them preselected merchandise or touring them around the premises. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> Along with trying to personalize the virtual experience, retailers are also humanizing their websites. Live chats with a rep are becoming a standard feature. Increasingly common, too, are virtual reality tools that let you “wear” clothes or “place” furniture in your room. The beauty brand Laura Mercier, for example, offers a virtual try on of blushes, lipsticks, and eye shadows, so you can “find your perfect shade in real time.”<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_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Finally, there are financial incentives: free shipping or participating with cash-back services such as Rakuten. Gall has seen stores increasing the cash-back percentage they offer to woo back old customers or to get them to pick up an online order in the store. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <span class="heading-toc" id="toc-the-future-of-in-store-shopping"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_102-0"> <span class="mntl-sc-block-heading__text"> The Future of In-Store Shopping </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> Beleaguered as they’ve been, brick-and-mortar stores may be due for a comeback. According to GlobalData’s research, 89% of retail executives in the U.S. say that physical stores will drive just as many, or more, sales for their business as they did before the pandemic started. And over the next five years, 87% are planning to invest more capital in multichannelling, allowing online and stores to operate seamlessly together.<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_104-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Some perks, such as free or same-day delivery, may be scaled back for cost, but many of these trends, such as contactless pay and curbside pickup, "are actually beneficial for retailers too," says Saunders, improving efficiency and reducing expenses. “Where there is a win-win situation, there is little reason for retailers to roll back the innovations they’ve put in place over the past year,” he adds. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_107-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> In a single year the ways people shopped and paid for things changed—or seemed to. In fact, many trends already were in place or developing before COVID-19, but they got a decided push with the pandemic, waking up some sleepy industries in the process. </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"> Are the changes permanent? It’s hard to say. While e-commerce is entrenched even further in some ways, live and in-person activities have been much missed. The virtual and the actual will likely coexist, complementing each other better in the future. </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"> Predicting fundamental changes in consumer habits and methods of doing business is always tricky. It’s safe to say, though, as the National Retail Federation’s Cullen notes, “Anything related to convenience or that enhances the shopping experience will have staying power.” </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_114-0"><span class="heading-toc" id="toc-what-is-buy-now-pay-later"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Buy Now, Pay Later?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Buy now, pay later, or BNPL, is a short-term financing tool that allows consumers to pay for purchases in generally equal installments, often without paying any interest. A merchant makes a deal with a lender, such as Affirm, Afterpay, or Klarna, and the consumer signs up with that lender when paying for the item. Currently BNPL is most prevalent online and most popular with younger consumers.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_116-0"><span class="heading-toc" id="toc-how-popular-is-online-homebuying"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Popular is Online Homebuying?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Prior to the pandemic, only 32% of homebuyers had made an offer on a property they had not seen in person. Perhaps not surprisingly, the number jumped to 63% in 2020.<span class="ql-inline-citation" data-cite="6"></span> Furthermore, 97% of homebuyers at least used the internet to research properties when looking to buy a home.<span class="ql-inline-citation" data-cite="7"></span> Online help is here to stay when it comes to homebuying, though sight-unseen purchasing is expected to dwindle once the pandemic recedes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_118-0"><span class="heading-toc" id="toc-how-popular-is-online-car-buying"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Popular Is Online Car Buying?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>According to automative retail consultancy Haig Partner, 30% of new car deals were done solely online in 2020, compared with only 2% in 2019. A survey conducted by Cox Automotive revealed that 76% of car buyers are open to buying a vehicle completely online.<span class="ql-inline-citation" data-cite="25"></span> Cars.com offers more than two million vehicles for sale by virtual appointment with home delivery. As for the future, Cox predicts that one out of four consumers will buy a car online by 2025.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_119-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_120-0"><span class="heading-toc" id="toc-what-is-multichanneling"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Multichanneling?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Mutlichannelling combines brick-and-mortar sales with online sales. With the service click and collect, consumers can buy something online and then pick it up in person in the store or at curbside. Conversely, some stores offer virtual concierge or personal shopper services, where a sales rep comes to you via Zoom. According to a GlobalData survey, 68% of shoppers would like to use curbside pickup more, while 60% would like to use in-store pickup more in the future.<span class="ql-inline-citation" data-cite="18"></span></p></div> </div></div>

The COVID-19 pandemic [affected nearly every phase of American life](https://www.investopedia.com/how-the-coronavirus-stimulus-bills-affect-you-4800404), and shopping is no exception. It has wrought changes in what we buy, how we buy it, and how we pay for it. Let’s look at some areas where the coronavirus crisis been especially influential: purchase methods such as [buy now, pay later (BNPL)](https://www.investopedia.com/buy-now-pay-later-5182291); home and car buying; and the operations of physical stores and their relationship with [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp). We’ll examine the trends and evaluate which seem likely to stay, marking a fundamental shift in shopping habits. ### Key Takeaways * The COVID-19 pandemic has [altered how we buy and sell things](https://www.investopedia.com/how-shopping-habits-changed-due-to-covid-5186278) in America. * Buy now, pay later (BNPL) services have seen their customers multiply by nearly 50%. * The purchasing of homes and cars online has significantly increased. * Online spending grew, with multichannelling—the combination of on-site and online purchases—becoming more and more popular. ## Buy Now, Pay Later (BNPL) BNPL is a type of short-term financing tool that allows consumers to make purchases and pay for them in installments, often without charging any interest. You apply at the checkout point, and you’re usually approved in seconds by the lender the merchant has signed up with. Affirm, Afterpay, and [Klarna are some of the leading BNPL companies](https://www.investopedia.com/articles/personal-finance/121316/how-klarna-lets-you-pay-later-no-interest.asp). BNPL isn’t new—many of the firms offering it have been around since 2012—“but it’s particularly well-suited to e-commerce,” says [Ted Rossman](https://www.creditcards.com/credit-card-news/authors/ted-rossman/), senior industry analyst for Creditcards.com. It has certainly benefitted from the pandemic-induced surge in online buying: A March 2021 survey of 2,000 Americans by the Ascent, the research arm of the Motley Fool, found that 55.8% used a BNPL service, up from 37.65% in July 2020—an increase of almost 50% in less than one year. Rossman says that BNPL offers “an enticing mix of instant gratification and financing,” making it especially popular among younger consumers in the coveted 18-to-44 age group for a discretionary big buy. “If you split it into installments, it feels more affordable,” he continues, but it doesn’t incur massive, ongoing debt. ### $1 trillion The potential amount in BNPL transactions by 2025, according to Bank of America, up from $66 billion currently. Its December 2020 report predicts that the BNPL market will grow 10 to 15 times in five years. ### Will Buy Now, Pay Later Last? BNPL does look like it’s here to stay. Those who try it like it. Repeat customers and the retention rates reported by many of the companies are “astonishingly high,” an extensive BNPL study by the Strawhecker Group noted. In addition, 79% of consumers would use it more often if more merchants offered it, and 83% wish more merchants did. The merchants, who pay the BNPL firms a fee, also “love it because it seems people spend more when they use BNPL,” says Rossman. “It also encourages people to come back to the retailer’s website." Whether BNPL will become as entrenched as credit cards is another question. Right now it’s flourishing in online purchases, but growth might slow as people return to [brick-and-mortar](https://www.investopedia.com/terms/b/brickandmortar.asp) stores (where it often isn’t offered or as convenient to use). The Strawhecker Group report also delineates some skepticism about BNPL among older consumers and concern about a saturation point among the millennial and Gen Z consumers who could “begin viewing their helpful new app as exploitative and predatory”—especially if there’s bad press about [late-payment fees](https://www.investopedia.com/terms/l/late-fee.asp), unexpected interest rates, and [credit score](https://www.investopedia.com/terms/c/credit_score.asp) damage. Also, according to both Rossman and the Strawhecker Group, with 10-odd companies offering services now, there are too many in the space. Given that consumers aren’t loyal to any particular BNPL provider, a shakeout seems likely, especially since PayPal joined the fray in 2020 with its Pay in 4 plan. ## Homebuying Online Buying a home without ever walking through it—sounds crazy, no? But in the pandemic year of 2020, it happened a lot. Some 63% of homebuyers made an offer on a residence they’d never visited, according to a survey by [the online real estate brokerage Redfin](https://www.investopedia.com/articles/markets/100215/5-best-alternatives-zillow-trulia.asp). In November 2019 only 32% had ever done so. For years, with the advent of public [multiple listing services](https://www.investopedia.com/terms/m/multiple-listing-service-mls.asp) and real estate aggregators such as StreetEasy, people have been looking at homes online. Now, however, they’re also buying them online as the final step in a speeded-up and enhanced virtual process born out of COVID-19–induced lockdowns, travel restrictions, health protocols, and inventory shortages. “Before the pandemic, [a sight-unseen sale] was an interesting anecdotal story that happened from time to time—we didn’t even track it because it was so infrequent,” says [Ryan Schleis](https://www.corcoran.com/nyc/AboutUs/Display/8511), senior vice president of research and analytics at the Corcoran Group, a New York-based realty firm. However, in the last year Corcoran Sunshine, its new-properties division, did 50 “totally virtual” deals, about 10% of all its annual transactions. And almost all of the company’s deals started digitally, says Schleis—such as with a client taking a virtual tour of the property. ### 97% The percentage of prospective homebuyers in 2020 who used the internet to search for residences—an all-time high, according to the [National Association of Realtors](https://www.investopedia.com/terms/n/national-association-of-realtors.asp). Such visual enhancements are the new normal in residential real estate and a crucial part of helping online sales happen. Innovations include: * Three-dimensional walkthroughs that take you room by room through the residence (Monthly views of these virtual tours have increased 563% on Redfin.com since the pandemic, the company says.) * Videos of the property, with cinematic features such as slow pans or speeded-up day-into-night views * Drone shots that show the view from above and the surrounding neighborhood * Virtual open houses via Zoom or Facetime with an agent who traverses every inch of the property, even flushing toilets or driving around the neighborhood * Virtual staging, showing rooms with and without furnishings * Development and optimization of imagery for social media apps and channels Many of these features had been showcased in listings before, especially for luxury homes, but their presence increased dramatically in 2020—and at all price points. For Corcoran’s New York City listings, virtual/video tours of homes for sale doubled, from 8.7% of listings in 2019 to 17.6% in 2020; for rentals, they jumped from 0.6% to 6.7% year-over-year, the company told Investopedia via email. Corcoran moved fast to upgrade its site in other ways: “Specific iconography denoted listings with virtual or 3D tours, and we also added functionality…that allows consumers to search virtual tours across all of our regions with just the click of a button. Finally, we quickly enabled agents to schedule a virtual open house remotely,” says Vice President of Product and Tech Support [Alisande Heriyanto](https://www.corcoran.com/nyc/AboutUs/Display/383). It helps that various legal and financial aspects of deals can be digitized as well. People can apply for mortgages or other financing via online lenders such as QuickenLoans or Rocket Mortgage. They can furnish down payments or key money through banking or [money transfer apps such as Venmo and Zelle](https://www.investopedia.com/best-money-transfer-apps-5180183), and they can sign contracts via services such as DocuSign. A number of states passed emergency measures during the COVID-19 pandemic that allow for remote closings or [notarizations](https://www.investopedia.com/terms/n/notarize.asp), and 34 states have remote online notary laws on the books as of July 15, 2021. ### The Outlook for Online Homebuying Is online homebuying here to stay? Some aspects of it certainly are—like the snazzy visual features. Once people have gotten to expect those, it’s hard to go back to the stilted stills and obviously stretched-out photos of old. Viewing residences virtually can also be a significant time-saver, as Schleis points out. In fact, the whole home search process averaged eight weeks in 2020, compared with the 10 weeks it had averaged in the previous five years, according to [Brandi Snowden](https://www.linkedin.com/in/brandi-snowden/), the National Association of Realtors’ director of member and consumer survey research. The streamlined online approach seems to suit folks, she adds. Customers like being able to find everything that’s available for themselves—instead of waiting for an agent to bring them more options—and moving fast if they see a house they want. Still, seeing things in person remains important. At Redfin the requests for video-chat viewings with an agent surged to one-third of all tours at the start of the pandemic, but they have since leveled off at 10% (albeit significantly higher than the 1% they represented in the pre-virus days). And there probably will be a backing-off on the actual buying. The sight-unseen phenomenon resulted from the unique conundrum of people having the need or “the urge to move—especially since they could work remotely—with it being harder to travel and search,” says Redfin Chief Economist [Daryl Fairweather](https://www.redfin.com/news/author/darylfairweather/). As the pandemic recedes, so will that problem. At the end of 2020, she predicted that the majority of 2021 buyers would make an offer before setting foot in the home. However, in May 2021 she thought it more likely that “sight-unseen offers will drop back, closer to 48% of all homebuyers.” ## Car Buying Online The April 2019 issue of Dismal Science, a business publication of the City University of New York’s graduate journalism school, ran a story headlined “Buying a Car Online … Remains a Distant Reality.” What a difference a pandemic year makes. Online auto buying is an accelerating trend. Sure, people had been digitally researching their dream wheels for a while, but actual purchasing was more the province of the used-car market. No more. Online sales spiked to unprecedented levels in 2020, according to Automotive News,and 30% of new car sales were completed online in 2020, versus just 2% in 2019, according to automotive retail consultancy Haig Partners, as reported by ABC News. The difference—and the big deal—lies with the auto dealerships. In 2020 these longtime retail dinosaurs embraced digital technology. In a January 2021 survey by Cox Automotive, 69% of dealers surveyed said they added online retailing tools in the past year—all the better to deal with both the constraints of the pandemic and nontraditional, high-tech savvy car providers such as Tesla and Walmart’s CarSaver network. In 2020 Cox itself provided its dealerships with a Dealer Home Services package to steer the car-buying experience into the 21st century. Some 13,000 dealers signed up for it, says Cox Automotive Research Senior Manager [Rachelle Petusky](https://www.linkedin.com/in/rachelle-petusky/)—4,000 of them in the first few days. What does the online experience involve? As with real estate, auto websites and listings now feature better, higher-quality images. There are live chats and expert advice tabs. Increasingly common are video walk-arounds of the vehicle—both prerecorded and live—in which a tablet-armed rep climbs in and out of the car while highlighting features and kicking the tires. Negotiating the price, finessing the options and add-ons, applying for financing, appraising trade-in value of old cars, and the rest of the paperwork all can get done virtually as well, without the client ever setting foot in the showroom. Finally, the car can be delivered right to your home. It doesn’t have to be a sight-unseen purchase, either. Another new wrinkle is the at-home test drive: A tester model is delivered to you that you can try out for at least 24 hours. Other inducements “to assuage online buying concerns” include expanded warranty periods and longer money-back guarantee return periods—sometimes as far out as 30 days, says Petusky. ### In January 2020 a prescient Cars.com introduced “Home Delivery” and “Virtual Appointments” badges to its auto listings. The marketplace site advertises that more than two million vehicles are available for a virtual appointment or home delivery. ### The Outlook for Online Car Buying The future of online car buying looks bright. It eliminates many of the annoyances people had with the auto purchase experience. “Consider my mind blown,” writes [Joe Bruzek](https://www.cars.com/about/), managing editor of the editorial department of Cars.com, in an article describing his virtual adventure in buying a Volkswagen Atlas from an out-of-state dealer. “I’ve been spoiled” by the whole experience, from the easy, emailed price negotiation with the sales rep to the pickup of the disinfected and plastic-wrapped vehicle. Perhaps the best part: not having to spend hours at the dealership waiting on the finance manager—a particular pet peeve of shoppers. Consumers had wanted many of these things for years, “but the industry was reluctant,” says Petusky. “2020 gave us a push.” According to another Cox survey, 64% of consumers want to complete more of their buys digitally, and 76% are open to the idea of buying a vehicle completely online. Meanwhile, 80% of Cox’s dealers say they plan to keep and/or augment their digital services, predicting that, by 2025, four out of 10 shoppers will purchase their car entirely online. It’s possible some enthusiasm could wane if the at-home test drives or longer return policies go. But not much, Petusky thinks: “If you can finance a home online, why shouldn’t you buy the car of your dreams from your couch?” ## E-Commerce and Online Stores E-commerce took a leap forward in the pandemic. According to research by Rakuten, the app that offers cash back with digital purchases, 66% of consumers increased their online spending during the pandemic, and the average order value rose 20% to 40%, says [Kristen Gall](https://theorg.com/org/rakuten/team/kristen-gall), president of Rakuten Rewards. With physical stores closed or off limits, new types of retailers started selling or beefing up their presence: Especially notable, says Gall, has been the success of small, independent brands offering their products directly to consumers—such as shoemaker M. Gemi, eyeglass manufacturer Warby Parker, resale clothier the Real Real, Casper Mattress, and food delivery services. [New generations of people started buying online](https://www.investopedia.com/articles/pf/08/buy-sell-online.asp) out of necessity but continued out of enjoyment. In Raydiant’s The State of Consumer Behavior 2021 Report, only 46% of respondents said that given the choice, they prefer to shop in person rather than [online](https://www.investopedia.com/is-having-a-smartphone-a-requirement-in-2021-5190186)—a 9% decline from the retail management platform builder’s 2020 report. Still, reports of brick-and-mortar stores’ death may have been greatly exaggerated. While e-commerce definitely spiked in April 2020, representing 21% of all U.S. retail sales at the height of the lockdown, it declined to 17.5% in June, a mere two months later, according to a report by research firm GlobalData. And by Feb. 2021 it was down to 15% of retail sales—only 2.5% higher than before the pandemic, says [Katherine Cullen](https://nrf.com/about-us/nrf-staff/katherine-cullen), the National Retail Federation’s senior director of industry and consumer insights. What’s more, 79% of U.S. consumers told GlobalData that they missed the social interaction of physical stores during the lockdown. ## Brick-and-Mortar Stores When you walk into a store today, the shopping experience is a little different. Though the Centers for Disease Control and Prevention (CDC) lifted mask-wearing restrictions on fully vaccinated individuals in public indoor settings in May, the sudden rise of the Delta variant led the CDC to reimpose them in July for fully vaccinated people in areas of substantial or high transmission. As of Aug. 19, 2021, that is the whole country. Many states and cities are also requiring retailers to maintain their social distancing and sanitation protocols. Among them: * Limiting the number of customers inside at any one time * Restricting walk-ins, requiring customers to make appointments first * Taking temperature checks at the door * Requiring employees and customers to wear masks and refusing entry to those who don’t * Hand sanitizers everywhere throughout the store * Cordoning off seating areas or every other fitting room * Frequent cleaning of high-touch surfaces * Plastic barriers around the checkout counters * Adopting [contactless payment](https://www.investopedia.com/terms/c/contactless-payment.asp) methods Except for contact-free paying—which was already getting popular before COVID-19—these restrictions aren’t likely to last. They “are all annoying and, outside of a pandemic, serve no real purpose,” says [Neil Saunders](https://www.linkedin.com/in/neilretail/), managing director and retail analyst at GlobalData. ## The Multichanneling Approach What is likely to last is what GlobalData calls “multichannelling”: the blending of brick-and-mortar retail and online retail. Retailers are getting smarter about their use of technology, employing it in ways to provide the best of both personal and virtual shopping experiences. One key innovation is click and collect: Customers make a purchase online but pick it up in the store or at curbside. While some big brands already provided “find at a store near you” services, click and collect blossomed during the pandemic, and it seems to have staying power: 68% of U.S. shoppers say that they are going to make more use of drive-up curbside collection facilities at stores in the future, and almost 60% say they will make greater use of collect-from-inside store services, according to GlobalData’s survey. Other stores are offering next-day or even same-day delivery after you order online. According to Cullen, smaller retailers in particular say that this allows them to differentiate themselves. If you can’t get to the store, the store can come to you—via virtual concierge or personal shopper services. At retailers Saks Fifth Avenue and Ralph Lauren, for example, sales reps will set up Zoom chats with clients, showing them preselected merchandise or touring them around the premises. Along with trying to personalize the virtual experience, retailers are also humanizing their websites. Live chats with a rep are becoming a standard feature. Increasingly common, too, are virtual reality tools that let you “wear” clothes or “place” furniture in your room. The beauty brand Laura Mercier, for example, offers a virtual try on of blushes, lipsticks, and eye shadows, so you can “find your perfect shade in real time.” Finally, there are financial incentives: free shipping or participating with cash-back services such as Rakuten. Gall has seen stores increasing the cash-back percentage they offer to woo back old customers or to get them to pick up an online order in the store. ## The Future of In-Store Shopping Beleaguered as they’ve been, brick-and-mortar stores may be due for a comeback. According to GlobalData’s research, 89% of retail executives in the U.S. say that physical stores will drive just as many, or more, sales for their business as they did before the pandemic started. And over the next five years, 87% are planning to invest more capital in multichannelling, allowing online and stores to operate seamlessly together. Some perks, such as free or same-day delivery, may be scaled back for cost, but many of these trends, such as contactless pay and curbside pickup, "are actually beneficial for retailers too," says Saunders, improving efficiency and reducing expenses. “Where there is a win-win situation, there is little reason for retailers to roll back the innovations they’ve put in place over the past year,” he adds. ## The Bottom Line In a single year the ways people shopped and paid for things changed—or seemed to. In fact, many trends already were in place or developing before COVID-19, but they got a decided push with the pandemic, waking up some sleepy industries in the process. Are the changes permanent? It’s hard to say. While e-commerce is entrenched even further in some ways, live and in-person activities have been much missed. The virtual and the actual will likely coexist, complementing each other better in the future. Predicting fundamental changes in consumer habits and methods of doing business is always tricky. It’s safe to say, though, as the National Retail Federation’s Cullen notes, “Anything related to convenience or that enhances the shopping experience will have staying power.” ## What Is Buy Now, Pay Later? Buy now, pay later, or BNPL, is a short-term financing tool that allows consumers to pay for purchases in generally equal installments, often without paying any interest. A merchant makes a deal with a lender, such as Affirm, Afterpay, or Klarna, and the consumer signs up with that lender when paying for the item. Currently BNPL is most prevalent online and most popular with younger consumers. ## How Popular is Online Homebuying? Prior to the pandemic, only 32% of homebuyers had made an offer on a property they had not seen in person. Perhaps not surprisingly, the number jumped to 63% in 2020. Furthermore, 97% of homebuyers at least used the internet to research properties when looking to buy a home. Online help is here to stay when it comes to homebuying, though sight-unseen purchasing is expected to dwindle once the pandemic recedes. ## How Popular Is Online Car Buying? According to automative retail consultancy Haig Partner, 30% of new car deals were done solely online in 2020, compared with only 2% in 2019. A survey conducted by Cox Automotive revealed that 76% of car buyers are open to buying a vehicle completely online. Cars.com offers more than two million vehicles for sale by virtual appointment with home delivery. As for the future, Cox predicts that one out of four consumers will buy a car online by 2025. ## What Is Multichanneling? Mutlichannelling combines brick-and-mortar sales with online sales. With the service click and collect, consumers can buy something online and then pick it up in person in the store or at curbside. Conversely, some stores offer virtual concierge or personal shopper services, where a sales rep comes to you via Zoom. According to a GlobalData survey, 68% of shoppers would like to use curbside pickup more, while 60% would like to use in-store pickup more in the future.

The COVID-19 pandemic affected nearly every phase of American life, and shopping is no exception. It has wrought changes in what we buy, how we buy it, and how we pay for it. Let’s look at some areas where the coronavirus crisis been especially influential: purchase methods such as buy now, pay later (BNPL); home and car buying; and the operations of physical stores and their relationship with e-commerce. We’ll examine the trends and evaluate which seem likely to stay, marking a fundamental shift in shopping habits. Key Takeaways The COVID-19 pandemic has altered how we buy and sell things in America. Buy now, pay later (BNPL) services have seen their customers multiply by nearly 50%. The purchasing of homes and cars online has significantly increased. Online spending grew, with multichannelling—the combination of on-site and online purchases—becoming more and more popular. Buy Now, Pay Later (BNPL) BNPL is a type of short-term financing tool that allows consumers to make purchases and pay for them in installments, often without charging any interest. You apply at the checkout point, and you’re usually approved in seconds by the lender the merchant has signed up with. Affirm, Afterpay, and Klarna are some of the leading BNPL companies. BNPL isn’t new—many of the firms offering it have been around since 2012—“but it’s particularly well-suited to e-commerce,” says Ted Rossman, senior industry analyst for Creditcards.com. It has certainly benefitted from the pandemic-induced surge in online buying: A March 2021 survey of 2,000 Americans by the Ascent, the research arm of the Motley Fool, found that 55.8% used a BNPL service, up from 37.65% in July 2020—an increase of almost 50% in less than one year. Rossman says that BNPL offers “an enticing mix of instant gratification and financing,” making it especially popular among younger consumers in the coveted 18-to-44 age group for a discretionary big buy. “If you split it into installments, it feels more affordable,” he continues, but it doesn’t incur massive, ongoing debt. $1 trillion The potential amount in BNPL transactions by 2025, according to Bank of America, up from $66 billion currently. Its December 2020 report predicts that the BNPL market will grow 10 to 15 times in five years. Will Buy Now, Pay Later Last? BNPL does look like it’s here to stay. Those who try it like it. Repeat customers and the retention rates reported by many of the companies are “astonishingly high,” an extensive BNPL study by the Strawhecker Group noted. In addition, 79% of consumers would use it more often if more merchants offered it, and 83% wish more merchants did. The merchants, who pay the BNPL firms a fee, also “love it because it seems people spend more when they use BNPL,” says Rossman. “It also encourages people to come back to the retailer’s website." Whether BNPL will become as entrenched as credit cards is another question. Right now it’s flourishing in online purchases, but growth might slow as people return to brick-and-mortar stores (where it often isn’t offered or as convenient to use). The Strawhecker Group report also delineates some skepticism about BNPL among older consumers and concern about a saturation point among the millennial and Gen Z consumers who could “begin viewing their helpful new app as exploitative and predatory”—especially if there’s bad press about late-payment fees, unexpected interest rates, and credit score damage. Also, according to both Rossman and the Strawhecker Group, with 10-odd companies offering services now, there are too many in the space. Given that consumers aren’t loyal to any particular BNPL provider, a shakeout seems likely, especially since PayPal joined the fray in 2020 with its Pay in 4 plan. Homebuying Online Buying a home without ever walking through it—sounds crazy, no? But in the pandemic year of 2020, it happened a lot. Some 63% of homebuyers made an offer on a residence they’d never visited, according to a survey by the online real estate brokerage Redfin. In November 2019 only 32% had ever done so. For years, with the advent of public multiple listing services and real estate aggregators such as StreetEasy, people have been looking at homes online. Now, however, they’re also buying them online as the final step in a speeded-up and enhanced virtual process born out of COVID-19–induced lockdowns, travel restrictions, health protocols, and inventory shortages. “Before the pandemic, [a sight-unseen sale] was an interesting anecdotal story that happened from time to time—we didn’t even track it because it was so infrequent,” says Ryan Schleis, senior vice president of research and analytics at the Corcoran Group, a New York-based realty firm. However, in the last year Corcoran Sunshine, its new-properties division, did 50 “totally virtual” deals, about 10% of all its annual transactions. And almost all of the company’s deals started digitally, says Schleis—such as with a client taking a virtual tour of the property. 97% The percentage of prospective homebuyers in 2020 who used the internet to search for residences—an all-time high, according to the National Association of Realtors. Such visual enhancements are the new normal in residential real estate and a crucial part of helping online sales happen. Innovations include: Three-dimensional walkthroughs that take you room by room through the residence (Monthly views of these virtual tours have increased 563% on Redfin.com since the pandemic, the company says.)Videos of the property, with cinematic features such as slow pans or speeded-up day-into-night viewsDrone shots that show the view from above and the surrounding neighborhoodVirtual open houses via Zoom or Facetime with an agent who traverses every inch of the property, even flushing toilets or driving around the neighborhoodVirtual staging, showing rooms with and without furnishingsDevelopment and optimization of imagery for social media apps and channels Many of these features had been showcased in listings before, especially for luxury homes, but their presence increased dramatically in 2020—and at all price points. For Corcoran’s New York City listings, virtual/video tours of homes for sale doubled, from 8.7% of listings in 2019 to 17.6% in 2020; for rentals, they jumped from 0.6% to 6.7% year-over-year, the company told Investopedia via email. Corcoran moved fast to upgrade its site in other ways: “Specific iconography denoted listings with virtual or 3D tours, and we also added functionality…that allows consumers to search virtual tours across all of our regions with just the click of a button. Finally, we quickly enabled agents to schedule a virtual open house remotely,” says Vice President of Product and Tech Support Alisande Heriyanto. It helps that various legal and financial aspects of deals can be digitized as well. People can apply for mortgages or other financing via online lenders such as QuickenLoans or Rocket Mortgage. They can furnish down payments or key money through banking or money transfer apps such as Venmo and Zelle, and they can sign contracts via services such as DocuSign. A number of states passed emergency measures during the COVID-19 pandemic that allow for remote closings or notarizations, and 34 states have remote online notary laws on the books as of July 15, 2021. The Outlook for Online Homebuying Is online homebuying here to stay? Some aspects of it certainly are—like the snazzy visual features. Once people have gotten to expect those, it’s hard to go back to the stilted stills and obviously stretched-out photos of old. Viewing residences virtually can also be a significant time-saver, as Schleis points out. In fact, the whole home search process averaged eight weeks in 2020, compared with the 10 weeks it had averaged in the previous five years, according to Brandi Snowden, the National Association of Realtors’ director of member and consumer survey research. The streamlined online approach seems to suit folks, she adds. Customers like being able to find everything that’s available for themselves—instead of waiting for an agent to bring them more options—and moving fast if they see a house they want. Still, seeing things in person remains important. At Redfin the requests for video-chat viewings with an agent surged to one-third of all tours at the start of the pandemic, but they have since leveled off at 10% (albeit significantly higher than the 1% they represented in the pre-virus days). And there probably will be a backing-off on the actual buying. The sight-unseen phenomenon resulted from the unique conundrum of people having the need or “the urge to move—especially since they could work remotely—with it being harder to travel and search,” says Redfin Chief Economist Daryl Fairweather. As the pandemic recedes, so will that problem. At the end of 2020, she predicted that the majority of 2021 buyers would make an offer before setting foot in the home. However, in May 2021 she thought it more likely that “sight-unseen offers will drop back, closer to 48% of all homebuyers.” Car Buying Online The April 2019 issue of Dismal Science, a business publication of the City University of New York’s graduate journalism school, ran a story headlined “Buying a Car Online … Remains a Distant Reality.” What a difference a pandemic year makes. Online auto buying is an accelerating trend. Sure, people had been digitally researching their dream wheels for a while, but actual purchasing was more the province of the used-car market. No more. Online sales spiked to unprecedented levels in 2020, according to Automotive News, and 30% of new car sales were completed online in 2020, versus just 2% in 2019, according to automotive retail consultancy Haig Partners, as reported by ABC News. The difference—and the big deal—lies with the auto dealerships. In 2020 these longtime retail dinosaurs embraced digital technology. In a January 2021 survey by Cox Automotive, 69% of dealers surveyed said they added online retailing tools in the past year—all the better to deal with both the constraints of the pandemic and nontraditional, high-tech savvy car providers such as Tesla and Walmart’s CarSaver network. In 2020 Cox itself provided its dealerships with a Dealer Home Services package to steer the car-buying experience into the 21st century. Some 13,000 dealers signed up for it, says Cox Automotive Research Senior Manager Rachelle Petusky—4,000 of them in the first few days. What does the online experience involve? As with real estate, auto websites and listings now feature better, higher-quality images. There are live chats and expert advice tabs. Increasingly common are video walk-arounds of the vehicle—both prerecorded and live—in which a tablet-armed rep climbs in and out of the car while highlighting features and kicking the tires. Negotiating the price, finessing the options and add-ons, applying for financing, appraising trade-in value of old cars, and the rest of the paperwork all can get done virtually as well, without the client ever setting foot in the showroom. Finally, the car can be delivered right to your home. It doesn’t have to be a sight-unseen purchase, either. Another new wrinkle is the at-home test drive: A tester model is delivered to you that you can try out for at least 24 hours. Other inducements “to assuage online buying concerns” include expanded warranty periods and longer money-back guarantee return periods—sometimes as far out as 30 days, says Petusky. In January 2020 a prescient Cars.com introduced “Home Delivery” and “Virtual Appointments” badges to its auto listings. The marketplace site advertises that more than two million vehicles are available for a virtual appointment or home delivery. The Outlook for Online Car Buying The future of online car buying looks bright. It eliminates many of the annoyances people had with the auto purchase experience. “Consider my mind blown,” writes Joe Bruzek, managing editor of the editorial department of Cars.com, in an article describing his virtual adventure in buying a Volkswagen Atlas from an out-of-state dealer. “I’ve been spoiled” by the whole experience, from the easy, emailed price negotiation with the sales rep to the pickup of the disinfected and plastic-wrapped vehicle. Perhaps the best part: not having to spend hours at the dealership waiting on the finance manager—a particular pet peeve of shoppers. Consumers had wanted many of these things for years, “but the industry was reluctant,” says Petusky. “2020 gave us a push.” According to another Cox survey, 64% of consumers want to complete more of their buys digitally, and 76% are open to the idea of buying a vehicle completely online. Meanwhile, 80% of Cox’s dealers say they plan to keep and/or augment their digital services, predicting that, by 2025, four out of 10 shoppers will purchase their car entirely online. It’s possible some enthusiasm could wane if the at-home test drives or longer return policies go. But not much, Petusky thinks: “If you can finance a home online, why shouldn’t you buy the car of your dreams from your couch?” E-Commerce and Online Stores E-commerce took a leap forward in the pandemic. According to research by Rakuten, the app that offers cash back with digital purchases, 66% of consumers increased their online spending during the pandemic, and the average order value rose 20% to 40%, says Kristen Gall, president of Rakuten Rewards. With physical stores closed or off limits, new types of retailers started selling or beefing up their presence: Especially notable, says Gall, has been the success of small, independent brands offering their products directly to consumers—such as shoemaker M. Gemi, eyeglass manufacturer Warby Parker, resale clothier the Real Real, Casper Mattress, and food delivery services. New generations of people started buying online out of necessity but continued out of enjoyment. In Raydiant’s The State of Consumer Behavior 2021 Report, only 46% of respondents said that given the choice, they prefer to shop in person rather than online—a 9% decline from the retail management platform builder’s 2020 report. Still, reports of brick-and-mortar stores’ death may have been greatly exaggerated. While e-commerce definitely spiked in April 2020, representing 21% of all U.S. retail sales at the height of the lockdown, it declined to 17.5% in June, a mere two months later, according to a report by research firm GlobalData. And by Feb. 2021 it was down to 15% of retail sales—only 2.5% higher than before the pandemic, says Katherine Cullen, the National Retail Federation’s senior director of industry and consumer insights. What’s more, 79% of U.S. consumers told GlobalData that they missed the social interaction of physical stores during the lockdown. Brick-and-Mortar Stores When you walk into a store today, the shopping experience is a little different. Though the Centers for Disease Control and Prevention (CDC) lifted mask-wearing restrictions on fully vaccinated individuals in public indoor settings in May, the sudden rise of the Delta variant led the CDC to reimpose them in July for fully vaccinated people in areas of substantial or high transmission. As of Aug. 19, 2021, that is the whole country. Many states and cities are also requiring retailers to maintain their social distancing and sanitation protocols. Among them: Limiting the number of customers inside at any one time Restricting walk-ins, requiring customers to make appointments first Taking temperature checks at the door Requiring employees and customers to wear masks and refusing entry to those who don’t Hand sanitizers everywhere throughout the store Cordoning off seating areas or every other fitting room Frequent cleaning of high-touch surfaces Plastic barriers around the checkout counters Adopting contactless payment methods Except for contact-free paying—which was already getting popular before COVID-19—these restrictions aren’t likely to last. They “are all annoying and, outside of a pandemic, serve no real purpose,” says Neil Saunders, managing director and retail analyst at GlobalData. The Multichanneling Approach What is likely to last is what GlobalData calls “multichannelling”: the blending of brick-and-mortar retail and online retail. Retailers are getting smarter about their use of technology, employing it in ways to provide the best of both personal and virtual shopping experiences. One key innovation is click and collect: Customers make a purchase online but pick it up in the store or at curbside. While some big brands already provided “find at a store near you” services, click and collect blossomed during the pandemic, and it seems to have staying power: 68% of U.S. shoppers say that they are going to make more use of drive-up curbside collection facilities at stores in the future, and almost 60% say they will make greater use of collect-from-inside store services, according to GlobalData’s survey. Other stores are offering next-day or even same-day delivery after you order online. According to Cullen, smaller retailers in particular say that this allows them to differentiate themselves. If you can’t get to the store, the store can come to you—via virtual concierge or personal shopper services. At retailers Saks Fifth Avenue and Ralph Lauren, for example, sales reps will set up Zoom chats with clients, showing them preselected merchandise or touring them around the premises. Along with trying to personalize the virtual experience, retailers are also humanizing their websites. Live chats with a rep are becoming a standard feature. Increasingly common, too, are virtual reality tools that let you “wear” clothes or “place” furniture in your room. The beauty brand Laura Mercier, for example, offers a virtual try on of blushes, lipsticks, and eye shadows, so you can “find your perfect shade in real time.” Finally, there are financial incentives: free shipping or participating with cash-back services such as Rakuten. Gall has seen stores increasing the cash-back percentage they offer to woo back old customers or to get them to pick up an online order in the store. The Future of In-Store Shopping Beleaguered as they’ve been, brick-and-mortar stores may be due for a comeback. According to GlobalData’s research, 89% of retail executives in the U.S. say that physical stores will drive just as many, or more, sales for their business as they did before the pandemic started. And over the next five years, 87% are planning to invest more capital in multichannelling, allowing online and stores to operate seamlessly together. Some perks, such as free or same-day delivery, may be scaled back for cost, but many of these trends, such as contactless pay and curbside pickup, "are actually beneficial for retailers too," says Saunders, improving efficiency and reducing expenses. “Where there is a win-win situation, there is little reason for retailers to roll back the innovations they’ve put in place over the past year,” he adds. The Bottom Line In a single year the ways people shopped and paid for things changed—or seemed to. In fact, many trends already were in place or developing before COVID-19, but they got a decided push with the pandemic, waking up some sleepy industries in the process. Are the changes permanent? It’s hard to say. While e-commerce is entrenched even further in some ways, live and in-person activities have been much missed. The virtual and the actual will likely coexist, complementing each other better in the future. Predicting fundamental changes in consumer habits and methods of doing business is always tricky. It’s safe to say, though, as the National Retail Federation’s Cullen notes, “Anything related to convenience or that enhances the shopping experience will have staying power.” What Is Buy Now, Pay Later? Buy now, pay later, or BNPL, is a short-term financing tool that allows consumers to pay for purchases in generally equal installments, often without paying any interest. A merchant makes a deal with a lender, such as Affirm, Afterpay, or Klarna, and the consumer signs up with that lender when paying for the item. Currently BNPL is most prevalent online and most popular with younger consumers. How Popular is Online Homebuying? Prior to the pandemic, only 32% of homebuyers had made an offer on a property they had not seen in person. Perhaps not surprisingly, the number jumped to 63% in 2020. Furthermore, 97% of homebuyers at least used the internet to research properties when looking to buy a home. Online help is here to stay when it comes to homebuying, though sight-unseen purchasing is expected to dwindle once the pandemic recedes. How Popular Is Online Car Buying? According to automative retail consultancy Haig Partner, 30% of new car deals were done solely online in 2020, compared with only 2% in 2019. A survey conducted by Cox Automotive revealed that 76% of car buyers are open to buying a vehicle completely online. Cars.com offers more than two million vehicles for sale by virtual appointment with home delivery. As for the future, Cox predicts that one out of four consumers will buy a car online by 2025. What Is Multichanneling? Mutlichannelling combines brick-and-mortar sales with online sales. With the service click and collect, consumers can buy something online and then pick it up in person in the store or at curbside. Conversely, some stores offer virtual concierge or personal shopper services, where a sales rep comes to you via Zoom. According to a GlobalData survey, 68% of shoppers would like to use curbside pickup more, while 60% would like to use in-store pickup more in the future.

https://www.investopedia.com/why-the-fed-cares-what-you-think-about-inflation-8634999

The Fed Cares What You Think About Inflation

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Federal Reserve officials closely watch surveys that show consumers' expectations for future price increases.</li><li>If consumers and business owners believe price pressures will ease, then they generally behave in ways that make that happen, according to Fed officials. </li><li>Consumer expectations for inflation are beginning to come in line, giving Fed officials more hope that inflation can eventually be brought back down to target. </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"> When <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-inside-the-fed-meetings-where-decisions-on-us-interest-rates-are-made-8549999">Federal Reserve officials meet</a> to discuss inflation and interest rates at the end of the month, they will take into account many factors, like the Consumer Price Index (CPI) and the unemployment rate. </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"> But there’s one data point Fed officials often highlight that might surprise you: what consumers like you think about inflation. </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"> As Fed officials have crisscrossed the country talking about economic conditions and interest rates as of late, they have emphasized the importance of where consumers believe prices will be in the future. </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"> “Inflation expectations, we think, are an important part of driving actual inflation and we want them to be at levels that are consistent with 2% inflation,” Federal Reserve Chair Jerome Powell said earlier this month at a Stanford University event.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <span class="heading-toc" id="toc-consumer-surveys-keep-tabs-on-price-expectations"></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"> Consumer Surveys Keep Tabs on Price Expectations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> There are several places that the Federal Reserve can go to see what consumers are thinking about prices, including the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mcsi.asp">University of Michigan’s Consumer Sentiment</a> survey and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cci.asp">Conference Board’s Consumer Confidence</a> survey. Each asks consumers what they think the inflation rate will be in the future. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-worse-off-adults-7501288">As inflation shot up in 2022</a> to show year-over-year price increases of as much as 9%, so did consumer expectations that inflation would remain high. During that time, the University of Michigan survey showed consumers' year-ahead inflation expectations exceeded 5% for the first time since the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp">2008 recession</a> and reached highs not seen since 1981.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <span class="heading-toc" id="toc-why-do-expectations-matter"></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 Do Expectations Matter? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When consumers and businesses think higher inflation is ahead, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-february-20-8594087#toc-2024-02-20t160105826z">they act accordingly</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"> “One of the funny things about economics is that people’s expectations—your expectation—for the future become self-fulfilling. So if all of us believe that inflation will be 2%, then we behave in a way that helps lead to inflation being 2%,” Minneapolis Fed President Neel Kashkari told a University of Montana audience earlier this month.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> When businesses think inflation will remain high, they often set their prices to contend with that expectation. Conversely, workers will ask for larger <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090415/salary-secrets-what-considered-big-raise.asp">pay increases</a> to keep up with the inflation they predict is ahead. </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 price-setters and wage-setters in an economy believe that inflation will be at 2%, then that will actually happen,” Powell said.  </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-expectations-appear-to-be-falling-in-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> Expectations Appear To Be Falling in Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Despite setting <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723">interest rates at 23-year highs</a>, inflation hasn’t yet been tamed. In fact, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">recent reports have shown</a> price pressures may be creeping back up. But there are some indications the Fed has at least successfully gotten consumers to pull back their inflation expectations.  </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"> “Importantly, inflation expectations in the New York Fed’s Survey of Consumer Expectations are now again within their pre-COVID ranges at all horizons, consistent with other measures of inflation expectations,” New York Fed President John Williams said earlier this month.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> And it’s not just consumers' expectations that the Fed follows, with Powell noting that officials also consider surveys of businesses, as well as other forecaster models and market indicators that can give information about the likely path of prices. </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"> “All of those are saying that the public does believe—and it’s a good thing because it’s true—that inflation will go back down to 2%. So that’s very assuring,” Powell said. <br/> </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-fed-has-to-go-all-the-way"></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"> Fed Has to ‘Go All the Way’ </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Not only does the Federal Reserve consider what the public thinks about inflation, but officials are also mindful of how the public perceives the central bank's credibility. In other words, it’s important to the Fed that you believe it is serious about fighting inflation.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> In their remarks, Powell, Kashkari, and other officials said it is crucial the Federal Reserve hit its annual target of a 2% inflation rate for that reason. They’ve also argued against changing the Fed’s target to a higher number because that would undermine confidence in the central bank.  </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> “We have to go all the way. Because if we stop short, then you all are going to say, ‘maybe they will stop short next time,’ and that undermines confidence in the Fed,” Kashkari said. </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 * Federal Reserve officials closely watch surveys that show consumers' expectations for future price increases. * If consumers and business owners believe price pressures will ease, then they generally behave in ways that make that happen, according to Fed officials. * Consumer expectations for inflation are beginning to come in line, giving Fed officials more hope that inflation can eventually be brought back down to target. When [Federal Reserve officials meet](https://www.investopedia.com/what-happens-inside-the-fed-meetings-where-decisions-on-us-interest-rates-are-made-8549999) to discuss inflation and interest rates at the end of the month, they will take into account many factors, like the Consumer Price Index (CPI) and the unemployment rate. But there’s one data point Fed officials often highlight that might surprise you: what consumers like you think about inflation. As Fed officials have crisscrossed the country talking about economic conditions and interest rates as of late, they have emphasized the importance of where consumers believe prices will be in the future. “Inflation expectations, we think, are an important part of driving actual inflation and we want them to be at levels that are consistent with 2% inflation,” Federal Reserve Chair Jerome Powell said earlier this month at a Stanford University event. ## Consumer Surveys Keep Tabs on Price Expectations There are several places that the Federal Reserve can go to see what consumers are thinking about prices, including the [University of Michigan’s Consumer Sentiment](https://www.investopedia.com/terms/m/mcsi.asp) survey and the [Conference Board’s Consumer Confidence](https://www.investopedia.com/terms/c/cci.asp) survey. Each asks consumers what they think the inflation rate will be in the future. [As inflation shot up in 2022](https://www.investopedia.com/inflation-worse-off-adults-7501288) to show year-over-year price increases of as much as 9%, so did consumer expectations that inflation would remain high. During that time, the University of Michigan survey showed consumers' year-ahead inflation expectations exceeded 5% for the first time since the [2008 recession](https://www.investopedia.com/terms/g/great-recession.asp) and reached highs not seen since 1981. ## Why Do Expectations Matter? When consumers and businesses think higher inflation is ahead, [they act accordingly](https://www.investopedia.com/us-economy-news-today-february-20-8594087#toc-2024-02-20t160105826z). “One of the funny things about economics is that people’s expectations—your expectation—for the future become self-fulfilling. So if all of us believe that inflation will be 2%, then we behave in a way that helps lead to inflation being 2%,” Minneapolis Fed President Neel Kashkari told a University of Montana audience earlier this month. When businesses think inflation will remain high, they often set their prices to contend with that expectation. Conversely, workers will ask for larger [pay increases](https://www.investopedia.com/articles/personal-finance/090415/salary-secrets-what-considered-big-raise.asp) to keep up with the inflation they predict is ahead. “If price-setters and wage-setters in an economy believe that inflation will be at 2%, then that will actually happen,” Powell said.  ## Expectations Appear To Be Falling in Line Despite setting [interest rates at 23-year highs](https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723), inflation hasn’t yet been tamed. In fact, [recent reports have shown](https://www.investopedia.com/inflation-heated-up-in-march-8629363) price pressures may be creeping back up. But there are some indications the Fed has at least successfully gotten consumers to pull back their inflation expectations.  “Importantly, inflation expectations in the New York Fed’s Survey of Consumer Expectations are now again within their pre-COVID ranges at all horizons, consistent with other measures of inflation expectations,” New York Fed President John Williams said earlier this month. And it’s not just consumers' expectations that the Fed follows, with Powell noting that officials also consider surveys of businesses, as well as other forecaster models and market indicators that can give information about the likely path of prices. “All of those are saying that the public does believe—and it’s a good thing because it’s true—that inflation will go back down to 2%. So that’s very assuring,” Powell said.  ## Fed Has to ‘Go All the Way’ Not only does the Federal Reserve consider what the public thinks about inflation, but officials are also mindful of how the public perceives the central bank's credibility. In other words, it’s important to the Fed that you believe it is serious about fighting inflation.  In their remarks, Powell, Kashkari, and other officials said it is crucial the Federal Reserve hit its annual target of a 2% inflation rate for that reason. They’ve also argued against changing the Fed’s target to a higher number because that would undermine confidence in the central bank.  “We have to go all the way. Because if we stop short, then you all are going to say, ‘maybe they will stop short next time,’ and that undermines confidence in the Fed,” Kashkari said. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways Federal Reserve officials closely watch surveys that show consumers' expectations for future price increases.If consumers and business owners believe price pressures will ease, then they generally behave in ways that make that happen, according to Fed officials. Consumer expectations for inflation are beginning to come in line, giving Fed officials more hope that inflation can eventually be brought back down to target.  When Federal Reserve officials meet to discuss inflation and interest rates at the end of the month, they will take into account many factors, like the Consumer Price Index (CPI) and the unemployment rate. But there’s one data point Fed officials often highlight that might surprise you: what consumers like you think about inflation. As Fed officials have crisscrossed the country talking about economic conditions and interest rates as of late, they have emphasized the importance of where consumers believe prices will be in the future. “Inflation expectations, we think, are an important part of driving actual inflation and we want them to be at levels that are consistent with 2% inflation,” Federal Reserve Chair Jerome Powell said earlier this month at a Stanford University event. Consumer Surveys Keep Tabs on Price Expectations There are several places that the Federal Reserve can go to see what consumers are thinking about prices, including the University of Michigan’s Consumer Sentiment survey and the Conference Board’s Consumer Confidence survey. Each asks consumers what they think the inflation rate will be in the future. As inflation shot up in 2022 to show year-over-year price increases of as much as 9%, so did consumer expectations that inflation would remain high. During that time, the University of Michigan survey showed consumers' year-ahead inflation expectations exceeded 5% for the first time since the 2008 recession and reached highs not seen since 1981. Why Do Expectations Matter? When consumers and businesses think higher inflation is ahead, they act accordingly. “One of the funny things about economics is that people’s expectations—your expectation—for the future become self-fulfilling. So if all of us believe that inflation will be 2%, then we behave in a way that helps lead to inflation being 2%,” Minneapolis Fed President Neel Kashkari told a University of Montana audience earlier this month. When businesses think inflation will remain high, they often set their prices to contend with that expectation. Conversely, workers will ask for larger pay increases to keep up with the inflation they predict is ahead. “If price-setters and wage-setters in an economy believe that inflation will be at 2%, then that will actually happen,” Powell said.  Expectations Appear To Be Falling in Line Despite setting interest rates at 23-year highs, inflation hasn’t yet been tamed. In fact, recent reports have shown price pressures may be creeping back up. But there are some indications the Fed has at least successfully gotten consumers to pull back their inflation expectations.  “Importantly, inflation expectations in the New York Fed’s Survey of Consumer Expectations are now again within their pre-COVID ranges at all horizons, consistent with other measures of inflation expectations,” New York Fed President John Williams said earlier this month. And it’s not just consumers' expectations that the Fed follows, with Powell noting that officials also consider surveys of businesses, as well as other forecaster models and market indicators that can give information about the likely path of prices. “All of those are saying that the public does believe—and it’s a good thing because it’s true—that inflation will go back down to 2%. So that’s very assuring,” Powell said.  Fed Has to ‘Go All the Way’ Not only does the Federal Reserve consider what the public thinks about inflation, but officials are also mindful of how the public perceives the central bank's credibility. In other words, it’s important to the Fed that you believe it is serious about fighting inflation.  In their remarks, Powell, Kashkari, and other officials said it is crucial the Federal Reserve hit its annual target of a 2% inflation rate for that reason. They’ve also argued against changing the Fed’s target to a higher number because that would undermine confidence in the central bank.  “We have to go all the way. Because if we stop short, then you all are going to say, ‘maybe they will stop short next time,’ and that undermines confidence in the Fed,” Kashkari said. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

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

Sharpe Ratio: Definition, Formula, 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-the-sharpe-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the Sharpe Ratio? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Sharpe ratio compares the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">return of an investment</a> with its risk. It's a mathematical expression of the insight that excess returns over a period of time may signify more <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> and risk, rather than investing skill. </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"> Economist <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/william-f-sharpe.asp">William F. Sharpe</a> proposed the Sharpe ratio in 1966 as an outgrowth of his work on the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model (CAPM)</a>, calling it the reward-to-variability ratio.<span class="ql-inline-citation" data-cite="1"></span> Sharpe won the Nobel Prize in economics for his work on CAPM in 1990.<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_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The Sharpe ratio's numerator is the difference over time between realized, or expected, returns and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freerate.asp">risk-free rate of return</a> or the performance of a particular investment category. Its denominator is the standard deviation of returns over the same period of time, a measure of volatility and risk.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Sharpe ratio divides a portfolio's excess returns by a measure of its volatility to assess risk-adjusted performance</li><li>Excess returns are those above an industry benchmark or the risk-free rate of return</li><li>The calculation may be based on historical returns or forecasts</li><li>A higher Sharpe ratio is better when comparing similar portfolios.</li><li>The Sharpe ratio has inherent weaknesses and may be overstated for some investment strategies.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Sharpe Ratio" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/osdsvuk3vQmq26jttAbxPfOkmuw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/osdsvuk3vQmq26jttAbxPfOkmuw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png" data-srcset="https://www.investopedia.com/thmb/kipODmVkXLDD_sMtAYfeQIfGUhA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Sharpe Ratio" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/osdsvuk3vQmq26jttAbxPfOkmuw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png" srcset="https://www.investopedia.com/thmb/kipODmVkXLDD_sMtAYfeQIfGUhA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Michela Buttignol</p></span> </figcaption></figure> <span class="heading-toc" id="toc-formula-and-calculation-of-the-sharpe-ratio"></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"> Formula and Calculation of the Sharpe Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In its simplest form,<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <span data-value="\begin{aligned} &amp;\textit{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}\\ &amp;\textbf{where:}\\ &amp;R_{p}=\text{return of portfolio}\\ &amp;R_{f} = \text{risk-free rate}\\ &amp;\sigma_p = \text{standard deviation of the portfolio's excess return}\\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mrow> <mtext> Sharpe </mtext> <mtext>   </mtext> <mtext> Ratio </mtext> </mrow> <mo> = </mo> <mfrac> <mrow> <msub> <mi> R </mi> <mi> p </mi> </msub> <mo> − </mo> <msub> <mi> R </mi> <mi> f </mi> </msub> </mrow> <msub> <mi> σ </mi> <mi> p </mi> </msub> </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> <mi> R </mi> <mi> p </mi> </msub> <mo> = </mo> <mtext> return of portfolio </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mi> R </mi> <mi> f </mi> </msub> <mo> = </mo> <mtext> risk-free rate </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <msub> <mi> σ </mi> <mi> p </mi> </msub> <mo> = </mo> <mtext> standard deviation of the portfolio’s excess return </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned} &amp;\textit{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}\\ &amp;\textbf{where:}\\ &amp;R_{p}=\text{return of portfolio}\\ &amp;R_{f} = \text{risk-free rate}\\ &amp;\sigma_p = \text{standard deviation of the portfolio's excess return}\\ \end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textit">Sharpe Ratio</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathnormal">σ</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 mathnormal mtight">p</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">p</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathnormal mtight">f</span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></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 mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mathnormal mtight">p</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">return of portfolio</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathnormal">R</span><span class="msupsub"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight"><span class="mord mathnormal mtight">f</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">risk-free rate</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord"><span class="mord mathnormal">σ</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 mathnormal mtight">p</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">standard deviation of the portfolio’s excess return</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span></span></span></span></span></span></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeviation.asp">Standard deviation</a> is derived from the variability of returns for a series of time intervals adding up to the total performance sample under consideration. </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 numerator's total return differential versus a benchmark (<em>Rp </em>- <em>Rf) </em>is calculated as the average of the return differentials in each of the incremental time periods making up the total. For example, the numerator of a 10-year Sharpe ratio might be the average of 120 monthly return differentials for a fund versus an industry benchmark. </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 Sharpe ratio's denominator in that example will be those monthly returns' standard deviation, calculated as follows: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li>Take the return <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variance.asp">variance</a> from the average return in each of the incremental periods, square it, and sum the squares from all of the incremental periods.</li> <li>Divide the sum by the number of incremental time periods.</li> <li>Take a square root of the quotient.</li> </ol> <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-what-the-sharpe-ratio-can-tell-you"></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 the Sharpe Ratio Can Tell You </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The Sharpe ratio is one of the most widely used methods for measuring risk-adjusted relative returns. It compares a fund's historical or projected returns relative to an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/032516/how-use-benchmark-evaluate-portfolio.asp">investment benchmark</a> with the historical or expected <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variability.asp">variability</a> of such returns. </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 risk-free rate was initially used in the formula to denote an investor's hypothetical minimal borrowing costs.<span class="ql-inline-citation" data-cite="1"></span> More generally, it represents the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskpremium.asp">risk premium</a> of an investment versus a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-asset.asp">safe asset</a> such as a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury bill</a> or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">bond</a>. </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 benchmarked against the returns of an industry sector or investing strategy, the Sharpe ratio provides a measure of risk-adjusted performance not attributable to such affiliations. </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 ratio is useful in determining to what degree excess historical returns were accompanied by excess volatility. While excess returns are measured in comparison with an investing benchmark, the standard deviation formula gauges volatility based on the variance of returns from their mean. </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 ratio's utility relies on the assumption that the historical record of relative risk-adjusted returns has at least some predictive value.<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_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_35-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_36-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Generally, the higher the Sharpe ratio, the more attractive the risk-adjusted return.<br/></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The Sharpe ratio can be used to evaluate a portfolio’s risk-adjusted performance. Alternatively, an investor could use a fund's return objective to estimate its projected Sharpe ratio <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exante.asp">ex-ante</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The Sharpe ratio can help explain whether a portfolio's excess returns are attributable to smart investment decisions or simply luck and 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"> For example, low-quality, highly speculative stocks can outperform blue chip shares for considerable periods of time, as during the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">Dot-Com Bubble</a> or, more recently, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/meme-stock-5206762">meme stocks</a> frenzy. If a YouTuber happens to beat <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/warren-buffett-4689826">Warren Buffett</a> in the market for a while as a result, the Sharpe ratio will provide a quick reality check by adjusting each manager's performance for their portfolio's volatility. </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 greater a portfolio's Sharpe ratio, the better its risk-adjusted performance. A negative Sharpe ratio means the risk-free or benchmark rate is greater than the portfolio’s historical or projected return, or else the portfolio's return is expected to be negative. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></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_45-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="William F. Sharpe" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" data-srcset="https://www.investopedia.com/thmb/l22sKE7LUZCPO3u-8CTva4lpyXE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_2-0" width="1500"/> <noscript> <img alt="William F. Sharpe" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" srcset="https://www.investopedia.com/thmb/l22sKE7LUZCPO3u-8CTva4lpyXE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Alison Czinkota / Investopedia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-sharpe-ratio-pitfalls"></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"> Sharpe Ratio Pitfalls </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> The Sharpe ratio can be manipulated by portfolio managers seeking to boost their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/010815/what-difference-between-sharpe-ratio-and-traynor-ratio.asp">apparent risk-adjusted returns</a> history. This can be done by lengthening the return measurement intervals, which results in a lower estimate of volatility. For example, the standard deviation (volatility) of annual returns is generally lower than that of monthly returns, which are in turn less volatile than daily returns. Financial analysts typically consider the volatility of monthly returns when using the Sharpe ratio. </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"> Calculating the Sharpe ratio for the most favorable stretch of performance rather than an objectively chosen look-back period is another way to cherry-pick the data that will distort the risk-adjusted returns. </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 Sharpe ratio also has some inherent limitations. The standard deviation calculation in the ratio's denominator, which serves as its proxy for portfolio risk, calculates volatility based on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/normaldistribution.asp">normal distribution</a> and is most useful in evaluating symmetrical <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probabilitydistribution.asp">probability distribution</a> curves. In contrast, financial markets subject to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/herdinstinct.asp">herding behavior</a> can go to extremes much more often than a normal distribution would suggest is possible. As a result, the standard deviation used to calculate the Sharpe ratio may understate <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tailrisk.asp">tail risk</a>.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Market returns are also subject to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/serial-correlation.asp">serial correlation</a>. The simplest example is that returns in adjacent time intervals may be correlated because they were influenced by the same market trend. But <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/meanreversion.asp">mean reversion</a> also depends on serial correlation, just like <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmomentum.asp">market momentum</a>. The upshot is that serial correlation tends to lower volatility, and as a result investment strategies dependent on serial correlation factors may exhibit misleadingly high Sharpe ratios as a result.<br/> </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"> One way to visualize these criticisms is to consider the investment strategy of picking up nickels in front of a steamroller that moves slowly and predictably nearly all the time, except for the few rare occasions when it suddenly and fatally accelerates. Because such unfortunate events are extremely uncommon, those picking up nickels would, most of the time, deliver positive returns with minimal volatility, earning high Sharpe ratios as a result. And if a fund picking up the proverbial nickels in front of a steamroller got flattened on one of those extremely rare and unfortunate occasions, its long-term Sharpe might still look good: just one bad month, after all. Unfortunately, that would bring little comfort to the fund's investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <span class="heading-toc" id="toc-sharpe-alternatives-the-sortino-and-the-treynor"></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"> Sharpe Alternatives: The Sortino and the Treynor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The standard deviation in the Sharpe ratio's formula assumes that price movements in either direction are equally risky. In fact, the risk of an abnormally low return is very different from the possibility of an abnormally high one for most investors and analysts. </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"> A variation of the Sharpe called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sortinoratio.asp">Sortino ratio</a> ignores the above-average returns to focus solely on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downside-deviation.asp">downside deviation</a> as a better proxy for the risk of a fund of a portfolio. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> The standard deviation in the denominator of a Sortino ratio measures the variance of negative returns or those below a chosen benchmark relative to the average of such returns. </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"> Another variation of the Sharpe is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treynorratio.asp">Treynor ratio</a>, which divides excess return over a risk-free rate or benchmark by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">beta</a> of a security, fund, or portfolio as a measure of its <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systematicrisk.asp">systematic risk</a> exposure. Beta measures the degree to which the volatility of a stock or fund correlates to that of the market as a whole. The goal of the Treynor ratio is to determine whether an investor is being compensated for extra risk above that posed by the market.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-example-of-how-to-use-sharpe-ratio"></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"> Example of How to Use Sharpe Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> The Sharpe ratio is sometimes used in assessing how adding an investment might affect the risk-adjusted returns of the portfolio. </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"> For example, an investor is considering adding a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp">hedge fund</a> allocation to a portfolio that has returned 18% over the last year. The current risk-free rate is 3%, and the annualized standard deviation of the portfolio’s monthly returns was 12%, which gives it a one-year Sharpe ratio of 1.25, or (18 - 3) / 12. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> The investor believes that adding the hedge fund to the portfolio will lower the expected return to 15% for the coming year, but also expects the portfolio’s volatility to drop to 8% as a result. The risk-free rate is expected to remain the same over the coming year. </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"> Using the same formula with the estimated future numbers, the investor finds the portfolio would have a projected Sharpe ratio of 1.5, or (15% - 3%) divided by 8%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> In this case, while the hedge fund investment is expected to reduce the absolute return of the portfolio, based on its projected lower volatility it would improve the portfolio's performance on a risk-adjusted basis. If the new investment lowered the Sharpe ratio it would be assumed to be detrimental to risk-adjusted returns, based on forecasts. This example assumes that the Sharpe ratio based on the portfolio's historical performance can be fairly compared to that using the investor's return and volatility assumptions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-what-is-a-good-sharpe-ratio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Sharpe Ratio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Sharpe ratios above 1 are generally considered “good," offering excess returns relative to volatility. However, investors often compare the Sharpe ratio of a portfolio or fund with those of its peers or market sector. So a portfolio with a Sharpe ratio of 1 might be found lacking if most rivals have ratios above 1.2, for example. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/010815/what-good-sharpe-ratio.asp">A good Sharpe ratio</a> in one context might be just a so-so one, or worse, in another.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_79-0"><span class="heading-toc" id="toc-how-is-the-sharpe-ratio-calculated"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is the Sharpe Ratio Calculated?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p><br/></p><p>To calculate the Sharpe ratio, investors first subtract the risk-free rate from the portfolio’s rate of return, often using U.S. Treasury bond yields as a proxy for the risk-free rate of return. Then, they divide the result by the standard deviation of the portfolio’s excess return.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-what-is-the-sharpe-ratio-of-sp-500"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Sharpe Ratio of S&amp;P 500?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>As of June 30, 2023, the S&amp;P 500 Portfolio Sharpe ratio is 0.88.<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_82-0"></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_83-0"> <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_84-0"> The Sharpe ratio, named after its creator, William F. Sharpe, is a mathematical expression that helps investors compare the return of an investment with its risk. To calculate the Sharpe ratio investors can subtract the risk-free rate of return from the expected rate of return, and then divide that result by the standard deviation (the asset's volatility.) </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> The Sharpe ratio can be helpful only when used to compare very similar investments, like mutual funds and ETFs that track the same underlying index. Still, investors should keep in mind that those investments with a higher Sharpe ratio can be more volatile than those with a lower rate. </p></div>

## What Is the Sharpe Ratio? The Sharpe ratio compares the [return of an investment](https://www.investopedia.com/terms/r/returnoninvestment.asp) with its risk. It's a mathematical expression of the insight that excess returns over a period of time may signify more [volatility](https://www.investopedia.com/terms/v/volatility.asp) and risk, rather than investing skill. Economist [William F. Sharpe](https://www.investopedia.com/terms/w/william-f-sharpe.asp) proposed the Sharpe ratio in 1966 as an outgrowth of his work on the [capital asset pricing model (CAPM)](https://www.investopedia.com/terms/c/capm.asp), calling it the reward-to-variability ratio. Sharpe won the Nobel Prize in economics for his work on CAPM in 1990. The Sharpe ratio's numerator is the difference over time between realized, or expected, returns and a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) such as the [risk-free rate of return](https://www.investopedia.com/terms/r/risk-freerate.asp) or the performance of a particular investment category. Its denominator is the standard deviation of returns over the same period of time, a measure of volatility and risk. ### Key Takeaways * The Sharpe ratio divides a portfolio's excess returns by a measure of its volatility to assess risk-adjusted performance * Excess returns are those above an industry benchmark or the risk-free rate of return * The calculation may be based on historical returns or forecasts * A higher Sharpe ratio is better when comparing similar portfolios. * The Sharpe ratio has inherent weaknesses and may be overstated for some investment strategies. ![Sharpe Ratio]() :max_bytes(150000):strip_icc()/Sharperatio-e93b773c49274c828f7508c79d4a18af.png) Michela Buttignol ## Formula and Calculation of the Sharpe Ratio In its simplest form, Sharpe   Ratio = R p − R f σ p where: R p = return of portfolio R f = risk-free rate σ p = standard deviation of the portfolio’s excess return \begin{aligned} &\textit{Sharpe Ratio} = \frac{R\_p - R\_f}{\sigma\_p}\\ &\textbf{where:}\\ &R\_{p}=\text{return of portfolio}\\ &R\_{f} = \text{risk-free rate}\\ &\sigma\_p = \text{standard deviation of the portfolio's excess return}\\ \end{aligned} ​Sharpe Ratio=σp​Rp​−Rf​​where:Rp​=return of portfolioRf​=risk-free rateσp​=standard deviation of the portfolio’s excess return​ [Standard deviation](https://www.investopedia.com/terms/s/standarddeviation.asp) is derived from the variability of returns for a series of time intervals adding up to the total performance sample under consideration. The numerator's total return differential versus a benchmark (*Rp* - *Rf)* is calculated as the average of the return differentials in each of the incremental time periods making up the total. For example, the numerator of a 10-year Sharpe ratio might be the average of 120 monthly return differentials for a fund versus an industry benchmark. The Sharpe ratio's denominator in that example will be those monthly returns' standard deviation, calculated as follows: 1. Take the return [variance](https://www.investopedia.com/terms/v/variance.asp) from the average return in each of the incremental periods, square it, and sum the squares from all of the incremental periods. 2. Divide the sum by the number of incremental time periods. 3. Take a square root of the quotient. ## What the Sharpe Ratio Can Tell You The Sharpe ratio is one of the most widely used methods for measuring risk-adjusted relative returns. It compares a fund's historical or projected returns relative to an [investment benchmark](https://www.investopedia.com/articles/investing/032516/how-use-benchmark-evaluate-portfolio.asp) with the historical or expected [variability](https://www.investopedia.com/terms/v/variability.asp) of such returns. The risk-free rate was initially used in the formula to denote an investor's hypothetical minimal borrowing costs. More generally, it represents the [risk premium](https://www.investopedia.com/terms/r/riskpremium.asp) of an investment versus a [safe asset](https://www.investopedia.com/terms/s/safe-asset.asp) such as a [Treasury bill](https://www.investopedia.com/terms/t/treasurybill.asp) or [bond](https://www.investopedia.com/terms/t/treasurybond.asp). When benchmarked against the returns of an industry sector or investing strategy, the Sharpe ratio provides a measure of risk-adjusted performance not attributable to such affiliations. The ratio is useful in determining to what degree excess historical returns were accompanied by excess volatility. While excess returns are measured in comparison with an investing benchmark, the standard deviation formula gauges volatility based on the variance of returns from their mean. The ratio's utility relies on the assumption that the historical record of relative risk-adjusted returns has at least some predictive value. ### Generally, the higher the Sharpe ratio, the more attractive the risk-adjusted return. The Sharpe ratio can be used to evaluate a portfolio’s risk-adjusted performance. Alternatively, an investor could use a fund's return objective to estimate its projected Sharpe ratio [ex-ante](https://www.investopedia.com/terms/e/exante.asp). The Sharpe ratio can help explain whether a portfolio's excess returns are attributable to smart investment decisions or simply luck and risk. For example, low-quality, highly speculative stocks can outperform blue chip shares for considerable periods of time, as during the [Dot-Com Bubble](https://www.investopedia.com/terms/d/dotcom-bubble.asp) or, more recently, the [meme stocks](https://www.investopedia.com/meme-stock-5206762) frenzy. If a YouTuber happens to beat [Warren Buffett](https://www.investopedia.com/warren-buffett-4689826) in the market for a while as a result, the Sharpe ratio will provide a quick reality check by adjusting each manager's performance for their portfolio's volatility. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance. A negative Sharpe ratio means the risk-free or benchmark rate is greater than the portfolio’s historical or projected return, or else the portfolio's return is expected to be negative. ![William F. Sharpe]() :max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png) Alison Czinkota / Investopedia ## Sharpe Ratio Pitfalls The Sharpe ratio can be manipulated by portfolio managers seeking to boost their [apparent risk-adjusted returns](https://www.investopedia.com/ask/answers/010815/what-difference-between-sharpe-ratio-and-traynor-ratio.asp) history. This can be done by lengthening the return measurement intervals, which results in a lower estimate of volatility. For example, the standard deviation (volatility) of annual returns is generally lower than that of monthly returns, which are in turn less volatile than daily returns. Financial analysts typically consider the volatility of monthly returns when using the Sharpe ratio. Calculating the Sharpe ratio for the most favorable stretch of performance rather than an objectively chosen look-back period is another way to cherry-pick the data that will distort the risk-adjusted returns. The Sharpe ratio also has some inherent limitations. The standard deviation calculation in the ratio's denominator, which serves as its proxy for portfolio risk, calculates volatility based on a [normal distribution](https://www.investopedia.com/terms/n/normaldistribution.asp) and is most useful in evaluating symmetrical [probability distribution](https://www.investopedia.com/terms/p/probabilitydistribution.asp) curves. In contrast, financial markets subject to [herding behavior](https://www.investopedia.com/terms/h/herdinstinct.asp) can go to extremes much more often than a normal distribution would suggest is possible. As a result, the standard deviation used to calculate the Sharpe ratio may understate [tail risk](https://www.investopedia.com/terms/t/tailrisk.asp). Market returns are also subject to [serial correlation](https://www.investopedia.com/terms/s/serial-correlation.asp). The simplest example is that returns in adjacent time intervals may be correlated because they were influenced by the same market trend. But [mean reversion](https://www.investopedia.com/terms/m/meanreversion.asp) also depends on serial correlation, just like [market momentum](https://www.investopedia.com/terms/m/marketmomentum.asp). The upshot is that serial correlation tends to lower volatility, and as a result investment strategies dependent on serial correlation factors may exhibit misleadingly high Sharpe ratios as a result. One way to visualize these criticisms is to consider the investment strategy of picking up nickels in front of a steamroller that moves slowly and predictably nearly all the time, except for the few rare occasions when it suddenly and fatally accelerates. Because such unfortunate events are extremely uncommon, those picking up nickels would, most of the time, deliver positive returns with minimal volatility, earning high Sharpe ratios as a result. And if a fund picking up the proverbial nickels in front of a steamroller got flattened on one of those extremely rare and unfortunate occasions, its long-term Sharpe might still look good: just one bad month, after all. Unfortunately, that would bring little comfort to the fund's investors. ## Sharpe Alternatives: The Sortino and the Treynor The standard deviation in the Sharpe ratio's formula assumes that price movements in either direction are equally risky. In fact, the risk of an abnormally low return is very different from the possibility of an abnormally high one for most investors and analysts. A variation of the Sharpe called the [Sortino ratio](https://www.investopedia.com/terms/s/sortinoratio.asp) ignores the above-average returns to focus solely on [downside deviation](https://www.investopedia.com/terms/d/downside-deviation.asp) as a better proxy for the risk of a fund of a portfolio. The standard deviation in the denominator of a Sortino ratio measures the variance of negative returns or those below a chosen benchmark relative to the average of such returns. Another variation of the Sharpe is the [Treynor ratio](https://www.investopedia.com/terms/t/treynorratio.asp), which divides excess return over a risk-free rate or benchmark by the [beta](https://www.investopedia.com/terms/b/beta.asp) of a security, fund, or portfolio as a measure of its [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp) exposure. Beta measures the degree to which the volatility of a stock or fund correlates to that of the market as a whole. The goal of the Treynor ratio is to determine whether an investor is being compensated for extra risk above that posed by the market. ## Example of How to Use Sharpe Ratio The Sharpe ratio is sometimes used in assessing how adding an investment might affect the risk-adjusted returns of the portfolio. For example, an investor is considering adding a [hedge fund](https://www.investopedia.com/terms/h/hedgefund.asp) allocation to a portfolio that has returned 18% over the last year. The current risk-free rate is 3%, and the annualized standard deviation of the portfolio’s monthly returns was 12%, which gives it a one-year Sharpe ratio of 1.25, or (18 - 3) / 12. The investor believes that adding the hedge fund to the portfolio will lower the expected return to 15% for the coming year, but also expects the portfolio’s volatility to drop to 8% as a result. The risk-free rate is expected to remain the same over the coming year. Using the same formula with the estimated future numbers, the investor finds the portfolio would have a projected Sharpe ratio of 1.5, or (15% - 3%) divided by 8%. In this case, while the hedge fund investment is expected to reduce the absolute return of the portfolio, based on its projected lower volatility it would improve the portfolio's performance on a risk-adjusted basis. If the new investment lowered the Sharpe ratio it would be assumed to be detrimental to risk-adjusted returns, based on forecasts. This example assumes that the Sharpe ratio based on the portfolio's historical performance can be fairly compared to that using the investor's return and volatility assumptions. ## What Is a Good Sharpe Ratio? Sharpe ratios above 1 are generally considered “good," offering excess returns relative to volatility. However, investors often compare the Sharpe ratio of a portfolio or fund with those of its peers or market sector. So a portfolio with a Sharpe ratio of 1 might be found lacking if most rivals have ratios above 1.2, for example. [A good Sharpe ratio](https://www.investopedia.com/ask/answers/010815/what-good-sharpe-ratio.asp) in one context might be just a so-so one, or worse, in another. ## How Is the Sharpe Ratio Calculated? To calculate the Sharpe ratio, investors first subtract the risk-free rate from the portfolio’s rate of return, often using U.S. Treasury bond yields as a proxy for the risk-free rate of return. Then, they divide the result by the standard deviation of the portfolio’s excess return. ## What Is the Sharpe Ratio of S&P 500? As of June 30, 2023, the S&P 500 Portfolio Sharpe ratio is 0.88. ## The Bottom Line The Sharpe ratio, named after its creator, William F. Sharpe, is a mathematical expression that helps investors compare the return of an investment with its risk. To calculate the Sharpe ratio investors can subtract the risk-free rate of return from the expected rate of return, and then divide that result by the standard deviation (the asset's volatility.) The Sharpe ratio can be helpful only when used to compare very similar investments, like mutual funds and ETFs that track the same underlying index. Still, investors should keep in mind that those investments with a higher Sharpe ratio can be more volatile than those with a lower rate.

What Is the Sharpe Ratio? The Sharpe ratio compares the return of an investment with its risk. It's a mathematical expression of the insight that excess returns over a period of time may signify more volatility and risk, rather than investing skill. Economist William F. Sharpe proposed the Sharpe ratio in 1966 as an outgrowth of his work on the capital asset pricing model (CAPM), calling it the reward-to-variability ratio. Sharpe won the Nobel Prize in economics for his work on CAPM in 1990. The Sharpe ratio's numerator is the difference over time between realized, or expected, returns and a benchmark such as the risk-free rate of return or the performance of a particular investment category. Its denominator is the standard deviation of returns over the same period of time, a measure of volatility and risk. Key Takeaways The Sharpe ratio divides a portfolio's excess returns by a measure of its volatility to assess risk-adjusted performanceExcess returns are those above an industry benchmark or the risk-free rate of returnThe calculation may be based on historical returns or forecastsA higher Sharpe ratio is better when comparing similar portfolios.The Sharpe ratio has inherent weaknesses and may be overstated for some investment strategies. Michela Buttignol Formula and Calculation of the Sharpe Ratio In its simplest form, Sharpe   Ratio = R p − R f σ p where: R p = return of portfolio R f = risk-free rate σ p = standard deviation of the portfolio’s excess return \begin{aligned} &\textit{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}\\ &\textbf{where:}\\ &R_{p}=\text{return of portfolio}\\ &R_{f} = \text{risk-free rate}\\ &\sigma_p = \text{standard deviation of the portfolio's excess return}\\ \end{aligned} ​Sharpe Ratio=σp​Rp​−Rf​​where:Rp​=return of portfolioRf​=risk-free rateσp​=standard deviation of the portfolio’s excess return​ Standard deviation is derived from the variability of returns for a series of time intervals adding up to the total performance sample under consideration. The numerator's total return differential versus a benchmark (Rp - Rf) is calculated as the average of the return differentials in each of the incremental time periods making up the total. For example, the numerator of a 10-year Sharpe ratio might be the average of 120 monthly return differentials for a fund versus an industry benchmark. The Sharpe ratio's denominator in that example will be those monthly returns' standard deviation, calculated as follows: Take the return variance from the average return in each of the incremental periods, square it, and sum the squares from all of the incremental periods. Divide the sum by the number of incremental time periods. Take a square root of the quotient. What the Sharpe Ratio Can Tell You The Sharpe ratio is one of the most widely used methods for measuring risk-adjusted relative returns. It compares a fund's historical or projected returns relative to an investment benchmark with the historical or expected variability of such returns. The risk-free rate was initially used in the formula to denote an investor's hypothetical minimal borrowing costs. More generally, it represents the risk premium of an investment versus a safe asset such as a Treasury bill or bond. When benchmarked against the returns of an industry sector or investing strategy, the Sharpe ratio provides a measure of risk-adjusted performance not attributable to such affiliations. The ratio is useful in determining to what degree excess historical returns were accompanied by excess volatility. While excess returns are measured in comparison with an investing benchmark, the standard deviation formula gauges volatility based on the variance of returns from their mean. The ratio's utility relies on the assumption that the historical record of relative risk-adjusted returns has at least some predictive value. Generally, the higher the Sharpe ratio, the more attractive the risk-adjusted return. The Sharpe ratio can be used to evaluate a portfolio’s risk-adjusted performance. Alternatively, an investor could use a fund's return objective to estimate its projected Sharpe ratio ex-ante. The Sharpe ratio can help explain whether a portfolio's excess returns are attributable to smart investment decisions or simply luck and risk. For example, low-quality, highly speculative stocks can outperform blue chip shares for considerable periods of time, as during the Dot-Com Bubble or, more recently, the meme stocks frenzy. If a YouTuber happens to beat Warren Buffett in the market for a while as a result, the Sharpe ratio will provide a quick reality check by adjusting each manager's performance for their portfolio's volatility. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance. A negative Sharpe ratio means the risk-free or benchmark rate is greater than the portfolio’s historical or projected return, or else the portfolio's return is expected to be negative. Alison Czinkota / Investopedia Sharpe Ratio Pitfalls The Sharpe ratio can be manipulated by portfolio managers seeking to boost their apparent risk-adjusted returns history. This can be done by lengthening the return measurement intervals, which results in a lower estimate of volatility. For example, the standard deviation (volatility) of annual returns is generally lower than that of monthly returns, which are in turn less volatile than daily returns. Financial analysts typically consider the volatility of monthly returns when using the Sharpe ratio. Calculating the Sharpe ratio for the most favorable stretch of performance rather than an objectively chosen look-back period is another way to cherry-pick the data that will distort the risk-adjusted returns. The Sharpe ratio also has some inherent limitations. The standard deviation calculation in the ratio's denominator, which serves as its proxy for portfolio risk, calculates volatility based on a normal distribution and is most useful in evaluating symmetrical probability distribution curves. In contrast, financial markets subject to herding behavior can go to extremes much more often than a normal distribution would suggest is possible. As a result, the standard deviation used to calculate the Sharpe ratio may understate tail risk. Market returns are also subject to serial correlation. The simplest example is that returns in adjacent time intervals may be correlated because they were influenced by the same market trend. But mean reversion also depends on serial correlation, just like market momentum. The upshot is that serial correlation tends to lower volatility, and as a result investment strategies dependent on serial correlation factors may exhibit misleadingly high Sharpe ratios as a result. One way to visualize these criticisms is to consider the investment strategy of picking up nickels in front of a steamroller that moves slowly and predictably nearly all the time, except for the few rare occasions when it suddenly and fatally accelerates. Because such unfortunate events are extremely uncommon, those picking up nickels would, most of the time, deliver positive returns with minimal volatility, earning high Sharpe ratios as a result. And if a fund picking up the proverbial nickels in front of a steamroller got flattened on one of those extremely rare and unfortunate occasions, its long-term Sharpe might still look good: just one bad month, after all. Unfortunately, that would bring little comfort to the fund's investors. Sharpe Alternatives: The Sortino and the Treynor The standard deviation in the Sharpe ratio's formula assumes that price movements in either direction are equally risky. In fact, the risk of an abnormally low return is very different from the possibility of an abnormally high one for most investors and analysts. A variation of the Sharpe called the Sortino ratio ignores the above-average returns to focus solely on downside deviation as a better proxy for the risk of a fund of a portfolio. The standard deviation in the denominator of a Sortino ratio measures the variance of negative returns or those below a chosen benchmark relative to the average of such returns. Another variation of the Sharpe is the Treynor ratio, which divides excess return over a risk-free rate or benchmark by the beta of a security, fund, or portfolio as a measure of its systematic risk exposure. Beta measures the degree to which the volatility of a stock or fund correlates to that of the market as a whole. The goal of the Treynor ratio is to determine whether an investor is being compensated for extra risk above that posed by the market. Example of How to Use Sharpe Ratio The Sharpe ratio is sometimes used in assessing how adding an investment might affect the risk-adjusted returns of the portfolio. For example, an investor is considering adding a hedge fund allocation to a portfolio that has returned 18% over the last year. The current risk-free rate is 3%, and the annualized standard deviation of the portfolio’s monthly returns was 12%, which gives it a one-year Sharpe ratio of 1.25, or (18 - 3) / 12. The investor believes that adding the hedge fund to the portfolio will lower the expected return to 15% for the coming year, but also expects the portfolio’s volatility to drop to 8% as a result. The risk-free rate is expected to remain the same over the coming year. Using the same formula with the estimated future numbers, the investor finds the portfolio would have a projected Sharpe ratio of 1.5, or (15% - 3%) divided by 8%. In this case, while the hedge fund investment is expected to reduce the absolute return of the portfolio, based on its projected lower volatility it would improve the portfolio's performance on a risk-adjusted basis. If the new investment lowered the Sharpe ratio it would be assumed to be detrimental to risk-adjusted returns, based on forecasts. This example assumes that the Sharpe ratio based on the portfolio's historical performance can be fairly compared to that using the investor's return and volatility assumptions. What Is a Good Sharpe Ratio? Sharpe ratios above 1 are generally considered “good," offering excess returns relative to volatility. However, investors often compare the Sharpe ratio of a portfolio or fund with those of its peers or market sector. So a portfolio with a Sharpe ratio of 1 might be found lacking if most rivals have ratios above 1.2, for example. A good Sharpe ratio in one context might be just a so-so one, or worse, in another. How Is the Sharpe Ratio Calculated? To calculate the Sharpe ratio, investors first subtract the risk-free rate from the portfolio’s rate of return, often using U.S. Treasury bond yields as a proxy for the risk-free rate of return. Then, they divide the result by the standard deviation of the portfolio’s excess return. What Is the Sharpe Ratio of S&P 500? As of June 30, 2023, the S&P 500 Portfolio Sharpe ratio is 0.88. The Bottom Line The Sharpe ratio, named after its creator, William F. Sharpe, is a mathematical expression that helps investors compare the return of an investment with its risk. To calculate the Sharpe ratio investors can subtract the risk-free rate of return from the expected rate of return, and then divide that result by the standard deviation (the asset's volatility.) The Sharpe ratio can be helpful only when used to compare very similar investments, like mutual funds and ETFs that track the same underlying index. Still, investors should keep in mind that those investments with a higher Sharpe ratio can be more volatile than those with a lower rate.

https://www.investopedia.com/understanding-futures-contract-expiration-7972595

Understanding Futures Contract Expiration: A Comprehensive Guide

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-futures-contract-expiration"></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 Futures Contract Expiration? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Futures contract expiration is the countdown clock of this part of the trading world. It marks the last day that you can trade a futures contract before it expires. After this day, the contract is settled either in cash or through the physical delivery of the underlying asset, depending on the terms of the agreement. </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>Futures contract expiration is a nonnegotiable deadline that marks the end of trading for a particular contract, requiring either cash settlement or delivery of the underlying asset.</li><li>As expiration nears, traders can expect increased price volatility, changes in liquidity, and a converging of futures and current market prices, all of which can significantly affect trading positions.</li><li>To maintain market exposure beyond a contract’s expiration, traders often roll the contract over, which involves closing the existing contract and opening a new one with a later expiration date.</li><li>Information on the expiration dates of futures can be found through exchange websites, trading platforms, financial news outlets, brokerage reports, and market calendars.</li></ul></div></div></div> <span class="heading-toc" id="toc-why-do-futures-contracts-expire"></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"> Why Do Futures Contracts Expire? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Just as a loaf of bread or carton of milk has an expiration date, so does a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contract</a>. Expiration ensures all obligations are met and finalized through cash settlement or physical delivery. It keeps the market orderly and reduces risk.<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_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Without a firm <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expiration-time.asp">expiration</a> date, contracts would linger indefinitely, creating uncertainty and increasing the risk of market manipulation. The expiration date acts as a clearing mechanism, essentially sweeping the market clean of obligations and allowing for a fresh start.<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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> By setting a finite life span for each futures contract, the market reduces the risk that one party will <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> on its obligations. As the expiration date approaches, traders know they need to settle or roll over their contracts. The pressure of a specific end date keeps everyone on their toes and ensures that contracts are less likely to go unfulfilled.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Another vital role that expiration dates play is for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/hedging-beginners-guide/">hedging</a>. Hedgers enter into futures contracts to protect against the volatility of asset prices in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spotmarket.asp">spot market</a>. They’re not necessarily in it for the profit, but for the stability and risk management that futures can offer.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Hedgers can use the expiration date of a futures contract to align their hedges with a specific financial need or obligation in the future. This is particularly important for producers or consumers hedging against price changes in commodities like oil, agricultural products, or metals. By choosing a futures contract with an expiration that matches their expected need date, hedgers can create a more effective and accurate hedge.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-subheading__text"> Example: A Forward Hedge in the Corn Market </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Suppose you’re a farmer who has just planted corn, expecting to harvest your crop in six months. You’re worried that corn prices could fall by then, leaving you with less revenue to cover your costs. To protect against this risk, you enter a forward hedge by selling a futures contract that expires in six months when the corn is planted. </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"> By doing this, you lock in a price for your corn today, effectively setting a guaranteed selling price for the future. If corn prices do indeed fall, the loss in your crop’s value is offset by gains from the futures contract. Otherwise, if prices rise, you’ll get less for your corn than you would have without the hedge, but you are protected against the downside risk. </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"> By aligning the expiration date of the futures contract with the timing of your corn harvest, you’ve effectively hedged against price risk. This is a classic example of how the expiration date can be a strategic tool for hedgers as they align their financial instruments with real-world needs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When you trade futures, you aren’t buying or selling the actual asset—for example, oil, gold, or wheat. You’re agreeing to buy or sell the asset at a specific future date. When that date arrives, it’s “game over” for that contract. Traders must then either settle up or move their positions to a new contract with a later expiration date.</p></div></div></div> <span class="heading-toc" id="toc-how-futures-contract-expiration-works"></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 Futures Contract Expiration Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The expiration date is a built-in deadline when both parties—the buyer and the seller—must fulfill their obligations. When a futures contract expires, it’s time to settle up. </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"> This can be done in two ways: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-subheading__text"> Cash Settlement </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In some markets, the contract is settled in cash rather than dealing with the hassle of shipping a truckload of soybeans or moving bars of gold. The cash amount is the difference between the contract and the market price at the time of expiration. This is common for futures contracts on financial products like indexes.<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_33-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> <li><strong>Final trading day</strong>: Each cash-settled contract has a final trading day, after which trading stops and settlement begins.</li> <li><strong>Price determination</strong>: The final settlement price is usually based on a specific calculation or an average of prices over a certain period, depending on the contract’s terms.</li> <li><strong>Clearinghouse involvement</strong>: The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearinghouse.asp">clearinghouse</a> calculates the difference between the final settlement price and the original contract price for each position.</li> <li><strong>Account adjustment</strong>: Profits or losses are then credited or debited to each trader’s corresponding margin account.</li> <li><strong>Contract closure</strong>: Once the cash settlement is complete, the contract is considered closed, and there are no further obligations between the contracting parties.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_36-0"> <span class="mntl-sc-block-subheading__text"> Physical Delivery </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> In certain markets, the expiration of the contract means that the physical goods change hands. For example, if you’ve contracted to buy 1,000 barrels of oil, those barrels will be delivered to a location specified in the contract.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <li><strong>Notice of intent</strong>: As the expiration date nears, the seller issues a notice of intent to deliver to the clearinghouse, which then notifies the buyer.</li> <li><strong>Delivery location and time</strong>: The specific location of the delivery point and the time frame for delivery are outlined in the contract’s terms.</li> <li><strong>Inspection</strong>: Typically, the goods are inspected for quality upon delivery to ensure that they meet the contract requirements.</li> <li><strong>Payment and transfer</strong>: Once inspected and approved, payment is made, often through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/letterofcredit.asp">letter of credit</a>, and ownership of the commodity moves from the seller to the buyer at the specified delivery price.</li> <li><strong>Contract closure</strong>: After the physical goods have been transferred and payment made, the contract is considered settled and closed.</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"> Understanding these mechanics gives you a clearer picture of what happens when a futures contract expires. Whether financially squaring up or exchanging goods, the expiration date sets the wheels in motion, ensuring that the market is smooth and efficient. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-finding-futures-expiration-dates"></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"> Finding Futures Expiration Dates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Expiration dates aren’t one-size-fits-all; they vary depending on the commodity or financial instrument. These dates are publicly listed on the websites of futures exchanges and are usually outlined in the contract specifications. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The most direct way to find an expiration date is to consult the website of the exchange where the futures contract is traded. Exchanges like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cme.asp">Chicago Mercantile Exchange (CME)</a>, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nymex.asp">New York Mercantile Exchange (NYMEX)</a>, and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intercontinentalexchange.asp">Intercontinental Exchange (ICE)</a> usually have the contract details, including expiration dates. These are generally in a section labeled “Contract Specifications,” “Expiration Calendar,” or something similar.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Most brokers and platforms also give you access to these specs. This includes the expiration date. For some platforms, you might need to hover over the contract name or click on an “info” button to see these details. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_50-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_51-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Remember that the expiration time might be in a different time zone, usually for the exchange where the contract is listed. Make sure to adjust for your local time to avoid any timing mishaps.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></div> <span class="heading-toc" id="toc-the-impact-of-expiration-dates-on-trading-positions"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Impact of Expiration Dates on Trading Positions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> As a contract nears its expiration date, its price can become more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatile</a>.<span class="ql-inline-citation" data-cite="5"></span> This is because traders are jockeying for position, either exiting their contracts or rolling them over to a new expiration date. This period requires considerable attention, as the stakes and risks are higher. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> The market’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> for a futures contract can also diminish as it nears expiration. Many traders prefer not to enter new positions in a contract that’s about to expire, potentially making it a challenge to execute large orders at favorable prices. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> A fascinating phenomenon that occurs as a futures contract nears expiration is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convergence.asp">convergence</a> of the futures price and the spot price of the underlying asset. This happens because the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage.asp">arbitrage</a> opportunities diminish, forcing the futures price to align more closely with the current market price.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Never underestimate the psychological aspects of trading. As expiration nears, the emotional stakes can rise, leading traders to make impulsive decisions based on short-term moves rather than long-term goals.</p></div></div></div> <span class="heading-toc" id="toc-rolling-over-contracts-a-key-strategy-in-futures-trading"></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"> Rolling Over Contracts: A Key Strategy in Futures Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> For those looking to maintain a position in the futures market, the approach of an expiration date means it’s time to consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/073015/how-do-futures-contracts-roll-over.asp">rolling over the contract</a>. This means closing out your current position in an expiring futures contract and simultaneously opening a similar position in a contract with a later expiration date. This enables you to continue your market exposure without being obligated to settle the expiring contract, either through cash or physical delivery.<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_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Rolling over involves costs, including potential differences in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spread.asp">spread</a> between the contract you’re closing and the one you’re opening. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-managing-expiration-risk-effective-strategies-and-tips"></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"> Managing Expiration Risk: Effective Strategies and Tips </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Managing the risk associated with futures contract expiration requires a keen eye and a solid strategy. Here are some tips: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> <li><strong>Set alerts</strong>: Use trading software to set reminders for when your contracts are nearing expiration.</li> <li><strong>Do your research</strong>: Know the market conditions for your asset as the expiration date nears.</li> <li><strong>Have an exit plan</strong>: Decide in advance whether you’ll roll over the contract, close it out before it expires, or settle it, and act accordingly.</li> <li><strong>Don’t forget to roll over</strong>: Timing is important if you plan to roll over the contract. Ideally, you want to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/switch.asp">switch before liquidity dries up</a> in the expiring contract, but not so early that you miss out on potential gains.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-can-i-avoid-futures-expiration-altogether"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Avoid Futures Expiration Altogether?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, you can’t entirely avoid expiration when trading futures contracts. However, you can prolong your market exposure by rolling over your contract to a new one with a later expiration date. This is a common practice for traders who want to maintain their positions.</p><p>Rolling over involves simultaneously closing your existing contract and entering a similar one that expires later.<span class="ql-inline-citation" data-cite="8"></span> But remember, each rollover likely has costs and tax implications.<span class="ql-inline-citation" data-cite="12"></span><span class="ql-inline-citation" data-cite="11"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_73-0"><span class="heading-toc" id="toc-what-happens-if-i-ignore-or-forget-the-expiration-date"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens If I Ignore or Forget the Expiration Date?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Ignoring the expiration date is not advisable. If you don’t act, the contract will reach its natural conclusion, through either cash settlement or physical delivery, depending on the contract’s terms.</p><p>If it’s a cash-settled contract, the settlement will be calculated based on the market prices at expiration and credited or debited to your account. For contracts requiring physical delivery, however, failing to exit your position could mean you’re obligated to take or make actual delivery of the underlying asset, which can be complicated and costly.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-can-traders-profit-from-futures-expiration"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Traders Profit from Futures Expiration?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Some traders specialize in strategies that focus on the price moves and volatility that typically occur as contracts near their expiration. These “expiration plays” are typically short-term strategies that seek to capitalize on the unique market dynamics during this period. However, they tend to be higher-risk and require a deep understanding of the market.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-do-all-futures-markets-have-the-same-expiration-dates"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do All Futures Markets Have the Same Expiration Dates?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No. Different futures markets have varying expiration schedules.</p><p>For example, agricultural commodities might expire seasonally, while financial indexes could expire monthly or quarterly.<span class="ql-inline-citation" data-cite="2"></span> Always check the specific expiration dates for the particular market that interests you.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_79-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Understanding futures contract expiration is like having a good grasp of the rules of a game. It’s crucial for your success and for avoiding unexpected losses. Keep your eyes on the clock, prepare for the final bell, and you’ll be well-equipped to navigate the intricate yet rewarding world of futures trading. </p></div>

## What Is Futures Contract Expiration? Futures contract expiration is the countdown clock of this part of the trading world. It marks the last day that you can trade a futures contract before it expires. After this day, the contract is settled either in cash or through the physical delivery of the underlying asset, depending on the terms of the agreement. ### Key Takeaways * Futures contract expiration is a nonnegotiable deadline that marks the end of trading for a particular contract, requiring either cash settlement or delivery of the underlying asset. * As expiration nears, traders can expect increased price volatility, changes in liquidity, and a converging of futures and current market prices, all of which can significantly affect trading positions. * To maintain market exposure beyond a contract’s expiration, traders often roll the contract over, which involves closing the existing contract and opening a new one with a later expiration date. * Information on the expiration dates of futures can be found through exchange websites, trading platforms, financial news outlets, brokerage reports, and market calendars. ## Why Do Futures Contracts Expire? Just as a loaf of bread or carton of milk has an expiration date, so does a [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp). Expiration ensures all obligations are met and finalized through cash settlement or physical delivery. It keeps the market orderly and reduces risk. Without a firm [expiration](https://www.investopedia.com/terms/e/expiration-time.asp) date, contracts would linger indefinitely, creating uncertainty and increasing the risk of market manipulation. The expiration date acts as a clearing mechanism, essentially sweeping the market clean of obligations and allowing for a fresh start. By setting a finite life span for each futures contract, the market reduces the risk that one party will [default](https://www.investopedia.com/terms/d/default2.asp) on its obligations. As the expiration date approaches, traders know they need to settle or roll over their contracts. The pressure of a specific end date keeps everyone on their toes and ensures that contracts are less likely to go unfulfilled. Another vital role that expiration dates play is for [hedging](https://www.investopedia.com/trading/hedging-beginners-guide/). Hedgers enter into futures contracts to protect against the volatility of asset prices in the [spot market](https://www.investopedia.com/terms/s/spotmarket.asp). They’re not necessarily in it for the profit, but for the stability and risk management that futures can offer. Hedgers can use the expiration date of a futures contract to align their hedges with a specific financial need or obligation in the future. This is particularly important for producers or consumers hedging against price changes in commodities like oil, agricultural products, or metals. By choosing a futures contract with an expiration that matches their expected need date, hedgers can create a more effective and accurate hedge. ### Example: A Forward Hedge in the Corn Market Suppose you’re a farmer who has just planted corn, expecting to harvest your crop in six months. You’re worried that corn prices could fall by then, leaving you with less revenue to cover your costs. To protect against this risk, you enter a forward hedge by selling a futures contract that expires in six months when the corn is planted. By doing this, you lock in a price for your corn today, effectively setting a guaranteed selling price for the future. If corn prices do indeed fall, the loss in your crop’s value is offset by gains from the futures contract. Otherwise, if prices rise, you’ll get less for your corn than you would have without the hedge, but you are protected against the downside risk. By aligning the expiration date of the futures contract with the timing of your corn harvest, you’ve effectively hedged against price risk. This is a classic example of how the expiration date can be a strategic tool for hedgers as they align their financial instruments with real-world needs. ### When you trade futures, you aren’t buying or selling the actual asset—for example, oil, gold, or wheat. You’re agreeing to buy or sell the asset at a specific future date. When that date arrives, it’s “game over” for that contract. Traders must then either settle up or move their positions to a new contract with a later expiration date. ## How Futures Contract Expiration Works The expiration date is a built-in deadline when both parties—the buyer and the seller—must fulfill their obligations. When a futures contract expires, it’s time to settle up. This can be done in two ways: ### Cash Settlement In some markets, the contract is settled in cash rather than dealing with the hassle of shipping a truckload of soybeans or moving bars of gold. The cash amount is the difference between the contract and the market price at the time of expiration. This is common for futures contracts on financial products like indexes. * **Final trading day**: Each cash-settled contract has a final trading day, after which trading stops and settlement begins. * **Price determination**: The final settlement price is usually based on a specific calculation or an average of prices over a certain period, depending on the contract’s terms. * **Clearinghouse involvement**: The [clearinghouse](https://www.investopedia.com/terms/c/clearinghouse.asp) calculates the difference between the final settlement price and the original contract price for each position. * **Account adjustment**: Profits or losses are then credited or debited to each trader’s corresponding margin account. * **Contract closure**: Once the cash settlement is complete, the contract is considered closed, and there are no further obligations between the contracting parties. ### Physical Delivery In certain markets, the expiration of the contract means that the physical goods change hands. For example, if you’ve contracted to buy 1,000 barrels of oil, those barrels will be delivered to a location specified in the contract. * **Notice of intent**: As the expiration date nears, the seller issues a notice of intent to deliver to the clearinghouse, which then notifies the buyer. * **Delivery location and time**: The specific location of the delivery point and the time frame for delivery are outlined in the contract’s terms. * **Inspection**: Typically, the goods are inspected for quality upon delivery to ensure that they meet the contract requirements. * **Payment and transfer**: Once inspected and approved, payment is made, often through a [letter of credit](https://www.investopedia.com/terms/l/letterofcredit.asp), and ownership of the commodity moves from the seller to the buyer at the specified delivery price. * **Contract closure**: After the physical goods have been transferred and payment made, the contract is considered settled and closed. Understanding these mechanics gives you a clearer picture of what happens when a futures contract expires. Whether financially squaring up or exchanging goods, the expiration date sets the wheels in motion, ensuring that the market is smooth and efficient. ## Finding Futures Expiration Dates Expiration dates aren’t one-size-fits-all; they vary depending on the commodity or financial instrument. These dates are publicly listed on the websites of futures exchanges and are usually outlined in the contract specifications. The most direct way to find an expiration date is to consult the website of the exchange where the futures contract is traded. Exchanges like the [Chicago Mercantile Exchange (CME)](https://www.investopedia.com/terms/c/cme.asp), the [New York Mercantile Exchange (NYMEX)](https://www.investopedia.com/terms/n/nymex.asp), and the [Intercontinental Exchange (ICE)](https://www.investopedia.com/terms/i/intercontinentalexchange.asp) usually have the contract details, including expiration dates. These are generally in a section labeled “Contract Specifications,” “Expiration Calendar,” or something similar. Most brokers and platforms also give you access to these specs. This includes the expiration date. For some platforms, you might need to hover over the contract name or click on an “info” button to see these details. ### Remember that the expiration time might be in a different time zone, usually for the exchange where the contract is listed. Make sure to adjust for your local time to avoid any timing mishaps. ## The Impact of Expiration Dates on Trading Positions As a contract nears its expiration date, its price can become more [volatile](https://www.investopedia.com/terms/v/volatility.asp). This is because traders are jockeying for position, either exiting their contracts or rolling them over to a new expiration date. This period requires considerable attention, as the stakes and risks are higher. The market’s [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) for a futures contract can also diminish as it nears expiration. Many traders prefer not to enter new positions in a contract that’s about to expire, potentially making it a challenge to execute large orders at favorable prices. A fascinating phenomenon that occurs as a futures contract nears expiration is the [convergence](https://www.investopedia.com/terms/c/convergence.asp) of the futures price and the spot price of the underlying asset. This happens because the [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) opportunities diminish, forcing the futures price to align more closely with the current market price. ### Never underestimate the psychological aspects of trading. As expiration nears, the emotional stakes can rise, leading traders to make impulsive decisions based on short-term moves rather than long-term goals. ## Rolling Over Contracts: A Key Strategy in Futures Trading For those looking to maintain a position in the futures market, the approach of an expiration date means it’s time to consider [rolling over the contract](https://www.investopedia.com/ask/answers/073015/how-do-futures-contracts-roll-over.asp). This means closing out your current position in an expiring futures contract and simultaneously opening a similar position in a contract with a later expiration date. This enables you to continue your market exposure without being obligated to settle the expiring contract, either through cash or physical delivery. Rolling over involves costs, including potential differences in the [spread](https://www.investopedia.com/terms/s/spread.asp) between the contract you’re closing and the one you’re opening. ## Managing Expiration Risk: Effective Strategies and Tips Managing the risk associated with futures contract expiration requires a keen eye and a solid strategy. Here are some tips: * **Set alerts**: Use trading software to set reminders for when your contracts are nearing expiration. * **Do your research**: Know the market conditions for your asset as the expiration date nears. * **Have an exit plan**: Decide in advance whether you’ll roll over the contract, close it out before it expires, or settle it, and act accordingly. * **Don’t forget to roll over**: Timing is important if you plan to roll over the contract. Ideally, you want to [switch before liquidity dries up](https://www.investopedia.com/terms/s/switch.asp) in the expiring contract, but not so early that you miss out on potential gains. ## Can I Avoid Futures Expiration Altogether? No, you can’t entirely avoid expiration when trading futures contracts. However, you can prolong your market exposure by rolling over your contract to a new one with a later expiration date. This is a common practice for traders who want to maintain their positions. Rolling over involves simultaneously closing your existing contract and entering a similar one that expires later. But remember, each rollover likely has costs and tax implications. ## What Happens If I Ignore or Forget the Expiration Date? Ignoring the expiration date is not advisable. If you don’t act, the contract will reach its natural conclusion, through either cash settlement or physical delivery, depending on the contract’s terms. If it’s a cash-settled contract, the settlement will be calculated based on the market prices at expiration and credited or debited to your account. For contracts requiring physical delivery, however, failing to exit your position could mean you’re obligated to take or make actual delivery of the underlying asset, which can be complicated and costly. ## Can Traders Profit from Futures Expiration? Some traders specialize in strategies that focus on the price moves and volatility that typically occur as contracts near their expiration. These “expiration plays” are typically short-term strategies that seek to capitalize on the unique market dynamics during this period. However, they tend to be higher-risk and require a deep understanding of the market. ## Do All Futures Markets Have the Same Expiration Dates? No. Different futures markets have varying expiration schedules. For example, agricultural commodities might expire seasonally, while financial indexes could expire monthly or quarterly. Always check the specific expiration dates for the particular market that interests you. ## The Bottom Line Understanding futures contract expiration is like having a good grasp of the rules of a game. It’s crucial for your success and for avoiding unexpected losses. Keep your eyes on the clock, prepare for the final bell, and you’ll be well-equipped to navigate the intricate yet rewarding world of futures trading.

What Is Futures Contract Expiration? Futures contract expiration is the countdown clock of this part of the trading world. It marks the last day that you can trade a futures contract before it expires. After this day, the contract is settled either in cash or through the physical delivery of the underlying asset, depending on the terms of the agreement. Key Takeaways Futures contract expiration is a nonnegotiable deadline that marks the end of trading for a particular contract, requiring either cash settlement or delivery of the underlying asset.As expiration nears, traders can expect increased price volatility, changes in liquidity, and a converging of futures and current market prices, all of which can significantly affect trading positions.To maintain market exposure beyond a contract’s expiration, traders often roll the contract over, which involves closing the existing contract and opening a new one with a later expiration date.Information on the expiration dates of futures can be found through exchange websites, trading platforms, financial news outlets, brokerage reports, and market calendars. Why Do Futures Contracts Expire? Just as a loaf of bread or carton of milk has an expiration date, so does a futures contract. Expiration ensures all obligations are met and finalized through cash settlement or physical delivery. It keeps the market orderly and reduces risk. Without a firm expiration date, contracts would linger indefinitely, creating uncertainty and increasing the risk of market manipulation. The expiration date acts as a clearing mechanism, essentially sweeping the market clean of obligations and allowing for a fresh start. By setting a finite life span for each futures contract, the market reduces the risk that one party will default on its obligations. As the expiration date approaches, traders know they need to settle or roll over their contracts. The pressure of a specific end date keeps everyone on their toes and ensures that contracts are less likely to go unfulfilled. Another vital role that expiration dates play is for hedging. Hedgers enter into futures contracts to protect against the volatility of asset prices in the spot market. They’re not necessarily in it for the profit, but for the stability and risk management that futures can offer. Hedgers can use the expiration date of a futures contract to align their hedges with a specific financial need or obligation in the future. This is particularly important for producers or consumers hedging against price changes in commodities like oil, agricultural products, or metals. By choosing a futures contract with an expiration that matches their expected need date, hedgers can create a more effective and accurate hedge. Example: A Forward Hedge in the Corn Market Suppose you’re a farmer who has just planted corn, expecting to harvest your crop in six months. You’re worried that corn prices could fall by then, leaving you with less revenue to cover your costs. To protect against this risk, you enter a forward hedge by selling a futures contract that expires in six months when the corn is planted. By doing this, you lock in a price for your corn today, effectively setting a guaranteed selling price for the future. If corn prices do indeed fall, the loss in your crop’s value is offset by gains from the futures contract. Otherwise, if prices rise, you’ll get less for your corn than you would have without the hedge, but you are protected against the downside risk. By aligning the expiration date of the futures contract with the timing of your corn harvest, you’ve effectively hedged against price risk. This is a classic example of how the expiration date can be a strategic tool for hedgers as they align their financial instruments with real-world needs. When you trade futures, you aren’t buying or selling the actual asset—for example, oil, gold, or wheat. You’re agreeing to buy or sell the asset at a specific future date. When that date arrives, it’s “game over” for that contract. Traders must then either settle up or move their positions to a new contract with a later expiration date. How Futures Contract Expiration Works The expiration date is a built-in deadline when both parties—the buyer and the seller—must fulfill their obligations. When a futures contract expires, it’s time to settle up. This can be done in two ways: Cash Settlement In some markets, the contract is settled in cash rather than dealing with the hassle of shipping a truckload of soybeans or moving bars of gold. The cash amount is the difference between the contract and the market price at the time of expiration. This is common for futures contracts on financial products like indexes. Final trading day: Each cash-settled contract has a final trading day, after which trading stops and settlement begins. Price determination: The final settlement price is usually based on a specific calculation or an average of prices over a certain period, depending on the contract’s terms. Clearinghouse involvement: The clearinghouse calculates the difference between the final settlement price and the original contract price for each position. Account adjustment: Profits or losses are then credited or debited to each trader’s corresponding margin account. Contract closure: Once the cash settlement is complete, the contract is considered closed, and there are no further obligations between the contracting parties. Physical Delivery In certain markets, the expiration of the contract means that the physical goods change hands. For example, if you’ve contracted to buy 1,000 barrels of oil, those barrels will be delivered to a location specified in the contract. Notice of intent: As the expiration date nears, the seller issues a notice of intent to deliver to the clearinghouse, which then notifies the buyer. Delivery location and time: The specific location of the delivery point and the time frame for delivery are outlined in the contract’s terms. Inspection: Typically, the goods are inspected for quality upon delivery to ensure that they meet the contract requirements. Payment and transfer: Once inspected and approved, payment is made, often through a letter of credit, and ownership of the commodity moves from the seller to the buyer at the specified delivery price. Contract closure: After the physical goods have been transferred and payment made, the contract is considered settled and closed. Understanding these mechanics gives you a clearer picture of what happens when a futures contract expires. Whether financially squaring up or exchanging goods, the expiration date sets the wheels in motion, ensuring that the market is smooth and efficient. Finding Futures Expiration Dates Expiration dates aren’t one-size-fits-all; they vary depending on the commodity or financial instrument. These dates are publicly listed on the websites of futures exchanges and are usually outlined in the contract specifications. The most direct way to find an expiration date is to consult the website of the exchange where the futures contract is traded. Exchanges like the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Intercontinental Exchange (ICE) usually have the contract details, including expiration dates. These are generally in a section labeled “Contract Specifications,” “Expiration Calendar,” or something similar. Most brokers and platforms also give you access to these specs. This includes the expiration date. For some platforms, you might need to hover over the contract name or click on an “info” button to see these details. Remember that the expiration time might be in a different time zone, usually for the exchange where the contract is listed. Make sure to adjust for your local time to avoid any timing mishaps. The Impact of Expiration Dates on Trading Positions As a contract nears its expiration date, its price can become more volatile. This is because traders are jockeying for position, either exiting their contracts or rolling them over to a new expiration date. This period requires considerable attention, as the stakes and risks are higher. The market’s liquidity for a futures contract can also diminish as it nears expiration. Many traders prefer not to enter new positions in a contract that’s about to expire, potentially making it a challenge to execute large orders at favorable prices. A fascinating phenomenon that occurs as a futures contract nears expiration is the convergence of the futures price and the spot price of the underlying asset. This happens because the arbitrage opportunities diminish, forcing the futures price to align more closely with the current market price. Never underestimate the psychological aspects of trading. As expiration nears, the emotional stakes can rise, leading traders to make impulsive decisions based on short-term moves rather than long-term goals. Rolling Over Contracts: A Key Strategy in Futures Trading For those looking to maintain a position in the futures market, the approach of an expiration date means it’s time to consider rolling over the contract. This means closing out your current position in an expiring futures contract and simultaneously opening a similar position in a contract with a later expiration date. This enables you to continue your market exposure without being obligated to settle the expiring contract, either through cash or physical delivery. Rolling over involves costs, including potential differences in the spread between the contract you’re closing and the one you’re opening. Managing Expiration Risk: Effective Strategies and Tips Managing the risk associated with futures contract expiration requires a keen eye and a solid strategy. Here are some tips: Set alerts: Use trading software to set reminders for when your contracts are nearing expiration. Do your research: Know the market conditions for your asset as the expiration date nears. Have an exit plan: Decide in advance whether you’ll roll over the contract, close it out before it expires, or settle it, and act accordingly. Don’t forget to roll over: Timing is important if you plan to roll over the contract. Ideally, you want to switch before liquidity dries up in the expiring contract, but not so early that you miss out on potential gains. Can I Avoid Futures Expiration Altogether? No, you can’t entirely avoid expiration when trading futures contracts. However, you can prolong your market exposure by rolling over your contract to a new one with a later expiration date. This is a common practice for traders who want to maintain their positions.Rolling over involves simultaneously closing your existing contract and entering a similar one that expires later. But remember, each rollover likely has costs and tax implications. What Happens If I Ignore or Forget the Expiration Date? Ignoring the expiration date is not advisable. If you don’t act, the contract will reach its natural conclusion, through either cash settlement or physical delivery, depending on the contract’s terms.If it’s a cash-settled contract, the settlement will be calculated based on the market prices at expiration and credited or debited to your account. For contracts requiring physical delivery, however, failing to exit your position could mean you’re obligated to take or make actual delivery of the underlying asset, which can be complicated and costly. Can Traders Profit from Futures Expiration? Some traders specialize in strategies that focus on the price moves and volatility that typically occur as contracts near their expiration. These “expiration plays” are typically short-term strategies that seek to capitalize on the unique market dynamics during this period. However, they tend to be higher-risk and require a deep understanding of the market. Do All Futures Markets Have the Same Expiration Dates? No. Different futures markets have varying expiration schedules.For example, agricultural commodities might expire seasonally, while financial indexes could expire monthly or quarterly. Always check the specific expiration dates for the particular market that interests you. The Bottom Line Understanding futures contract expiration is like having a good grasp of the rules of a game. It’s crucial for your success and for avoiding unexpected losses. Keep your eyes on the clock, prepare for the final bell, and you’ll be well-equipped to navigate the intricate yet rewarding world of futures trading.

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

Probate: What It Is and How It Works With and Without a Will

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-probate"></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 Probate? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Probate is the process completed when a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/decedent.asp#:~:text=%22Decedent%22%20is%20a%20legal%20term%20used%20to%20refer%20to%20a,in%20their%20wills%20and%20trusts.">decedent</a> leaves assets to distribute, such as bank accounts, real estate, and financial investments. Probate is the general administration of a deceased person's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/will.asp">will</a> or the estate of a deceased person without a will. </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"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/executor.asp">executor</a> is commonly named in the will or an administrator, if there is no will, to complete the probate process. This involves collecting the deceased's assets to pay any remaining liabilities on their estate and distributing the assets to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiaries</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>Probate is the legal process for reviewing the assets of a deceased person and determining inheritors.</li><li>Probate proceedings typically focus on the existence, authenticity, and validity of a will.</li><li>Probate can be initiated with or without a will. </li><li>A proceeding is usually essential when a deceased person’s remaining estate is of high value even when there is a will.</li><li>Individuals can avoid exorbitant probate costs and complexities by having an easily authenticated will or using investment vehicles that do not require probate.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-probate-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 Probate Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Probate is the analysis and transfer administration of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estate.asp">estate</a> assets previously owned by a deceased person. When a property owner dies, their assets are commonly reviewed by a probate court. This court provides the final ruling on the division and distribution of assets to beneficiaries. A probate proceeding will typically begin by analyzing whether or not the deceased person has provided a legalized will. </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 many cases, the deceased person has established documentation, which contains instructions on how their assets should be distributed after death. However, in some cases, the deceased does not leave a will. There are special circumstances that occur with both situations that we've listed below. </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-factors-for-probate-law"></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"> Factors for Probate Law </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Probate law is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. Common factors include:<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <li>Size of the estate. In some states, anything more than $3,000 must be probated; in others the limit is as high as $200,000.</li><li>Whether the estate includes real estate. </li><li>Whether or not there is a surviving spouse.</li><li>The number of motor vehicles in the estate.</li><li>The presence of a will, and the number of named heirs. </li><li>Any liens, debts, or taxes due on the estate.</li> </ul> <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-probate-with-a-will"></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"> Probate With a Will </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> A deceased person with a will is known as a testator. When a testator dies, the executor is responsible for initiating the probate process. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/executor.asp">executor</a> is typically a family member. The will can also provide details on a specified executor. </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 executor is responsible for filing the will with the probate court. States can have different rules for the timeframe in which a will must be filed after death. Filing the will initiates the probate process. The probate process is a court-supervised proceeding in which the authenticity of the will left behind is proven to be valid and accepted as the true <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/last-will-and-testament.asp">last testament</a> of the deceased. The court officially appoints the executor named in the will, which gives the executor the legal power to act on behalf of the deceased. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-subheading__text"> The Executor </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> A will typically designate a legal representative or executor approved by the court. This person is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternate valuation date, as specified by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/internal-revenue-code.asp">Internal Revenue Code (IRC)</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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death. The exception is real estate. Probate for real estate may need to be extended to any county in which the real estate is located. </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 executor also has to pay off any taxes and debt owed by the deceased from the estate. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditor.asp">Creditors</a> usually have a limited amount of time (approximately one year) from the date of death to make any <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/notice-to-creditors.asp">claims against the estate</a> for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say on whether or not the claim is justified. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The executor is also responsible for filing the final, personal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/individual-tax-return.asp">income tax returns</a> on behalf of the deceased. Any <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estatetax.asp">estate taxes</a> that are pending can also come due within one year from the date of death. After the inventory of the estate has been taken, the value of assets calculated, and debts paid off, the executor will then seek authorization from the court to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/waiver-of-notice.asp">distribute whatever is left of the estate to the beneficiaries</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_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> If a deceased person’s estate is insolvent, which means that their debts outweigh their assets, an administrator will likely choose not to initiate probate. In general, individual states may have their own rulings on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/statute-of-limitations.asp">statute of limitations</a> for the processing of a will through probate. States can also have thresholds for probate filings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_35-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Trust funds can be orchestrated to pass immediately to designated inheritors upon death.</p></div></div></div> <span class="heading-toc" id="toc-probate-without-a-will"></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"> Probate Without a Will </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> When a person dies without a will, he is said to have died intestate. An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intestate.asp">intestate estate</a> is also one where the will presented to the court has been deemed to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to state laws. If a deceased person has no assets, probate may not be necessary. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> In general, a probate court proceeding usually begins with the appointment of an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/administrator.asp">administrator</a> to oversee the estate of the deceased. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/administration-bond.asp">administrator functions as an executor</a>, receiving all legal claims against the estate and paying off the outstanding debts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The administrator is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probate-court.asp">probate court</a> will assess what assets need to be distributed among the legal heirs and how to distribute them. The probate laws in most states divide property among the surviving spouse and children of the deceased. </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"> Asset transfer to the government is known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/escheat.asp">escheatment</a>. States do typically have a timeframe for the claiming of any assets by an heir who may step forward. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Spouses as Joint Property Owners </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Community property laws can recognize both spouses as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jointownedproperty.asp">joint property owners</a> in an intestate proceeding. In effect, the distribution hierarchy typically starts with the surviving spouse. If unmarried or widowed at the time of death, assets are usually divided among any surviving children. After a spouse and children are considered, other relatives may also be deemed appropriate for distribution. </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"> Close friends of the deceased will not normally be added to the list of beneficiaries under a state’s probate laws for intestate estates. However, If the deceased had a joint account with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/with-benefit-of-survivorship.asp">right of survivorship</a> or owned property jointly with another, the joint asset would automatically be owned by the surviving partner. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_50-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_51-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>If an individual has no will and no heirs, any remaining assets go to the state.</p></div></div></div> <span class="heading-toc" id="toc-is-a-probate-always-required"></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"> Is a Probate Always Required? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> It is important to know whether a probate is required following the death of an individual. The probate process can take a long time to finalize. The more complex or contested the estate is, the more time it will take to settle and distribute the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a>. The longer the duration, the higher the cost. </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"> Probating an estate without a will is typically costlier than probating one with a valid will. However, the time and cost required of each are still high. Also, since the proceedings of a probate court are publicly recorded, avoiding probate would ensure that all settlements are done privately. </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"> Different states have different laws concerning probate and whether probate is required after the death of a testator. Some states have a specified estate value, which requires probate. For example, probate laws in Texas hold that if the value of the estate is less than $75,000, then probate may be skipped. </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"> If an estate is small enough to bypass the probate process, then the estate’s asset may be claimed using alternative legal actions, such as an affidavit. Typically, if a deceased person’s debts exceed their assets, probate is not necessarily initiated and alternative actions may be taken.<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_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Some assets can bypass probate because beneficiaries have been <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp">initiated through contractual terms</a>. Pension plans, life insurance proceeds, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401k plans</a>, medical savings accounts, and individual retirement accounts (IRA) that have designated beneficiaries will not need to be probated. Likewise, assets jointly owned with a right of survivorship can bypass the probate process. </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"> Another popular way to bypass probate is through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/04/121304.asp">the use of a trust</a>. </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"> Overall, minimizing costs associated with the probate process can be prudent. Accumulated expenses can include court fees, professional service hours, and administration costs. Having an easily authenticated will is one of the most common ways to quickly move through a probate process and efficiently distribute assets appropriately. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-how-much-does-probate-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does Probate Cost?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The cost of the probate process varies depending on your state and your lawyer. In some states, it is typical for lawyers to process estates for a flat or hourly fee. In others, they charge a percentage of the estate. You will also have to pay for any outstanding debts, court and filing fees, and the costs of notifying creditors about the probate process. In addition, you may also have to pay an inheritance tax. It is worth researching the probate costs for your state when you begin end-of-life planning.<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_68-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_69-0"><span class="heading-toc" id="toc-which-state-has-the-best-probate-laws"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which State Has the Best Probate Laws?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While probate laws vary from state to state, 18 states have adopted the Uniform Probate Code, which offers a standardized procedure for dividing a decedent's assets. The states that have adopted the UPC are Idaho, Alaska (1972), Arizona (1973), Colorado (1974), Minnesota, Montana, Nebraska, South Dakota, New Mexico, Utah, Michigan, Maine, Pennsylvania, Minnesota, South Carolina, Hawaii, North Dakota, New Jersey, and Massachusetts.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-how-can-i-avoid-probate"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Avoid Probate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Each state has its own limit to determine how much an estate must be to go through the probate process. Smaller estates may be able to go through a simplified probate process, or simply have heirs claim assets by affidavit. In addition, some assets—such as living trusts and 401(k) plans—do not need to go through the probate process. Since the probate process is expensive, it is worth researching your state's probate rules during your end-of-life planning.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_73-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Probate law deals with the rules that determine how a person's assets are divided after they die. Each state has its own rules for the probate process, depending on the size of the estate, the type of assets, and the presence of a will. Since the probate process can be expensive, it is worth researching the different ways to structure an estate in order to avoid it.<br/> </p></div>

## What Is Probate? Probate is the process completed when a [decedent](https://www.investopedia.com/terms/d/decedent.asp#:~:text=%22Decedent%22%20is%20a%20legal%20term%20used%20to%20refer%20to%20a,in%20their%20wills%20and%20trusts.) leaves assets to distribute, such as bank accounts, real estate, and financial investments. Probate is the general administration of a deceased person's [will](https://www.investopedia.com/terms/w/will.asp) or the estate of a deceased person without a will. An [executor](https://www.investopedia.com/terms/e/executor.asp) is commonly named in the will or an administrator, if there is no will, to complete the probate process. This involves collecting the deceased's assets to pay any remaining liabilities on their estate and distributing the assets to [beneficiaries](https://www.investopedia.com/terms/b/beneficiary.asp). ### Key Takeaways * Probate is the legal process for reviewing the assets of a deceased person and determining inheritors. * Probate proceedings typically focus on the existence, authenticity, and validity of a will. * Probate can be initiated with or without a will. * A proceeding is usually essential when a deceased person’s remaining estate is of high value even when there is a will. * Individuals can avoid exorbitant probate costs and complexities by having an easily authenticated will or using investment vehicles that do not require probate. ## How Probate Works Probate is the analysis and transfer administration of [estate](https://www.investopedia.com/terms/e/estate.asp) assets previously owned by a deceased person. When a property owner dies, their assets are commonly reviewed by a probate court. This court provides the final ruling on the division and distribution of assets to beneficiaries. A probate proceeding will typically begin by analyzing whether or not the deceased person has provided a legalized will. In many cases, the deceased person has established documentation, which contains instructions on how their assets should be distributed after death. However, in some cases, the deceased does not leave a will. There are special circumstances that occur with both situations that we've listed below. ## Factors for Probate Law Probate law is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. Common factors include: * Size of the estate. In some states, anything more than $3,000 must be probated; in others the limit is as high as $200,000. * Whether the estate includes real estate. * Whether or not there is a surviving spouse. * The number of motor vehicles in the estate. * The presence of a will, and the number of named heirs. * Any liens, debts, or taxes due on the estate. ## Probate With a Will A deceased person with a will is known as a testator. When a testator dies, the executor is responsible for initiating the probate process. The [executor](https://www.investopedia.com/terms/e/executor.asp) is typically a family member. The will can also provide details on a specified executor. The executor is responsible for filing the will with the probate court. States can have different rules for the timeframe in which a will must be filed after death. Filing the will initiates the probate process. The probate process is a court-supervised proceeding in which the authenticity of the will left behind is proven to be valid and accepted as the true [last testament](https://www.investopedia.com/terms/l/last-will-and-testament.asp) of the deceased. The court officially appoints the executor named in the will, which gives the executor the legal power to act on behalf of the deceased. ### The Executor A will typically designate a legal representative or executor approved by the court. This person is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternate valuation date, as specified by the [Internal Revenue Code (IRC)](https://www.investopedia.com/terms/i/internal-revenue-code.asp). Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death. The exception is real estate. Probate for real estate may need to be extended to any county in which the real estate is located. The executor also has to pay off any taxes and debt owed by the deceased from the estate. [Creditors](https://www.investopedia.com/terms/c/creditor.asp) usually have a limited amount of time (approximately one year) from the date of death to make any [claims against the estate](https://www.investopedia.com/terms/n/notice-to-creditors.asp) for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say on whether or not the claim is justified. The executor is also responsible for filing the final, personal [income tax returns](https://www.investopedia.com/terms/i/individual-tax-return.asp) on behalf of the deceased. Any [estate taxes](https://www.investopedia.com/terms/e/estatetax.asp) that are pending can also come due within one year from the date of death. After the inventory of the estate has been taken, the value of assets calculated, and debts paid off, the executor will then seek authorization from the court to [distribute whatever is left of the estate to the beneficiaries](https://www.investopedia.com/terms/w/waiver-of-notice.asp). If a deceased person’s estate is insolvent, which means that their debts outweigh their assets, an administrator will likely choose not to initiate probate. In general, individual states may have their own rulings on a [statute of limitations](https://www.investopedia.com/terms/s/statute-of-limitations.asp) for the processing of a will through probate. States can also have thresholds for probate filings. ### Trust funds can be orchestrated to pass immediately to designated inheritors upon death. ## Probate Without a Will When a person dies without a will, he is said to have died intestate. An [intestate estate](https://www.investopedia.com/terms/i/intestate.asp) is also one where the will presented to the court has been deemed to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to state laws. If a deceased person has no assets, probate may not be necessary. In general, a probate court proceeding usually begins with the appointment of an [administrator](https://www.investopedia.com/terms/a/administrator.asp) to oversee the estate of the deceased. The [administrator functions as an executor](https://www.investopedia.com/terms/a/administration-bond.asp), receiving all legal claims against the estate and paying off the outstanding debts. The administrator is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. The [probate court](https://www.investopedia.com/terms/p/probate-court.asp) will assess what assets need to be distributed among the legal heirs and how to distribute them. The probate laws in most states divide property among the surviving spouse and children of the deceased. Asset transfer to the government is known as [escheatment](https://www.investopedia.com/terms/e/escheat.asp). States do typically have a timeframe for the claiming of any assets by an heir who may step forward. ### Spouses as Joint Property Owners Community property laws can recognize both spouses as [joint property owners](https://www.investopedia.com/terms/j/jointownedproperty.asp) in an intestate proceeding. In effect, the distribution hierarchy typically starts with the surviving spouse. If unmarried or widowed at the time of death, assets are usually divided among any surviving children. After a spouse and children are considered, other relatives may also be deemed appropriate for distribution. Close friends of the deceased will not normally be added to the list of beneficiaries under a state’s probate laws for intestate estates. However, If the deceased had a joint account with [right of survivorship](https://www.investopedia.com/terms/w/with-benefit-of-survivorship.asp) or owned property jointly with another, the joint asset would automatically be owned by the surviving partner. ### If an individual has no will and no heirs, any remaining assets go to the state. ## Is a Probate Always Required? It is important to know whether a probate is required following the death of an individual. The probate process can take a long time to finalize. The more complex or contested the estate is, the more time it will take to settle and distribute the [assets](https://www.investopedia.com/terms/a/asset.asp). The longer the duration, the higher the cost. Probating an estate without a will is typically costlier than probating one with a valid will. However, the time and cost required of each are still high. Also, since the proceedings of a probate court are publicly recorded, avoiding probate would ensure that all settlements are done privately. Different states have different laws concerning probate and whether probate is required after the death of a testator. Some states have a specified estate value, which requires probate. For example, probate laws in Texas hold that if the value of the estate is less than $75,000, then probate may be skipped. If an estate is small enough to bypass the probate process, then the estate’s asset may be claimed using alternative legal actions, such as an affidavit. Typically, if a deceased person’s debts exceed their assets, probate is not necessarily initiated and alternative actions may be taken. Some assets can bypass probate because beneficiaries have been [initiated through contractual terms](https://www.investopedia.com/articles/personal-finance/100616/do-retirement-accounts-go-through-probate.asp). Pension plans, life insurance proceeds, [401k plans](https://www.investopedia.com/terms/1/401kplan.asp), medical savings accounts, and individual retirement accounts (IRA) that have designated beneficiaries will not need to be probated. Likewise, assets jointly owned with a right of survivorship can bypass the probate process. Another popular way to bypass probate is through [the use of a trust](https://www.investopedia.com/articles/04/121304.asp). Overall, minimizing costs associated with the probate process can be prudent. Accumulated expenses can include court fees, professional service hours, and administration costs. Having an easily authenticated will is one of the most common ways to quickly move through a probate process and efficiently distribute assets appropriately. ## How Much Does Probate Cost? The cost of the probate process varies depending on your state and your lawyer. In some states, it is typical for lawyers to process estates for a flat or hourly fee. In others, they charge a percentage of the estate. You will also have to pay for any outstanding debts, court and filing fees, and the costs of notifying creditors about the probate process. In addition, you may also have to pay an inheritance tax. It is worth researching the probate costs for your state when you begin end-of-life planning. ## Which State Has the Best Probate Laws? While probate laws vary from state to state, 18 states have adopted the Uniform Probate Code, which offers a standardized procedure for dividing a decedent's assets. The states that have adopted the UPC are Idaho, Alaska (1972), Arizona (1973), Colorado (1974), Minnesota, Montana, Nebraska, South Dakota, New Mexico, Utah, Michigan, Maine, Pennsylvania, Minnesota, South Carolina, Hawaii, North Dakota, New Jersey, and Massachusetts. ## How Can I Avoid Probate? Each state has its own limit to determine how much an estate must be to go through the probate process. Smaller estates may be able to go through a simplified probate process, or simply have heirs claim assets by affidavit. In addition, some assets—such as living trusts and 401(k) plans—do not need to go through the probate process. Since the probate process is expensive, it is worth researching your state's probate rules during your end-of-life planning. ## The Bottom Line Probate law deals with the rules that determine how a person's assets are divided after they die. Each state has its own rules for the probate process, depending on the size of the estate, the type of assets, and the presence of a will. Since the probate process can be expensive, it is worth researching the different ways to structure an estate in order to avoid it.

What Is Probate? Probate is the process completed when a decedent leaves assets to distribute, such as bank accounts, real estate, and financial investments. Probate is the general administration of a deceased person's will or the estate of a deceased person without a will. An executor is commonly named in the will or an administrator, if there is no will, to complete the probate process. This involves collecting the deceased's assets to pay any remaining liabilities on their estate and distributing the assets to beneficiaries. Key Takeaways Probate is the legal process for reviewing the assets of a deceased person and determining inheritors.Probate proceedings typically focus on the existence, authenticity, and validity of a will.Probate can be initiated with or without a will. A proceeding is usually essential when a deceased person’s remaining estate is of high value even when there is a will.Individuals can avoid exorbitant probate costs and complexities by having an easily authenticated will or using investment vehicles that do not require probate. How Probate Works Probate is the analysis and transfer administration of estate assets previously owned by a deceased person. When a property owner dies, their assets are commonly reviewed by a probate court. This court provides the final ruling on the division and distribution of assets to beneficiaries. A probate proceeding will typically begin by analyzing whether or not the deceased person has provided a legalized will. In many cases, the deceased person has established documentation, which contains instructions on how their assets should be distributed after death. However, in some cases, the deceased does not leave a will. There are special circumstances that occur with both situations that we've listed below. Factors for Probate Law Probate law is the field of law that determines how an estate must be divided. Each state has its own laws and statutes requirements to determine if and how an estate must be probated. Common factors include: Size of the estate. In some states, anything more than $3,000 must be probated; in others the limit is as high as $200,000.Whether the estate includes real estate. Whether or not there is a surviving spouse.The number of motor vehicles in the estate.The presence of a will, and the number of named heirs. Any liens, debts, or taxes due on the estate. Probate With a Will A deceased person with a will is known as a testator. When a testator dies, the executor is responsible for initiating the probate process. The executor is typically a family member. The will can also provide details on a specified executor. The executor is responsible for filing the will with the probate court. States can have different rules for the timeframe in which a will must be filed after death. Filing the will initiates the probate process. The probate process is a court-supervised proceeding in which the authenticity of the will left behind is proven to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which gives the executor the legal power to act on behalf of the deceased. The Executor A will typically designate a legal representative or executor approved by the court. This person is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternate valuation date, as specified by the Internal Revenue Code (IRC). Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death. The exception is real estate. Probate for real estate may need to be extended to any county in which the real estate is located. The executor also has to pay off any taxes and debt owed by the deceased from the estate. Creditors usually have a limited amount of time (approximately one year) from the date of death to make any claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say on whether or not the claim is justified. The executor is also responsible for filing the final, personal income tax returns on behalf of the deceased. Any estate taxes that are pending can also come due within one year from the date of death. After the inventory of the estate has been taken, the value of assets calculated, and debts paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries. If a deceased person’s estate is insolvent, which means that their debts outweigh their assets, an administrator will likely choose not to initiate probate. In general, individual states may have their own rulings on a statute of limitations for the processing of a will through probate. States can also have thresholds for probate filings. Trust funds can be orchestrated to pass immediately to designated inheritors upon death. Probate Without a Will When a person dies without a will, he is said to have died intestate. An intestate estate is also one where the will presented to the court has been deemed to be invalid. The probate process for an intestate estate includes distributing the decedent’s assets according to state laws. If a deceased person has no assets, probate may not be necessary. In general, a probate court proceeding usually begins with the appointment of an administrator to oversee the estate of the deceased. The administrator functions as an executor, receiving all legal claims against the estate and paying off the outstanding debts. The administrator is tasked with locating any legal heirs of the deceased, including surviving spouses, children, and parents. The probate court will assess what assets need to be distributed among the legal heirs and how to distribute them. The probate laws in most states divide property among the surviving spouse and children of the deceased. Asset transfer to the government is known as escheatment. States do typically have a timeframe for the claiming of any assets by an heir who may step forward. Spouses as Joint Property Owners Community property laws can recognize both spouses as joint property owners in an intestate proceeding. In effect, the distribution hierarchy typically starts with the surviving spouse. If unmarried or widowed at the time of death, assets are usually divided among any surviving children. After a spouse and children are considered, other relatives may also be deemed appropriate for distribution. Close friends of the deceased will not normally be added to the list of beneficiaries under a state’s probate laws for intestate estates. However, If the deceased had a joint account with right of survivorship or owned property jointly with another, the joint asset would automatically be owned by the surviving partner. If an individual has no will and no heirs, any remaining assets go to the state. Is a Probate Always Required? It is important to know whether a probate is required following the death of an individual. The probate process can take a long time to finalize. The more complex or contested the estate is, the more time it will take to settle and distribute the assets. The longer the duration, the higher the cost. Probating an estate without a will is typically costlier than probating one with a valid will. However, the time and cost required of each are still high. Also, since the proceedings of a probate court are publicly recorded, avoiding probate would ensure that all settlements are done privately. Different states have different laws concerning probate and whether probate is required after the death of a testator. Some states have a specified estate value, which requires probate. For example, probate laws in Texas hold that if the value of the estate is less than $75,000, then probate may be skipped. If an estate is small enough to bypass the probate process, then the estate’s asset may be claimed using alternative legal actions, such as an affidavit. Typically, if a deceased person’s debts exceed their assets, probate is not necessarily initiated and alternative actions may be taken. Some assets can bypass probate because beneficiaries have been initiated through contractual terms. Pension plans, life insurance proceeds, 401k plans, medical savings accounts, and individual retirement accounts (IRA) that have designated beneficiaries will not need to be probated. Likewise, assets jointly owned with a right of survivorship can bypass the probate process. Another popular way to bypass probate is through the use of a trust. Overall, minimizing costs associated with the probate process can be prudent. Accumulated expenses can include court fees, professional service hours, and administration costs. Having an easily authenticated will is one of the most common ways to quickly move through a probate process and efficiently distribute assets appropriately. How Much Does Probate Cost? The cost of the probate process varies depending on your state and your lawyer. In some states, it is typical for lawyers to process estates for a flat or hourly fee. In others, they charge a percentage of the estate. You will also have to pay for any outstanding debts, court and filing fees, and the costs of notifying creditors about the probate process. In addition, you may also have to pay an inheritance tax. It is worth researching the probate costs for your state when you begin end-of-life planning. Which State Has the Best Probate Laws? While probate laws vary from state to state, 18 states have adopted the Uniform Probate Code, which offers a standardized procedure for dividing a decedent's assets. The states that have adopted the UPC are Idaho, Alaska (1972), Arizona (1973), Colorado (1974), Minnesota, Montana, Nebraska, South Dakota, New Mexico, Utah, Michigan, Maine, Pennsylvania, Minnesota, South Carolina, Hawaii, North Dakota, New Jersey, and Massachusetts. How Can I Avoid Probate? Each state has its own limit to determine how much an estate must be to go through the probate process. Smaller estates may be able to go through a simplified probate process, or simply have heirs claim assets by affidavit. In addition, some assets—such as living trusts and 401(k) plans—do not need to go through the probate process. Since the probate process is expensive, it is worth researching your state's probate rules during your end-of-life planning. The Bottom Line Probate law deals with the rules that determine how a person's assets are divided after they die. Each state has its own rules for the probate process, depending on the size of the estate, the type of assets, and the presence of a will. Since the probate process can be expensive, it is worth researching the different ways to structure an estate in order to avoid it.

https://www.investopedia.com/what-are-the-rules-for-cd-beneficiaries-5223958

What Are the Rules for CD Beneficiaries?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 CD beneficiary can inherit money in a CD account <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-to-my-cds-when-i-die-5270936">when the original CD owner dies</a>, but specific rules apply. For example, you will be responsible for paying taxes on any interest earned in the CD after the deceased owner's passing. You'll also need to provide a death certificate and proof of identity to claim the CD's funds. </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>Beneficiaries may qualify for a waiver on the usual early withdrawal penalties that apply to CDs, depending upon the bank.</li><li>Interest earned after the original account holder's death is the responsibility of the CD beneficiary or beneficiaries. </li><li>If you're listed as a CD beneficiary, it's important to know how to claim funds if the account owner passes away.</li></ul></div></div></div> <span class="heading-toc" id="toc-cd-accounts-and-cd-beneficiaries"></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"> CD Accounts and CD Beneficiaries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> You'll find <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) accounts</a> offered at banks, credit unions, and online banks. You'll deposit money in the CD account and leave it there for a set time period (such as 3 or 12 months), during which your account earns interest. </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"> Once the CD matures, you can withdraw your original deposit and the interest or roll the entire amount into a new CD. Taking money out before the term ends (reaches <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a>) could lead to a penalty, typically a few months of interest. Federal regulations require banks charge early withdrawal penalties for any time deposit account such as a CD.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> When opening a CD account, you decide whether you want to name a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiary</a> for your CD account. A beneficiary is someone you'd like to inherit the money in the account if you pass away. If you don't name a beneficiary, your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-cds-bypass-probate-5272180">CD may need to go through probate</a>, which is a time-intensive court process. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> You may choose one or multiple beneficiaries. Your bank may require the beneficiary or beneficiaries you name to provide their Social Security number.<span class="ql-inline-citation" data-cite="2"></span> While you're living, the beneficiary has no claim on your CD account. But after your death, the CD beneficiary can withdraw money from the account, including your original deposit and the interest earned.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <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">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If you want to name a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-open-a-cd-for-a-child-5248856">minor child as a beneficiary to a CD account</a> or other financial accounts, you may also need to name a custodian who will manage those assets on their behalf until they reach adulthood.</p></div></div></div> <span class="heading-toc" id="toc-rights-of-cd-beneficiaries"></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"> Rights of CD Beneficiaries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> CD account beneficiaries can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-inherit-a-cd-5268099">inherit CD funds</a> if the original <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">CD account owner passes away</a>.<span class="ql-inline-citation" data-cite="11"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate. The bank may ask you to complete a notarized bank document called a beneficiary letter of instruction, which outlines where you want the funds sent or transferred.<br> </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"> What happens next can depend on the bank and its policies. Generally, banks can handle CDs belonging to a deceased account owner in two ways: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-close-a-cd-5225194">Close the CD</a> and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary. </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"> Closing the CD </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <br/>Federal regulations allow an exception to early withdrawal penalties upon the death of an account holder, though the CD hasn't yet reached maturity. However, the exception isn't a requirement, so the penalty may still be charged.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> To qualify for the withdrawal penalty waiver, you will likely need to present the death certificate of the original CD account holder. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you inherit a CD as a beneficiary and the bank closes the account, you can decide whether to open a new CD with the proceeds or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-transfer-on-death-5272318">use the money for something else</a>. You may be able to find <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">better CD rates</a> elsewhere or use the money to pay off debt or make home repairs. </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"> Just remember that you may not get the entire amount of the CD, but rather the amount minus any fees and outstanding debt that the deceased owed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-subheading__text"> Transferring a CD to a Beneficiary </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Transferring ownership of inherited CDs means you don't have to move the money anywhere else. Once the account has been transferred to you, you could name one or more beneficiaries. You might consider a transfer of ownership if it would allow you to avoid an early withdrawal penalty or if you don't have a pressing need to use the money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_35-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_36-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>If the bank requires you to close an inherited CD, ask if you can wait until it matures to do so in order to maximize the interest earnings.</p></div></div></div> <span class="heading-toc" id="toc-tax-rules-for-cd-beneficiaries"></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"> Tax Rules for CD Beneficiaries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Interest earned on CD accounts is taxable, but who pays when the account owner passes away? Generally, interest earned before the account owner's death is not taxable to the beneficiary, nor is the original amount deposited. But any interest earned after the account owner's death would be taxable for beneficiaries.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> How much this impacts your tax situation can depend on how much interest the CD earns. If the account balance is relatively small, the interest may be negligible. But if you're inheriting CDs with five- or six-figure balances, it's possible that you could be looking at a larger tax bill for the earnings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> If you're listed as the beneficiary of one or more CD accounts, talking to a tax professional may be helpful. They can give you insight into how your tax liability may be affected if you inherit CDs and suggest strategies for minimizing those taxes. </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-note" 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 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>Different tax rules may apply if you're inheriting an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/102714/what-are-some-examples-most-common-types-investments-ira.asp">individual retirement account (IRA) CD</a>, which is a CD that is subject to traditional or Roth IRA tax treatment.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span></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_46-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="What Are the Rules for CD Beneficiaries?" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/56wa3_Po_ul333FhayafhRTP8oM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/56wa3_Po_ul333FhayafhRTP8oM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png" data-srcset="https://www.investopedia.com/thmb/kgEDFYr5Lr6HWlI7Ua_vA-qH2ZQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="What Are the Rules for CD Beneficiaries?" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/56wa3_Po_ul333FhayafhRTP8oM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png" srcset="https://www.investopedia.com/thmb/kgEDFYr5Lr6HWlI7Ua_vA-qH2ZQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jessica Olah</p></span> </figcaption></figure> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_47-0"><span class="heading-toc" id="toc-can-you-change-beneficiaries-on-a-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Change Beneficiaries on a CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Whether you can change beneficiaries to a CD account can depend on the bank's policy and how the beneficiary agreement is structured. If you set up a CD account as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payableondeath.asp">payable on death (POD)</a>, some banks may require you to close the account completely and reopen a new CD to change the beneficiary. Other banks may allow you to change the POD beneficiary through the bank's online portal.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-how-many-beneficiaries-can-you-have-on-a-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Beneficiaries Can You Have on a CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The number of beneficiaries allowed for a CD account can be determined by your bank, though it's possible to have more than one. For instance, you could name three people to inherit a CD, with each one inheriting a 33% share of the balance.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-how-do-you-name-a-beneficiary-on-a-cd"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Name a Beneficiary on a CD?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>When you open a new CD account, your bank may ask if you'd like to name one or more beneficiaries. You can then provide the name or names of the person(s) you'd like to select. Your bank may also require a Social Security number for each designated beneficiary.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Adding a beneficiary to a CD account can offer some peace of mind if you're worried about your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a> getting lost in limbo should something happen to you. When naming a beneficiary, it's important to think about who you'd like to inherit those funds. And if you're the beneficiary of a CD, it's also helpful to understand what rights and responsibilities you have.<br/> </p></div>

A CD beneficiary can inherit money in a CD account [when the original CD owner dies](https://www.investopedia.com/what-happens-to-my-cds-when-i-die-5270936), but specific rules apply. For example, you will be responsible for paying taxes on any interest earned in the CD after the deceased owner's passing. You'll also need to provide a death certificate and proof of identity to claim the CD's funds. ### Key Takeaways * Beneficiaries may qualify for a waiver on the usual early withdrawal penalties that apply to CDs, depending upon the bank. * Interest earned after the original account holder's death is the responsibility of the CD beneficiary or beneficiaries. * If you're listed as a CD beneficiary, it's important to know how to claim funds if the account owner passes away. ## CD Accounts and CD Beneficiaries You'll find [certificate of deposit (CD) accounts](https://www.investopedia.com/terms/c/certificateofdeposit.asp) offered at banks, credit unions, and online banks. You'll deposit money in the CD account and leave it there for a set time period (such as 3 or 12 months), during which your account earns interest. Once the CD matures, you can withdraw your original deposit and the interest or roll the entire amount into a new CD. Taking money out before the term ends (reaches [maturity](https://www.investopedia.com/terms/m/maturity.asp)) could lead to a penalty, typically a few months of interest. Federal regulations require banks charge early withdrawal penalties for any time deposit account such as a CD. When opening a CD account, you decide whether you want to name a [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) for your CD account. A beneficiary is someone you'd like to inherit the money in the account if you pass away. If you don't name a beneficiary, your [CD may need to go through probate](https://www.investopedia.com/can-cds-bypass-probate-5272180), which is a time-intensive court process. You may choose one or multiple beneficiaries. Your bank may require the beneficiary or beneficiaries you name to provide their Social Security number. While you're living, the beneficiary has no claim on your CD account. But after your death, the CD beneficiary can withdraw money from the account, including your original deposit and the interest earned. ### Important If you want to name a [minor child as a beneficiary to a CD account](https://www.investopedia.com/how-to-open-a-cd-for-a-child-5248856) or other financial accounts, you may also need to name a custodian who will manage those assets on their behalf until they reach adulthood. ## Rights of CD Beneficiaries CD account beneficiaries can [inherit CD funds](https://www.investopedia.com/how-to-inherit-a-cd-5268099) if the original [CD account owner passes away](https://www.investopedia.com/what-happens-to-my-cds-when-i-die-5270936). If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate. The bank may ask you to complete a notarized bank document called a beneficiary letter of instruction, which outlines where you want the funds sent or transferred. What happens next can depend on the bank and its policies. Generally, banks can handle CDs belonging to a deceased account owner in two ways: [Close the CD](https://www.investopedia.com/how-to-close-a-cd-5225194) and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary. ### Closing the CD Federal regulations allow an exception to early withdrawal penalties upon the death of an account holder, though the CD hasn't yet reached maturity. However, the exception isn't a requirement, so the penalty may still be charged. To qualify for the withdrawal penalty waiver, you will likely need to present the death certificate of the original CD account holder. If you inherit a CD as a beneficiary and the bank closes the account, you can decide whether to open a new CD with the proceeds or [use the money for something else](https://www.investopedia.com/cd-transfer-on-death-5272318). You may be able to find [better CD rates](https://www.investopedia.com/best-cd-rates-4770214) elsewhere or use the money to pay off debt or make home repairs. Just remember that you may not get the entire amount of the CD, but rather the amount minus any fees and outstanding debt that the deceased owed. ### Transferring a CD to a Beneficiary Transferring ownership of inherited CDs means you don't have to move the money anywhere else. Once the account has been transferred to you, you could name one or more beneficiaries. You might consider a transfer of ownership if it would allow you to avoid an early withdrawal penalty or if you don't have a pressing need to use the money. ### Note If the bank requires you to close an inherited CD, ask if you can wait until it matures to do so in order to maximize the interest earnings. ## Tax Rules for CD Beneficiaries Interest earned on CD accounts is taxable, but who pays when the account owner passes away? Generally, interest earned before the account owner's death is not taxable to the beneficiary, nor is the original amount deposited. But any interest earned after the account owner's death would be taxable for beneficiaries. How much this impacts your tax situation can depend on how much interest the CD earns. If the account balance is relatively small, the interest may be negligible. But if you're inheriting CDs with five- or six-figure balances, it's possible that you could be looking at a larger tax bill for the earnings. If you're listed as the beneficiary of one or more CD accounts, talking to a tax professional may be helpful. They can give you insight into how your tax liability may be affected if you inherit CDs and suggest strategies for minimizing those taxes. ### Note Different tax rules may apply if you're inheriting an [individual retirement account (IRA) CD](https://www.investopedia.com/ask/answers/102714/what-are-some-examples-most-common-types-investments-ira.asp), which is a CD that is subject to traditional or Roth IRA tax treatment. ![What Are the Rules for CD Beneficiaries?]() :max_bytes(150000):strip_icc()/what-are-the-rules-for-cd-beneficiaries-5223958-final-d731180c60894e7b89d5e7a019c5e303.png) Investopedia / Jessica Olah ## Can You Change Beneficiaries on a CD? Whether you can change beneficiaries to a CD account can depend on the bank's policy and how the beneficiary agreement is structured. If you set up a CD account as [payable on death (POD)](https://www.investopedia.com/terms/p/payableondeath.asp), some banks may require you to close the account completely and reopen a new CD to change the beneficiary. Other banks may allow you to change the POD beneficiary through the bank's online portal. ## How Many Beneficiaries Can You Have on a CD? The number of beneficiaries allowed for a CD account can be determined by your bank, though it's possible to have more than one. For instance, you could name three people to inherit a CD, with each one inheriting a 33% share of the balance. ## How Do You Name a Beneficiary on a CD? When you open a new CD account, your bank may ask if you'd like to name one or more beneficiaries. You can then provide the name or names of the person(s) you'd like to select. Your bank may also require a Social Security number for each designated beneficiary. ## The Bottom Line Adding a beneficiary to a CD account can offer some peace of mind if you're worried about your [savings](https://www.investopedia.com/terms/s/savings.asp) getting lost in limbo should something happen to you. When naming a beneficiary, it's important to think about who you'd like to inherit those funds. And if you're the beneficiary of a CD, it's also helpful to understand what rights and responsibilities you have.

A CD beneficiary can inherit money in a CD account when the original CD owner dies, but specific rules apply. For example, you will be responsible for paying taxes on any interest earned in the CD after the deceased owner's passing. You'll also need to provide a death certificate and proof of identity to claim the CD's funds. Key Takeaways Beneficiaries may qualify for a waiver on the usual early withdrawal penalties that apply to CDs, depending upon the bank.Interest earned after the original account holder's death is the responsibility of the CD beneficiary or beneficiaries. If you're listed as a CD beneficiary, it's important to know how to claim funds if the account owner passes away. CD Accounts and CD Beneficiaries You'll find certificate of deposit (CD) accounts offered at banks, credit unions, and online banks. You'll deposit money in the CD account and leave it there for a set time period (such as 3 or 12 months), during which your account earns interest. Once the CD matures, you can withdraw your original deposit and the interest or roll the entire amount into a new CD. Taking money out before the term ends (reaches maturity) could lead to a penalty, typically a few months of interest. Federal regulations require banks charge early withdrawal penalties for any time deposit account such as a CD. When opening a CD account, you decide whether you want to name a beneficiary for your CD account. A beneficiary is someone you'd like to inherit the money in the account if you pass away. If you don't name a beneficiary, your CD may need to go through probate, which is a time-intensive court process. You may choose one or multiple beneficiaries. Your bank may require the beneficiary or beneficiaries you name to provide their Social Security number. While you're living, the beneficiary has no claim on your CD account. But after your death, the CD beneficiary can withdraw money from the account, including your original deposit and the interest earned. Important If you want to name a minor child as a beneficiary to a CD account or other financial accounts, you may also need to name a custodian who will manage those assets on their behalf until they reach adulthood. Rights of CD Beneficiaries CD account beneficiaries can inherit CD funds if the original CD account owner passes away. If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate. The bank may ask you to complete a notarized bank document called a beneficiary letter of instruction, which outlines where you want the funds sent or transferred. What happens next can depend on the bank and its policies. Generally, banks can handle CDs belonging to a deceased account owner in two ways: Close the CD and pay out the balance to the beneficiary, or transfer or convert ownership of the CD to the beneficiary. Closing the CD Federal regulations allow an exception to early withdrawal penalties upon the death of an account holder, though the CD hasn't yet reached maturity. However, the exception isn't a requirement, so the penalty may still be charged. To qualify for the withdrawal penalty waiver, you will likely need to present the death certificate of the original CD account holder. If you inherit a CD as a beneficiary and the bank closes the account, you can decide whether to open a new CD with the proceeds or use the money for something else. You may be able to find better CD rates elsewhere or use the money to pay off debt or make home repairs. Just remember that you may not get the entire amount of the CD, but rather the amount minus any fees and outstanding debt that the deceased owed. Transferring a CD to a Beneficiary Transferring ownership of inherited CDs means you don't have to move the money anywhere else. Once the account has been transferred to you, you could name one or more beneficiaries. You might consider a transfer of ownership if it would allow you to avoid an early withdrawal penalty or if you don't have a pressing need to use the money. Note If the bank requires you to close an inherited CD, ask if you can wait until it matures to do so in order to maximize the interest earnings. Tax Rules for CD Beneficiaries Interest earned on CD accounts is taxable, but who pays when the account owner passes away? Generally, interest earned before the account owner's death is not taxable to the beneficiary, nor is the original amount deposited. But any interest earned after the account owner's death would be taxable for beneficiaries. How much this impacts your tax situation can depend on how much interest the CD earns. If the account balance is relatively small, the interest may be negligible. But if you're inheriting CDs with five- or six-figure balances, it's possible that you could be looking at a larger tax bill for the earnings. If you're listed as the beneficiary of one or more CD accounts, talking to a tax professional may be helpful. They can give you insight into how your tax liability may be affected if you inherit CDs and suggest strategies for minimizing those taxes. Note Different tax rules may apply if you're inheriting an individual retirement account (IRA) CD, which is a CD that is subject to traditional or Roth IRA tax treatment. Investopedia / Jessica Olah Can You Change Beneficiaries on a CD? Whether you can change beneficiaries to a CD account can depend on the bank's policy and how the beneficiary agreement is structured. If you set up a CD account as payable on death (POD), some banks may require you to close the account completely and reopen a new CD to change the beneficiary. Other banks may allow you to change the POD beneficiary through the bank's online portal. How Many Beneficiaries Can You Have on a CD? The number of beneficiaries allowed for a CD account can be determined by your bank, though it's possible to have more than one. For instance, you could name three people to inherit a CD, with each one inheriting a 33% share of the balance. How Do You Name a Beneficiary on a CD? When you open a new CD account, your bank may ask if you'd like to name one or more beneficiaries. You can then provide the name or names of the person(s) you'd like to select. Your bank may also require a Social Security number for each designated beneficiary. The Bottom Line Adding a beneficiary to a CD account can offer some peace of mind if you're worried about your savings getting lost in limbo should something happen to you. When naming a beneficiary, it's important to think about who you'd like to inherit those funds. And if you're the beneficiary of a CD, it's also helpful to understand what rights and responsibilities you have.

https://www.investopedia.com/johnson-controls-stock-rises-as-elliott-reportedly-takes-usd1-billion-plus-stake-8650947

Johnson Controls Stock Rises As Elliott Reportedly Takes $1 Billion-Plus Stake

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>Johnson Controls stock moved higher in premarket trading Monday after <em>Bloomberg </em>reported that activist investor Elliott Investment Management has taken a stake of more than $1 billion in the company.</li><li>Elliott's reported investment in the company comes at a time when the industrial conglomerate is exploring selling several non-core businesses and has seen a number of senior executive changes.</li><li>A break above key chart resistance around $70 could lead to a retest of the stock’s all-time high at $81.77 set in December 2021.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Shares in Johnson Controls International (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=jci">JCI</a>) moved higher in premarket trading Monday after <em>Bloomberg</em> reported late Sunday that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activist-investor.asp">activist investor</a> Elliott Investment management has taken a significant stake in the industrial conglomerate.<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"> According to people familiar with the matter, the New York-based <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp">hedge fund</a> has built a position in the company valued at over $1 billion, though the intentions for taking the stake couldn’t be immediately learned, the report said. </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"> Elliott’s investment in Johnson Controls comes several months after reports surfaced that the industrial conglomerate was considering <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/divestment.asp">divesting</a> several non-core businesses. In March, <em>Reuters</em> reported the industrial firms including Robert Bosch GmbH, Lennox International (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=lii">LII</a>), and Samsung Electronics (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ssnlf">SSNLF</a>) had competed against each other to acquire the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/06/conglomerates.asp">conglomerate’s</a> heating and ventilation assets worth more than $6 billion.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Johnson Controls, which primarily manufacturers fire detection, refrigeration, security, and HVAC equipment for commercial buildings, has also seen changes in its senior executive ranks. In January, the company announced that Marc Vandiepenbeeck would replace Olivier Leonetti as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfo.asp">chief financial officer (CFO)</a>.<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"> Elliott's recent investments in Sensata Technologies Holdings (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=st">ST</a>), Crown Castle (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=cci">CCI</a>), and NRG Energy (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=nrg">NRG</a>) Inc have led to <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/c-suite.asp">C-suite</a> reshuffles after it gained corporate influence in each of those firms, <em>Bloomberg</em> reported.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-monitor-this-chart-level-amid-news-driven-strength"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Monitor This Chart Level Amid News-Driven Strength </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Since bottoming out in late October last year, the Johnson Controls share price has trended mostly higher, with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012815/why-50-simple-moving-average-sma-so-common-traders-and-analysts.asp">50-day moving average</a> (MA) crossing above the 200-day MA in March to form a bullish <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldencross.asp">golden cross</a> buy signal. More recently, investors promptly stepped in to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buy-the-dips.asp">buy the dip</a> below the 50-day MA, suggesting underlying strength in the stock.  </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"> Following the news that Elliott has taken a significant stake in the company, it’s worth keeping an eye on a key area of chart <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/resistance.asp">resistance</a> around $70 that has been in play since early last year. A convincing close above this technically important area could lead to a retest of the stock’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/051315/how-trade-stocks-hit-alltime-highs.asp">all-time high (ATH)</a> at $81.77 set in December 2021. </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"> Johnson Controls shares were up 6.2% at $73.30 about two hours before the opening bell. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer">warranty and liability disclaimer</a> for more info.</em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <em>As of the date this article was written, the author does not own any of the above securities.</em><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>

### Key Takeaways * Johnson Controls stock moved higher in premarket trading Monday after *Bloomberg* reported that activist investor Elliott Investment Management has taken a stake of more than $1 billion in the company. * Elliott's reported investment in the company comes at a time when the industrial conglomerate is exploring selling several non-core businesses and has seen a number of senior executive changes. * A break above key chart resistance around $70 could lead to a retest of the stock’s all-time high at $81.77 set in December 2021. Shares in Johnson Controls International ([JCI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=jci)) moved higher in premarket trading Monday after *Bloomberg* reported late Sunday that [activist investor](https://www.investopedia.com/terms/a/activist-investor.asp) Elliott Investment management has taken a significant stake in the industrial conglomerate. According to people familiar with the matter, the New York-based [hedge fund](https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp) has built a position in the company valued at over $1 billion, though the intentions for taking the stake couldn’t be immediately learned, the report said. Elliott’s investment in Johnson Controls comes several months after reports surfaced that the industrial conglomerate was considering [divesting](https://www.investopedia.com/terms/d/divestment.asp) several non-core businesses. In March, *Reuters* reported the industrial firms including Robert Bosch GmbH, Lennox International ([LII](https://www.investopedia.com/markets/quote?tvwidgetsymbol=lii)), and Samsung Electronics ([SSNLF](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ssnlf)) had competed against each other to acquire the [conglomerate’s](https://www.investopedia.com/articles/basics/06/conglomerates.asp) heating and ventilation assets worth more than $6 billion. Johnson Controls, which primarily manufacturers fire detection, refrigeration, security, and HVAC equipment for commercial buildings, has also seen changes in its senior executive ranks. In January, the company announced that Marc Vandiepenbeeck would replace Olivier Leonetti as [chief financial officer (CFO)](https://www.investopedia.com/terms/c/cfo.asp). Elliott's recent investments in Sensata Technologies Holdings ([ST](https://www.investopedia.com/markets/quote?tvwidgetsymbol=st)), Crown Castle ([CCI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cci)), and NRG Energy ([NRG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=nrg)) Inc have led to [C-suite](https://www.investopedia.com/terms/c/c-suite.asp) reshuffles after it gained corporate influence in each of those firms, *Bloomberg* reported. ## Monitor This Chart Level Amid News-Driven Strength Since bottoming out in late October last year, the Johnson Controls share price has trended mostly higher, with the [50-day moving average](https://www.investopedia.com/ask/answers/012815/why-50-simple-moving-average-sma-so-common-traders-and-analysts.asp) (MA) crossing above the 200-day MA in March to form a bullish [golden cross](https://www.investopedia.com/terms/g/goldencross.asp) buy signal. More recently, investors promptly stepped in to [buy the dip](https://www.investopedia.com/terms/b/buy-the-dips.asp) below the 50-day MA, suggesting underlying strength in the stock.  Following the news that Elliott has taken a significant stake in the company, it’s worth keeping an eye on a key area of chart [resistance](https://www.investopedia.com/terms/r/resistance.asp) around $70 that has been in play since early last year. A convincing close above this technically important area could lead to a retest of the stock’s [all-time high (ATH)](https://www.investopedia.com/articles/active-trading/051315/how-trade-stocks-hit-alltime-highs.asp) at $81.77 set in December 2021. Johnson Controls shares were up 6.2% at $73.30 about two hours before the opening bell. *The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info.* *As of the date this article was written, the author does not own any of the above securities.* Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])

Key Takeaways Johnson Controls stock moved higher in premarket trading Monday after Bloomberg reported that activist investor Elliott Investment Management has taken a stake of more than $1 billion in the company.Elliott's reported investment in the company comes at a time when the industrial conglomerate is exploring selling several non-core businesses and has seen a number of senior executive changes.A break above key chart resistance around $70 could lead to a retest of the stock’s all-time high at $81.77 set in December 2021. Shares in Johnson Controls International (JCI) moved higher in premarket trading Monday after Bloomberg reported late Sunday that activist investor Elliott Investment management has taken a significant stake in the industrial conglomerate. According to people familiar with the matter, the New York-based hedge fund has built a position in the company valued at over $1 billion, though the intentions for taking the stake couldn’t be immediately learned, the report said. Elliott’s investment in Johnson Controls comes several months after reports surfaced that the industrial conglomerate was considering divesting several non-core businesses. In March, Reuters reported the industrial firms including Robert Bosch GmbH, Lennox International (LII), and Samsung Electronics (SSNLF) had competed against each other to acquire the conglomerate’s heating and ventilation assets worth more than $6 billion. Johnson Controls, which primarily manufacturers fire detection, refrigeration, security, and HVAC equipment for commercial buildings, has also seen changes in its senior executive ranks. In January, the company announced that Marc Vandiepenbeeck would replace Olivier Leonetti as chief financial officer (CFO). Elliott's recent investments in Sensata Technologies Holdings (ST), Crown Castle (CCI), and NRG Energy (NRG) Inc have led to C-suite reshuffles after it gained corporate influence in each of those firms, Bloomberg reported. Monitor This Chart Level Amid News-Driven Strength Since bottoming out in late October last year, the Johnson Controls share price has trended mostly higher, with the 50-day moving average (MA) crossing above the 200-day MA in March to form a bullish golden cross buy signal. More recently, investors promptly stepped in to buy the dip below the 50-day MA, suggesting underlying strength in the stock.  Following the news that Elliott has taken a significant stake in the company, it’s worth keeping an eye on a key area of chart resistance around $70 that has been in play since early last year. A convincing close above this technically important area could lead to a retest of the stock’s all-time high (ATH) at $81.77 set in December 2021. Johnson Controls shares were up 6.2% at $73.30 about two hours before the opening bell. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own any of the above securities. Do you have a news tip for Investopedia reporters? Please email us at [email protected]

https://www.investopedia.com/temporal-discounting-7972594

Temporal Discounting: The Psychology Behind Future Reward Depreciation

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Temporal discounting is the everyday experience of valuing more immediate rewards over those in the future. A central theme in behavioral economics and neuroeconomics, temporal discounting can help us appreciate how our financial decisions are not always rational. Understanding the phenomenon, also known as time discounting or intertemporal choice, can help us make better decisions. </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>Temporal discounting is the cognitive phenomenon of preferring more immediate rewards over future benefits.</li><li>Also known as hyperbolic discounting, it can lead to poor financial decisions, unhealthy lifestyle choices, and even societal issues like climate change.</li><li>The impact of temporal discounting isn’t just material; it also affects our emotional well-being, sometimes leading to regret or guilt when we opt for short-term gratification.</li><li>Awareness is the first step in reducing the effects of temporal discounting. Practical strategies like goal visualization and automated systems can help you align your choices with long-term goals.<br/></li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Understanding this tendency is vital in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance-4427760">personal finance</a>, public policy, and health. For example, it could help explain why some struggle with long-term financial planning or engage in behaviors with immediate rewards but long-term negative consequences, such as smoking and other unhealthy habits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-temporal-discounting-explained"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> Temporal Discounting Explained </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Have you ever wondered why that piece of cake is too tempting to pass up, even though you know it could derail your diet? Or why you sometimes can’t resist spending on other immediate pleasures rather than saving for the future? </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The psychological concept of temporal discounting can help explain these behaviors. At its core, temporal discounting is about how we perceive the value of time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Imagine you’re given a choice between receiving $100 today or $110 in a month—taking for granted there are no issues of trust related to the future payment. Many would pick the immediate $100, even though the future number is greater. The extra $10 seems less valuable merely because it’s delayed. Temporal discounting relates to how we value future rewards or punishments. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> While discounting is a natural extension of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/082703.asp">time value of money</a>, which in classical economics diminishes at a constant rate, behavioral economists have described the irrational behavior of hyperbolic discounting. Here, the value we place on future rewards drops dramatically the closer we are to receiving them. </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"> Repeating our example, many people would prefer $100 now to $110 in a day, but very few people would prefer $100 in 30 days to $110 in 31 days—if choosing now. It seems people would rather wait one day for $10 if it happens a month from now, so their imagined future selves would be more patient than the ones deciding today. It’s not just that you’re impatient now; it’s that you plan to be more patient in the future.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Hyperbolic discounting shows that our personal “discount rate” is not constant. Instead, it fluctuates based on our mood, social context, and even the time of day. As a result, the more distant a future reward is, the easier it is to commit to waiting for it. But as the time for the potential reward approaches, the temptation to settle for a smaller, more immediate reward grows stronger. </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"> Understanding hyperbolic discounting sheds light on why we make illogical or self-defeating choices. Whether it’s skipping a workout, wasting money on a rash purchase, or opting for fast food over a healthy meal, the appeal of immediate gratification frequently overshadows rational decision-making. </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"> This indicates <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/present-bias-in-investment-7369328">present bias</a>, a tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. It’s why you might opt for a Netflix binge instead of an early night’s sleep or choose a sugary snack over a nutritious meal. The benefits of the latter choices are far off in the future and therefore dismissed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_2-0">Present Bias</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Present bias refers to our tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better.</p></div></div></div> <span class="heading-toc" id="toc-factors-influencing-temporal-discounting"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-heading__text"> Factors Influencing Temporal Discounting </span> </h2> <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"> Psychological Factors </span> </h3> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <li><strong>Impulsivity</strong>: A tendency for impulsivity can lead to a greater pull toward temporal discounting.</li> <li><strong>Risk tolerance</strong>: Those who are more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskaverse.asp">risk-averse</a> may lean toward immediate gains over uncertain future rewards.<span class="ql-inline-citation" data-cite="2"></span></li> <li><strong>Emotional state</strong>: Emotions like stress or pleasure can skew our preferences for immediate versus future rewards.<span class="ql-inline-citation" data-cite="3"></span></li> </ol> <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"> Contextual Factors </span> </h3> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <li><strong>Social influences</strong>: Peer pressure and societal norms can influence our discounting choices.<span class="ql-inline-citation" data-cite="4"></span></li><li><strong>Past experiences</strong>: If you’ve been burned waiting for future gains that never materialized, you may be more inclined to opt for immediate rewards.<span class="ql-inline-citation" data-cite="5"></span></li> </ol> <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-impact-of-temporal-discounting-on-decision-making-and-self-control"></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 Impact of Temporal Discounting on Decision Making and Self-Control </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> We balance immediate needs and desires daily against long-term goals and well-being. Temporal discounting effectively nudges us toward the immediate gratification side of the scale at the expense of self-control. This psychological tendency profoundly affects our ability to make rational decisions and exercise patience, many times leading us to act against our best interests. </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"> One of the more intriguing aspects of temporal discounting is how it distorts our perception of value.<span class="ql-inline-citation" data-cite="6"></span> We might recognize on an intellectual level that saving money, eating healthily, or pursuing an education has long-term value. However, the immediacy of a new purchase, a tasty meal, or having a late night out with friends can cloud our judgment. This overrating of immediate value can make it challenging to stick to financial plans and achieve our long-term goals. </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"> Temporal discounting doesn’t just affect our choices; it also has a long-lasting impact on the opportunities we miss. For instance, waiting to save for retirement or pursuing further education can lead to financial instability and limited career advancement later in life. In health, choosing immediate gratification over long-term well-being can lead to chronic conditions that are not only costly but also life-altering. </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"> There is also the emotional cost. When we give in to immediate gratification, there’s frequently a fleeting sense of pleasure followed by regret or guilt.<span class="ql-inline-citation" data-cite="8"></span> Conversely, making a choice that aligns with long-term goals can provide a more lasting sense of satisfaction and accomplishment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-temporal-discounting-in-various-domains"></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"> Temporal Discounting in Various Domains </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Temporal discounting subtly convinces us to opt for immediate pleasures like dining out or buying the latest gadgets while neglecting long-term financial planning related to our investments or retirement funds. You might think spending a little extra today won’t hurt, but seemingly insignificant expenditures can accumulate into a significant financial loss over time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Finance </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> In personal finance, saving, budgeting, and long-term planning often take a back seat because of temporal discounting.<span class="ql-inline-citation" data-cite="2"></span> The satisfaction derived from having a growing <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> or the peace of mind from following a well-thought-out budget might seem too distant compared with the instant gratification of a new purchase. </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"> As a result, many people who have the means to live more comfortably might live paycheck to paycheck, unable to break free to build a financial cushion for emergencies or the future. This short-term focus jeopardizes financial stability and limits the freedom to make choices that could lead to a more fulfilling life. </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"> Quick returns tempt investors through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/daytrader.asp">day trading</a> or “hot” short-term investment options. These trades might provide the thrill of immediate gains, but they often carry higher risks and can result in significant losses. Moreover, focusing on short-term wins detracts from the steady, long-term growth that more conservative investments like bonds or index funds can offer. It’s a striking paradox—though investing is fundamentally a long-term endeavor, temporal discounting can lure even seasoned investors into making shortsighted decisions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> The irony is that the financial world teaches the value of time through the power of compound interest. Investments can grow exponentially over time, but the appeal of immediate rewards usually overshadows this reality. As a result, many people miss chances to leverage time to their financial advantage, compromising future security for present indulgence. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_54-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_55-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-planning-4689695">Retirement planning</a> is a critical area where temporal discounting wreaks havoc. Saving for an event decades away can feel less pressing than immediate financial needs or desires. This leads to underfunding retirement accounts, missing out on employer matches, and ultimately jeopardizing financial security in what should have been our retirement years.</p></div></div></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"> Consumption </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/buy-now-pay-later-5182291">Buy now, pay later</a>” marketing reveals how sellers might take advantage of temporal discounting. Whether it’s online shopping, fast fashion, or quick-service restaurants, the market is designed to capitalize on our present bias. It feeds our urge for immediate possession and enjoyment, encouraging unnecessary spending. </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"> This pattern of behavior doesn’t just affect individual wallets; it has broader implications for environmental sustainability. The drive for immediate consumption contributes to resource depletion and waste, creating a cycle that’s difficult to break. Recognizing the role of temporal discounting in our consumer habits is a first step toward more sustainable choices that benefit not just ourselves but the planet as a whole. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> Health </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> For health and well-being, temporal discounting poses a unique challenge.<span class="ql-inline-citation" data-cite="10"></span> The gratification derived from unhealthy foods or skipping a workout is instant, while the benefits of healthy choices, such as better physical fitness or the reduced risk of disease, are apparent only much later. This makes it more challenging to stick to a diet or exercise regimen. </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"> Moreover, we frequently underestimate the long-term health effects of such behavior. Neglecting regular exercise or indulging in unhealthy foods might not deliver immediate repercussions, but they set the stage for potential health issues like obesity, diabetes, and cardiovascular disease. In the long run, the immediate pleasure could lead to costly medical bills and lower quality of life.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> Addiction </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Addictions to substances like alcohol and drugs or behaviors like gambling show how the tug of immediate reward can become overpowering. This is where temporal discounting reveals its most destructive effects.<span class="ql-inline-citation" data-cite="8"></span> The immediate “high” or pleasure received from the addictive activity can block out, for the moment, severe long-term consequences such as the resulting health problems, social isolation, or even legal troubles. </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"> Breaking free of addiction is particularly challenging because the immediate costs of quitting, like withdrawal symptoms, are highly tangible and immediate. They can easily overpower the ability to work toward the longer-term benefits of sobriety and well-being, making recovery a far steeper uphill climb.<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_70-0"></div> <span class="heading-toc" id="toc-strategies-to-manage-or-overcome-temporal-discounting"></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"> Strategies to Manage or Overcome Temporal Discounting </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> What can we do about temporal discounting? Awareness is the first step. By recognizing this psychological tendency, we can develop strategies to make choices that align better with our long-term goals and values.<span class="ql-inline-citation" data-cite="9"></span> Whether setting up automatic contributions to a retirement account or finding healthier coping mechanisms than comfort food, understanding the quirks of temporal and hyperbolic discounting can be key to unlocking a more purposeful and fulfilling life. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> <li><strong>Goal visualization</strong>: Keeping your long-term goals in view can reduce the temptation of immediate rewards.</li><li><strong>Delayed gratification training</strong>: Practicing postponing smaller rewards can help build up your tolerance for waiting.</li><li><strong>Accountability partners</strong>: Having someone who can help keep you on track can significantly reduce the effects of temporal discounting.</li><li><strong>Automate your decisions</strong>: Setting up direct deposit, automatic retirement plan contributions, recurring stock purchases, dividend reinvestment, and other tasks that can be automated can keep your impulses at bay.</li> </ol> <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-callout mntl-block" id="mntl-sc-block_76-0"><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_77-0"><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 are many strategies to counteract the influence of temporal discounting. Simple tactics such as the “10-10-10 rule,” where you consider the impact of a decision in 10 minutes, 10 months, and 10 years, can help you regain the proper perspective to counteract this psychological tendency.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_78-0"><span class="heading-toc" id="toc-what-is-an-example-of-temporal-discounting"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of Temporal Discounting?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Imagine you receive an unexpected bonus at work. You have two options:</p><ul><li>You could use that money to pay off a part of your high-interest credit card debt, saving you significant interest over time.</li><li>You could use the bonus to buy a high-end gadget you’ve been eyeing, which offers immediate gratification but no long-term financial benefit.</li></ul><p>If you opt for the gadget over paying down your debt, you’re caught in temporal discounting. The immediate pleasure of owning the new gadget feels better than the long-term financial relief of reducing your debt.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_80-0"><span class="heading-toc" id="toc-what-is-temporal-discounting-in-behavioral-economics"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Temporal Discounting in Behavioral Economics?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In behavioral economics, temporal discounting is an anomaly in our choices that researchers and policymakers use to understand why individuals might make decisions that seem irrational from a classical economics standpoint.<span class="ql-inline-citation" data-cite="11"></span> It’s not just about measuring the objective value of different options; it’s about understanding the subjective psychological factors that make immediate rewards seem more attractive. Understanding why people are time-inconsistent can inform how to design interventions, policies, or products that help people make better long-term decisions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_82-0"><span class="heading-toc" id="toc-what-is-the-temporal-discounting-of-future-risks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Temporal Discounting of Future Risks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Temporal discounting doesn’t just apply to rewards; it also influences how we perceive future risks. For example, the potential health risks of smoking or not consuming high-calorie drinks are discounted because the effects are not immediate. We might think, “What’s the harm in just one more cigarette?” or “It’s just a soda—I’ll start going to the gym next week.” This form of temporal discounting can lead to risky behaviors, since the immediate inconvenience of taking precautionary measures is given more weight than the potential consequences.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_84-0"><span class="heading-toc" id="toc-how-does-temporal-discounting-play-into-climate-change"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Temporal Discounting Play into Climate Change?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Temporal discounting can have profound societal and ecological consequences for urgent global issues like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-green-investor-podcast-episode-1-5212965">climate change</a>. The immediate costs of acting, such as transitioning to renewable energy or implementing conservation efforts, may appear burdensome compared with the status quo. The benefits—like a more stable and sustainable climate—of our present actions are distant and may not fully materialize for years or even decades. This creates a challenging psychological barrier to taking meaningful action. It’s easier to maintain behaviors and practices damaging to the environment if the costs of those actions are not immediate. Meanwhile, the long-term benefits of adopting sustainable practices are discounted because of their delayed nature.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Understanding temporal discounting can empower you to make better decisions in different aspects of life. From your finances to your health, understanding this psychological phenomenon can give you the tools to plan for a more fulfilling future. </p></div>

Temporal discounting is the everyday experience of valuing more immediate rewards over those in the future. A central theme in behavioral economics and neuroeconomics, temporal discounting can help us appreciate how our financial decisions are not always rational. Understanding the phenomenon, also known as time discounting or intertemporal choice, can help us make better decisions. ### Key Takeaways * Temporal discounting is the cognitive phenomenon of preferring more immediate rewards over future benefits. * Also known as hyperbolic discounting, it can lead to poor financial decisions, unhealthy lifestyle choices, and even societal issues like climate change. * The impact of temporal discounting isn’t just material; it also affects our emotional well-being, sometimes leading to regret or guilt when we opt for short-term gratification. * Awareness is the first step in reducing the effects of temporal discounting. Practical strategies like goal visualization and automated systems can help you align your choices with long-term goals. Understanding this tendency is vital in [personal finance](https://www.investopedia.com/personal-finance-4427760), public policy, and health. For example, it could help explain why some struggle with long-term financial planning or engage in behaviors with immediate rewards but long-term negative consequences, such as smoking and other unhealthy habits. ## Temporal Discounting Explained Have you ever wondered why that piece of cake is too tempting to pass up, even though you know it could derail your diet? Or why you sometimes can’t resist spending on other immediate pleasures rather than saving for the future? The psychological concept of temporal discounting can help explain these behaviors. At its core, temporal discounting is about how we perceive the value of time. Imagine you’re given a choice between receiving $100 today or $110 in a month—taking for granted there are no issues of trust related to the future payment. Many would pick the immediate $100, even though the future number is greater. The extra $10 seems less valuable merely because it’s delayed. Temporal discounting relates to how we value future rewards or punishments. While discounting is a natural extension of the [time value of money](https://www.investopedia.com/articles/03/082703.asp), which in classical economics diminishes at a constant rate, behavioral economists have described the irrational behavior of hyperbolic discounting. Here, the value we place on future rewards drops dramatically the closer we are to receiving them. Repeating our example, many people would prefer $100 now to $110 in a day, but very few people would prefer $100 in 30 days to $110 in 31 days—if choosing now. It seems people would rather wait one day for $10 if it happens a month from now, so their imagined future selves would be more patient than the ones deciding today. It’s not just that you’re impatient now; it’s that you plan to be more patient in the future. Hyperbolic discounting shows that our personal “discount rate” is not constant. Instead, it fluctuates based on our mood, social context, and even the time of day. As a result, the more distant a future reward is, the easier it is to commit to waiting for it. But as the time for the potential reward approaches, the temptation to settle for a smaller, more immediate reward grows stronger. Understanding hyperbolic discounting sheds light on why we make illogical or self-defeating choices. Whether it’s skipping a workout, wasting money on a rash purchase, or opting for fast food over a healthy meal, the appeal of immediate gratification frequently overshadows rational decision-making. This indicates [present bias](https://www.investopedia.com/present-bias-in-investment-7369328), a tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. It’s why you might opt for a Netflix binge instead of an early night’s sleep or choose a sugary snack over a nutritious meal. The benefits of the latter choices are far off in the future and therefore dismissed. ### Present Bias Present bias refers to our tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. ## Factors Influencing Temporal Discounting ### Psychological Factors 1. **Impulsivity**: A tendency for impulsivity can lead to a greater pull toward temporal discounting. 2. **Risk tolerance**: Those who are more [risk-averse](https://www.investopedia.com/terms/r/riskaverse.asp) may lean toward immediate gains over uncertain future rewards. 3. **Emotional state**: Emotions like stress or pleasure can skew our preferences for immediate versus future rewards. ### Contextual Factors 1. **Social influences**: Peer pressure and societal norms can influence our discounting choices. 2. **Past experiences**: If you’ve been burned waiting for future gains that never materialized, you may be more inclined to opt for immediate rewards. ## The Impact of Temporal Discounting on Decision Making and Self-Control We balance immediate needs and desires daily against long-term goals and well-being. Temporal discounting effectively nudges us toward the immediate gratification side of the scale at the expense of self-control. This psychological tendency profoundly affects our ability to make rational decisions and exercise patience, many times leading us to act against our best interests. One of the more intriguing aspects of temporal discounting is how it distorts our perception of value. We might recognize on an intellectual level that saving money, eating healthily, or pursuing an education has long-term value. However, the immediacy of a new purchase, a tasty meal, or having a late night out with friends can cloud our judgment. This overrating of immediate value can make it challenging to stick to financial plans and achieve our long-term goals. Temporal discounting doesn’t just affect our choices; it also has a long-lasting impact on the opportunities we miss. For instance, waiting to save for retirement or pursuing further education can lead to financial instability and limited career advancement later in life. In health, choosing immediate gratification over long-term well-being can lead to chronic conditions that are not only costly but also life-altering. There is also the emotional cost. When we give in to immediate gratification, there’s frequently a fleeting sense of pleasure followed by regret or guilt. Conversely, making a choice that aligns with long-term goals can provide a more lasting sense of satisfaction and accomplishment. ## Temporal Discounting in Various Domains Temporal discounting subtly convinces us to opt for immediate pleasures like dining out or buying the latest gadgets while neglecting long-term financial planning related to our investments or retirement funds. You might think spending a little extra today won’t hurt, but seemingly insignificant expenditures can accumulate into a significant financial loss over time. ### Finance In personal finance, saving, budgeting, and long-term planning often take a back seat because of temporal discounting. The satisfaction derived from having a growing [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp) or the peace of mind from following a well-thought-out budget might seem too distant compared with the instant gratification of a new purchase. As a result, many people who have the means to live more comfortably might live paycheck to paycheck, unable to break free to build a financial cushion for emergencies or the future. This short-term focus jeopardizes financial stability and limits the freedom to make choices that could lead to a more fulfilling life. Quick returns tempt investors through [day trading](https://www.investopedia.com/terms/d/daytrader.asp) or “hot” short-term investment options. These trades might provide the thrill of immediate gains, but they often carry higher risks and can result in significant losses. Moreover, focusing on short-term wins detracts from the steady, long-term growth that more conservative investments like bonds or index funds can offer. It’s a striking paradox—though investing is fundamentally a long-term endeavor, temporal discounting can lure even seasoned investors into making shortsighted decisions. The irony is that the financial world teaches the value of time through the power of compound interest. Investments can grow exponentially over time, but the appeal of immediate rewards usually overshadows this reality. As a result, many people miss chances to leverage time to their financial advantage, compromising future security for present indulgence. ### [Retirement planning](https://www.investopedia.com/retirement-planning-4689695) is a critical area where temporal discounting wreaks havoc. Saving for an event decades away can feel less pressing than immediate financial needs or desires. This leads to underfunding retirement accounts, missing out on employer matches, and ultimately jeopardizing financial security in what should have been our retirement years. ### Consumption “[Buy now, pay later](https://www.investopedia.com/buy-now-pay-later-5182291)” marketing reveals how sellers might take advantage of temporal discounting. Whether it’s online shopping, fast fashion, or quick-service restaurants, the market is designed to capitalize on our present bias. It feeds our urge for immediate possession and enjoyment, encouraging unnecessary spending. This pattern of behavior doesn’t just affect individual wallets; it has broader implications for environmental sustainability. The drive for immediate consumption contributes to resource depletion and waste, creating a cycle that’s difficult to break. Recognizing the role of temporal discounting in our consumer habits is a first step toward more sustainable choices that benefit not just ourselves but the planet as a whole. ### Health For health and well-being, temporal discounting poses a unique challenge. The gratification derived from unhealthy foods or skipping a workout is instant, while the benefits of healthy choices, such as better physical fitness or the reduced risk of disease, are apparent only much later. This makes it more challenging to stick to a diet or exercise regimen. Moreover, we frequently underestimate the long-term health effects of such behavior. Neglecting regular exercise or indulging in unhealthy foods might not deliver immediate repercussions, but they set the stage for potential health issues like obesity, diabetes, and cardiovascular disease. In the long run, the immediate pleasure could lead to costly medical bills and lower quality of life. ### Addiction Addictions to substances like alcohol and drugs or behaviors like gambling show how the tug of immediate reward can become overpowering. This is where temporal discounting reveals its most destructive effects. The immediate “high” or pleasure received from the addictive activity can block out, for the moment, severe long-term consequences such as the resulting health problems, social isolation, or even legal troubles. Breaking free of addiction is particularly challenging because the immediate costs of quitting, like withdrawal symptoms, are highly tangible and immediate. They can easily overpower the ability to work toward the longer-term benefits of sobriety and well-being, making recovery a far steeper uphill climb. ## Strategies to Manage or Overcome Temporal Discounting What can we do about temporal discounting? Awareness is the first step. By recognizing this psychological tendency, we can develop strategies to make choices that align better with our long-term goals and values. Whether setting up automatic contributions to a retirement account or finding healthier coping mechanisms than comfort food, understanding the quirks of temporal and hyperbolic discounting can be key to unlocking a more purposeful and fulfilling life. 1. **Goal visualization**: Keeping your long-term goals in view can reduce the temptation of immediate rewards. 2. **Delayed gratification training**: Practicing postponing smaller rewards can help build up your tolerance for waiting. 3. **Accountability partners**: Having someone who can help keep you on track can significantly reduce the effects of temporal discounting. 4. **Automate your decisions**: Setting up direct deposit, automatic retirement plan contributions, recurring stock purchases, dividend reinvestment, and other tasks that can be automated can keep your impulses at bay. ### There are many strategies to counteract the influence of temporal discounting. Simple tactics such as the “10-10-10 rule,” where you consider the impact of a decision in 10 minutes, 10 months, and 10 years, can help you regain the proper perspective to counteract this psychological tendency. ## What Is an Example of Temporal Discounting? Imagine you receive an unexpected bonus at work. You have two options: * You could use that money to pay off a part of your high-interest credit card debt, saving you significant interest over time. * You could use the bonus to buy a high-end gadget you’ve been eyeing, which offers immediate gratification but no long-term financial benefit. If you opt for the gadget over paying down your debt, you’re caught in temporal discounting. The immediate pleasure of owning the new gadget feels better than the long-term financial relief of reducing your debt. ## What Is Temporal Discounting in Behavioral Economics? In behavioral economics, temporal discounting is an anomaly in our choices that researchers and policymakers use to understand why individuals might make decisions that seem irrational from a classical economics standpoint. It’s not just about measuring the objective value of different options; it’s about understanding the subjective psychological factors that make immediate rewards seem more attractive. Understanding why people are time-inconsistent can inform how to design interventions, policies, or products that help people make better long-term decisions. ## What Is the Temporal Discounting of Future Risks? Temporal discounting doesn’t just apply to rewards; it also influences how we perceive future risks. For example, the potential health risks of smoking or not consuming high-calorie drinks are discounted because the effects are not immediate. We might think, “What’s the harm in just one more cigarette?” or “It’s just a soda—I’ll start going to the gym next week.” This form of temporal discounting can lead to risky behaviors, since the immediate inconvenience of taking precautionary measures is given more weight than the potential consequences. ## How Does Temporal Discounting Play into Climate Change? Temporal discounting can have profound societal and ecological consequences for urgent global issues like [climate change](https://www.investopedia.com/the-green-investor-podcast-episode-1-5212965). The immediate costs of acting, such as transitioning to renewable energy or implementing conservation efforts, may appear burdensome compared with the status quo. The benefits—like a more stable and sustainable climate—of our present actions are distant and may not fully materialize for years or even decades. This creates a challenging psychological barrier to taking meaningful action. It’s easier to maintain behaviors and practices damaging to the environment if the costs of those actions are not immediate. Meanwhile, the long-term benefits of adopting sustainable practices are discounted because of their delayed nature. ## The Bottom Line Understanding temporal discounting can empower you to make better decisions in different aspects of life. From your finances to your health, understanding this psychological phenomenon can give you the tools to plan for a more fulfilling future.

Temporal discounting is the everyday experience of valuing more immediate rewards over those in the future. A central theme in behavioral economics and neuroeconomics, temporal discounting can help us appreciate how our financial decisions are not always rational. Understanding the phenomenon, also known as time discounting or intertemporal choice, can help us make better decisions. Key Takeaways Temporal discounting is the cognitive phenomenon of preferring more immediate rewards over future benefits.Also known as hyperbolic discounting, it can lead to poor financial decisions, unhealthy lifestyle choices, and even societal issues like climate change.The impact of temporal discounting isn’t just material; it also affects our emotional well-being, sometimes leading to regret or guilt when we opt for short-term gratification.Awareness is the first step in reducing the effects of temporal discounting. Practical strategies like goal visualization and automated systems can help you align your choices with long-term goals. Understanding this tendency is vital in personal finance, public policy, and health. For example, it could help explain why some struggle with long-term financial planning or engage in behaviors with immediate rewards but long-term negative consequences, such as smoking and other unhealthy habits. Temporal Discounting Explained Have you ever wondered why that piece of cake is too tempting to pass up, even though you know it could derail your diet? Or why you sometimes can’t resist spending on other immediate pleasures rather than saving for the future? The psychological concept of temporal discounting can help explain these behaviors. At its core, temporal discounting is about how we perceive the value of time. Imagine you’re given a choice between receiving $100 today or $110 in a month—taking for granted there are no issues of trust related to the future payment. Many would pick the immediate $100, even though the future number is greater. The extra $10 seems less valuable merely because it’s delayed. Temporal discounting relates to how we value future rewards or punishments. While discounting is a natural extension of the time value of money, which in classical economics diminishes at a constant rate, behavioral economists have described the irrational behavior of hyperbolic discounting. Here, the value we place on future rewards drops dramatically the closer we are to receiving them. Repeating our example, many people would prefer $100 now to $110 in a day, but very few people would prefer $100 in 30 days to $110 in 31 days—if choosing now. It seems people would rather wait one day for $10 if it happens a month from now, so their imagined future selves would be more patient than the ones deciding today. It’s not just that you’re impatient now; it’s that you plan to be more patient in the future. Hyperbolic discounting shows that our personal “discount rate” is not constant. Instead, it fluctuates based on our mood, social context, and even the time of day. As a result, the more distant a future reward is, the easier it is to commit to waiting for it. But as the time for the potential reward approaches, the temptation to settle for a smaller, more immediate reward grows stronger. Understanding hyperbolic discounting sheds light on why we make illogical or self-defeating choices. Whether it’s skipping a workout, wasting money on a rash purchase, or opting for fast food over a healthy meal, the appeal of immediate gratification frequently overshadows rational decision-making. This indicates present bias, a tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. It’s why you might opt for a Netflix binge instead of an early night’s sleep or choose a sugary snack over a nutritious meal. The benefits of the latter choices are far off in the future and therefore dismissed. Present Bias Present bias refers to our tendency to prefer immediate rewards or pleasures over future gains, even when the future option is objectively better. Factors Influencing Temporal Discounting Psychological Factors Impulsivity: A tendency for impulsivity can lead to a greater pull toward temporal discounting. Risk tolerance: Those who are more risk-averse may lean toward immediate gains over uncertain future rewards. Emotional state: Emotions like stress or pleasure can skew our preferences for immediate versus future rewards. Contextual Factors Social influences: Peer pressure and societal norms can influence our discounting choices.Past experiences: If you’ve been burned waiting for future gains that never materialized, you may be more inclined to opt for immediate rewards. The Impact of Temporal Discounting on Decision Making and Self-Control We balance immediate needs and desires daily against long-term goals and well-being. Temporal discounting effectively nudges us toward the immediate gratification side of the scale at the expense of self-control. This psychological tendency profoundly affects our ability to make rational decisions and exercise patience, many times leading us to act against our best interests. One of the more intriguing aspects of temporal discounting is how it distorts our perception of value. We might recognize on an intellectual level that saving money, eating healthily, or pursuing an education has long-term value. However, the immediacy of a new purchase, a tasty meal, or having a late night out with friends can cloud our judgment. This overrating of immediate value can make it challenging to stick to financial plans and achieve our long-term goals. Temporal discounting doesn’t just affect our choices; it also has a long-lasting impact on the opportunities we miss. For instance, waiting to save for retirement or pursuing further education can lead to financial instability and limited career advancement later in life. In health, choosing immediate gratification over long-term well-being can lead to chronic conditions that are not only costly but also life-altering. There is also the emotional cost. When we give in to immediate gratification, there’s frequently a fleeting sense of pleasure followed by regret or guilt. Conversely, making a choice that aligns with long-term goals can provide a more lasting sense of satisfaction and accomplishment. Temporal Discounting in Various Domains Temporal discounting subtly convinces us to opt for immediate pleasures like dining out or buying the latest gadgets while neglecting long-term financial planning related to our investments or retirement funds. You might think spending a little extra today won’t hurt, but seemingly insignificant expenditures can accumulate into a significant financial loss over time. Finance In personal finance, saving, budgeting, and long-term planning often take a back seat because of temporal discounting. The satisfaction derived from having a growing savings account or the peace of mind from following a well-thought-out budget might seem too distant compared with the instant gratification of a new purchase. As a result, many people who have the means to live more comfortably might live paycheck to paycheck, unable to break free to build a financial cushion for emergencies or the future. This short-term focus jeopardizes financial stability and limits the freedom to make choices that could lead to a more fulfilling life. Quick returns tempt investors through day trading or “hot” short-term investment options. These trades might provide the thrill of immediate gains, but they often carry higher risks and can result in significant losses. Moreover, focusing on short-term wins detracts from the steady, long-term growth that more conservative investments like bonds or index funds can offer. It’s a striking paradox—though investing is fundamentally a long-term endeavor, temporal discounting can lure even seasoned investors into making shortsighted decisions. The irony is that the financial world teaches the value of time through the power of compound interest. Investments can grow exponentially over time, but the appeal of immediate rewards usually overshadows this reality. As a result, many people miss chances to leverage time to their financial advantage, compromising future security for present indulgence. Retirement planning is a critical area where temporal discounting wreaks havoc. Saving for an event decades away can feel less pressing than immediate financial needs or desires. This leads to underfunding retirement accounts, missing out on employer matches, and ultimately jeopardizing financial security in what should have been our retirement years. Consumption “Buy now, pay later” marketing reveals how sellers might take advantage of temporal discounting. Whether it’s online shopping, fast fashion, or quick-service restaurants, the market is designed to capitalize on our present bias. It feeds our urge for immediate possession and enjoyment, encouraging unnecessary spending. This pattern of behavior doesn’t just affect individual wallets; it has broader implications for environmental sustainability. The drive for immediate consumption contributes to resource depletion and waste, creating a cycle that’s difficult to break. Recognizing the role of temporal discounting in our consumer habits is a first step toward more sustainable choices that benefit not just ourselves but the planet as a whole. Health For health and well-being, temporal discounting poses a unique challenge. The gratification derived from unhealthy foods or skipping a workout is instant, while the benefits of healthy choices, such as better physical fitness or the reduced risk of disease, are apparent only much later. This makes it more challenging to stick to a diet or exercise regimen. Moreover, we frequently underestimate the long-term health effects of such behavior. Neglecting regular exercise or indulging in unhealthy foods might not deliver immediate repercussions, but they set the stage for potential health issues like obesity, diabetes, and cardiovascular disease. In the long run, the immediate pleasure could lead to costly medical bills and lower quality of life. Addiction Addictions to substances like alcohol and drugs or behaviors like gambling show how the tug of immediate reward can become overpowering. This is where temporal discounting reveals its most destructive effects. The immediate “high” or pleasure received from the addictive activity can block out, for the moment, severe long-term consequences such as the resulting health problems, social isolation, or even legal troubles. Breaking free of addiction is particularly challenging because the immediate costs of quitting, like withdrawal symptoms, are highly tangible and immediate. They can easily overpower the ability to work toward the longer-term benefits of sobriety and well-being, making recovery a far steeper uphill climb. Strategies to Manage or Overcome Temporal Discounting What can we do about temporal discounting? Awareness is the first step. By recognizing this psychological tendency, we can develop strategies to make choices that align better with our long-term goals and values. Whether setting up automatic contributions to a retirement account or finding healthier coping mechanisms than comfort food, understanding the quirks of temporal and hyperbolic discounting can be key to unlocking a more purposeful and fulfilling life. Goal visualization: Keeping your long-term goals in view can reduce the temptation of immediate rewards.Delayed gratification training: Practicing postponing smaller rewards can help build up your tolerance for waiting.Accountability partners: Having someone who can help keep you on track can significantly reduce the effects of temporal discounting.Automate your decisions: Setting up direct deposit, automatic retirement plan contributions, recurring stock purchases, dividend reinvestment, and other tasks that can be automated can keep your impulses at bay. There are many strategies to counteract the influence of temporal discounting. Simple tactics such as the “10-10-10 rule,” where you consider the impact of a decision in 10 minutes, 10 months, and 10 years, can help you regain the proper perspective to counteract this psychological tendency. What Is an Example of Temporal Discounting? Imagine you receive an unexpected bonus at work. You have two options:You could use that money to pay off a part of your high-interest credit card debt, saving you significant interest over time.You could use the bonus to buy a high-end gadget you’ve been eyeing, which offers immediate gratification but no long-term financial benefit.If you opt for the gadget over paying down your debt, you’re caught in temporal discounting. The immediate pleasure of owning the new gadget feels better than the long-term financial relief of reducing your debt. What Is Temporal Discounting in Behavioral Economics? In behavioral economics, temporal discounting is an anomaly in our choices that researchers and policymakers use to understand why individuals might make decisions that seem irrational from a classical economics standpoint. It’s not just about measuring the objective value of different options; it’s about understanding the subjective psychological factors that make immediate rewards seem more attractive. Understanding why people are time-inconsistent can inform how to design interventions, policies, or products that help people make better long-term decisions. What Is the Temporal Discounting of Future Risks? Temporal discounting doesn’t just apply to rewards; it also influences how we perceive future risks. For example, the potential health risks of smoking or not consuming high-calorie drinks are discounted because the effects are not immediate. We might think, “What’s the harm in just one more cigarette?” or “It’s just a soda—I’ll start going to the gym next week.” This form of temporal discounting can lead to risky behaviors, since the immediate inconvenience of taking precautionary measures is given more weight than the potential consequences. How Does Temporal Discounting Play into Climate Change? Temporal discounting can have profound societal and ecological consequences for urgent global issues like climate change. The immediate costs of acting, such as transitioning to renewable energy or implementing conservation efforts, may appear burdensome compared with the status quo. The benefits—like a more stable and sustainable climate—of our present actions are distant and may not fully materialize for years or even decades. This creates a challenging psychological barrier to taking meaningful action. It’s easier to maintain behaviors and practices damaging to the environment if the costs of those actions are not immediate. Meanwhile, the long-term benefits of adopting sustainable practices are discounted because of their delayed nature. The Bottom Line Understanding temporal discounting can empower you to make better decisions in different aspects of life. From your finances to your health, understanding this psychological phenomenon can give you the tools to plan for a more fulfilling future.

https://www.investopedia.com/investing/dollar-cost-averaging-pays/

Use Dollar-Cost Averaging to Build Wealth Over Time

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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"> Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. </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 have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/08/401k-info.asp">401(k) retirement plan</a>, you're already using this strategy. </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"> Make no mistake, dollar-cost averaging is a strategy, and it's one that can get results that are as good or better than aiming to buy low and sell high. As many experts will tell you, nobody can time the market. </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>Dollar-cost averaging requires the investor to invest the same amount of money in the same stock on a regular basis over time, regardless of the share price.</li><li>Over time, this strategy tends to achieve as good or better results than trying to time the market.</li><li>Dollar-cost averaging is a particularly attractive strategy for new investors with a limited stake. They can invest a little at a time over time, with good results.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-to-invest-using-dollar-cost-averaging"></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 to Invest Using Dollar-Cost Averaging </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> This can even be done automatically by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/090915/reinvesting-dividends-pays-long-run.asp">reinvesting a dividend payment</a> back into the stock itself. </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 number of shares purchased each month will vary depending on the share price of the investment at the time of the purchase. When the share value rises, your money will buy fewer shares per dollar invested. When the share price is down, your money will get you more shares. </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"> Over time, the average <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp">cost per share</a> you spend should compare quite favorably with the price you would have paid if you had tried to time it. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_18-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_19-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>You might consider using the dollar-cost averaging strategy to invest in an exchange-traded fund or no-load mutual fund. That can give you the benefit of diversification.</p></div></div></div> <span class="heading-toc" id="toc-rewards-of-dollar-cost-averaging"></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"> Rewards of Dollar-Cost Averaging </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In the long run, this is a highly strategic way to invest. Since you're buying more shares when the cost is low, you're reducing your average cost per share over time. </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"> Dollar-cost averaging is particularly attractive to new investors just starting out. It's a way to slowly but surely build wealth even if you're starting out with a small stake. </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-example-of-dollar-cost-averaging"></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"> 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_26-0"> For example, assume an investor deposits $1,000 on the first of each month into Mutual Fund XYZ, beginning in January. Like any investment, this fund bounces around in price from month to month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> In January, Mutual Fund XYZ was at $20 per share. By Feb. 1, it was at $16; by March 1, it was $12; by April 1, it was $17, and by May 1, it was $23. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The investor keeps steadily putting $1,000 into the fund on the first of each month while the number of shares that amount of money buys varies. In January, $1,000 bought 50 shares. In February, it bought 62.5 shares, in March it bought 83.3 shares, in April it was 58.2 shares, and in May it was 43.48 shares. </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"> Just five months after beginning to contribute to the fund, the investor owns 298.14 shares of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mutual-funds-4427787">mutual fund</a>. The investment of $5,000 has turned into $6.857.11. The average price of those shares is $16.77. Based on the current price of the shares, the investment of $5,000 has turned into $6,857.11. </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 investor had spent the entire $5,000 at once at any time during this period, the total profit might be higher or lower. But by staggering the purchases, the risk of the investment has been greatly reduced. </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"> Dollar-cost averaging is a less risky way to obtain a favorable price per share. </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-use-mutual-funds"></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 Use Mutual Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> When it comes to using the dollar-cost averaging strategy there may be no better investment vehicle than the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/no-loadfund.asp">no-load mutual fund</a>. The structure of these mutual funds, which are bought and sold without commission fees, could almost have been designed with dollar-cost averaging in mind. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The expense ratio that mutual fund investors pay is a fixed percentage of the total contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. </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"> For example, if you made a $25 installment payment in a mutual fund that charges a 20 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basispoint.asp">basis-point</a> expense ratio, you would pay a fee of $0.05, which amounts to 0.2%. For a $250 lump-sum investment in the same fund, you would pay $0.50, or 0.2%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-subheading__text"> Several Fund Options for Dollar-Cost Averaging </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Still, the availability of no-load mutual funds, which by definition do not charge transaction fees, combined with their low minimum investment requirements, offers access to investing to almost everyone. In fact, many mutual funds waive required minimums for investors who set up automatic contribution plans, the plans that put dollar-cost averaging into action. </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"> To really cut the costs, you might consider index funds or exchange-traded funds (ETFs). These funds are not actively managed and are built to parallel the performance of a particular index. Since there are no management fees involved, the costs are a fraction of a percentage. </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-a-long-term-strategy"></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"> A Long-Term Strategy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Regardless of the amount you have to invest, dollar-cost averaging is a long-term strategy. </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"> While the financial markets are in a constant state of flux, over long periods of time, most stocks tend to move in the same general direction, swept along by larger currents in the economy. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> A bear market or a bull market can last for months or even years. That reduces the value of dollar-cost averaging as a short-term strategy. </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 addition, mutual funds and even individual stocks don't, as a general rule, change in value drastically from month to month. You have to keep your investment going through bad and good times to see the real value of dollar-cost averaging. Over time, your assets will reflect both the premium prices of a bull market and the discounts of a bear market. </p></div>

Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. If you have a [401(k) retirement plan](https://www.investopedia.com/articles/retirement/08/401k-info.asp), you're already using this strategy. Make no mistake, dollar-cost averaging is a strategy, and it's one that can get results that are as good or better than aiming to buy low and sell high. As many experts will tell you, nobody can time the market. ### Key Takeaways * Dollar-cost averaging requires the investor to invest the same amount of money in the same stock on a regular basis over time, regardless of the share price. * Over time, this strategy tends to achieve as good or better results than trying to time the market. * Dollar-cost averaging is a particularly attractive strategy for new investors with a limited stake. They can invest a little at a time over time, with good results. ## How to Invest Using Dollar-Cost Averaging The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it. This can even be done automatically by [reinvesting a dividend payment](https://www.investopedia.com/articles/investing/090915/reinvesting-dividends-pays-long-run.asp) back into the stock itself. The number of shares purchased each month will vary depending on the share price of the investment at the time of the purchase. When the share value rises, your money will buy fewer shares per dollar invested. When the share price is down, your money will get you more shares. Over time, the average [cost per share](https://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp) you spend should compare quite favorably with the price you would have paid if you had tried to time it. ### You might consider using the dollar-cost averaging strategy to invest in an exchange-traded fund or no-load mutual fund. That can give you the benefit of diversification. ## Rewards of Dollar-Cost Averaging In the long run, this is a highly strategic way to invest. Since you're buying more shares when the cost is low, you're reducing your average cost per share over time. Dollar-cost averaging is particularly attractive to new investors just starting out. It's a way to slowly but surely build wealth even if you're starting out with a small stake. ## Example of Dollar-Cost Averaging For example, assume an investor deposits $1,000 on the first of each month into Mutual Fund XYZ, beginning in January. Like any investment, this fund bounces around in price from month to month. In January, Mutual Fund XYZ was at $20 per share. By Feb. 1, it was at $16; by March 1, it was $12; by April 1, it was $17, and by May 1, it was $23. The investor keeps steadily putting $1,000 into the fund on the first of each month while the number of shares that amount of money buys varies. In January, $1,000 bought 50 shares. In February, it bought 62.5 shares, in March it bought 83.3 shares, in April it was 58.2 shares, and in May it was 43.48 shares. Just five months after beginning to contribute to the fund, the investor owns 298.14 shares of the [mutual fund](https://www.investopedia.com/mutual-funds-4427787). The investment of $5,000 has turned into $6.857.11. The average price of those shares is $16.77. Based on the current price of the shares, the investment of $5,000 has turned into $6,857.11. If the investor had spent the entire $5,000 at once at any time during this period, the total profit might be higher or lower. But by staggering the purchases, the risk of the investment has been greatly reduced. Dollar-cost averaging is a less risky way to obtain a favorable price per share. ## Why Use Mutual Funds When it comes to using the dollar-cost averaging strategy there may be no better investment vehicle than the [no-load mutual fund](https://www.investopedia.com/terms/n/no-loadfund.asp). The structure of these mutual funds, which are bought and sold without commission fees, could almost have been designed with dollar-cost averaging in mind. The expense ratio that mutual fund investors pay is a fixed percentage of the total contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. For example, if you made a $25 installment payment in a mutual fund that charges a 20 [basis-point](https://www.investopedia.com/terms/b/basispoint.asp) expense ratio, you would pay a fee of $0.05, which amounts to 0.2%. For a $250 lump-sum investment in the same fund, you would pay $0.50, or 0.2%. ### Several Fund Options for Dollar-Cost Averaging Still, the availability of no-load mutual funds, which by definition do not charge transaction fees, combined with their low minimum investment requirements, offers access to investing to almost everyone. In fact, many mutual funds waive required minimums for investors who set up automatic contribution plans, the plans that put dollar-cost averaging into action. To really cut the costs, you might consider index funds or exchange-traded funds (ETFs). These funds are not actively managed and are built to parallel the performance of a particular index. Since there are no management fees involved, the costs are a fraction of a percentage. ## A Long-Term Strategy Regardless of the amount you have to invest, dollar-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, over long periods of time, most stocks tend to move in the same general direction, swept along by larger currents in the economy. A bear market or a bull market can last for months or even years. That reduces the value of dollar-cost averaging as a short-term strategy. In addition, mutual funds and even individual stocks don't, as a general rule, change in value drastically from month to month. You have to keep your investment going through bad and good times to see the real value of dollar-cost averaging. Over time, your assets will reflect both the premium prices of a bull market and the discounts of a bear market.

Dollar-cost averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period of time. If you have a 401(k) retirement plan, you're already using this strategy. Make no mistake, dollar-cost averaging is a strategy, and it's one that can get results that are as good or better than aiming to buy low and sell high. As many experts will tell you, nobody can time the market. Key Takeaways Dollar-cost averaging requires the investor to invest the same amount of money in the same stock on a regular basis over time, regardless of the share price.Over time, this strategy tends to achieve as good or better results than trying to time the market.Dollar-cost averaging is a particularly attractive strategy for new investors with a limited stake. They can invest a little at a time over time, with good results. How to Invest Using Dollar-Cost Averaging The strategy couldn't be simpler. Invest the same amount of money in the same stock or mutual fund at regular intervals, say monthly. Ignore the fluctuations in the price of your investment. Whether it's up or down, you're putting the same amount of money into it. This can even be done automatically by reinvesting a dividend payment back into the stock itself. The number of shares purchased each month will vary depending on the share price of the investment at the time of the purchase. When the share value rises, your money will buy fewer shares per dollar invested. When the share price is down, your money will get you more shares. Over time, the average cost per share you spend should compare quite favorably with the price you would have paid if you had tried to time it. You might consider using the dollar-cost averaging strategy to invest in an exchange-traded fund or no-load mutual fund. That can give you the benefit of diversification. Rewards of Dollar-Cost Averaging In the long run, this is a highly strategic way to invest. Since you're buying more shares when the cost is low, you're reducing your average cost per share over time. Dollar-cost averaging is particularly attractive to new investors just starting out. It's a way to slowly but surely build wealth even if you're starting out with a small stake. Example of Dollar-Cost Averaging For example, assume an investor deposits $1,000 on the first of each month into Mutual Fund XYZ, beginning in January. Like any investment, this fund bounces around in price from month to month. In January, Mutual Fund XYZ was at $20 per share. By Feb. 1, it was at $16; by March 1, it was $12; by April 1, it was $17, and by May 1, it was $23. The investor keeps steadily putting $1,000 into the fund on the first of each month while the number of shares that amount of money buys varies. In January, $1,000 bought 50 shares. In February, it bought 62.5 shares, in March it bought 83.3 shares, in April it was 58.2 shares, and in May it was 43.48 shares. Just five months after beginning to contribute to the fund, the investor owns 298.14 shares of the mutual fund. The investment of $5,000 has turned into $6.857.11. The average price of those shares is $16.77. Based on the current price of the shares, the investment of $5,000 has turned into $6,857.11. If the investor had spent the entire $5,000 at once at any time during this period, the total profit might be higher or lower. But by staggering the purchases, the risk of the investment has been greatly reduced. Dollar-cost averaging is a less risky way to obtain a favorable price per share. Why Use Mutual Funds When it comes to using the dollar-cost averaging strategy there may be no better investment vehicle than the no-load mutual fund. The structure of these mutual funds, which are bought and sold without commission fees, could almost have been designed with dollar-cost averaging in mind. The expense ratio that mutual fund investors pay is a fixed percentage of the total contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. For example, if you made a $25 installment payment in a mutual fund that charges a 20 basis-point expense ratio, you would pay a fee of $0.05, which amounts to 0.2%. For a $250 lump-sum investment in the same fund, you would pay $0.50, or 0.2%. Several Fund Options for Dollar-Cost Averaging Still, the availability of no-load mutual funds, which by definition do not charge transaction fees, combined with their low minimum investment requirements, offers access to investing to almost everyone. In fact, many mutual funds waive required minimums for investors who set up automatic contribution plans, the plans that put dollar-cost averaging into action. To really cut the costs, you might consider index funds or exchange-traded funds (ETFs). These funds are not actively managed and are built to parallel the performance of a particular index. Since there are no management fees involved, the costs are a fraction of a percentage. A Long-Term Strategy Regardless of the amount you have to invest, dollar-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, over long periods of time, most stocks tend to move in the same general direction, swept along by larger currents in the economy. A bear market or a bull market can last for months or even years. That reduces the value of dollar-cost averaging as a short-term strategy. In addition, mutual funds and even individual stocks don't, as a general rule, change in value drastically from month to month. You have to keep your investment going through bad and good times to see the real value of dollar-cost averaging. Over time, your assets will reflect both the premium prices of a bull market and the discounts of a bear market.

https://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp

Why Money Market Funds Break The Buck

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-marketfund.asp">Money market funds</a> are often thought of as cash and a safe place to park money that isn't invested elsewhere. Investing in 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> fund is a low-risk, low-return investment in a pool of very secure, very <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidasset.asp">liquid</a>, <a data-component="link" data-ordinal="4" 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_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">Money market</a> funds seek stability and security with the goal of never losing money and keeping <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset value</a> (NAV) at $1.<span class="ql-inline-citation" data-cite="5"></span>This one-buck NAV baseline gives rise to the phrase "<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breaking-the-buck.asp">break the buck</a>," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> However, this only happens very rarely, but because money market funds are not <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">FDIC</a>-insured, meaning that money market funds can lose money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_7-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Why Money Market Funds Break The Buck" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/hXv6Q_IumjayqZcSKvcomldkAfE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/hXv6Q_IumjayqZcSKvcomldkAfE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg" data-srcset="https://www.investopedia.com/thmb/n5jmgZnkuoIZ2uG9_E43RVhsBvw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Why Money Market Funds Break The Buck" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/hXv6Q_IumjayqZcSKvcomldkAfE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg" srcset="https://www.investopedia.com/thmb/n5jmgZnkuoIZ2uG9_E43RVhsBvw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Ellen Lindner</p></span> </figcaption></figure> <span class="heading-toc" id="toc-insecurity-in-the-money-market"></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"> Insecurity in the (Money) Market </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> While investors are typically aware that money market funds are not as safe as 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> in a bank, they treat them as such because, as their track record shows, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp">they are very close</a>. But given the rocky market events of 2008, many did wonder if their money market funds would break the buck. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In the history of the money market, dating back to 1971, less than a handful of funds broke the buck until the 2008 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-crisis.asp">financial crisis</a>.<span class="ql-inline-citation" data-cite="6"></span> In 1994, a small money market fund that invested in adjustable-rate securities got caught when interest rates increased and paid out only 96 cents for every dollar invested. But as this was an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalfund.asp">institutional fund</a>, no individual investor lost money, and 37 years passed without a single individual investor losing a cent.<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"> In 2008 however, the day after <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lehman-brothers.asp">Lehman Brothers</a> Holdings Inc. filed for <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankrun.asp">bank run</a> in money markets as there was fear that more funds would break the buck.<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_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>In a money market fund, investors are buying securities, and the brokerage is holding them.</li><li>In a money market deposit account, investors are depositing money in the bank.</li><li>In a money market deposit account, the bank is investing it for itself and paying the investor the agreed-upon return.</li><li>The FDIC does not insure money market funds. It does guarantee money market deposit accounts.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Shortly thereafter, another fund announced that it was liquidating due to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redemption.asp">redemptions</a>, but the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/fdicinsurance.asp#">investors would be protected</a> to $1 NAV.<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_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerageaccount.asp">brokerage accounts</a> sweep cash into money market funds as a default holding investment until the funds can be invested elsewhere.</p></div></div></div> <span class="heading-toc" id="toc-a-track-record-of-safety"></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"> A Track Record of Safety </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> There are three main reasons that money market funds have a safe track record. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a> of the debt in the portfolio is short-term (397 days or less), with a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/weightedaverage.asp">weighted average</a> portfolio maturity of 90 days or less. This allows <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfoliomanager.asp">portfolio managers</a> to quickly adjust to a changing interest rate environment, thereby reducing risk.</li> <li>The <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditquality.asp">credit quality</a> of the debt is limited to the highest credit quality, typically 'AAA' rated debt. Money market funds can't invest more than 5% with any one <a class="pseudoStyle" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/issuer.asp">issuer</a>, except the government, so they diversify the risk that a credit <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downgrade.asp">downgrade</a> will impact the overall fund.<span class="ql-inline-citation" data-cite="9"></span></li> <li>The participants in the market are large professional institutions that have their reputations riding on the ability to keep NAV above $1. With only the very rare case of a fund <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breaking-the-buck.asp">breaking the buck</a>, no firm wants to be singled out for this type of loss. If this were to happen, it would be devastating to the overall firm and shake the confidence of all its investors, even the ones that weren't impacted. Firms will do just about anything to avoid breaking the buck, and that adds to the safety for investors.</li> </ol> <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-readying-yourself-for-the-risks"></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"> Readying Yourself for the Risks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Although the risks are generally very low, events can put pressure on a money market fund. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or increased redemptions that weren't anticipated. </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"> Another potential issue could occur if 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> drops below the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratio</a> of the fund, which may produce a loss to the fund's investors. </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"> To reduce the risks and better protect themselves, investors should consider the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li>Review what the fund is holding. If you don't understand what you are getting into, then look for another fund.</li> <li>Keep in mind that return is tied to risk—the highest return will typically be the riskiest. One way to increase return without increasing risk is to look for funds with lower fees. The lower fee will allow for a potentially higher return without additional risk.</li> <li>Major firms are typically better funded and will be able to withstand short-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a> better than smaller firms. In some cases, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fund_company.asp">fund companies</a> will cover losses in a fund to make sure that it doesn't break the buck. All things being equal, larger is safer.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-confusion-in-the-money-market"></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"> Confusion in the Money Market </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Money market funds are sometimes called "money funds" or "money market <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>," but should not be confused with the similar-sounding <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market deposit accounts</a> offered by banks in the United States.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank, which can invest the money at its discretion—and potentially in (riskier) investments other than money market securities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> If a bank can invest the funds at higher rates than it pays on the money market deposit account, it makes a profit. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/fdicinsurance.asp">Money market deposit accounts offered by banks are FDIC insured</a>, so they are safer than money market funds. They often provide a higher yield than a passbook savings account and can be competitive with money market funds, but may have limited transactions or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-balance.asp">minimum balance</a> requirements.<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_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"> Prior to the 2008 financial crisis, only a couple of small institution funds broke the buck in the preceding 37 years.<span class="ql-inline-citation" data-cite="6"></span> During the 2008 financial crisis, the U.S. government stepped in and offered to insure any money market fund, giving rise to the expectation that it would do so again if another such calamity were to occur.<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_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> It's easy to conclude then that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/051415/what-are-benefits-investing-money-market-fund.asp">money market funds are very safe</a> and a good option for an investor that wants a higher return than a bank account can provide, and an easy place to allocate cash awaiting future investment with a high level of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>. Although it's extremely unlikely that your money market fund will break the buck, it's a possibility that shouldn't be dismissed when the right conditions arise. </p></div>

[Money market funds](https://www.investopedia.com/terms/m/money-marketfund.asp) are often thought of as cash and a safe place to park money that isn't invested elsewhere. Investing in a [money market](https://www.investopedia.com/terms/m/moneymarket.asp) fund is a low-risk, low-return investment in a pool of very secure, very [liquid](https://www.investopedia.com/terms/l/liquidasset.asp), [short-term debt](https://www.investopedia.com/terms/s/shorttermdebt.asp) instruments. [Money market](https://www.investopedia.com/terms/m/moneymarket.asp) funds seek stability and security with the goal of never losing money and keeping [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) at $1.This one-buck NAV baseline gives rise to the phrase "[break the buck](https://www.investopedia.com/terms/b/breaking-the-buck.asp)," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money. However, this only happens very rarely, but because money market funds are not [FDIC](https://www.investopedia.com/terms/f/fdic.asp)-insured, meaning that money market funds can lose money. ![Why Money Market Funds Break The Buck]() :max_bytes(150000):strip_icc()/money-market-break-buck.asp_final-1449c4d69fe34fa3b4b1a2319d17f56b.jpg) Investopedia / Ellen Lindner ## Insecurity in the (Money) Market While investors are typically aware that money market funds are not as safe as a [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp) in a bank, they treat them as such because, as their track record shows, [they are very close](https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp). But given the rocky market events of 2008, many did wonder if their money market funds would break the buck. In the history of the money market, dating back to 1971, less than a handful of funds broke the buck until the 2008 [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp). In 1994, a small money market fund that invested in adjustable-rate securities got caught when interest rates increased and paid out only 96 cents for every dollar invested. But as this was an [institutional fund](https://www.investopedia.com/terms/i/institutionalfund.asp), no individual investor lost money, and 37 years passed without a single individual investor losing a cent. In 2008 however, the day after [Lehman Brothers](https://www.investopedia.com/terms/l/lehman-brothers.asp) Holdings Inc. filed for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp), one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a [bank run](https://www.investopedia.com/terms/b/bankrun.asp) in money markets as there was fear that more funds would break the buck. ### Key Takeaways * In a money market fund, investors are buying securities, and the brokerage is holding them. * In a money market deposit account, investors are depositing money in the bank. * In a money market deposit account, the bank is investing it for itself and paying the investor the agreed-upon return. * The FDIC does not insure money market funds. It does guarantee money market deposit accounts. Shortly thereafter, another fund announced that it was liquidating due to [redemptions](https://www.investopedia.com/terms/r/redemption.asp), but the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, [investors would be protected](https://www.investopedia.com/articles/pf/06/fdicinsurance.asp#) to $1 NAV. ### Many [brokerage accounts](https://www.investopedia.com/terms/b/brokerageaccount.asp) sweep cash into money market funds as a default holding investment until the funds can be invested elsewhere. ## A Track Record of Safety There are three main reasons that money market funds have a safe track record. 1. The [maturity](https://www.investopedia.com/terms/m/maturity.asp) of the debt in the portfolio is short-term (397 days or less), with a [weighted average](https://www.investopedia.com/terms/w/weightedaverage.asp) portfolio maturity of 90 days or less. This allows [portfolio managers](https://www.investopedia.com/terms/p/portfoliomanager.asp) to quickly adjust to a changing interest rate environment, thereby reducing risk. 2. The [credit quality](https://www.investopedia.com/terms/c/creditquality.asp) of the debt is limited to the highest credit quality, typically 'AAA' rated debt. Money market funds can't invest more than 5% with any one [issuer](https://www.investopedia.com/terms/i/issuer.asp), except the government, so they diversify the risk that a credit [downgrade](https://www.investopedia.com/terms/d/downgrade.asp) will impact the overall fund. 3. The participants in the market are large professional institutions that have their reputations riding on the ability to keep NAV above $1. With only the very rare case of a fund [breaking the buck](https://www.investopedia.com/terms/b/breaking-the-buck.asp), no firm wants to be singled out for this type of loss. If this were to happen, it would be devastating to the overall firm and shake the confidence of all its investors, even the ones that weren't impacted. Firms will do just about anything to avoid breaking the buck, and that adds to the safety for investors. ## Readying Yourself for the Risks Although the risks are generally very low, events can put pressure on a money market fund. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or increased redemptions that weren't anticipated. Another potential issue could occur if the [fed funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) drops below the [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of the fund, which may produce a loss to the fund's investors. To reduce the risks and better protect themselves, investors should consider the following: * Review what the fund is holding. If you don't understand what you are getting into, then look for another fund. * Keep in mind that return is tied to risk—the highest return will typically be the riskiest. One way to increase return without increasing risk is to look for funds with lower fees. The lower fee will allow for a potentially higher return without additional risk. * Major firms are typically better funded and will be able to withstand short-term [volatility](https://www.investopedia.com/terms/v/volatility.asp) better than smaller firms. In some cases, [fund companies](https://www.investopedia.com/terms/f/fund_company.asp) will cover losses in a fund to make sure that it doesn't break the buck. All things being equal, larger is safer. ## Confusion in the Money Market Money market funds are sometimes called "money funds" or "money market [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp)," but should not be confused with the similar-sounding [money market deposit accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp) offered by banks in the United States. The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank, which can invest the money at its discretion—and potentially in (riskier) investments other than money market securities. If a bank can invest the funds at higher rates than it pays on the money market deposit account, it makes a profit. [Money market deposit accounts offered by banks are FDIC insured](https://www.investopedia.com/articles/pf/06/fdicinsurance.asp), so they are safer than money market funds. They often provide a higher yield than a passbook savings account and can be competitive with money market funds, but may have limited transactions or [minimum balance](https://www.investopedia.com/terms/m/minimum-balance.asp) requirements. ## The Bottom Line Prior to the 2008 financial crisis, only a couple of small institution funds broke the buck in the preceding 37 years. During the 2008 financial crisis, the U.S. government stepped in and offered to insure any money market fund, giving rise to the expectation that it would do so again if another such calamity were to occur. It's easy to conclude then that [money market funds are very safe](https://www.investopedia.com/ask/answers/051415/what-are-benefits-investing-money-market-fund.asp) and a good option for an investor that wants a higher return than a bank account can provide, and an easy place to allocate cash awaiting future investment with a high level of [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). Although it's extremely unlikely that your money market fund will break the buck, it's a possibility that shouldn't be dismissed when the right conditions arise.

Money market funds are often thought of as cash and a safe place to park money that isn't invested elsewhere. Investing in a money market fund is a low-risk, low-return investment in a pool of very secure, very liquid, short-term debt instruments. Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1.This one-buck NAV baseline gives rise to the phrase "break the buck," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money. However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money. Investopedia / Ellen Lindner Insecurity in the (Money) Market While investors are typically aware that money market funds are not as safe as a savings account in a bank, they treat them as such because, as their track record shows, they are very close. But given the rocky market events of 2008, many did wonder if their money market funds would break the buck. In the history of the money market, dating back to 1971, less than a handful of funds broke the buck until the 2008 financial crisis. In 1994, a small money market fund that invested in adjustable-rate securities got caught when interest rates increased and paid out only 96 cents for every dollar invested. But as this was an institutional fund, no individual investor lost money, and 37 years passed without a single individual investor losing a cent. In 2008 however, the day after Lehman Brothers Holdings Inc. filed for bankruptcy, one money market fund fell to 97 cents after writing off the debt it owned that was issued by Lehman. This created the potential for a bank run in money markets as there was fear that more funds would break the buck. Key Takeaways In a money market fund, investors are buying securities, and the brokerage is holding them.In a money market deposit account, investors are depositing money in the bank.In a money market deposit account, the bank is investing it for itself and paying the investor the agreed-upon return.The FDIC does not insure money market funds. It does guarantee money market deposit accounts. Shortly thereafter, another fund announced that it was liquidating due to redemptions, but the next day the United States Treasury announced a program to insure the holdings of publicly offered money market funds so that should a covered fund break the buck, investors would be protected to $1 NAV. Many brokerage accounts sweep cash into money market funds as a default holding investment until the funds can be invested elsewhere. A Track Record of Safety There are three main reasons that money market funds have a safe track record. The maturity of the debt in the portfolio is short-term (397 days or less), with a weighted average portfolio maturity of 90 days or less. This allows portfolio managers to quickly adjust to a changing interest rate environment, thereby reducing risk. The credit quality of the debt is limited to the highest credit quality, typically 'AAA' rated debt. Money market funds can't invest more than 5% with any one issuer, except the government, so they diversify the risk that a credit downgrade will impact the overall fund. The participants in the market are large professional institutions that have their reputations riding on the ability to keep NAV above $1. With only the very rare case of a fund breaking the buck, no firm wants to be singled out for this type of loss. If this were to happen, it would be devastating to the overall firm and shake the confidence of all its investors, even the ones that weren't impacted. Firms will do just about anything to avoid breaking the buck, and that adds to the safety for investors. Readying Yourself for the Risks Although the risks are generally very low, events can put pressure on a money market fund. For example, there can be sudden shifts in interest rates, major credit quality downgrades for multiple firms and/or increased redemptions that weren't anticipated. Another potential issue could occur if the fed funds rate drops below the expense ratio of the fund, which may produce a loss to the fund's investors. To reduce the risks and better protect themselves, investors should consider the following: Review what the fund is holding. If you don't understand what you are getting into, then look for another fund. Keep in mind that return is tied to risk—the highest return will typically be the riskiest. One way to increase return without increasing risk is to look for funds with lower fees. The lower fee will allow for a potentially higher return without additional risk. Major firms are typically better funded and will be able to withstand short-term volatility better than smaller firms. In some cases, fund companies will cover losses in a fund to make sure that it doesn't break the buck. All things being equal, larger is safer. Confusion in the Money Market Money market funds are sometimes called "money funds" or "money market mutual funds," but should not be confused with the similar-sounding money market deposit accounts offered by banks in the United States. The major difference is that money market funds are assets held by a brokerage, or possibly a bank, whereas money market deposit accounts are liabilities for a bank, which can invest the money at its discretion—and potentially in (riskier) investments other than money market securities. If a bank can invest the funds at higher rates than it pays on the money market deposit account, it makes a profit. Money market deposit accounts offered by banks are FDIC insured, so they are safer than money market funds. They often provide a higher yield than a passbook savings account and can be competitive with money market funds, but may have limited transactions or minimum balance requirements. The Bottom Line Prior to the 2008 financial crisis, only a couple of small institution funds broke the buck in the preceding 37 years. During the 2008 financial crisis, the U.S. government stepped in and offered to insure any money market fund, giving rise to the expectation that it would do so again if another such calamity were to occur. It's easy to conclude then that money market funds are very safe and a good option for an investor that wants a higher return than a bank account can provide, and an easy place to allocate cash awaiting future investment with a high level of liquidity. Although it's extremely unlikely that your money market fund will break the buck, it's a possibility that shouldn't be dismissed when the right conditions arise.

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

Short Position: Meaning, Overview and 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-a-short-or-short-position"></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 (or Short Position) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nakedshorting.asp">naked short</a> is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. It is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/short-selling-india.asp#citation-10">banned fully in India</a> and other countries. A covered short is when a trader borrows the shares from a stock loan department; in return, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012915/how-long-can-trader-keep-short-position.asp">trader pays a borrowing rate</a> during the time the short position is in place. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In the futures or foreign exchange markets, short positions can be created at any time. </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 short position refers to a trading technique in which an investor sells a security with plans to buy it later.</li><li>Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term.</li><li>In common practice, short sellers borrow shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Short Position: Betting that a security will decrease in value." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/0FsKsIRH6-iarqgKhzeDVt7t_LI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/0FsKsIRH6-iarqgKhzeDVt7t_LI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.png" data-srcset="https://www.investopedia.com/thmb/ZeHYlLYUx79EslRSyUyF5j_zwlo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Short Position: Betting that a security will decrease in value." class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/0FsKsIRH6-iarqgKhzeDVt7t_LI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.png" srcset="https://www.investopedia.com/thmb/ZeHYlLYUx79EslRSyUyF5j_zwlo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.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 / NoNo Flores</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-short-positions"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Understanding Short Positions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> When creating a short position, one must understand that the trader has a finite potential to earn a profit and infinite potential for losses. That is because the potential for a profit is limited to the stock's distance to zero. However, a stock could potentially rise for years, making a series of higher highs. One of the most dangerous aspects of being short is the potential for a short squeeze.  </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 short squeeze is when a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/shortedstock.asp">heavily shorted stock</a> suddenly begins to increase in price as traders that are short begin to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortcovering.asp">cover</a> the stock. One famous short squeeze occurred in October 2008, when the shares of Volkswagen surged higher as short sellers scrambled to cover their shares. During the short squeeze, the stock rose from roughly €200 to €1,000 in a little over a month. </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:47.2%;"> <img alt="Share price chart of Volkswagen AG, showing steep rise resulting from short squeeze in 2008" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/HkEgAtcdxAmVZggMqrO0JJspEc4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/HkEgAtcdxAmVZggMqrO0JJspEc4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg" data-srcset="https://www.investopedia.com/thmb/gn5RaYcfxo6slk3BgWI1qh8whJE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg 750w" data-tracking-container="true" height="2959" id="mntl-sc-block-image_2-0" width="6263"/> <noscript> <img alt="Share price chart of Volkswagen AG, showing steep rise resulting from short squeeze in 2008" class="img--noscript universal-image__image" height="2959" sizes="750px" src="https://www.investopedia.com/thmb/HkEgAtcdxAmVZggMqrO0JJspEc4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg" srcset="https://www.investopedia.com/thmb/gn5RaYcfxo6slk3BgWI1qh8whJE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg 750w" width="6263"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Image by Sabrina Jiang © Investopedia 2022</p></span> </figcaption></figure> <span class="heading-toc" id="toc-how-to-set-up-a-short-position"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_17-0"> <span class="mntl-sc-block-heading__text"> How to Set Up a Short Position </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In order to place a short order, an investor must first have access to this type of order within their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/types-brokerage-accounts/">brokerage account</a>. Since margin and interest will be incurred in a short trade, this means that you need to have a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marginaccount.asp">margin account</a> in order to set up a short position. Once you have the correct type of account, along with any necessary permissions, the order details are entered on the order screen just like for any other trade. </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"> Just remember that you are selling first to open a position in hopes of closing the trade by buying the asset back in the future at a lower price. In the case of a short position, the entry price is the sale price, while the exit price is the buy price. It is also important to remember that trading on margin does entail interest, margin requirements, and possibly other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-fee.asp">brokerage fees</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-example-of-a-successful-short-position"></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 Successful Short Position </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> A trader thinks that Amazon's stock is poised to fall after it reports quarterly results. To take advantage of this possibility, the trader borrows 1,000 shares of the stock from his stock loan department with the intent to short the stock. The trader then goes out and sells short the 1,000 shares for $1,500. In the following weeks, the company reports weaker-than-expected revenue and guides for a weaker-than-expected forward quarter. As a result, the stock plunges to $1,300; the trader then buys to cover the short position. The trade results in a gain of $200 per share, or $200,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_25-0"><span class="heading-toc" id="toc-what-is-margin"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Margin?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. For example, a short position cannot be established without sufficient margin. In the case of short sales, under <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulationt.asp">Regulation T</a>, the Federal Reserve Board requires all short sale accounts to have 150% of the value of the short sale at the time the sale is initiated. The 150% consists of the full value of the short sale proceeds (100%), plus an additional margin requirement of 50% of the value of the short sale.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_27-0"><span class="heading-toc" id="toc-how-much-can-i-lose-on-a-short-position"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Can I Lose on a Short Position?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Short selling occurs when a trader borrows a security and sells it on the open market, planning to buy it back later for less money. Theoretically, the price of an asset has no upper bound and can climb to infinity. This means that, in theory, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/shortsaleloss.asp">risk of loss on a short</a> position is unlimited.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_29-0"><span class="heading-toc" id="toc-what-is-a-short-squeeze"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Short Squeeze?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Short positions represent borrowed shares that have been sold in anticipation of buying them back in the future. As the underlying asset prices rise, investors are faced with losses to their short position. Aside from the pressure of mounting paper losses, maintaining a short position can also become more difficult because, if the price of the underlying asset rises, so does the amount of margin required as collateral to ensure that the investor will be able to buy back the shares and return them to the broker. When investors are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050715/what-difference-between-short-squeeze-and-short-covering.asp">forced to buy back shares to cover</a> their position, it is referred to as a short squeeze. If enough short sellers are forced to buy back shares at the same time, then it can result in a surge in demand for shares and therefore an extremely sharp rise in the underlying asset's price.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> While it sounds illegal to sell something you don't own, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/110614/why-short-selling-legal-brief-history.asp">market is tightly regulated</a>. When traders believe that a security's price is likely to decline in the near term, they may enter a short position by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/070715/trading-stage-analysis.asp">selling the security first</a> with the intention of buying it later at a lower price. To set up a short position, traders generally borrow shares of the security from their brokerage. This means that going short requires a margin account, as well as other potential permissions and possible broker fees. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If the price of a shorted security begins to rise rather than fall, the losses can mount up quickly. In fact, since the price of the security has no ceiling, the losses on a short position are theoretically unlimited. Given this inherent riskiness and the complexity of the transaction, shorting securities is generally recommended only for more advanced traders and investors. </p></div>

## What Is a Short (or Short Position) A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. A [naked short](https://www.investopedia.com/terms/n/nakedshorting.asp) is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. It is [banned fully in India](https://www.investopedia.com/ask/answers/09/short-selling-india.asp#citation-10) and other countries. A covered short is when a trader borrows the shares from a stock loan department; in return, the [trader pays a borrowing rate](https://www.investopedia.com/ask/answers/012915/how-long-can-trader-keep-short-position.asp) during the time the short position is in place. In the futures or foreign exchange markets, short positions can be created at any time. ### Key Takeaways * A short position refers to a trading technique in which an investor sells a security with plans to buy it later. * Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term. * In common practice, short sellers borrow shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place. ![Short Position: Betting that a security will decrease in value.]() :max_bytes(150000):strip_icc()/short.asp-finalv2-8fca874f91704f4db4fc393ee25c9fb7.png) Investopedia / NoNo Flores ## Understanding Short Positions When creating a short position, one must understand that the trader has a finite potential to earn a profit and infinite potential for losses. That is because the potential for a profit is limited to the stock's distance to zero. However, a stock could potentially rise for years, making a series of higher highs. One of the most dangerous aspects of being short is the potential for a short squeeze.  A short squeeze is when a [heavily shorted stock](https://www.investopedia.com/ask/answers/06/shortedstock.asp) suddenly begins to increase in price as traders that are short begin to [cover](https://www.investopedia.com/terms/s/shortcovering.asp) the stock. One famous short squeeze occurred in October 2008, when the shares of Volkswagen surged higher as short sellers scrambled to cover their shares. During the short squeeze, the stock rose from roughly €200 to €1,000 in a little over a month. ![Share price chart of Volkswagen AG, showing steep rise resulting from short squeeze in 2008]() :max_bytes(150000):strip_icc()/dotdash_Final_Short_Short_Position_Sep_2020-01-efaa3113009c4bdbb42f0fcc7ad4f653.jpg) Image by Sabrina Jiang © Investopedia 2022 ## How to Set Up a Short Position In order to place a short order, an investor must first have access to this type of order within their [brokerage account](https://www.investopedia.com/investing/types-brokerage-accounts/). Since margin and interest will be incurred in a short trade, this means that you need to have a [margin account](https://www.investopedia.com/terms/m/marginaccount.asp) in order to set up a short position. Once you have the correct type of account, along with any necessary permissions, the order details are entered on the order screen just like for any other trade. Just remember that you are selling first to open a position in hopes of closing the trade by buying the asset back in the future at a lower price. In the case of a short position, the entry price is the sale price, while the exit price is the buy price. It is also important to remember that trading on margin does entail interest, margin requirements, and possibly other [brokerage fees](https://www.investopedia.com/terms/b/brokerage-fee.asp). ## Example of a Successful Short Position A trader thinks that Amazon's stock is poised to fall after it reports quarterly results. To take advantage of this possibility, the trader borrows 1,000 shares of the stock from his stock loan department with the intent to short the stock. The trader then goes out and sells short the 1,000 shares for $1,500. In the following weeks, the company reports weaker-than-expected revenue and guides for a weaker-than-expected forward quarter. As a result, the stock plunges to $1,300; the trader then buys to cover the short position. The trade results in a gain of $200 per share, or $200,000. ## What Is Margin? In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. For example, a short position cannot be established without sufficient margin. In the case of short sales, under [Regulation T](https://www.investopedia.com/terms/r/regulationt.asp), the Federal Reserve Board requires all short sale accounts to have 150% of the value of the short sale at the time the sale is initiated. The 150% consists of the full value of the short sale proceeds (100%), plus an additional margin requirement of 50% of the value of the short sale. ## How Much Can I Lose on a Short Position? Short selling occurs when a trader borrows a security and sells it on the open market, planning to buy it back later for less money. Theoretically, the price of an asset has no upper bound and can climb to infinity. This means that, in theory, the [risk of loss on a short](https://www.investopedia.com/ask/answers/05/shortsaleloss.asp) position is unlimited. ## What Is a Short Squeeze? Short positions represent borrowed shares that have been sold in anticipation of buying them back in the future. As the underlying asset prices rise, investors are faced with losses to their short position. Aside from the pressure of mounting paper losses, maintaining a short position can also become more difficult because, if the price of the underlying asset rises, so does the amount of margin required as collateral to ensure that the investor will be able to buy back the shares and return them to the broker. When investors are [forced to buy back shares to cover](https://www.investopedia.com/ask/answers/050715/what-difference-between-short-squeeze-and-short-covering.asp) their position, it is referred to as a short squeeze. If enough short sellers are forced to buy back shares at the same time, then it can result in a surge in demand for shares and therefore an extremely sharp rise in the underlying asset's price. ## The Bottom Line While it sounds illegal to sell something you don't own, the [market is tightly regulated](https://www.investopedia.com/articles/investing/110614/why-short-selling-legal-brief-history.asp). When traders believe that a security's price is likely to decline in the near term, they may enter a short position by [selling the security first](https://www.investopedia.com/articles/investing/070715/trading-stage-analysis.asp) with the intention of buying it later at a lower price. To set up a short position, traders generally borrow shares of the security from their brokerage. This means that going short requires a margin account, as well as other potential permissions and possible broker fees. If the price of a shorted security begins to rise rather than fall, the losses can mount up quickly. In fact, since the price of the security has no ceiling, the losses on a short position are theoretically unlimited. Given this inherent riskiness and the complexity of the transaction, shorting securities is generally recommended only for more advanced traders and investors.

What Is a Short (or Short Position) A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short a security when she believes that the price of that security is likely to decrease in the near future. There are two types of short positions: naked and covered. A naked short is when a trader sells a security without having possession of it. However, that practice is illegal in the U.S. for equities. It is banned fully in India and other countries. A covered short is when a trader borrows the shares from a stock loan department; in return, the trader pays a borrowing rate during the time the short position is in place. In the futures or foreign exchange markets, short positions can be created at any time. Key Takeaways A short position refers to a trading technique in which an investor sells a security with plans to buy it later.Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term.In common practice, short sellers borrow shares of stock from an investment bank or other financial institution, paying a fee to borrow the shares while the short position is in place. Investopedia / NoNo Flores Understanding Short Positions When creating a short position, one must understand that the trader has a finite potential to earn a profit and infinite potential for losses. That is because the potential for a profit is limited to the stock's distance to zero. However, a stock could potentially rise for years, making a series of higher highs. One of the most dangerous aspects of being short is the potential for a short squeeze.  A short squeeze is when a heavily shorted stock suddenly begins to increase in price as traders that are short begin to cover the stock. One famous short squeeze occurred in October 2008, when the shares of Volkswagen surged higher as short sellers scrambled to cover their shares. During the short squeeze, the stock rose from roughly €200 to €1,000 in a little over a month. Image by Sabrina Jiang © Investopedia 2022 How to Set Up a Short Position In order to place a short order, an investor must first have access to this type of order within their brokerage account. Since margin and interest will be incurred in a short trade, this means that you need to have a margin account in order to set up a short position. Once you have the correct type of account, along with any necessary permissions, the order details are entered on the order screen just like for any other trade. Just remember that you are selling first to open a position in hopes of closing the trade by buying the asset back in the future at a lower price. In the case of a short position, the entry price is the sale price, while the exit price is the buy price. It is also important to remember that trading on margin does entail interest, margin requirements, and possibly other brokerage fees. Example of a Successful Short Position A trader thinks that Amazon's stock is poised to fall after it reports quarterly results. To take advantage of this possibility, the trader borrows 1,000 shares of the stock from his stock loan department with the intent to short the stock. The trader then goes out and sells short the 1,000 shares for $1,500. In the following weeks, the company reports weaker-than-expected revenue and guides for a weaker-than-expected forward quarter. As a result, the stock plunges to $1,300; the trader then buys to cover the short position. The trade results in a gain of $200 per share, or $200,000. What Is Margin? In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange. For example, a short position cannot be established without sufficient margin. In the case of short sales, under Regulation T, the Federal Reserve Board requires all short sale accounts to have 150% of the value of the short sale at the time the sale is initiated. The 150% consists of the full value of the short sale proceeds (100%), plus an additional margin requirement of 50% of the value of the short sale. How Much Can I Lose on a Short Position? Short selling occurs when a trader borrows a security and sells it on the open market, planning to buy it back later for less money. Theoretically, the price of an asset has no upper bound and can climb to infinity. This means that, in theory, the risk of loss on a short position is unlimited. What Is a Short Squeeze? Short positions represent borrowed shares that have been sold in anticipation of buying them back in the future. As the underlying asset prices rise, investors are faced with losses to their short position. Aside from the pressure of mounting paper losses, maintaining a short position can also become more difficult because, if the price of the underlying asset rises, so does the amount of margin required as collateral to ensure that the investor will be able to buy back the shares and return them to the broker. When investors are forced to buy back shares to cover their position, it is referred to as a short squeeze. If enough short sellers are forced to buy back shares at the same time, then it can result in a surge in demand for shares and therefore an extremely sharp rise in the underlying asset's price. The Bottom Line While it sounds illegal to sell something you don't own, the market is tightly regulated. When traders believe that a security's price is likely to decline in the near term, they may enter a short position by selling the security first with the intention of buying it later at a lower price. To set up a short position, traders generally borrow shares of the security from their brokerage. This means that going short requires a margin account, as well as other potential permissions and possible broker fees. If the price of a shorted security begins to rise rather than fall, the losses can mount up quickly. In fact, since the price of the security has no ceiling, the losses on a short position are theoretically unlimited. Given this inherent riskiness and the complexity of the transaction, shorting securities is generally recommended only for more advanced traders and investors.

https://www.investopedia.com/terms/s/sp_500_mini.asp

E-mini S&P 500: Definition, Trading, 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-the-e-mini-sp-500"></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 E-mini S&amp;P 500? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An E-mini S&amp;P 500 is an electronically traded futures and options contract on the Chicago Mercantile Exchange (CME). Launched by the CME in 1997, the E-mini S&amp;P 500 is open to all investors.<span class="ql-inline-citation" data-cite="9"></span> It enables them to hedge their bets or speculate on the price moves of the S&amp;P 500 index. The contract is cash-settled and is priced at $50 times the value of the S&amp;P 500. Its value is one-fifth of the now-delisted standard-sized S&amp;P 500 futures contract.<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_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The S&amp;P 500 E-mini is a futures contract based on the S&amp;P 500 index.</li><li>It was the first E-mini index futures contract launched by the CME in 1997.</li><li>The E-mini S&amp;P 500 is priced at $50 times the value of the index.</li><li>It offers ease of trading, low volatility and margin rates, liquidity, and greater affordability.</li><li>Investors and traders can use these contracts to hedge or speculate on the index's movement.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-e-mini-sp-500"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding the E-mini S&amp;P 500 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The S&amp;P 500 index tracks the 500 largest U.S. publicly traded companies by market value and is a common benchmark used for the broader U.S. equity markets. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">Futures</a> are financial contracts that obligate the trader to buy or sell an asset at a predetermined price by a set date. They detail the quality and quantity of the underlying asset and are standardized for trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. </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 CME developed a series of standard contracts that were typically only available to institutional investors. With more investors seeking alternative investment options, the exchange launched smaller futures contracts called E-mini. They make futures trading accessible to a variety of traders, including retail investors. </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"> E-mini contracts are traded on the CME and other international exchanges. They cover a variety of assets: </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><strong>Indexes: </strong>S&amp;P 500, Dow Jones Industrial Average, Nasdaq 100, Russell 2000, FTSE 100, Hang Seng</li><li><strong>Commodities:</strong> Oil, wheat, copper, gold, soybeans, natural gas, corn</li><li><strong>Currencies: </strong>Euro</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"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contractsize.asp">contract size</a> of an E-mini is the value of the contract based on the price of the futures contract times a contract-specific multiplier. The E-mini S&amp;P 500 has a contract size of $50 times the value of the S&amp;P 500.<span class="ql-inline-citation" data-cite="10"></span> So, if the S&amp;P 500 is trading at 2,580, the value of the contract would be $129,000 ($50 x 2,580). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> To trade E-minis, investors must open an account with a brokerage firm. Because they can be traded almost round the clock and have low volatility, margin rates, liquidity, and greater affordability, many active traders view the E-mini S&amp;P 500 as their preferred trading instrument for the index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The E-mini S&amp;P 500 is the most actively traded futures contract in the world.<span class="ql-inline-citation" data-cite="11"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Most futures strategies are possible with E-minis, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spread.asp">spread</a> trading. This is a strategy that investors and traders can use to speculate on financial markets. A spread is the difference between a buy and sell price. The smaller the spread, the cheaper the trade. Conversely, a larger difference between prices indicates a more expensive trade. </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"> E-mini <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volumeoftrade.asp">trading volumes</a> eclipsed those of the standard contract when it was delisted, indicating the E-mini's popularity among individual and institutional investors alike. Both favored the E-mini for its high liquidity and the ability to trade a substantial number of contracts. </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 S&amp;P 500 E-mini can move quickly, especially during high-impact news releases, so it's recommended that traders have significantly more than the minimum required day trading margin in their account to help avoid margin calls or having positions liquidated by the broker. </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"> Many traders suggest that only 1% to 2% of account equity should be risked on any single trade. In this case, the trader is risking $525. Therefore, if they want to keep the risk to 1% to 2% of their account balance, they should have at least $26,250 to $52,500 in their account ($525 x 50 and $525 x 100).<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-specifics-about-the-e-mini-sp-500-contracts"></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"> Specifics About the E-mini S&amp;P 500 Contracts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The E-mini S&amp;P 500 trades on CME <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/globex.asp">Globex</a> under ticker ES. It has standard specifications, which allows for easy trading. Electronic trading takes place between 6 p.m. Sunday and 5 p.m. ET. Friday with a daily maintenance break between 5 p.m. and 6 p.m. ET.<span class="ql-inline-citation" data-cite="10"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Contracts are available quarterly with March, June, September, and December expiry dates.<span class="ql-inline-citation" data-cite="10"></span> They are financially- or cash-settled contracts, which means traders receive a cash credit or debit based on the contract's settlement price. As such, the S&amp;P index or stocks don't need to be delivered if the contract is held until expiration. </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"> As noted, the value of the contract is $50 x the S&amp;P 500 index value. What matters to most traders is the minimum price fluctuation and tick value, as this determines profit or losses on the contract. The E-mini moves in 0.25-point increments, and each one of those increments equates to $12.50 on one contract.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="1"></span> Therefore, a one-point move, which is four ticks, means $50 is gained or lost.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <span class="heading-toc" id="toc-history-of-the-e-mini-sp-500"></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"> History of the E-mini S&amp;P 500 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The CME introduced the standard-sized stock index futures contract in 1982. This first contract was based on the S&amp;P 500 and traded on the CME under the Globex ticker SP.<span class="ql-inline-citation" data-cite="9"></span> The price for the full-sized contract was $250 times the value of the S&amp;P 500. This means if the index value was 2,500, the contract was worth $250 times that number, or $625,000. </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"> This was aimed at large institutional investors who used the standard contract as a hedge or a speculative tool. However, the value of the full-sized S&amp;P 500 contract was too large for most small traders, many of whom were interested in these contracts if they were affordable. </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"> In response to this demand, the CME launched the first E-mini contract in September 1997.<span class="ql-inline-citation" data-cite="9"></span> Like the standard-sized contract, the first E-mini was based on the S&amp;P 500. Its value was one-fifth that of the full-sized contract.<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_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Both functioned the same. Investors and traders used them both for hedging and speculating. The E-mini just opened up the landscape for smaller investors to take part. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The daily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlementprice.asp">settlement prices</a> for the E-minis were essentially the same as those of the regular-sized contract, though they differed slightly because of rounding. This meant a position with five E-mini S&amp;P 500 futures contracts had the same financial value as one full-sized contract in the same contract month before the full-sized version ended in 2021.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The CME delisted the standard- or full-sized contracts for S&amp;P 500 futures and options in September 2021.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <span class="heading-toc" id="toc-example-of-an-e-mini-sp-500-trade"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-heading__text"> Example of an E-mini S&amp;P 500 Trade </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Let's assume that the S&amp;P 500 is trading at 2,965, and you seek a breakout above the 2,970 on the E-mini S&amp;P 500, where short-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/resistance.asp">resistance</a> has formed. You believe that if the price can break above that level, it will go to 3,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> When the price moves above 2,970, you purchase one contract. Assuming you get a price of 2,970.50, you do the following: </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>Put in a stop-loss order at 2,960, resulting in a risk of 10.5 points. Each point is worth $50, so your risk is $525 ($50 × 10.5).</li> <li>Put in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/limitorder.asp">limit order</a> to sell at the target level of 3,000. If the target is reached, the profit is $1,475: $50 × (3,000 - 2970.50).</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> You're not required to buy the full contract, valued at $148,525 ($50 × 2,970.50) at the time. Instead, you have to put up a margin. If you only hold the position for the day, you must only post a day-trading margin. With some futures brokers, this can be as low as $400. </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 this case, you could lose $525 on the trade plus commissions, so if the margin is $400, you would want to have at least $925 plus the cost of commissions in your account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <span class="heading-toc" id="toc-pros-and-cons-of-the-e-mini-sp-500"></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"> Pros and Cons of the E-mini S&amp;P 500 </span> </h2> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_61-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_62-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Trading the E-mini S&amp;P 500</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 affordable than standard S&amp;P 500 futures<br/></p></li> <li><p>Offers diverse investment opportunities</p></li> <li><p>Highly adaptable to market conditions</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>Leverage increases potential losses<br/></p></li> <li><p>High risk if S&amp;P 500 value drops</p></li> <li><p>Requires careful management</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> The E-mini S&amp;P 500's primary advantage lies in its affordability compared with now-defunct traditional S&amp;P 500 contracts. The E-mini S&amp;P 500 also offers market efficiency, which can lead to more accurate pricing and increased liquidity. In addition, it is very adaptable to different of investment strategies, and you can also use it to respond quickly to changing market conditions, making it an attractive choice for many.<br/> </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"> On the flip side, the E-mini S&amp;P 500 also carries certain risks that must be considered carefully. The same leverage that can significantly magnify gains can amplify losses. When the S&amp;P 500 index's market value drops, investors face substantial financial setbacks. Therefore, despite its numerous advantages, the E-mini S&amp;P 500 requires a comprehensive understanding of the market, calculated trading strategies, and careful risk management because of these inherent risks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-how-do-i-trade-e-mini-sp-500-futures"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Trade E-mini S&amp;P 500 Futures?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>To trade E-mini S&amp;P 500 futures, you must open an account with a brokerage firm. Once you do, choose your trading strategy and monitor the market until the contract expires.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-what-are-the-advantages-of-trading-e-mini-sp-500-futures-over-individual-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Advantages of Trading E-mini S&amp;P 500 Futures Over Individual Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Trading E-mini S&amp;P 500 futures offers several potential benefits over individual stocks, including diversification, since each contract is based on the broad market performance of the S&amp;P 500 index, reducing the risk of the volatility of individual stocks. In addition, the futures market operates nearly 24 hours, providing more flexibility for traders to respond to global economic events outside regular stock market hours. The leverage in futures trading could also lead to a higher return on investment, though this comes with increased risk. As such, any investments in this area should be done with a well-thought-out and prudent strategy.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_72-0"><span class="heading-toc" id="toc-how-do-i-use-e-mini-sp-500-futures-to-hedge-my-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Use E-mini S&amp;P 500 Futures To Hedge My Portfolio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>By taking a position in the futures market opposite to your stock market holdings, you can help protect yourself against losses from market downturns. For example, if you hold a portfolio of stocks that mirrors the S&amp;P 500 and expect a market decline, you might short sell E-mini S&amp;P 500 futures to offset potential losses in your stock portfolio.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_74-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The E-mini S&amp;P 500 boasts several advantages, including affordability, ease of trading, and liquidity. It's a potent tool for hedging and speculating on the S&amp;P 500 index's movement. However, it's not without its downsides. The leverage that can magnify gains also has the potential to increase losses. Despite these risks, the E-mini S&amp;P 500 remains an accessible and appealing investment option, offering a balance of benefits for informed investors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> <em><strong>Correction—Jan. 18, 2024:</strong> </em>This article has been corrected to state that the E-mini S&amp;P 500 is the most actively traded futures contract in the world.<br/> </p></div>

## What Is the E-mini S&P 500? An E-mini S&P 500 is an electronically traded futures and options contract on the Chicago Mercantile Exchange (CME). Launched by the CME in 1997, the E-mini S&P 500 is open to all investors. It enables them to hedge their bets or speculate on the price moves of the S&P 500 index. The contract is cash-settled and is priced at $50 times the value of the S&P 500. Its value is one-fifth of the now-delisted standard-sized S&P 500 futures contract. ### Key Takeaways * The S&P 500 E-mini is a futures contract based on the S&P 500 index. * It was the first E-mini index futures contract launched by the CME in 1997. * The E-mini S&P 500 is priced at $50 times the value of the index. * It offers ease of trading, low volatility and margin rates, liquidity, and greater affordability. * Investors and traders can use these contracts to hedge or speculate on the index's movement. ## Understanding the E-mini S&P 500 The S&P 500 index tracks the 500 largest U.S. publicly traded companies by market value and is a common benchmark used for the broader U.S. equity markets. [Futures](https://www.investopedia.com/terms/f/futurescontract.asp) are financial contracts that obligate the trader to buy or sell an asset at a predetermined price by a set date. They detail the quality and quantity of the underlying asset and are standardized for trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The CME developed a series of standard contracts that were typically only available to institutional investors. With more investors seeking alternative investment options, the exchange launched smaller futures contracts called E-mini. They make futures trading accessible to a variety of traders, including retail investors. E-mini contracts are traded on the CME and other international exchanges. They cover a variety of assets: * **Indexes:** S&P 500, Dow Jones Industrial Average, Nasdaq 100, Russell 2000, FTSE 100, Hang Seng * **Commodities:** Oil, wheat, copper, gold, soybeans, natural gas, corn * **Currencies:** Euro The [contract size](https://www.investopedia.com/terms/c/contractsize.asp) of an E-mini is the value of the contract based on the price of the futures contract times a contract-specific multiplier. The E-mini S&P 500 has a contract size of $50 times the value of the S&P 500. So, if the S&P 500 is trading at 2,580, the value of the contract would be $129,000 ($50 x 2,580). To trade E-minis, investors must open an account with a brokerage firm. Because they can be traded almost round the clock and have low volatility, margin rates, liquidity, and greater affordability, many active traders view the E-mini S&P 500 as their preferred trading instrument for the index. ### The E-mini S&P 500 is the most actively traded futures contract in the world. Most futures strategies are possible with E-minis, including [spread](https://www.investopedia.com/terms/s/spread.asp) trading. This is a strategy that investors and traders can use to speculate on financial markets. A spread is the difference between a buy and sell price. The smaller the spread, the cheaper the trade. Conversely, a larger difference between prices indicates a more expensive trade. E-mini [trading volumes](https://www.investopedia.com/terms/v/volumeoftrade.asp) eclipsed those of the standard contract when it was delisted, indicating the E-mini's popularity among individual and institutional investors alike. Both favored the E-mini for its high liquidity and the ability to trade a substantial number of contracts. The S&P 500 E-mini can move quickly, especially during high-impact news releases, so it's recommended that traders have significantly more than the minimum required day trading margin in their account to help avoid margin calls or having positions liquidated by the broker. Many traders suggest that only 1% to 2% of account equity should be risked on any single trade. In this case, the trader is risking $525. Therefore, if they want to keep the risk to 1% to 2% of their account balance, they should have at least $26,250 to $52,500 in their account ($525 x 50 and $525 x 100). ## Specifics About the E-mini S&P 500 Contracts The E-mini S&P 500 trades on CME [Globex](https://www.investopedia.com/terms/g/globex.asp) under ticker ES. It has standard specifications, which allows for easy trading. Electronic trading takes place between 6 p.m. Sunday and 5 p.m. ET. Friday with a daily maintenance break between 5 p.m. and 6 p.m. ET. Contracts are available quarterly with March, June, September, and December expiry dates. They are financially- or cash-settled contracts, which means traders receive a cash credit or debit based on the contract's settlement price. As such, the S&P index or stocks don't need to be delivered if the contract is held until expiration. As noted, the value of the contract is $50 x the S&P 500 index value. What matters to most traders is the minimum price fluctuation and tick value, as this determines profit or losses on the contract. The E-mini moves in 0.25-point increments, and each one of those increments equates to $12.50 on one contract. Therefore, a one-point move, which is four ticks, means $50 is gained or lost. ## History of the E-mini S&P 500 The CME introduced the standard-sized stock index futures contract in 1982. This first contract was based on the S&P 500 and traded on the CME under the Globex ticker SP. The price for the full-sized contract was $250 times the value of the S&P 500. This means if the index value was 2,500, the contract was worth $250 times that number, or $625,000. This was aimed at large institutional investors who used the standard contract as a hedge or a speculative tool. However, the value of the full-sized S&P 500 contract was too large for most small traders, many of whom were interested in these contracts if they were affordable. In response to this demand, the CME launched the first E-mini contract in September 1997. Like the standard-sized contract, the first E-mini was based on the S&P 500. Its value was one-fifth that of the full-sized contract. Both functioned the same. Investors and traders used them both for hedging and speculating. The E-mini just opened up the landscape for smaller investors to take part. The daily [settlement prices](https://www.investopedia.com/terms/s/settlementprice.asp) for the E-minis were essentially the same as those of the regular-sized contract, though they differed slightly because of rounding. This meant a position with five E-mini S&P 500 futures contracts had the same financial value as one full-sized contract in the same contract month before the full-sized version ended in 2021. ### The CME delisted the standard- or full-sized contracts for S&P 500 futures and options in September 2021. ## Example of an E-mini S&P 500 Trade Let's assume that the S&P 500 is trading at 2,965, and you seek a breakout above the 2,970 on the E-mini S&P 500, where short-term [resistance](https://www.investopedia.com/terms/r/resistance.asp) has formed. You believe that if the price can break above that level, it will go to 3,000. When the price moves above 2,970, you purchase one contract. Assuming you get a price of 2,970.50, you do the following: * Put in a stop-loss order at 2,960, resulting in a risk of 10.5 points. Each point is worth $50, so your risk is $525 ($50 × 10.5). * Put in a [limit order](https://www.investopedia.com/terms/l/limitorder.asp) to sell at the target level of 3,000. If the target is reached, the profit is $1,475: $50 × (3,000 - 2970.50). You're not required to buy the full contract, valued at $148,525 ($50 × 2,970.50) at the time. Instead, you have to put up a margin. If you only hold the position for the day, you must only post a day-trading margin. With some futures brokers, this can be as low as $400. In this case, you could lose $525 on the trade plus commissions, so if the margin is $400, you would want to have at least $925 plus the cost of commissions in your account. ## Pros and Cons of the E-mini S&P 500 ### Pros and Cons of Trading the E-mini S&P 500 Pros * More affordable than standard S&P 500 futures * Offers diverse investment opportunities * Highly adaptable to market conditions Cons * Leverage increases potential losses * High risk if S&P 500 value drops * Requires careful management The E-mini S&P 500's primary advantage lies in its affordability compared with now-defunct traditional S&P 500 contracts. The E-mini S&P 500 also offers market efficiency, which can lead to more accurate pricing and increased liquidity. In addition, it is very adaptable to different of investment strategies, and you can also use it to respond quickly to changing market conditions, making it an attractive choice for many. On the flip side, the E-mini S&P 500 also carries certain risks that must be considered carefully. The same leverage that can significantly magnify gains can amplify losses. When the S&P 500 index's market value drops, investors face substantial financial setbacks. Therefore, despite its numerous advantages, the E-mini S&P 500 requires a comprehensive understanding of the market, calculated trading strategies, and careful risk management because of these inherent risks. ## How Do I Trade E-mini S&P 500 Futures? To trade E-mini S&P 500 futures, you must open an account with a brokerage firm. Once you do, choose your trading strategy and monitor the market until the contract expires. ## What Are the Advantages of Trading E-mini S&P 500 Futures Over Individual Stocks? Trading E-mini S&P 500 futures offers several potential benefits over individual stocks, including diversification, since each contract is based on the broad market performance of the S&P 500 index, reducing the risk of the volatility of individual stocks. In addition, the futures market operates nearly 24 hours, providing more flexibility for traders to respond to global economic events outside regular stock market hours. The leverage in futures trading could also lead to a higher return on investment, though this comes with increased risk. As such, any investments in this area should be done with a well-thought-out and prudent strategy. ## How Do I Use E-mini S&P 500 Futures To Hedge My Portfolio? By taking a position in the futures market opposite to your stock market holdings, you can help protect yourself against losses from market downturns. For example, if you hold a portfolio of stocks that mirrors the S&P 500 and expect a market decline, you might short sell E-mini S&P 500 futures to offset potential losses in your stock portfolio. ## The Bottom Line The E-mini S&P 500 boasts several advantages, including affordability, ease of trading, and liquidity. It's a potent tool for hedging and speculating on the S&P 500 index's movement. However, it's not without its downsides. The leverage that can magnify gains also has the potential to increase losses. Despite these risks, the E-mini S&P 500 remains an accessible and appealing investment option, offering a balance of benefits for informed investors. ***Correction—Jan. 18, 2024:*** This article has been corrected to state that the E-mini S&P 500 is the most actively traded futures contract in the world.

What Is the E-mini S&P 500? An E-mini S&P 500 is an electronically traded futures and options contract on the Chicago Mercantile Exchange (CME). Launched by the CME in 1997, the E-mini S&P 500 is open to all investors. It enables them to hedge their bets or speculate on the price moves of the S&P 500 index. The contract is cash-settled and is priced at $50 times the value of the S&P 500. Its value is one-fifth of the now-delisted standard-sized S&P 500 futures contract. Key Takeaways The S&P 500 E-mini is a futures contract based on the S&P 500 index.It was the first E-mini index futures contract launched by the CME in 1997.The E-mini S&P 500 is priced at $50 times the value of the index.It offers ease of trading, low volatility and margin rates, liquidity, and greater affordability.Investors and traders can use these contracts to hedge or speculate on the index's movement. Understanding the E-mini S&P 500 The S&P 500 index tracks the 500 largest U.S. publicly traded companies by market value and is a common benchmark used for the broader U.S. equity markets. Futures are financial contracts that obligate the trader to buy or sell an asset at a predetermined price by a set date. They detail the quality and quantity of the underlying asset and are standardized for trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The CME developed a series of standard contracts that were typically only available to institutional investors. With more investors seeking alternative investment options, the exchange launched smaller futures contracts called E-mini. They make futures trading accessible to a variety of traders, including retail investors. E-mini contracts are traded on the CME and other international exchanges. They cover a variety of assets: Indexes: S&P 500, Dow Jones Industrial Average, Nasdaq 100, Russell 2000, FTSE 100, Hang SengCommodities: Oil, wheat, copper, gold, soybeans, natural gas, cornCurrencies: Euro The contract size of an E-mini is the value of the contract based on the price of the futures contract times a contract-specific multiplier. The E-mini S&P 500 has a contract size of $50 times the value of the S&P 500. So, if the S&P 500 is trading at 2,580, the value of the contract would be $129,000 ($50 x 2,580). To trade E-minis, investors must open an account with a brokerage firm. Because they can be traded almost round the clock and have low volatility, margin rates, liquidity, and greater affordability, many active traders view the E-mini S&P 500 as their preferred trading instrument for the index. The E-mini S&P 500 is the most actively traded futures contract in the world. Most futures strategies are possible with E-minis, including spread trading. This is a strategy that investors and traders can use to speculate on financial markets. A spread is the difference between a buy and sell price. The smaller the spread, the cheaper the trade. Conversely, a larger difference between prices indicates a more expensive trade. E-mini trading volumes eclipsed those of the standard contract when it was delisted, indicating the E-mini's popularity among individual and institutional investors alike. Both favored the E-mini for its high liquidity and the ability to trade a substantial number of contracts. The S&P 500 E-mini can move quickly, especially during high-impact news releases, so it's recommended that traders have significantly more than the minimum required day trading margin in their account to help avoid margin calls or having positions liquidated by the broker. Many traders suggest that only 1% to 2% of account equity should be risked on any single trade. In this case, the trader is risking $525. Therefore, if they want to keep the risk to 1% to 2% of their account balance, they should have at least $26,250 to $52,500 in their account ($525 x 50 and $525 x 100). Specifics About the E-mini S&P 500 Contracts The E-mini S&P 500 trades on CME Globex under ticker ES. It has standard specifications, which allows for easy trading. Electronic trading takes place between 6 p.m. Sunday and 5 p.m. ET. Friday with a daily maintenance break between 5 p.m. and 6 p.m. ET. Contracts are available quarterly with March, June, September, and December expiry dates. They are financially- or cash-settled contracts, which means traders receive a cash credit or debit based on the contract's settlement price. As such, the S&P index or stocks don't need to be delivered if the contract is held until expiration. As noted, the value of the contract is $50 x the S&P 500 index value. What matters to most traders is the minimum price fluctuation and tick value, as this determines profit or losses on the contract. The E-mini moves in 0.25-point increments, and each one of those increments equates to $12.50 on one contract. Therefore, a one-point move, which is four ticks, means $50 is gained or lost. History of the E-mini S&P 500 The CME introduced the standard-sized stock index futures contract in 1982. This first contract was based on the S&P 500 and traded on the CME under the Globex ticker SP. The price for the full-sized contract was $250 times the value of the S&P 500. This means if the index value was 2,500, the contract was worth $250 times that number, or $625,000. This was aimed at large institutional investors who used the standard contract as a hedge or a speculative tool. However, the value of the full-sized S&P 500 contract was too large for most small traders, many of whom were interested in these contracts if they were affordable. In response to this demand, the CME launched the first E-mini contract in September 1997. Like the standard-sized contract, the first E-mini was based on the S&P 500. Its value was one-fifth that of the full-sized contract. Both functioned the same. Investors and traders used them both for hedging and speculating. The E-mini just opened up the landscape for smaller investors to take part. The daily settlement prices for the E-minis were essentially the same as those of the regular-sized contract, though they differed slightly because of rounding. This meant a position with five E-mini S&P 500 futures contracts had the same financial value as one full-sized contract in the same contract month before the full-sized version ended in 2021. The CME delisted the standard- or full-sized contracts for S&P 500 futures and options in September 2021. Example of an E-mini S&P 500 Trade Let's assume that the S&P 500 is trading at 2,965, and you seek a breakout above the 2,970 on the E-mini S&P 500, where short-term resistance has formed. You believe that if the price can break above that level, it will go to 3,000. When the price moves above 2,970, you purchase one contract. Assuming you get a price of 2,970.50, you do the following: Put in a stop-loss order at 2,960, resulting in a risk of 10.5 points. Each point is worth $50, so your risk is $525 ($50 × 10.5). Put in a limit order to sell at the target level of 3,000. If the target is reached, the profit is $1,475: $50 × (3,000 - 2970.50). You're not required to buy the full contract, valued at $148,525 ($50 × 2,970.50) at the time. Instead, you have to put up a margin. If you only hold the position for the day, you must only post a day-trading margin. With some futures brokers, this can be as low as $400. In this case, you could lose $525 on the trade plus commissions, so if the margin is $400, you would want to have at least $925 plus the cost of commissions in your account. Pros and Cons of the E-mini S&P 500 Pros and Cons of Trading the E-mini S&P 500 Pros More affordable than standard S&P 500 futures Offers diverse investment opportunities Highly adaptable to market conditions Cons Leverage increases potential losses High risk if S&P 500 value drops Requires careful management The E-mini S&P 500's primary advantage lies in its affordability compared with now-defunct traditional S&P 500 contracts. The E-mini S&P 500 also offers market efficiency, which can lead to more accurate pricing and increased liquidity. In addition, it is very adaptable to different of investment strategies, and you can also use it to respond quickly to changing market conditions, making it an attractive choice for many. On the flip side, the E-mini S&P 500 also carries certain risks that must be considered carefully. The same leverage that can significantly magnify gains can amplify losses. When the S&P 500 index's market value drops, investors face substantial financial setbacks. Therefore, despite its numerous advantages, the E-mini S&P 500 requires a comprehensive understanding of the market, calculated trading strategies, and careful risk management because of these inherent risks. How Do I Trade E-mini S&P 500 Futures? To trade E-mini S&P 500 futures, you must open an account with a brokerage firm. Once you do, choose your trading strategy and monitor the market until the contract expires. What Are the Advantages of Trading E-mini S&P 500 Futures Over Individual Stocks? Trading E-mini S&P 500 futures offers several potential benefits over individual stocks, including diversification, since each contract is based on the broad market performance of the S&P 500 index, reducing the risk of the volatility of individual stocks. In addition, the futures market operates nearly 24 hours, providing more flexibility for traders to respond to global economic events outside regular stock market hours. The leverage in futures trading could also lead to a higher return on investment, though this comes with increased risk. As such, any investments in this area should be done with a well-thought-out and prudent strategy. How Do I Use E-mini S&P 500 Futures To Hedge My Portfolio? By taking a position in the futures market opposite to your stock market holdings, you can help protect yourself against losses from market downturns. For example, if you hold a portfolio of stocks that mirrors the S&P 500 and expect a market decline, you might short sell E-mini S&P 500 futures to offset potential losses in your stock portfolio. The Bottom Line The E-mini S&P 500 boasts several advantages, including affordability, ease of trading, and liquidity. It's a potent tool for hedging and speculating on the S&P 500 index's movement. However, it's not without its downsides. The leverage that can magnify gains also has the potential to increase losses. Despite these risks, the E-mini S&P 500 remains an accessible and appealing investment option, offering a balance of benefits for informed investors. Correction—Jan. 18, 2024: This article has been corrected to state that the E-mini S&P 500 is the most actively traded futures contract in the world.

https://www.investopedia.com/ask/answers/010815/what-good-sharpe-ratio.asp

What the Sharpe Ratio Means for Investors

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-sharpe-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the Sharpe Ratio? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> <br/>The Sharpe ratio measures the risk-adjusted return on an investment or portfolio, developed by the economist William Sharpe. The Sharpe ratio can be used to evaluate the total performance of an investment portfolio or the performance of an individual stock. </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 Sharpe ratio compares how well an equity investment performs to the rate of return on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/08/risk-free-rate-return.asp">risk-free investment</a>, such as U.S. government treasury bonds or bills. </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 Sharpe ratio compares how well an equity investment performs to the rate of return on a risk-free investment.</li><li>To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return.</li><li>A higher Sharpe ratio may indicate good investment performance, given the risk.</li></ul><p><br/></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_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="William F. Sharpe" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" data-srcset="https://www.investopedia.com/thmb/l22sKE7LUZCPO3u-8CTva4lpyXE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="William F. Sharpe" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/EEifiYFxy41uE4bvFugv0CRHOm4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png" srcset="https://www.investopedia.com/thmb/l22sKE7LUZCPO3u-8CTva4lpyXE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Alison Czinkota / Investopedia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-the-sharpe-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding the Sharpe Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Since William Sharpe created the Sharpe ratio in 1966, it has been a popular risk-return measure used in finance due to its simplicity.<span class="ql-inline-citation" data-cite="2"></span> Professor Sharpe won a Nobel Memorial Prize in Economic Sciences in 1990 for his work on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model</a> (CAPM).<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"> The ratio compares investment opportunities or portfolios and investors to make more informed decisions by considering returns and risk. The Sharpe Ratio helps rank and indicate the expected return compared to risk: </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>Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors.</li><li>A ratio higher than 2.0 is rated as very good.</li><li>A ratio of 3.0 or higher is considered excellent.</li><li>A ratio under 1.0 is considered sub-optimal.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Certain factors can affect the Sharpe ratio. For instance, adding assets to a portfolio to better diversify it can increase the ratio. Investing in stocks with higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/010815/what-difference-between-sharpe-ratio-and-traynor-ratio.asp">risk-adjusted returns</a> can power the ratio upward. Investments with an abnormal distribution of returns can result in a flawed high ratio.</p></div></div></div> <span class="heading-toc" id="toc-formula"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-heading__text"> Formula </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return.</p> <p>Divide that figure by the standard deviation of the portfolio or investment. The Sharpe ratio can be recalculated at the end of the year to examine the actual return rather than the expected return.<br/></p> <p>Sharpe Ratio Formula</p> <p><strong><span data-value="\begin{aligned}&amp;\text{Sharpe Ratio}=\frac{\text{Rx}-\text{Rf}}{\text{StdDev Rx}}\\&amp;\textbf{where:}\\&amp;\text{Rx}=\text{Expected portfolio return}\\&amp;\text{Rf}=\text{Risk-free rate of return}\\&amp;\text{StdDev Rx}=\text{Standard derivation of the}\\&amp;\qquad\quad\text{portfolio's return or its volatility}\end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Sharpe Ratio </mtext> <mo> = </mo> <mfrac> <mrow> <mtext> Rx </mtext> <mo> − </mo> <mtext> Rf </mtext> </mrow> <mtext> StdDev Rx </mtext> </mfrac> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> where: </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Rx </mtext> <mo> = </mo> <mtext> Expected portfolio return </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Rf </mtext> <mo> = </mo> <mtext> Risk-free rate of return </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> StdDev Rx </mtext> <mo> = </mo> <mtext> Standard derivation of the </mtext> </mrow> </mstyle> </mtd> </mtr> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mspace width="2em"></mspace> <mspace width="1em"></mspace> <mtext> portfolio’s return or its volatility </mtext> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned}&amp;\text{Sharpe Ratio}=\frac{\text{Rx}-\text{Rf}}{\text{StdDev Rx}}\\&amp;\textbf{where:}\\&amp;\text{Rx}=\text{Expected portfolio return}\\&amp;\text{Rf}=\text{Risk-free rate of return}\\&amp;\text{StdDev Rx}=\text{Standard derivation of the}\\&amp;\qquad\quad\text{portfolio's return or its volatility}\end{aligned} </annotation> </semantics> </math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord"><span class="mtable"><span class="col-align-r"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span><span class=""><span class="pstrut"></span><span class="mord"></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="col-align-l"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Sharpe Ratio</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord">StdDev Rx</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">Rx</span></span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord text"><span class="mord">Rf</span></span></span></span></span><span class="vlist-s">​</span></span><span class="vlist-r"><span class="vlist"><span class=""></span></span></span></span></span><span class="mclose nulldelimiter"></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord textbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Rx</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Expected portfolio return</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">Rf</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Risk-free rate of return</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">StdDev Rx</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Standard derivation of the</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mspace"></span><span class="mspace"></span><span class="mord text"><span class="mord">portfolio’s return or its volatility</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></strong> </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-example"></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"> Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Assume a mutual fund has an expected return over time of 25%. A risk-free rate of return is 2.70%. The standard deviation is 20%. Under these circumstances, the Sharpe ratio calculation is:</p> <p><span data-value="\begin{aligned}\frac{25 - 2.70}{20} = 1.11\end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mtable> <mtr> <mtd> <mstyle> <mrow> <mfrac> <mrow> <mn> 25 </mn> <mo> − </mo> <mn> 2.70 </mn> </mrow> <mn> 20 </mn> </mfrac> <mo> = </mo> <mn> 1.11 </mn> </mrow> </mstyle> </mtd> </mtr> </mtable> <annotation encoding="application/x-tex"> \begin{aligned}\frac{25 - 2.70}{20} = 1.11\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 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">20</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">25</span><span class="mspace"></span><span class="mbin">−</span><span class="mspace"></span><span class="mord">2.70</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 class="mord">1.11</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> <p>A Sharpe ratio greater than one but less than two indicates acceptable performance compared to the performance of the risk-free investment.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-using-the-sharpe-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Using the Sharpe Ratio </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> <li><strong>Measure Risk-Adjusted Performance: </strong>Instead of looking at the overall return, the Sharpe ratio hones in the money made relative to the risk.</li> <li><strong>Compare Investments:</strong> Investors can use the Sharpe ratio to compare the risk-adjusted performance of different investments.</li> <li><strong>Optimize Portfolios: </strong>Portfolio managers utilize the Sharpe ratio to optimize the allocation of assets within a portfolio.</li> <li><strong>Evaluate Performance: </strong>Investors can evaluate whether or not the risk profile matches their risk appetite.</li> <li><strong>Benchmark:</strong> Investors often use the Sharpe ratio to compare the performance of a portfolio or investment against a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a>, such as a market index.</li> <li><strong>Rank Risk: </strong>Investors can rank different investments or portfolios based on risk. This ranking can help identify which assets are more likely to incur losses.</li> <li><strong>Plan Hedging Strategies: </strong>Investors can use the Sharpe ratio to decide which assets they want to hold onto and then <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">plan to hedge</a> or protect themselves against potential losses.</li> </ul> <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_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The Sharpe ratio is used in so many different contexts. The U.S. Commodities Futures Trading Commission analyzed high frequency trading activity and evaluated a Sharpe ratio of 4.3 for firms specializing in this activity.<span class="ql-inline-citation" data-cite="4"></span></p></div></div></div> <span class="heading-toc" id="toc-ratio-variations"></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"> Ratio Variations </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li><strong>Modified Sharpe Ratio:</strong> This variation modifies the traditional Sharpe ratio by replacing the standard deviation in the denominator with a downside risk measure. This places more emphasis on the downside risk.</li> <li><strong>Sortino Ratio:</strong> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sortinoratio.asp">Sortino ratio</a> is similar to the Modified Sharpe Ratio but focuses on downside risk instead of prioritizing it. It also uses the standard deviation of negative returns in the denominator. </li> <li><strong>M2 Measure: </strong>The M2 Measure introduces a risk aversion parameter into the Sharpe ratio formula. It incorporates an investor's risk preferences by allowing for a subjective assessment of risk aversion. </li> <li><strong>Omega Ratio:</strong> The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/omega.asp">Omega</a> ratio considers the entire distribution of returns and calculates the probability-weighted ratio of gains to losses. It provides a more comprehensive view of risk and return.</li> <li><strong>Treynor Ratio: </strong>Instead of using total risk in the denominator, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treynorratio.asp">Treynor ratio</a> uses beta, which represents the systematic risk of an investment relative to the market. </li> <li><strong>Upside Potential Ratio (UPR):</strong> The UPR focuses on the potential upside of an investment by comparing the average gain to the average loss. </li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-what-does-a-sharpe-ratio-of-less-than-1-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Sharpe Ratio of Less Than 1 Mean?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A Sharpe ratio of less than one is considered unacceptable or bad. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/021315/what-difference-between-sharpe-ratio-and-alpha.asp">risk a portfolio encounters</a> isn't being offset well enough by its return. The higher the Sharpe ratio, the better.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-can-investors-use-the-sharpe-ratio-to-evaluate-a-single-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Investors Use the Sharpe Ratio to Evaluate a Single Investment?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, the Sharpe ratio is useful as a way to compare investments. It is also often used by institutional investors managing large portfolios for many investors to maximize returns without taking on excessive risk.</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-does-the-sharpe-ratio-indicate"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does the Sharpe Ratio Indicate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It can indicate how well an investment in equities performs when compared to the return offered by an essentially risk-free investment over the long term. It can help improve investment decision-making as investors take steps to improve portfolio performance.</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-are-the-limitations-of-the-sharpe-ratio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Limitations of the Sharpe Ratio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The main problem with the Sharpe ratio is that it is accentuated by investments that don't have a normal distribution of returns. Asset prices have zero downside but have unlimited upside potential, making their returns right-skewed or log-normal. The Sharpe ratio assumes that asset returns are normally distributed. Many hedge funds use dynamic trading strategies and options that give way to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/skewness.asp">skewness</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/kurtosis.asp">kurtosis</a> in their distribution of returns. A simple strategy of selling deep <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outofthemoney.asp">out-of-the-money</a> options tends to collect small premiums and pay out nothing until the "big one" hits. Until a big loss, this strategy would erroneously show a very high and favorable Sharpe ratio.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The Sharpe ratio is a metric used in finance to evaluate the risk-adjusted performance of an investment. It's calculated as the ratio of the difference between the investment's return and the risk-free rate to the standard deviation of its returns. Investors use the Sharpe ratio to evaluate whether an investment earns the appropriate amount of money, based on the risk. </p></div>

## What Is the Sharpe Ratio? The Sharpe ratio measures the risk-adjusted return on an investment or portfolio, developed by the economist William Sharpe. The Sharpe ratio can be used to evaluate the total performance of an investment portfolio or the performance of an individual stock. The Sharpe ratio compares how well an equity investment performs to the rate of return on a [risk-free investment](https://www.investopedia.com/articles/financial-theory/08/risk-free-rate-return.asp), such as U.S. government treasury bonds or bills. ### Key Takeaways * The Sharpe ratio compares how well an equity investment performs to the rate of return on a risk-free investment. * To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return. * A higher Sharpe ratio may indicate good investment performance, given the risk. ![William F. Sharpe]() :max_bytes(150000):strip_icc()/william-f-sharpe_final-70794d182ddf4a26b92bed8c36f11a0b.png) Alison Czinkota / Investopedia ## Understanding the Sharpe Ratio Since William Sharpe created the Sharpe ratio in 1966, it has been a popular risk-return measure used in finance due to its simplicity. Professor Sharpe won a Nobel Memorial Prize in Economic Sciences in 1990 for his work on the [capital asset pricing model](https://www.investopedia.com/terms/c/capm.asp) (CAPM). The ratio compares investment opportunities or portfolios and investors to make more informed decisions by considering returns and risk. The Sharpe Ratio helps rank and indicate the expected return compared to risk: * Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors. * A ratio higher than 2.0 is rated as very good. * A ratio of 3.0 or higher is considered excellent. * A ratio under 1.0 is considered sub-optimal. ### Certain factors can affect the Sharpe ratio. For instance, adding assets to a portfolio to better diversify it can increase the ratio. Investing in stocks with higher [risk-adjusted returns](https://www.investopedia.com/ask/answers/010815/what-difference-between-sharpe-ratio-and-traynor-ratio.asp) can power the ratio upward. Investments with an abnormal distribution of returns can result in a flawed high ratio. ## Formula To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return. Divide that figure by the standard deviation of the portfolio or investment. The Sharpe ratio can be recalculated at the end of the year to examine the actual return rather than the expected return. Sharpe Ratio Formula **Sharpe Ratio = Rx − Rf StdDev Rx where: Rx = Expected portfolio return Rf = Risk-free rate of return StdDev Rx = Standard derivation of the portfolio’s return or its volatility \begin{aligned}&\text{Sharpe Ratio}=\frac{\text{Rx}-\text{Rf}}{\text{StdDev Rx}}\\&\textbf{where:}\\&\text{Rx}=\text{Expected portfolio return}\\&\text{Rf}=\text{Risk-free rate of return}\\&\text{StdDev Rx}=\text{Standard derivation of the}\\&\qquad\quad\text{portfolio's return or its volatility}\end{aligned} ​Sharpe Ratio=StdDev RxRx−Rf​where:Rx=Expected portfolio returnRf=Risk-free rate of returnStdDev Rx=Standard derivation of theportfolio’s return or its volatility​** ## Example Assume a mutual fund has an expected return over time of 25%. A risk-free rate of return is 2.70%. The standard deviation is 20%. Under these circumstances, the Sharpe ratio calculation is: 25 − 2.70 20 = 1.11 \begin{aligned}\frac{25 - 2.70}{20} = 1.11\end{aligned} 2025−2.70​=1.11​ A Sharpe ratio greater than one but less than two indicates acceptable performance compared to the performance of the risk-free investment. ## Using the Sharpe Ratio * **Measure Risk-Adjusted Performance:** Instead of looking at the overall return, the Sharpe ratio hones in the money made relative to the risk. * **Compare Investments:** Investors can use the Sharpe ratio to compare the risk-adjusted performance of different investments. * **Optimize Portfolios:** Portfolio managers utilize the Sharpe ratio to optimize the allocation of assets within a portfolio. * **Evaluate Performance:** Investors can evaluate whether or not the risk profile matches their risk appetite. * **Benchmark:** Investors often use the Sharpe ratio to compare the performance of a portfolio or investment against a [benchmark](https://www.investopedia.com/terms/b/benchmark.asp), such as a market index. * **Rank Risk:** Investors can rank different investments or portfolios based on risk. This ranking can help identify which assets are more likely to incur losses. * **Plan Hedging Strategies:** Investors can use the Sharpe ratio to decide which assets they want to hold onto and then [plan to hedge](https://www.investopedia.com/terms/h/hedge.asp) or protect themselves against potential losses. ### The Sharpe ratio is used in so many different contexts. The U.S. Commodities Futures Trading Commission analyzed high frequency trading activity and evaluated a Sharpe ratio of 4.3 for firms specializing in this activity. ## Ratio Variations * **Modified Sharpe Ratio:** This variation modifies the traditional Sharpe ratio by replacing the standard deviation in the denominator with a downside risk measure. This places more emphasis on the downside risk. * **Sortino Ratio:** The [Sortino ratio](https://www.investopedia.com/terms/s/sortinoratio.asp) is similar to the Modified Sharpe Ratio but focuses on downside risk instead of prioritizing it. It also uses the standard deviation of negative returns in the denominator. * **M2 Measure:** The M2 Measure introduces a risk aversion parameter into the Sharpe ratio formula. It incorporates an investor's risk preferences by allowing for a subjective assessment of risk aversion. * **Omega Ratio:** The [Omega](https://www.investopedia.com/terms/o/omega.asp) ratio considers the entire distribution of returns and calculates the probability-weighted ratio of gains to losses. It provides a more comprehensive view of risk and return. * **Treynor Ratio:** Instead of using total risk in the denominator, the [Treynor ratio](https://www.investopedia.com/terms/t/treynorratio.asp) uses beta, which represents the systematic risk of an investment relative to the market. * **Upside Potential Ratio (UPR):** The UPR focuses on the potential upside of an investment by comparing the average gain to the average loss. ## What Does a Sharpe Ratio of Less Than 1 Mean? A Sharpe ratio of less than one is considered unacceptable or bad. The [risk a portfolio encounters](https://www.investopedia.com/ask/answers/021315/what-difference-between-sharpe-ratio-and-alpha.asp) isn't being offset well enough by its return. The higher the Sharpe ratio, the better. ## Can Investors Use the Sharpe Ratio to Evaluate a Single Investment? Yes, the Sharpe ratio is useful as a way to compare investments. It is also often used by institutional investors managing large portfolios for many investors to maximize returns without taking on excessive risk. ## What Does the Sharpe Ratio Indicate? It can indicate how well an investment in equities performs when compared to the return offered by an essentially risk-free investment over the long term. It can help improve investment decision-making as investors take steps to improve portfolio performance. ## What Are the Limitations of the Sharpe Ratio? The main problem with the Sharpe ratio is that it is accentuated by investments that don't have a normal distribution of returns. Asset prices have zero downside but have unlimited upside potential, making their returns right-skewed or log-normal. The Sharpe ratio assumes that asset returns are normally distributed. Many hedge funds use dynamic trading strategies and options that give way to [skewness](https://www.investopedia.com/terms/s/skewness.asp) and [kurtosis](https://www.investopedia.com/terms/k/kurtosis.asp) in their distribution of returns. A simple strategy of selling deep [out-of-the-money](https://www.investopedia.com/terms/o/outofthemoney.asp) options tends to collect small premiums and pay out nothing until the "big one" hits. Until a big loss, this strategy would erroneously show a very high and favorable Sharpe ratio. ## The Bottom Line The Sharpe ratio is a metric used in finance to evaluate the risk-adjusted performance of an investment. It's calculated as the ratio of the difference between the investment's return and the risk-free rate to the standard deviation of its returns. Investors use the Sharpe ratio to evaluate whether an investment earns the appropriate amount of money, based on the risk.

What Is the Sharpe Ratio? The Sharpe ratio measures the risk-adjusted return on an investment or portfolio, developed by the economist William Sharpe. The Sharpe ratio can be used to evaluate the total performance of an investment portfolio or the performance of an individual stock. The Sharpe ratio compares how well an equity investment performs to the rate of return on a risk-free investment, such as U.S. government treasury bonds or bills. Key Takeaways The Sharpe ratio compares how well an equity investment performs to the rate of return on a risk-free investment.To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return.A higher Sharpe ratio may indicate good investment performance, given the risk. Alison Czinkota / Investopedia Understanding the Sharpe Ratio Since William Sharpe created the Sharpe ratio in 1966, it has been a popular risk-return measure used in finance due to its simplicity. Professor Sharpe won a Nobel Memorial Prize in Economic Sciences in 1990 for his work on the capital asset pricing model (CAPM). The ratio compares investment opportunities or portfolios and investors to make more informed decisions by considering returns and risk. The Sharpe Ratio helps rank and indicate the expected return compared to risk: Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors.A ratio higher than 2.0 is rated as very good.A ratio of 3.0 or higher is considered excellent.A ratio under 1.0 is considered sub-optimal. Certain factors can affect the Sharpe ratio. For instance, adding assets to a portfolio to better diversify it can increase the ratio. Investing in stocks with higher risk-adjusted returns can power the ratio upward. Investments with an abnormal distribution of returns can result in a flawed high ratio. Formula To calculate the Sharpe ratio, calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return. Divide that figure by the standard deviation of the portfolio or investment. The Sharpe ratio can be recalculated at the end of the year to examine the actual return rather than the expected return. Sharpe Ratio Formula Sharpe Ratio = Rx − Rf StdDev Rx where: Rx = Expected portfolio return Rf = Risk-free rate of return StdDev Rx = Standard derivation of the portfolio’s return or its volatility \begin{aligned}&\text{Sharpe Ratio}=\frac{\text{Rx}-\text{Rf}}{\text{StdDev Rx}}\\&\textbf{where:}\\&\text{Rx}=\text{Expected portfolio return}\\&\text{Rf}=\text{Risk-free rate of return}\\&\text{StdDev Rx}=\text{Standard derivation of the}\\&\qquad\quad\text{portfolio's return or its volatility}\end{aligned} ​Sharpe Ratio=StdDev RxRx−Rf​where:Rx=Expected portfolio returnRf=Risk-free rate of returnStdDev Rx=Standard derivation of theportfolio’s return or its volatility​ Example Assume a mutual fund has an expected return over time of 25%. A risk-free rate of return is 2.70%. The standard deviation is 20%. Under these circumstances, the Sharpe ratio calculation is: 25 − 2.70 20 = 1.11 \begin{aligned}\frac{25 - 2.70}{20} = 1.11\end{aligned} 2025−2.70​=1.11​ A Sharpe ratio greater than one but less than two indicates acceptable performance compared to the performance of the risk-free investment. Using the Sharpe Ratio Measure Risk-Adjusted Performance: Instead of looking at the overall return, the Sharpe ratio hones in the money made relative to the risk. Compare Investments: Investors can use the Sharpe ratio to compare the risk-adjusted performance of different investments. Optimize Portfolios: Portfolio managers utilize the Sharpe ratio to optimize the allocation of assets within a portfolio. Evaluate Performance: Investors can evaluate whether or not the risk profile matches their risk appetite. Benchmark: Investors often use the Sharpe ratio to compare the performance of a portfolio or investment against a benchmark, such as a market index. Rank Risk: Investors can rank different investments or portfolios based on risk. This ranking can help identify which assets are more likely to incur losses. Plan Hedging Strategies: Investors can use the Sharpe ratio to decide which assets they want to hold onto and then plan to hedge or protect themselves against potential losses. The Sharpe ratio is used in so many different contexts. The U.S. Commodities Futures Trading Commission analyzed high frequency trading activity and evaluated a Sharpe ratio of 4.3 for firms specializing in this activity. Ratio Variations Modified Sharpe Ratio: This variation modifies the traditional Sharpe ratio by replacing the standard deviation in the denominator with a downside risk measure. This places more emphasis on the downside risk. Sortino Ratio: The Sortino ratio is similar to the Modified Sharpe Ratio but focuses on downside risk instead of prioritizing it. It also uses the standard deviation of negative returns in the denominator. M2 Measure: The M2 Measure introduces a risk aversion parameter into the Sharpe ratio formula. It incorporates an investor's risk preferences by allowing for a subjective assessment of risk aversion. Omega Ratio: The Omega ratio considers the entire distribution of returns and calculates the probability-weighted ratio of gains to losses. It provides a more comprehensive view of risk and return. Treynor Ratio: Instead of using total risk in the denominator, the Treynor ratio uses beta, which represents the systematic risk of an investment relative to the market. Upside Potential Ratio (UPR): The UPR focuses on the potential upside of an investment by comparing the average gain to the average loss. What Does a Sharpe Ratio of Less Than 1 Mean? A Sharpe ratio of less than one is considered unacceptable or bad. The risk a portfolio encounters isn't being offset well enough by its return. The higher the Sharpe ratio, the better. Can Investors Use the Sharpe Ratio to Evaluate a Single Investment? Yes, the Sharpe ratio is useful as a way to compare investments. It is also often used by institutional investors managing large portfolios for many investors to maximize returns without taking on excessive risk. What Does the Sharpe Ratio Indicate? It can indicate how well an investment in equities performs when compared to the return offered by an essentially risk-free investment over the long term. It can help improve investment decision-making as investors take steps to improve portfolio performance. What Are the Limitations of the Sharpe Ratio? The main problem with the Sharpe ratio is that it is accentuated by investments that don't have a normal distribution of returns. Asset prices have zero downside but have unlimited upside potential, making their returns right-skewed or log-normal. The Sharpe ratio assumes that asset returns are normally distributed. Many hedge funds use dynamic trading strategies and options that give way to skewness and kurtosis in their distribution of returns. A simple strategy of selling deep out-of-the-money options tends to collect small premiums and pay out nothing until the "big one" hits. Until a big loss, this strategy would erroneously show a very high and favorable Sharpe ratio. The Bottom Line The Sharpe ratio is a metric used in finance to evaluate the risk-adjusted performance of an investment. It's calculated as the ratio of the difference between the investment's return and the risk-free rate to the standard deviation of its returns. Investors use the Sharpe ratio to evaluate whether an investment earns the appropriate amount of money, based on the risk.

https://www.investopedia.com/articles/investing/040915/investing-green-technologythe-future-now.asp

Investing in Green Technology

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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-green-technology-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 Green Technology Investing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Green tech is a group of technologies that seek to reduce or eliminate the negative impacts of human activity on the natural environment. This can include anything from exploring new clean and renewable sources of energy to pioneering new and clean materials and finding ways to recycle waste and used materials. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> There are many ways to invest in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/green_tech.asp">green technology</a>, from installing wind turbines and solar arrays to supporting electric vehicle research. Both private and government actors can contribute to green technology. Governments invest in green technology by giving subsidies or tax credits to green technology companies, while private individuals can support them by financing green technology enterprises. </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 technology seeks to reduce or eliminate the harmful environmental effects of human activity on the natural environment. </li><li>Green technology encompasses a wide range of innovations, from renewable energy to sustainable agriculture, materials, and chemistry. </li><li>Both governments and private actors are investing in green technology in different ways.</li><li>Worldwide, green technology investments reached $755 billion in 2021, a sharp rise from the previous year. </li><li>Electric vehicles and energy solutions were the largest sectors in green technology investment. </li></ul><p><br/></p></div></div></div> <span class="heading-toc" id="toc-understanding-green-technology-investing"></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 Technology Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Since there is no universal definition of what makes a technology "green," estimates of green technology investments vary widely. Renewable energy technologies such as solar, wind, and hydropower are widely considered "green," even though each of them has different environmental consequences. It's less clear if nuclear power or more efficient combustion engines can be considered "green tech," even if they do reduce carbon emissions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> By any definition, investment in green tech or "climate tech" is increasing every year. Total investment in low-carbon technologies reached $755 billion in 2021, according to research by BloombergNEF. That's a 25% rise over the previous year, but still only about a third of what's needed to eliminate net carbon emissions by 2050.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Here are some of the other ways businesses and countries are investing in green technology. </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-tip" 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>To get the latest analysis and advice on green investing, check out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-green-investor-podcast-episode-1-5212965">The Green Investor podcast</a> powered by Investopedia.</p></div></div></div> <span class="heading-toc" id="toc-green-technology-industries"></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"> Green Technology Industries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In 2021, renewable energy took up the largest share of new investments, with a total of $368 billion worldwide. This category, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wind-investments-how-to-invest-in-wind-energy-5220593">wind</a>, solar, and other renewable power sources, saw investment grow by 6.5% over the previous 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_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Investment in green transportation also surged, reaching $273 billion, or 77% more than had been invested the year prior. This was largely thanks to increased electric vehicle sales, along with the associated infrastructure for charging and maintenance. Note that electric vehicles represent only under 10% of all circulating cars. This gives a signal about the potential opportunity in this market and the energy needed to power it.<span class="ql-inline-citation" data-cite="4"></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_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> These industries were the largest investment recipients in 2021. There were also significant gains in investment for sustainable materials, carbon capture, and energy storage, although these figures were dwarfed by the investment in energy and transportation.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-countries-investing-in-green-tech"></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"> Countries Investing in Green Tech </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Following the COP26 conference in Glasgow, many industrial nations set goals to reduce or eliminate carbon emissions by 2050. In order to meet that goal, investment in green technology is rising worldwide, both by governments and private investors. </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 Asia-Pacific region saw the largest amount of green tech investment in 2021, as well as the highest growth. Over $368 billion were invested in Asia-Pacific green tech industries, a 38% increase from 2020. China was by far the largest source of investment, accounting for over two-thirds of the region's total.<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"> Other regions saw comparatively lower rates of investment growth. Investment in the Middle East/North Africa region grew 16%, and in the Americas, it reached 21%.<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"> Corporate investments in climate-tech companies also increased, reaching $165 billion in 2021. Two-thirds of this figure came from public markets, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">IPOs</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spac.asp">SPACs</a>, or other offerings. Venture capitalists and private equity investors contributed only $53 billion, but they tended to focus on more nascent sectors.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_33-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-advisorinsight" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_34-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">$111 Billion</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The amount of money raised by climate tech companies through public markets in 2021.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-types-of-green-technology-investments"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Types of Green Technology Investments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Investors who are considering taking the plunge into green technology would do well to take the time to understand a bit of background behind this sector, including the goals that serve as the foundation for this rapidly growing field. Those goals include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <li><strong>Source Reduction: </strong>This is the goal of reducing pollution and waste by changing production and consumption patterns.</li> <li><strong>Sustainability:</strong> This is an effort to meet societal needs with methods that can continue to be used into the future indefinitely without depleting or damaging natural resources.</li> <li><strong>Innovation: </strong>The focus is on developing alternatives to types of technology that are harmful to the environment.</li> <li><strong>Cradle-to-cradle design: </strong>This involves the creation of products that can be reused or reclaimed, thus ending the cradle-to-grave cycle of manufactured products.</li> <li><strong>Viability: </strong>The aim is to create an economic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041415/what-are-different-types-costs-cost-accounting.asp">activity center</a> that focuses on products and technologies that are beneficial to the environment, thus increasing the speed at which such technology and product concepts can be implemented.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Investors will find there are numerous subsectors in green technology that currently provide excellent opportunities for investments. They include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <li><strong>Energy: </strong>With energy often being considered the most pressing issue in the green technology sector, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sustainable-investing-4427774">green energy</a> sector focuses on the development of alternative fuels.</li> <li><strong>Green Nanotechnology: </strong>This includes the manipulation of various materials at the nanometer level, which could transform how products are manufactured.</li> <li><strong>Green Chemistry: </strong>This encompasses the invention, development, and application of chemical processes and products that are designed to eliminate or reduce the generation and use of hazardous substances. </li> </ul> <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-special-considerations"></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"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Green tech investors should focus on finding not only the most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lucrative.asp">lucrative</a> opportunities but also those that align with their own personal and environmental interests. New IPOs can also top prospects as many smaller, successful private companies grow and list on exchanges. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> There are also risks associated with investing in any new technology as well as unknown and emerging companies. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">Diversification</a> is vital to any successful <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstrategy.asp">investment strategy</a>. Investing in different green sectors can help you to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/05/diversification.asp">diversify your portfolio</a> while protecting your funds. Managed exchange-traded funds (ETFs) and mutual funds can also be good investments leaving the active stock picking to professionals. </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"> Keep in mind that it can be easy to fall into a trap known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/greenwashing.asp">greenwashing</a>, where a company or service claims to be green but actually is not. Take the time to do your research and understand the basis of the technology that is being developed before you decide whether to financially back a particular company. The best way to determine whether the environmental practices and technology behind a company are solid, or are simply greenwashing, is to ask questions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_51-0"><span class="heading-toc" id="toc-what-are-the-benefits-of-green-technology"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Benefits of Green Technology?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Green technology can be used to reduce pollution and waste products of traditional industrial processes. In addition to reducing the negative effects on the natural environment, these technologies can also use resources more efficiently. For example, sustainable agriculture initiatives can prevent the soil damage associated with crop monoculture, and sustainable building materials are less likely to be depleted.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_53-0"><span class="heading-toc" id="toc-how-can-green-technology-improve-the-economy"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Green Technology Improve the Economy?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Innovation in green technologies can improve human health and increase lifespans, resulting in a net increase in economic productivity. For example, recent research has found fossil fuel pollution to be responsible for about one in every five deaths worldwide, due to the hazards associated with their extraction and air pollution.<span class="ql-inline-citation" data-cite="3"></span> Replacing fossil fuels with renewable energy would reduce the burdens on the workforce and health sectors, not to mention the benefits of reducing global climate change.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_55-0"><span class="heading-toc" id="toc-how-much-does-the-us-invest-in-green-technology"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does the US Invest in Green Technology?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>According to research by BloombergNEF, the United States ranked second in the world for green technology investments, with $114 billion invested in 2021. This sum includes both public and private sector investments.<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_56-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Investors searching for environmentally responsible, financially sound investments will find abundant opportunities. The challenge of investing in green technology is often twofold; the objective is to increase personal wealth and to make the world a better place through socially responsible investing. </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"> Admittedly, this can be a somewhat daunting task, but taking the time to research can help find opportunities to protect your portfolio as well as the environment. Remember to consider the investment level that best aligns with your level of financial commitment, risk tolerance, and goals, while also supporting environmental goals and sustainable practices through the latest technological advances. </p></div>

## What Is Green Technology Investing? Green tech is a group of technologies that seek to reduce or eliminate the negative impacts of human activity on the natural environment. This can include anything from exploring new clean and renewable sources of energy to pioneering new and clean materials and finding ways to recycle waste and used materials. There are many ways to invest in [green technology](https://www.investopedia.com/terms/g/green_tech.asp), from installing wind turbines and solar arrays to supporting electric vehicle research. Both private and government actors can contribute to green technology. Governments invest in green technology by giving subsidies or tax credits to green technology companies, while private individuals can support them by financing green technology enterprises. ### Key Takeaways * Green technology seeks to reduce or eliminate the harmful environmental effects of human activity on the natural environment. * Green technology encompasses a wide range of innovations, from renewable energy to sustainable agriculture, materials, and chemistry. * Both governments and private actors are investing in green technology in different ways. * Worldwide, green technology investments reached $755 billion in 2021, a sharp rise from the previous year. * Electric vehicles and energy solutions were the largest sectors in green technology investment. ## Understanding Green Technology Investing Since there is no universal definition of what makes a technology "green," estimates of green technology investments vary widely. Renewable energy technologies such as solar, wind, and hydropower are widely considered "green," even though each of them has different environmental consequences. It's less clear if nuclear power or more efficient combustion engines can be considered "green tech," even if they do reduce carbon emissions. By any definition, investment in green tech or "climate tech" is increasing every year. Total investment in low-carbon technologies reached $755 billion in 2021, according to research by BloombergNEF. That's a 25% rise over the previous year, but still only about a third of what's needed to eliminate net carbon emissions by 2050. Here are some of the other ways businesses and countries are investing in green technology. ### To get the latest analysis and advice on green investing, check out [The Green Investor podcast](https://www.investopedia.com/the-green-investor-podcast-episode-1-5212965) powered by Investopedia. ## Green Technology Industries In 2021, renewable energy took up the largest share of new investments, with a total of $368 billion worldwide. This category, including [wind](https://www.investopedia.com/wind-investments-how-to-invest-in-wind-energy-5220593), solar, and other renewable power sources, saw investment grow by 6.5% over the previous year. Investment in green transportation also surged, reaching $273 billion, or 77% more than had been invested the year prior. This was largely thanks to increased electric vehicle sales, along with the associated infrastructure for charging and maintenance. Note that electric vehicles represent only under 10% of all circulating cars. This gives a signal about the potential opportunity in this market and the energy needed to power it. These industries were the largest investment recipients in 2021. There were also significant gains in investment for sustainable materials, carbon capture, and energy storage, although these figures were dwarfed by the investment in energy and transportation. ## Countries Investing in Green Tech Following the COP26 conference in Glasgow, many industrial nations set goals to reduce or eliminate carbon emissions by 2050. In order to meet that goal, investment in green technology is rising worldwide, both by governments and private investors. The Asia-Pacific region saw the largest amount of green tech investment in 2021, as well as the highest growth. Over $368 billion were invested in Asia-Pacific green tech industries, a 38% increase from 2020. China was by far the largest source of investment, accounting for over two-thirds of the region's total. Other regions saw comparatively lower rates of investment growth. Investment in the Middle East/North Africa region grew 16%, and in the Americas, it reached 21%. Corporate investments in climate-tech companies also increased, reaching $165 billion in 2021. Two-thirds of this figure came from public markets, such as [IPOs](https://www.investopedia.com/terms/i/ipo.asp), [SPACs](https://www.investopedia.com/terms/s/spac.asp), or other offerings. Venture capitalists and private equity investors contributed only $53 billion, but they tended to focus on more nascent sectors. ### $111 Billion The amount of money raised by climate tech companies through public markets in 2021. ## Types of Green Technology Investments Investors who are considering taking the plunge into green technology would do well to take the time to understand a bit of background behind this sector, including the goals that serve as the foundation for this rapidly growing field. Those goals include: * **Source Reduction:**This is the goal of reducing pollution and waste by changing production and consumption patterns. * **Sustainability:** This is an effort to meet societal needs with methods that can continue to be used into the future indefinitely without depleting or damaging natural resources. * **Innovation:** The focus is on developing alternatives to types of technology that are harmful to the environment. * **Cradle-to-cradle design:**This involves the creation of products that can be reused or reclaimed, thus ending the cradle-to-grave cycle of manufactured products. * **Viability:** The aim is to create an economic [activity center](https://www.investopedia.com/ask/answers/041415/what-are-different-types-costs-cost-accounting.asp) that focuses on products and technologies that are beneficial to the environment, thus increasing the speed at which such technology and product concepts can be implemented. Investors will find there are numerous subsectors in green technology that currently provide excellent opportunities for investments. They include: * **Energy:** With energy often being considered the most pressing issue in the green technology sector, the [green energy](https://www.investopedia.com/sustainable-investing-4427774) sector focuses on the development of alternative fuels. * **Green Nanotechnology:** This includes the manipulation of various materials at the nanometer level, which could transform how products are manufactured. * **Green Chemistry:**This encompasses the invention, development, and application of chemical processes and products that are designed to eliminate or reduce the generation and use of hazardous substances. ## Special Considerations Green tech investors should focus on finding not only the most [lucrative](https://www.investopedia.com/terms/l/lucrative.asp) opportunities but also those that align with their own personal and environmental interests. New IPOs can also top prospects as many smaller, successful private companies grow and list on exchanges. There are also risks associated with investing in any new technology as well as unknown and emerging companies. [Diversification](https://www.investopedia.com/terms/d/diversification.asp) is vital to any successful [investment strategy](https://www.investopedia.com/terms/i/investmentstrategy.asp). Investing in different green sectors can help you to [diversify your portfolio](https://www.investopedia.com/articles/basics/05/diversification.asp) while protecting your funds. Managed exchange-traded funds (ETFs) and mutual funds can also be good investments leaving the active stock picking to professionals. Keep in mind that it can be easy to fall into a trap known as [greenwashing](https://www.investopedia.com/terms/g/greenwashing.asp), where a company or service claims to be green but actually is not. Take the time to do your research and understand the basis of the technology that is being developed before you decide whether to financially back a particular company. The best way to determine whether the environmental practices and technology behind a company are solid, or are simply greenwashing, is to ask questions. ## What Are the Benefits of Green Technology? Green technology can be used to reduce pollution and waste products of traditional industrial processes. In addition to reducing the negative effects on the natural environment, these technologies can also use resources more efficiently. For example, sustainable agriculture initiatives can prevent the soil damage associated with crop monoculture, and sustainable building materials are less likely to be depleted. ## How Can Green Technology Improve the Economy? Innovation in green technologies can improve human health and increase lifespans, resulting in a net increase in economic productivity. For example, recent research has found fossil fuel pollution to be responsible for about one in every five deaths worldwide, due to the hazards associated with their extraction and air pollution. Replacing fossil fuels with renewable energy would reduce the burdens on the workforce and health sectors, not to mention the benefits of reducing global climate change. ## How Much Does the US Invest in Green Technology? According to research by BloombergNEF, the United States ranked second in the world for green technology investments, with $114 billion invested in 2021. This sum includes both public and private sector investments. ## The Bottom Line Investors searching for environmentally responsible, financially sound investments will find abundant opportunities. The challenge of investing in green technology is often twofold; the objective is to increase personal wealth and to make the world a better place through socially responsible investing. Admittedly, this can be a somewhat daunting task, but taking the time to research can help find opportunities to protect your portfolio as well as the environment. Remember to consider the investment level that best aligns with your level of financial commitment, risk tolerance, and goals, while also supporting environmental goals and sustainable practices through the latest technological advances.

What Is Green Technology Investing? Green tech is a group of technologies that seek to reduce or eliminate the negative impacts of human activity on the natural environment. This can include anything from exploring new clean and renewable sources of energy to pioneering new and clean materials and finding ways to recycle waste and used materials. There are many ways to invest in green technology, from installing wind turbines and solar arrays to supporting electric vehicle research. Both private and government actors can contribute to green technology. Governments invest in green technology by giving subsidies or tax credits to green technology companies, while private individuals can support them by financing green technology enterprises. Key Takeaways Green technology seeks to reduce or eliminate the harmful environmental effects of human activity on the natural environment. Green technology encompasses a wide range of innovations, from renewable energy to sustainable agriculture, materials, and chemistry. Both governments and private actors are investing in green technology in different ways.Worldwide, green technology investments reached $755 billion in 2021, a sharp rise from the previous year. Electric vehicles and energy solutions were the largest sectors in green technology investment. Understanding Green Technology Investing Since there is no universal definition of what makes a technology "green," estimates of green technology investments vary widely. Renewable energy technologies such as solar, wind, and hydropower are widely considered "green," even though each of them has different environmental consequences. It's less clear if nuclear power or more efficient combustion engines can be considered "green tech," even if they do reduce carbon emissions. By any definition, investment in green tech or "climate tech" is increasing every year. Total investment in low-carbon technologies reached $755 billion in 2021, according to research by BloombergNEF. That's a 25% rise over the previous year, but still only about a third of what's needed to eliminate net carbon emissions by 2050. Here are some of the other ways businesses and countries are investing in green technology. To get the latest analysis and advice on green investing, check out The Green Investor podcast powered by Investopedia. Green Technology Industries In 2021, renewable energy took up the largest share of new investments, with a total of $368 billion worldwide. This category, including wind, solar, and other renewable power sources, saw investment grow by 6.5% over the previous year. Investment in green transportation also surged, reaching $273 billion, or 77% more than had been invested the year prior. This was largely thanks to increased electric vehicle sales, along with the associated infrastructure for charging and maintenance. Note that electric vehicles represent only under 10% of all circulating cars. This gives a signal about the potential opportunity in this market and the energy needed to power it. These industries were the largest investment recipients in 2021. There were also significant gains in investment for sustainable materials, carbon capture, and energy storage, although these figures were dwarfed by the investment in energy and transportation. Countries Investing in Green Tech Following the COP26 conference in Glasgow, many industrial nations set goals to reduce or eliminate carbon emissions by 2050. In order to meet that goal, investment in green technology is rising worldwide, both by governments and private investors. The Asia-Pacific region saw the largest amount of green tech investment in 2021, as well as the highest growth. Over $368 billion were invested in Asia-Pacific green tech industries, a 38% increase from 2020. China was by far the largest source of investment, accounting for over two-thirds of the region's total. Other regions saw comparatively lower rates of investment growth. Investment in the Middle East/North Africa region grew 16%, and in the Americas, it reached 21%. Corporate investments in climate-tech companies also increased, reaching $165 billion in 2021. Two-thirds of this figure came from public markets, such as IPOs, SPACs, or other offerings. Venture capitalists and private equity investors contributed only $53 billion, but they tended to focus on more nascent sectors. $111 Billion The amount of money raised by climate tech companies through public markets in 2021. Types of Green Technology Investments Investors who are considering taking the plunge into green technology would do well to take the time to understand a bit of background behind this sector, including the goals that serve as the foundation for this rapidly growing field. Those goals include: Source Reduction: This is the goal of reducing pollution and waste by changing production and consumption patterns. Sustainability: This is an effort to meet societal needs with methods that can continue to be used into the future indefinitely without depleting or damaging natural resources. Innovation: The focus is on developing alternatives to types of technology that are harmful to the environment. Cradle-to-cradle design: This involves the creation of products that can be reused or reclaimed, thus ending the cradle-to-grave cycle of manufactured products. Viability: The aim is to create an economic activity center that focuses on products and technologies that are beneficial to the environment, thus increasing the speed at which such technology and product concepts can be implemented. Investors will find there are numerous subsectors in green technology that currently provide excellent opportunities for investments. They include: Energy: With energy often being considered the most pressing issue in the green technology sector, the green energy sector focuses on the development of alternative fuels. Green Nanotechnology: This includes the manipulation of various materials at the nanometer level, which could transform how products are manufactured. Green Chemistry: This encompasses the invention, development, and application of chemical processes and products that are designed to eliminate or reduce the generation and use of hazardous substances.  Special Considerations Green tech investors should focus on finding not only the most lucrative opportunities but also those that align with their own personal and environmental interests. New IPOs can also top prospects as many smaller, successful private companies grow and list on exchanges. There are also risks associated with investing in any new technology as well as unknown and emerging companies. Diversification is vital to any successful investment strategy. Investing in different green sectors can help you to diversify your portfolio while protecting your funds. Managed exchange-traded funds (ETFs) and mutual funds can also be good investments leaving the active stock picking to professionals. Keep in mind that it can be easy to fall into a trap known as greenwashing, where a company or service claims to be green but actually is not. Take the time to do your research and understand the basis of the technology that is being developed before you decide whether to financially back a particular company. The best way to determine whether the environmental practices and technology behind a company are solid, or are simply greenwashing, is to ask questions. What Are the Benefits of Green Technology? Green technology can be used to reduce pollution and waste products of traditional industrial processes. In addition to reducing the negative effects on the natural environment, these technologies can also use resources more efficiently. For example, sustainable agriculture initiatives can prevent the soil damage associated with crop monoculture, and sustainable building materials are less likely to be depleted. How Can Green Technology Improve the Economy? Innovation in green technologies can improve human health and increase lifespans, resulting in a net increase in economic productivity. For example, recent research has found fossil fuel pollution to be responsible for about one in every five deaths worldwide, due to the hazards associated with their extraction and air pollution. Replacing fossil fuels with renewable energy would reduce the burdens on the workforce and health sectors, not to mention the benefits of reducing global climate change. How Much Does the US Invest in Green Technology? According to research by BloombergNEF, the United States ranked second in the world for green technology investments, with $114 billion invested in 2021. This sum includes both public and private sector investments. The Bottom Line Investors searching for environmentally responsible, financially sound investments will find abundant opportunities. The challenge of investing in green technology is often twofold; the objective is to increase personal wealth and to make the world a better place through socially responsible investing. Admittedly, this can be a somewhat daunting task, but taking the time to research can help find opportunities to protect your portfolio as well as the environment. Remember to consider the investment level that best aligns with your level of financial commitment, risk tolerance, and goals, while also supporting environmental goals and sustainable practices through the latest technological advances.

https://www.investopedia.com/how-to-teach-your-child-about-cryptocurrency-5224013

How to Teach Your Child About Cryptocurrency

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Your child may have heard about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a>, seen the flashy videos on TikTok, or discussed the subject with friends but still have not fully grasped their significance. Some may be well-versed in these terms and itching to buy electronics with crypto or even invest in digital currencies. Or, they may have zero interest in cryptocurrencies. </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 any case, as part of good parenting, it's your job to help your children understand the complexities of the financial world. With younger people now factoring cryptocurrency into their retirement investing plans, according to 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 Survey</a>, understanding cryptocurrency may be extremely important for children.<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>Given its high profile, cryptocurrency may be generating a lot of interest from your kids.</li><li>You can help your child research the topic by checking out both reputable and untrustworthy sources, focusing on how to separate reliable information from ill-informed chatter and outright scams.</li><li>It's important to communicate to your kids that cryptocurrency can decline sharply in value, making it risky to own.<br/></li></ul></div></div></div> <span class="heading-toc" id="toc-why-crypto-literacy-matters"></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 Crypto Literacy Matters </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The early enthusiasm for cryptocurrency has been tempered lately by its extreme price volatility, not to mention the scams, hacks, and bugs that regularly rock this nascent industry. </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"> Economists disagree on the longevity of cryptocurrency. It may be around for years to come and some believe that it may overtake spending with cash and credit cards within five to 10 years. It may never become widely adopted by society. In either case, cryptocurrency currently has a presence in global financial markets. </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"> Whatever your own view is of crypto, it may be generating a great deal of interest from your child. There's no need to over-emphasize cryptocurrency but it should be a part of the basics of financial literacy that you pass on to your child. </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 ABCs of Money </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> "Teaching about money [almost] starts at birth," explains Joyce Serido, professor and extension specialist of family social science<strong> </strong>at the University of Minnesota, who specializes in financial parenting. If children have received a solid foundation on how money and currency translate into value and buying power, they're on their way to understanding crypto. It's around the preteen years, she adds, that children may amp up their questions about crypto and feel that they are ready to use it. </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 former resident crypto expert at the University of Minnesota's Carlson School of Management was accounting professor Vivian Fang. Fang is currently a professor and the Richard E. Jacobs Chair in Finance at Indiana University.<span class="ql-inline-citation" data-cite="16"></span> Fang notes that she's years off from teaching her young son about crypto. Until then, she's schooling him in the value of money through lessons in earning, losing, and working for money. </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"> Raising a Wise Consumer </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In addition to a weekly allowance of $5, Fang pays her son in quarters for completed tasks, such as one quarter for helping with the dishes and two quarters for assisting in dog walking. He can also incur losses in the form of a fine issued by his parents, if, for example, he misbehaves at a swimming lesson. </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"> Fang has witnessed what a discerning shopper her son has become. Working from the idea of using his own money, her youngster will either make a purchase or walk away after deciding an item is "too expensive." </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 a few years, he'll probably also take on a keen interest in crypto, as are millions of older kids now. </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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Learning about cryptocurrency is more than just the tokens. Educate your child on ancillary elements like wallets, exchanges, and keys.</p></div></div></div> <span class="heading-toc" id="toc-learning-about-crypto-online"></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"> Learning About Crypto Online </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Let's say your child is ready to jump into crypto. You can help your kid research the topic by checking out reputable sources which explain in clear terms what cryptocurrency is and the potential risks and benefits. Also, review together social media sites, like YouTube, which is filled with tutorial videos. </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"> Many kids are drawn to TikTok, so you may want to look at that, too, as it can be a teaching opportunity to review its crypto videos together. The site features many videos, including some from disreputable influencers who make wild get-rich-quick claims, punctuated with images of Ferraris and Rolls-Royces parked in front of sleek homes. </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"> By looking into a range of sources, reputable and dubious, you are helping your child separate reliable information from potential cons and become a smarter consumer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-what-is-crypto"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> What Is Crypto? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Cryptocurrency is money that exists only in digital form, not in physical form. The records of its ownership and exchange are verified and maintained by a decentralized system that relies on cryptography to keep it secure.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Crypto can be used like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiatmoney.asp">fiat</a>, traditional currencies, such as <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. dollars</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/forex/m/mxn-mexican-peso.asp">Mexican pesos</a>, as investments, and to pay for everyday goods and experiences. </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 exact number of cryptocurrencies that exist at any given point of time can be difficult to determine. Many cryptocurrencies are very small and not listed on common, public, or active exchanges. As of April, 2024, there are more than 9,000 digital currencies listed on CoinMarketCap with a combined <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a> of $2.41 trillion.<span class="ql-inline-citation" data-cite="10"></span> Note that there may be many more cryptocurrencies and tokens simply not listed on this platform. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Perils of Cryptocurrency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The largest cryptocurrency by far is Bitcoin (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=btcusd">BTCUSD</a>), released in January 2009 by the pseudonymous Satoshi Nakamoto.<span class="ql-inline-citation" data-cite="11"></span> As of March 12, 2023, a single Bitcoin was worth $21,240. However, one year later, in April 2024, it is worth more than three times that amount. It's worth pointing out to your child that certain forms of investments like stocks, bonds, or cryptocurrency can change in value - both for the good and the bad.<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_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Then there's the FTX token, which launched in May 2019 for $1.20, soared to as much as $61 within days, and then crashed back to $1.08 on March 12, 2023.<span class="ql-inline-citation" data-cite="9"></span> That, of course, was after the cryptocurrency exchange on which it was traded <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ftx-exchange-5200842">went bankrupt</a>. Though the allure of high profits may initially entice investors, education your child that there are severe risks where you could lose almost all (or all) of your investment. </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"> Safeguarding Cryptocurrency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The early digital products were easy to replicate, which was an inherent challenge to digital currencies until Bitcoin was introduced with safety measures in place. Now the use of cryptography and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a> technology ensures that cryptocurrencies are nearly impossible to counterfeit or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/doublespending.asp">double-spend</a>, despite being digital. </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"> Blockchain is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distributed-ledgers.asp">distributed ledger</a> enforced by a vast network of computers. No central authority issues cryptocurrencies, which renders them theoretically immune to government interference or manipulation.  </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"> While some crypto investing platforms require the trader to be at least 18 years old, others have no age limit. Even with an age requirement, any adult can invest in cryptocurrency on behalf of a child. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_54-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_55-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>When "training" on how to use cryptocurrency, do test transactions that send small amounts of money to ensure it goes through correctly. You may incur more transaction fees, but this is a great way to make sure your transactions work.</p></div></div></div> <span class="heading-toc" id="toc-heres-what-else-to-tell-your-child-about-crypto-6-tips"></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"> Here's What Else to Tell Your Child About Crypto: 6 Tips </span> </h2> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <li><strong>Spending crypto.</strong> Cryptocurrency is like fiat or traditional currency in that you can use it to buy items and services. It's different because it exists only in digital form. One of the easiest ways to spend cryptocurrency at retailers and vendors is through gift cards purchased through platforms like Bitrefill. It would be difficult or impossible to use a crypto coin to buy a pizza on Main Street, but many large retailers are jumping aboard the crypto wagon. Among them are Starbucks Corporation (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=sbux">BUX</a>), Burger King, and Yum! Brands, Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=yum">YUM</a>, parent of KFC, Taco Bell, and Pizza Hut). It's important to note that only certain locations in qualifying countries may accept digital currencies.<span class="ql-inline-citation" data-cite="2"></span></li> <li><strong>Trading crypto.</strong> You must <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-in-cryptocurrency-5215269">create a crypto account </a>where your funds are stored. You can do that through <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coinbase-commerce.asp">Coinbase</a>, which is a <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-crypto-exchanges-5071855">cryptocurrency exchange</a> that offers many currencies and payment methods. You buy crypto with traditional currency using debit cards or bank accounts.</li> <li><strong>Accessing crypto.</strong> Crypto funds are always available anyplace in the world because they aren't tied to a bank or a government. (Of course, that's assuming that the platform is a going concern, unlike FTX.)</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Crypto security.</strong> Cryptocurrency can be safer to use because you don't need to provide personal information to a vendor, reducing the risk of identity theft or fraud.</li> <li><strong>Crypto volatility.</strong> Cryptocurrency values have wild ups and downs, which can be good or bad. Let's say you have $100 in your crypto account. The value can increase, meaning you have more in your account. However, if it dips in value—to $25, for example—there's nothing you can do to recover the lost funds but wait it out, hoping that the value will increase. It may not.</li> <li><strong>Crypto is not a game.</strong> Some games like <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.roblox.com/" rel="nofollow"><em>Roblox</em> </a>and <em><a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://www.epicgames.com/fortnite/en-US/home" rel="nofollow">Fortnite</a> </em>use virtual currencies called Robux and V-Bucks, respectively. These are fictional currencies that hold no monetary value in the real world. When playing, you can lose Robux, but you do not lose real money. Investments in actual cryptocurrency, on the other hand, can generate real and often big losses.<br/></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-what-is-a-blockchain"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Blockchain?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A blockchain is a verification system that is the heart of any cryptocurrency. A blockchain is a distributed database that is shared among the nodes of many computers, providing unalterable proof of a crypto coin's existence and a history of its use.<span class="ql-inline-citation" data-cite="12"></span></p><p>The blockchain maintains a secure and decentralized record of transactions. It guarantees the fidelity and security of a record of data.</p><p>One key difference between a traditional database and a blockchain is how the data is structured. A blockchain collects information in groups, known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/block-bitcoin-block.asp">blocks</a>, each of which holds a set of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once it is filled.<br/></p><p>A database usually structures its data into tables. A blockchain, as its name implies, structures data into chunks (blocks) that are strung together.</p><p>This data structure creates an irreversible timeline of data. When a block is filled, it is set in stone and becomes a part of the timeline. Each block in the chain is given an exact time stamp when it is added to the chain.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_61-0"><span class="heading-toc" id="toc-what-is-bitcoin"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Bitcoin?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Bitcoin is a decentralized <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-money.asp">digital currency</a> created in January 2009. It follows the ideas set out in a white paper by the mysterious and pseudonymous Satoshi Nakamoto.<span class="ql-inline-citation" data-cite="11"></span> The identity of the person or persons who created the technology remains a mystery.</p><p>Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is operated by a decentralized authority.<span class="ql-inline-citation" data-cite="11"></span><br/></p><p>Bitcoin is known as a type of cryptocurrency because it uses cryptography to keep it secure. As with any cryptocurrency, there are no physical bitcoins, only balances kept on a public ledger that anyone can view but no one can alter.</p><p>All Bitcoin transactions are verified by a massive amount of computing power via a process known as mining.</p><p>Bitcoin is not issued or backed by any bank or government, nor is an individual bitcoin valuable as a commodity. Despite it not being <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/legal-tender.asp">legal tender</a> in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/altcoin.asp">altcoins</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_63-0"><span class="heading-toc" id="toc-how-does-crypto-mining-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Crypto Mining Work?</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/b/bitcoin-mining.asp">Bitcoin mining</a> is the process by which new <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">bitcoins</a> are entered into circulation. It is also the way the network confirms each new transaction.<span class="ql-inline-citation" data-cite="13"></span></p><p>Mining is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/block-bitcoin-block.asp">block</a> of bitcoins and the process begins again.<br/></p><p><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/forex/041515/countries-where-bitcoin-legal-illegal.asp">Cryptocurrency</a> mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal because miners receive rewards for their work with crypto tokens. Technology-inclined entrepreneurial types see mining as pennies from heaven, like the California gold prospectors in 1849.</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-a-distribued-ledger"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Distribued Ledger?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public "witnesses."<span class="ql-inline-citation" data-cite="14"></span> The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes.<br/></p><p>A distributed ledger stands in contrast to a centralized ledger, which is the type of ledger that most companies use. A centralized <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/generalledger.asp">ledger</a> is more prone to cyber-attacks and fraud, as it has a single point of failure.<br/></p><p>Underlying distributed ledgers is the same technology that is used by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>, which is the technology that is used by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">bitcoin</a>. Blockchain is a type of distributed ledger used by bitcoin.<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-what-is-a-digital-wallet"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Digital Wallet?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A digital wallet (or e-wallet) is a personal storage space for cryptocurrency users.<span class="ql-inline-citation" data-cite="15"></span> Like the currency itself, it exists only in the form of software.</p><p>The digital wallet stores users' <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payment.asp">payment</a> information and passwords for their payment methods and related websites. By using a digital wallet, users can trade crypto or make purchases using it.<br/></p><p>Digital wallets can be used in conjunction with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mobile-payment.asp">mobile payment</a> systems, which allow customers to pay for purchases with their smartphones. A digital wallet can also be used to store loyalty card information and digital <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon.asp">coupons</a>.</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"> Given the likelihood that cryptocurrency will have a continued and, perhaps, a growing impact on the world economy, it is an important element to consider when it comes to your children's financial education. </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"> In addition to helping your kids track down reputable information, it's important to be upfront with them about the risky nature of cryptocurrency investing. </p></div>

Your child may have heard about [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) and [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp), seen the flashy videos on TikTok, or discussed the subject with friends but still have not fully grasped their significance. Some may be well-versed in these terms and itching to buy electronics with crypto or even invest in digital currencies. Or, they may have zero interest in cryptocurrencies. In any case, as part of good parenting, it's your job to help your children understand the complexities of the financial world. With younger people now factoring cryptocurrency into their retirement investing plans, according to the [2022 Investopedia Financial Literacy Survey](https://www.investopedia.com/financial-literacy-survey-5223919), understanding cryptocurrency may be extremely important for children. ### Key Takeaways * Given its high profile, cryptocurrency may be generating a lot of interest from your kids. * You can help your child research the topic by checking out both reputable and untrustworthy sources, focusing on how to separate reliable information from ill-informed chatter and outright scams. * It's important to communicate to your kids that cryptocurrency can decline sharply in value, making it risky to own. ## Why Crypto Literacy Matters The early enthusiasm for cryptocurrency has been tempered lately by its extreme price volatility, not to mention the scams, hacks, and bugs that regularly rock this nascent industry. Economists disagree on the longevity of cryptocurrency. It may be around for years to come and some believe that it may overtake spending with cash and credit cards within five to 10 years. It may never become widely adopted by society. In either case, cryptocurrency currently has a presence in global financial markets. Whatever your own view is of crypto, it may be generating a great deal of interest from your child. There's no need to over-emphasize cryptocurrency but it should be a part of the basics of financial literacy that you pass on to your child. ### The ABCs of Money "Teaching about money [almost] starts at birth," explains Joyce Serido, professor and extension specialist of family social scienceat the University of Minnesota, who specializes in financial parenting. If children have received a solid foundation on how money and currency translate into value and buying power, they're on their way to understanding crypto. It's around the preteen years, she adds, that children may amp up their questions about crypto and feel that they are ready to use it. The former resident crypto expert at the University of Minnesota's Carlson School of Management was accounting professor Vivian Fang. Fang is currently a professor and the Richard E. Jacobs Chair in Finance at Indiana University. Fang notes that she's years off from teaching her young son about crypto. Until then, she's schooling him in the value of money through lessons in earning, losing, and working for money. ### Raising a Wise Consumer In addition to a weekly allowance of $5, Fang pays her son in quarters for completed tasks, such as one quarter for helping with the dishes and two quarters for assisting in dog walking. He can also incur losses in the form of a fine issued by his parents, if, for example, he misbehaves at a swimming lesson. Fang has witnessed what a discerning shopper her son has become. Working from the idea of using his own money, her youngster will either make a purchase or walk away after deciding an item is "too expensive." In a few years, he'll probably also take on a keen interest in crypto, as are millions of older kids now. ### Learning about cryptocurrency is more than just the tokens. Educate your child on ancillary elements like wallets, exchanges, and keys. ## Learning About Crypto Online Let's say your child is ready to jump into crypto. You can help your kid research the topic by checking out reputable sources which explain in clear terms what cryptocurrency is and the potential risks and benefits. Also, review together social media sites, like YouTube, which is filled with tutorial videos. Many kids are drawn to TikTok, so you may want to look at that, too, as it can be a teaching opportunity to review its crypto videos together. The site features many videos, including some from disreputable influencers who make wild get-rich-quick claims, punctuated with images of Ferraris and Rolls-Royces parked in front of sleek homes. By looking into a range of sources, reputable and dubious, you are helping your child separate reliable information from potential cons and become a smarter consumer. ## What Is Crypto? Cryptocurrency is money that exists only in digital form, not in physical form. The records of its ownership and exchange are verified and maintained by a decentralized system that relies on cryptography to keep it secure. Crypto can be used like [fiat](https://www.investopedia.com/terms/f/fiatmoney.asp), traditional currencies, such as [U.S. dollars](https://www.investopedia.com/terms/forex/u/usd-united-states-dollar.asp) and [Mexican pesos](https://www.investopedia.com/terms/forex/m/mxn-mexican-peso.asp), as investments, and to pay for everyday goods and experiences. The exact number of cryptocurrencies that exist at any given point of time can be difficult to determine. Many cryptocurrencies are very small and not listed on common, public, or active exchanges. As of April, 2024, there are more than 9,000 digital currencies listed on CoinMarketCap with a combined [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of $2.41 trillion. Note that there may be many more cryptocurrencies and tokens simply not listed on this platform. ### Perils of Cryptocurrency The largest cryptocurrency by far is Bitcoin ([BTCUSD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=btcusd)), released in January 2009 by the pseudonymous Satoshi Nakamoto. As of March 12, 2023, a single Bitcoin was worth $21,240. However, one year later, in April 2024, it is worth more than three times that amount. It's worth pointing out to your child that certain forms of investments like stocks, bonds, or cryptocurrency can change in value - both for the good and the bad. Then there's the FTX token, which launched in May 2019 for $1.20, soared to as much as $61 within days, and then crashed back to $1.08 on March 12, 2023. That, of course, was after the cryptocurrency exchange on which it was traded [went bankrupt](https://www.investopedia.com/ftx-exchange-5200842). Though the allure of high profits may initially entice investors, education your child that there are severe risks where you could lose almost all (or all) of your investment. ### Safeguarding Cryptocurrency The early digital products were easy to replicate, which was an inherent challenge to digital currencies until Bitcoin was introduced with safety measures in place. Now the use of cryptography and [blockchain](https://www.investopedia.com/terms/b/blockchain.asp) technology ensures that cryptocurrencies are nearly impossible to counterfeit or [double-spend](https://www.investopedia.com/terms/d/doublespending.asp), despite being digital. Blockchain is a [distributed ledger](https://www.investopedia.com/terms/d/distributed-ledgers.asp) enforced by a vast network of computers. No central authority issues cryptocurrencies, which renders them theoretically immune to government interference or manipulation.  While some crypto investing platforms require the trader to be at least 18 years old, others have no age limit. Even with an age requirement, any adult can invest in cryptocurrency on behalf of a child. ### When "training" on how to use cryptocurrency, do test transactions that send small amounts of money to ensure it goes through correctly. You may incur more transaction fees, but this is a great way to make sure your transactions work. ## Here's What Else to Tell Your Child About Crypto: 6 Tips 1. **Spending crypto.** Cryptocurrency is like fiat or traditional currency in that you can use it to buy items and services. It's different because it exists only in digital form. One of the easiest ways to spend cryptocurrency at retailers and vendors is through gift cards purchased through platforms like Bitrefill. It would be difficult or impossible to use a crypto coin to buy a pizza on Main Street, but many large retailers are jumping aboard the crypto wagon. Among them are Starbucks Corporation ([BUX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=sbux)), Burger King, and Yum! Brands, Inc. ([YUM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=yum), parent of KFC, Taco Bell, and Pizza Hut). It's important to note that only certain locations in qualifying countries may accept digital currencies. 2. **Trading crypto.** You must [create a crypto account](https://www.investopedia.com/investing-in-cryptocurrency-5215269) where your funds are stored. You can do that through [Coinbase](https://www.investopedia.com/terms/c/coinbase-commerce.asp), which is a [cryptocurrency exchange](https://www.investopedia.com/best-crypto-exchanges-5071855) that offers many currencies and payment methods. You buy crypto with traditional currency using debit cards or bank accounts. 3. **Accessing crypto.** Crypto funds are always available anyplace in the world because they aren't tied to a bank or a government. (Of course, that's assuming that the platform is a going concern, unlike FTX.) 5. **Crypto security.** Cryptocurrency can be safer to use because you don't need to provide personal information to a vendor, reducing the risk of identity theft or fraud. 6. **Crypto volatility.** Cryptocurrency values have wild ups and downs, which can be good or bad. Let's say you have $100 in your crypto account. The value can increase, meaning you have more in your account. However, if it dips in value—to $25, for example—there's nothing you can do to recover the lost funds but wait it out, hoping that the value will increase. It may not. 7. **Crypto is not a game.** Some games like [*Roblox*](https://www.roblox.com/)and *[Fortnite](https://www.epicgames.com/fortnite/en-US/home)*use virtual currencies called Robux and V-Bucks, respectively. These are fictional currencies that hold no monetary value in the real world. When playing, you can lose Robux, but you do not lose real money. Investments in actual cryptocurrency, on the other hand, can generate real and often big losses. ## What Is a Blockchain? A blockchain is a verification system that is the heart of any cryptocurrency. A blockchain is a distributed database that is shared among the nodes of many computers, providing unalterable proof of a crypto coin's existence and a history of its use. The blockchain maintains a secure and decentralized record of transactions. It guarantees the fidelity and security of a record of data. One key difference between a traditional database and a blockchain is how the data is structured. A blockchain collects information in groups, known as [blocks](https://www.investopedia.com/terms/b/block-bitcoin-block.asp), each of which holds a set of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once it is filled. A database usually structures its data into tables. A blockchain, as its name implies, structures data into chunks (blocks) that are strung together. This data structure creates an irreversible timeline of data. When a block is filled, it is set in stone and becomes a part of the timeline. Each block in the chain is given an exact time stamp when it is added to the chain. ## What Is Bitcoin? Bitcoin is a decentralized [digital currency](https://www.investopedia.com/terms/d/digital-money.asp) created in January 2009. It follows the ideas set out in a white paper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology remains a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is operated by a decentralized authority. Bitcoin is known as a type of cryptocurrency because it uses cryptography to keep it secure. As with any cryptocurrency, there are no physical bitcoins, only balances kept on a public ledger that anyone can view but no one can alter. All Bitcoin transactions are verified by a massive amount of computing power via a process known as mining. Bitcoin is not issued or backed by any bank or government, nor is an individual bitcoin valuable as a commodity. Despite it not being [legal tender](https://www.investopedia.com/terms/l/legal-tender.asp) in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as [altcoins](https://www.investopedia.com/terms/a/altcoin.asp). ## How Does Crypto Mining Work? [Bitcoin mining](https://www.investopedia.com/terms/b/bitcoin-mining.asp) is the process by which new [bitcoins](https://www.investopedia.com/terms/b/bitcoin.asp) are entered into circulation. It is also the way the network confirms each new transaction. Mining is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next [block](https://www.investopedia.com/terms/b/block-bitcoin-block.asp) of bitcoins and the process begins again. [Cryptocurrency](https://www.investopedia.com/articles/forex/041515/countries-where-bitcoin-legal-illegal.asp) mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal because miners receive rewards for their work with crypto tokens. Technology-inclined entrepreneurial types see mining as pennies from heaven, like the California gold prospectors in 1849. ## What Is a Distribued Ledger? A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public "witnesses." The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes. A distributed ledger stands in contrast to a centralized ledger, which is the type of ledger that most companies use. A centralized [ledger](https://www.investopedia.com/terms/g/generalledger.asp) is more prone to cyber-attacks and fraud, as it has a single point of failure. Underlying distributed ledgers is the same technology that is used by [blockchain](https://www.investopedia.com/terms/b/blockchain.asp), which is the technology that is used by [bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp). Blockchain is a type of distributed ledger used by bitcoin. ## What Is a Digital Wallet? A digital wallet (or e-wallet) is a personal storage space for cryptocurrency users. Like the currency itself, it exists only in the form of software. The digital wallet stores users' [payment](https://www.investopedia.com/terms/p/payment.asp) information and passwords for their payment methods and related websites. By using a digital wallet, users can trade crypto or make purchases using it. Digital wallets can be used in conjunction with [mobile payment](https://www.investopedia.com/terms/m/mobile-payment.asp) systems, which allow customers to pay for purchases with their smartphones. A digital wallet can also be used to store loyalty card information and digital [coupons](https://www.investopedia.com/terms/c/coupon.asp). ## The Bottom Line Given the likelihood that cryptocurrency will have a continued and, perhaps, a growing impact on the world economy, it is an important element to consider when it comes to your children's financial education. In addition to helping your kids track down reputable information, it's important to be upfront with them about the risky nature of cryptocurrency investing.

Your child may have heard about cryptocurrency and Bitcoin, seen the flashy videos on TikTok, or discussed the subject with friends but still have not fully grasped their significance. Some may be well-versed in these terms and itching to buy electronics with crypto or even invest in digital currencies. Or, they may have zero interest in cryptocurrencies. In any case, as part of good parenting, it's your job to help your children understand the complexities of the financial world. With younger people now factoring cryptocurrency into their retirement investing plans, according to the 2022 Investopedia Financial Literacy Survey, understanding cryptocurrency may be extremely important for children. Key Takeaways Given its high profile, cryptocurrency may be generating a lot of interest from your kids.You can help your child research the topic by checking out both reputable and untrustworthy sources, focusing on how to separate reliable information from ill-informed chatter and outright scams.It's important to communicate to your kids that cryptocurrency can decline sharply in value, making it risky to own. Why Crypto Literacy Matters The early enthusiasm for cryptocurrency has been tempered lately by its extreme price volatility, not to mention the scams, hacks, and bugs that regularly rock this nascent industry. Economists disagree on the longevity of cryptocurrency. It may be around for years to come and some believe that it may overtake spending with cash and credit cards within five to 10 years. It may never become widely adopted by society. In either case, cryptocurrency currently has a presence in global financial markets. Whatever your own view is of crypto, it may be generating a great deal of interest from your child. There's no need to over-emphasize cryptocurrency but it should be a part of the basics of financial literacy that you pass on to your child. The ABCs of Money "Teaching about money [almost] starts at birth," explains Joyce Serido, professor and extension specialist of family social science at the University of Minnesota, who specializes in financial parenting. If children have received a solid foundation on how money and currency translate into value and buying power, they're on their way to understanding crypto. It's around the preteen years, she adds, that children may amp up their questions about crypto and feel that they are ready to use it. The former resident crypto expert at the University of Minnesota's Carlson School of Management was accounting professor Vivian Fang. Fang is currently a professor and the Richard E. Jacobs Chair in Finance at Indiana University. Fang notes that she's years off from teaching her young son about crypto. Until then, she's schooling him in the value of money through lessons in earning, losing, and working for money. Raising a Wise Consumer In addition to a weekly allowance of $5, Fang pays her son in quarters for completed tasks, such as one quarter for helping with the dishes and two quarters for assisting in dog walking. He can also incur losses in the form of a fine issued by his parents, if, for example, he misbehaves at a swimming lesson. Fang has witnessed what a discerning shopper her son has become. Working from the idea of using his own money, her youngster will either make a purchase or walk away after deciding an item is "too expensive." In a few years, he'll probably also take on a keen interest in crypto, as are millions of older kids now. Learning about cryptocurrency is more than just the tokens. Educate your child on ancillary elements like wallets, exchanges, and keys. Learning About Crypto Online Let's say your child is ready to jump into crypto. You can help your kid research the topic by checking out reputable sources which explain in clear terms what cryptocurrency is and the potential risks and benefits. Also, review together social media sites, like YouTube, which is filled with tutorial videos. Many kids are drawn to TikTok, so you may want to look at that, too, as it can be a teaching opportunity to review its crypto videos together. The site features many videos, including some from disreputable influencers who make wild get-rich-quick claims, punctuated with images of Ferraris and Rolls-Royces parked in front of sleek homes. By looking into a range of sources, reputable and dubious, you are helping your child separate reliable information from potential cons and become a smarter consumer. What Is Crypto? Cryptocurrency is money that exists only in digital form, not in physical form. The records of its ownership and exchange are verified and maintained by a decentralized system that relies on cryptography to keep it secure. Crypto can be used like fiat, traditional currencies, such as U.S. dollars and Mexican pesos, as investments, and to pay for everyday goods and experiences. The exact number of cryptocurrencies that exist at any given point of time can be difficult to determine. Many cryptocurrencies are very small and not listed on common, public, or active exchanges. As of April, 2024, there are more than 9,000 digital currencies listed on CoinMarketCap with a combined market capitalization of $2.41 trillion. Note that there may be many more cryptocurrencies and tokens simply not listed on this platform. Perils of Cryptocurrency The largest cryptocurrency by far is Bitcoin (BTCUSD), released in January 2009 by the pseudonymous Satoshi Nakamoto. As of March 12, 2023, a single Bitcoin was worth $21,240. However, one year later, in April 2024, it is worth more than three times that amount. It's worth pointing out to your child that certain forms of investments like stocks, bonds, or cryptocurrency can change in value - both for the good and the bad. Then there's the FTX token, which launched in May 2019 for $1.20, soared to as much as $61 within days, and then crashed back to $1.08 on March 12, 2023. That, of course, was after the cryptocurrency exchange on which it was traded went bankrupt. Though the allure of high profits may initially entice investors, education your child that there are severe risks where you could lose almost all (or all) of your investment. Safeguarding Cryptocurrency The early digital products were easy to replicate, which was an inherent challenge to digital currencies until Bitcoin was introduced with safety measures in place. Now the use of cryptography and blockchain technology ensures that cryptocurrencies are nearly impossible to counterfeit or double-spend, despite being digital. Blockchain is a distributed ledger enforced by a vast network of computers. No central authority issues cryptocurrencies, which renders them theoretically immune to government interference or manipulation.  While some crypto investing platforms require the trader to be at least 18 years old, others have no age limit. Even with an age requirement, any adult can invest in cryptocurrency on behalf of a child. When "training" on how to use cryptocurrency, do test transactions that send small amounts of money to ensure it goes through correctly. You may incur more transaction fees, but this is a great way to make sure your transactions work. Here's What Else to Tell Your Child About Crypto: 6 Tips Spending crypto. Cryptocurrency is like fiat or traditional currency in that you can use it to buy items and services. It's different because it exists only in digital form. One of the easiest ways to spend cryptocurrency at retailers and vendors is through gift cards purchased through platforms like Bitrefill. It would be difficult or impossible to use a crypto coin to buy a pizza on Main Street, but many large retailers are jumping aboard the crypto wagon. Among them are Starbucks Corporation (BUX), Burger King, and Yum! Brands, Inc. (YUM, parent of KFC, Taco Bell, and Pizza Hut). It's important to note that only certain locations in qualifying countries may accept digital currencies. Trading crypto. You must create a crypto account where your funds are stored. You can do that through Coinbase, which is a cryptocurrency exchange that offers many currencies and payment methods. You buy crypto with traditional currency using debit cards or bank accounts. Accessing crypto. Crypto funds are always available anyplace in the world because they aren't tied to a bank or a government. (Of course, that's assuming that the platform is a going concern, unlike FTX.) Crypto security. Cryptocurrency can be safer to use because you don't need to provide personal information to a vendor, reducing the risk of identity theft or fraud. Crypto volatility. Cryptocurrency values have wild ups and downs, which can be good or bad. Let's say you have $100 in your crypto account. The value can increase, meaning you have more in your account. However, if it dips in value—to $25, for example—there's nothing you can do to recover the lost funds but wait it out, hoping that the value will increase. It may not. Crypto is not a game. Some games like Roblox and Fortnite use virtual currencies called Robux and V-Bucks, respectively. These are fictional currencies that hold no monetary value in the real world. When playing, you can lose Robux, but you do not lose real money. Investments in actual cryptocurrency, on the other hand, can generate real and often big losses. What Is a Blockchain? A blockchain is a verification system that is the heart of any cryptocurrency. A blockchain is a distributed database that is shared among the nodes of many computers, providing unalterable proof of a crypto coin's existence and a history of its use.The blockchain maintains a secure and decentralized record of transactions. It guarantees the fidelity and security of a record of data.One key difference between a traditional database and a blockchain is how the data is structured. A blockchain collects information in groups, known as blocks, each of which holds a set of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once it is filled.A database usually structures its data into tables. A blockchain, as its name implies, structures data into chunks (blocks) that are strung together.This data structure creates an irreversible timeline of data. When a block is filled, it is set in stone and becomes a part of the timeline. Each block in the chain is given an exact time stamp when it is added to the chain. What Is Bitcoin? Bitcoin is a decentralized digital currency created in January 2009. It follows the ideas set out in a white paper by the mysterious and pseudonymous Satoshi Nakamoto. The identity of the person or persons who created the technology remains a mystery.Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms, and unlike government-issued currencies, it is operated by a decentralized authority.Bitcoin is known as a type of cryptocurrency because it uses cryptography to keep it secure. As with any cryptocurrency, there are no physical bitcoins, only balances kept on a public ledger that anyone can view but no one can alter.All Bitcoin transactions are verified by a massive amount of computing power via a process known as mining.Bitcoin is not issued or backed by any bank or government, nor is an individual bitcoin valuable as a commodity. Despite it not being legal tender in most parts of the world, Bitcoin is very popular and has triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins. How Does Crypto Mining Work? Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms each new transaction.Mining is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal because miners receive rewards for their work with crypto tokens. Technology-inclined entrepreneurial types see mining as pennies from heaven, like the California gold prospectors in 1849. What Is a Distribued Ledger? A distributed ledger is a database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people. It allows transactions to have public "witnesses." The participant at each node of the network can access the recordings shared across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes.A distributed ledger stands in contrast to a centralized ledger, which is the type of ledger that most companies use. A centralized ledger is more prone to cyber-attacks and fraud, as it has a single point of failure.Underlying distributed ledgers is the same technology that is used by blockchain, which is the technology that is used by bitcoin. Blockchain is a type of distributed ledger used by bitcoin. What Is a Digital Wallet? A digital wallet (or e-wallet) is a personal storage space for cryptocurrency users. Like the currency itself, it exists only in the form of software.The digital wallet stores users' payment information and passwords for their payment methods and related websites. By using a digital wallet, users can trade crypto or make purchases using it.Digital wallets can be used in conjunction with mobile payment systems, which allow customers to pay for purchases with their smartphones. A digital wallet can also be used to store loyalty card information and digital coupons. The Bottom Line Given the likelihood that cryptocurrency will have a continued and, perhaps, a growing impact on the world economy, it is an important element to consider when it comes to your children's financial education. In addition to helping your kids track down reputable information, it's important to be upfront with them about the risky nature of cryptocurrency investing.

https://www.investopedia.com/zeekr-stock-continues-rising-after-ipo-chinese-ev-maker-8647374

Chinese EV Maker Zeekr Continues Rising After IPO

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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>American depositary shares (ADSs) of Zeekr, a Chinese electric vehicle and battery manufacturer, continued to rise in intraday trading Monday.</li><li>The company's debut on the New York Stock Exchange (NYSE) took place Friday, with ADSs rising nearly 35%.</li><li>Zeekr is one of many EV makers in China increasing competition and making life more difficult for international brands like Tesla.</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"> Zeekr Intelligent Technology Holding's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZK">ZK</a>) American depositary shares (ADSs) continued to rise in intraday trading Monday after the Chinese electric vehicle maker's Friday <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO</a>). </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"> Zeekr on Friday priced its 21 million ADSs at $21 each on the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange (NYSE</a>), and they closed at $28.26, a rise of nearly 35%.<span class="ql-inline-citation" data-cite="2"></span> Each ADS represents 10 ordinary shares. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-what-is-zeekr-and-why-did-it-list-in-the-us"></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 Zeekr and Why Did It List in the US? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The company is one of several making competition in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chinese-ev-makers-nio-li-auto-byd-see-jump-in-sales-as-investors-await-tesla-numbers-8622840">Chinese and global EV market</a> increasingly tight, squeezing the margins of larger Chinese companies like BYD (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BYDDY">BYDDY</a>), and other international players like Tesla (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>). Some of the Chinese companies have expanded abroad, with Zeekr's IPO bringing some speculation about whether the company could be next.<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_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> "The capital markets in New York are very favorable for new energy vehicles. Zeekr is a global brand, and choosing to list in New York further demonstrates its global capabilities," Zeekr CEO Conghui An said, according to <em>Reuters</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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Zeekr is a subsidiary of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-chinese-ceos-7486014#toc-li-shufu">Zhejiang Geely Holding Group</a>, which holds positions in a number of Chinese and international automakers including Geely, Volvo, Polestar, and Lotus, among others.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Zeekr represents the largest U.S. IPO from a Chinese company since ridesharing platform <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/didi-global-didi-ipo-what-you-need-to-know-5191083">Didi in 2021</a>, according to <em>Bloomberg.<span class="ql-inline-citation" data-cite="7"></span> </em>Chinese regulators subsequently banned Didi from app stores there, claiming that it broke data privacy laws and posed cybersecurity risks, leading the company to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/didi-china-uber-delists-from-nyse-5211755">delist from the NYSE</a> just months after its IPO. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> After their debut surge Friday, ADSs of Zeekr were up a further 7.2% to $30.28 as of 11:35 a.m. ET Monday. </p></div>

### Key Takeaways * American depositary shares (ADSs) of Zeekr, a Chinese electric vehicle and battery manufacturer, continued to rise in intraday trading Monday. * The company's debut on the New York Stock Exchange (NYSE) took place Friday, with ADSs rising nearly 35%. * Zeekr is one of many EV makers in China increasing competition and making life more difficult for international brands like Tesla. Zeekr Intelligent Technology Holding's ([ZK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ZK)) American depositary shares (ADSs) continued to rise in intraday trading Monday after the Chinese electric vehicle maker's Friday [initial public offering (IPO](https://www.investopedia.com/terms/i/ipo.asp)). Zeekr on Friday priced its 21 million ADSs at $21 each on the [New York Stock Exchange (NYSE](https://www.investopedia.com/terms/n/nyse.asp)), and they closed at $28.26, a rise of nearly 35%. Each ADS represents 10 ordinary shares. ## What Is Zeekr and Why Did It List in the US? The company is one of several making competition in the [Chinese and global EV market](https://www.investopedia.com/chinese-ev-makers-nio-li-auto-byd-see-jump-in-sales-as-investors-await-tesla-numbers-8622840) increasingly tight, squeezing the margins of larger Chinese companies like BYD ([BYDDY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BYDDY)), and other international players like Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)). Some of the Chinese companies have expanded abroad, with Zeekr's IPO bringing some speculation about whether the company could be next. "The capital markets in New York are very favorable for new energy vehicles. Zeekr is a global brand, and choosing to list in New York further demonstrates its global capabilities," Zeekr CEO Conghui An said, according to *Reuters*. Zeekr is a subsidiary of [Zhejiang Geely Holding Group](https://www.investopedia.com/top-chinese-ceos-7486014#toc-li-shufu), which holds positions in a number of Chinese and international automakers including Geely, Volvo, Polestar, and Lotus, among others. Zeekr represents the largest U.S. IPO from a Chinese company since ridesharing platform [Didi in 2021](https://www.investopedia.com/didi-global-didi-ipo-what-you-need-to-know-5191083), according to *Bloomberg.* Chinese regulators subsequently banned Didi from app stores there, claiming that it broke data privacy laws and posed cybersecurity risks, leading the company to [delist from the NYSE](https://www.investopedia.com/didi-china-uber-delists-from-nyse-5211755) just months after its IPO. After their debut surge Friday, ADSs of Zeekr were up a further 7.2% to $30.28 as of 11:35 a.m. ET Monday.

Key Takeaways American depositary shares (ADSs) of Zeekr, a Chinese electric vehicle and battery manufacturer, continued to rise in intraday trading Monday.The company's debut on the New York Stock Exchange (NYSE) took place Friday, with ADSs rising nearly 35%.Zeekr is one of many EV makers in China increasing competition and making life more difficult for international brands like Tesla. Zeekr Intelligent Technology Holding's (ZK) American depositary shares (ADSs) continued to rise in intraday trading Monday after the Chinese electric vehicle maker's Friday initial public offering (IPO). Zeekr on Friday priced its 21 million ADSs at $21 each on the New York Stock Exchange (NYSE), and they closed at $28.26, a rise of nearly 35%. Each ADS represents 10 ordinary shares. What Is Zeekr and Why Did It List in the US? The company is one of several making competition in the Chinese and global EV market increasingly tight, squeezing the margins of larger Chinese companies like BYD (BYDDY), and other international players like Tesla (TSLA). Some of the Chinese companies have expanded abroad, with Zeekr's IPO bringing some speculation about whether the company could be next. "The capital markets in New York are very favorable for new energy vehicles. Zeekr is a global brand, and choosing to list in New York further demonstrates its global capabilities," Zeekr CEO Conghui An said, according to Reuters. Zeekr is a subsidiary of Zhejiang Geely Holding Group, which holds positions in a number of Chinese and international automakers including Geely, Volvo, Polestar, and Lotus, among others. Zeekr represents the largest U.S. IPO from a Chinese company since ridesharing platform Didi in 2021, according to Bloomberg. Chinese regulators subsequently banned Didi from app stores there, claiming that it broke data privacy laws and posed cybersecurity risks, leading the company to delist from the NYSE just months after its IPO. After their debut surge Friday, ADSs of Zeekr were up a further 7.2% to $30.28 as of 11:35 a.m. ET Monday.

https://www.investopedia.com/top-cds-today-march-20-2024-rates-steady-as-fed-announces-another-hold-8612416

Top CDs Today, March 20, 2024: Rates Steady as Fed Announces Another Hold

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="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 leading rates across CD terms held steady today, offering top APYs up to 5.55%.</li> <li>The quiet rates day coincides with the Federal Reserve announcing its fifth consecutive interest-rate hold, as it waits for inflation to get more firmly under control.</li> <li>The national CD leader is <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&amp;lender=Newtek%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Newtek Bank</a>, whose 5.55% yield is available for a 6-month term.</li> <li>Those who can stretch to a jumbo deposit can earn more for longer, with <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.hughesfcu.org/products/detail/certificate-accounts&amp;lender=Hughes%20Federal%20Credit%20Uniontype=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Hughes Federal Credit Union's</a> 17-month offer of 5.65% APY.</li> <li>The <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best CD rates</a> have generally been inching lower for the past few months. But they'll likely start falling faster once the Fed appears ready to make a rate cut.</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"> Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--ma-rate-table--finance-mma" id="mntl-sc-block_5-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div class="comp ma-rate-table--finance-mma mntl-block" id="ma-rate-table--finance-mma_1-0"></div><!-- end: comp ma-rate-table--finance-mma mntl-block --> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <span class="heading-toc" id="toc-the-overall-rate-leader-pays-555"></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 Overall Rate Leader Pays 5.55% </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The top yield across all CD terms on a nationally available certificate fell this week to 5.55% APY, available to lock in with Newtek Bank for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267">6 months</a>. Previously, a top rate of 5.75% APY had been available since late January. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In the 1-year term, you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650">earn as much as 5.40% APY</a>, guaranteeing your rate into 2025. You can also score 5.20% into 2026 with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-2-year-cd-rates-4801682">best 2-year CD</a> or secure a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-year-cd-rates-4782938">5.00% rate as long as 2027</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <div class="comp mntl-sc-block finance-sc-block-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/adC0z/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Ranges of the Top 15 CD rates by term"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_14-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 92px;"></colgroup> <colgroup span="1" style="width: 107px;"></colgroup> <colgroup span="1" style="width: 109px;"></colgroup> <colgroup span="1" style="width: 120px;"></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td><b>CD Terms</b></td> <td><b>Yesterday's Top National Rate</b></td> <td><b>Today's Top National Rate</b></td> <td><b>Day's Change </b>(percentage points)</td> <td><b>Top Rate Provider</b></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-month-cd-rates-5272288" rel="noopener noreferrer">3 months</a></td> <td>5.42% APY</td> <td>5.42% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.totaldirectbank.com/personal/cds&amp;lender=TotalDirectBank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">TotalDirectBank</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267" rel="noopener noreferrer">6 months</a></td> <td>5.55% APY</td> <td>5.55% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&amp;lender=Newtek%20Bank&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Newtek Bank</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650" rel="noopener noreferrer">1 year</a></td> <td>5.40% APY</td> <td>5.40% APY</td> <td>No change</td> <td>6 institutions</td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-18-month-cd-rates-5272348" rel="noopener noreferrer">18 months</a></td> <td>5.35% APY</td> <td>5.35% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://forteracu.com/banking/personal/savings/certificates/fixed-rate-share-certificate&amp;lender=Fortera%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Fortera Credit Union</a></td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.xcelfcu.org/Explore/Resources/Rates&amp;lender=XCEL%20Federal%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">2 years</a></td> <td>5.20% APY</td> <td>5.20% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&amp;lender=Credit%20Human&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-year-cd-rates-4782938" rel="noopener noreferrer">3 years</a></td> <td>5.00% APY</td> <td>5.00% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.dollarsavingsdirect.com/securebanking/cdInfo.do&amp;lender=DollarSavingsDirect&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">DollarSavingsDirect</a></td> </tr> <tr> <td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473" rel="noopener noreferrer">4 years</a></td> <td>4.60% APY</td> <td>4.60% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&amp;lender=Credit%20Human&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td> </tr> <tr> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lfcu.org/rates/personal-certificate-rates/&amp;lender=Lafayette%20Federal%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">5 years</a></td> <td>4.70% APY</td> <td>4.70% APY</td> <td>No change</td> <td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&amp;sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.pelicanstatecu.com/rates&amp;lender=Pelican%20State%20Credit%20Union&amp;type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Pelican State Credit Union</a></td> </tr> </tbody> </table> <figcaption>To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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 true that certificate of deposit (CD) rates have softened since climbing to a record high of 6.50% in October. At the start of February, the number of CDs in our daily ranking that pay a least 5.50% APY was 30. Today that count is down to seven. </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"> But don't lose sight of how high CD returns still are relative to the past 20 years. Being able to lock in a return in the 4% to 5% range for a year or more down the road is still a great earning opportunity, especially if future interest rates fall. </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"> Also keep in mind that snagging the <em>highest</em> APY isn't the only way to win with today's CDs. Since CD rates could fall significantly in 2024 and 2025, locking in a rate soon that's guaranteed far into the future can be a smart move.<br/> </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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_22-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/erdLE/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Today's CD rates vs. the fall peak vs. Jan 2022"></iframe></div> <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-todays-top-bank-credit-union-and-jumbo-cd-rates"></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"> Today's Top Bank, Credit Union, and Jumbo CD Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Today's best jumbo CD rate remains 5.65% APY on a 17-month term, available from Hughes Federal Credit Union with a deposit of at least $99,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> As always, beware that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-jumbo-cd-rates-4797766">the best jumbo CD rates</a> don't <em>always</em> pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in every term but two below, so it's always wise to shop both certificate types before making a final decision. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_29-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 94px;"></colgroup> <colgroup span="1" style="width: 152px;"></colgroup> <colgroup span="1" style="width: 159px;"></colgroup> <colgroup span="1" style="width: 144px;"></colgroup> <tbody data-check="-1"> <tr> <td><b>CD Term</b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-cd-rates-4801462" rel="noopener noreferrer">Today's Top National Bank Rate</a></b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214" rel="noopener noreferrer">Today's Top National Credit Union Rate</a></b></td> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-jumbo-cd-rates-4797766" rel="noopener noreferrer">Today's Top National Jumbo Rate</a></b></td> </tr> <tr> <td>3 months</td> <td>5.42% APY*</td> <td>5.30% APY</td> <td>5.20% APY</td> </tr> <tr> <td>6 months</td> <td>5.55% APY*</td> <td>5.50% APY*</td> <td>5.51% APY</td> </tr> <tr> <td>1 year</td> <td>5.40% APY</td> <td>5.40% APY</td> <td>5.51% APY*</td> </tr> <tr> <td>18 months</td> <td>5.05% APY</td> <td>5.35% APY</td> <td>5.65% APY*</td> </tr> <tr> <td>2 years</td> <td>4.91% APY</td> <td>5.20% APY*</td> <td>5.05% APY</td> </tr> <tr> <td>3 years</td> <td>5.00% APY*</td> <td>5.00% APY*</td> <td>4.97% APY</td> </tr> <tr> <td>4 years</td> <td>4.55% APY</td> <td>4.60% APY*</td> <td>4.52% APY</td> </tr> <tr> <td>5 years</td> <td>4.55% APY</td> <td>4.70% APY*</td> <td>4.42% APY</td> </tr> </tbody> </table> <figcaption>*Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <span class="heading-toc" id="toc-where-are-cd-rates-headed-in-2024"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> Where Are CD Rates Headed in 2024? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The Federal Reserve announced today that it is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723">maintaining rates at their current level</a>, the fifth meeting in a row it's done so.<span class="ql-inline-citation" data-cite="32"></span> To combat decades-high inflation, the Fed had aggressively hiked interest rates between March 2022 and July 2023, raising the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to its highest level in 22 years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> This in turn created historically favorable conditions for CD shoppers, as well as for anyone holding cash in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">high-yield savings</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-market-accounts-5096917">money market account</a>. Rates on CDs continued rising to a peak this fall, reaching their highest levels in two decades. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_36-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/5bF6w/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Top CD Rates Since December 2021"></iframe></div> <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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">Inflation</a> has since been cooling, allowing the Fed to stop raising interest rates. But it's now in wait-and-see mode, looking for evidence that inflation is falling sufficiently low to justify lowering the federal funds rate. According to the Fed's statement today, that first rate cut could still be a ways off. </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 Committee does not expect it will be appropriate to reduce the (fed funds rate) until it has gained greater confidence that inflation is moving sustainably toward 2 percent", the central bank said in the statement, using language identical to its previous statement in January.<span class="ql-inline-citation" data-cite="43"></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"> Additionally, in his post-announcement press conference, Fed Chair <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/jerome-powell-5210572">Jerome Powell</a> similarly echoed sentiments he's relayed before: "Inflation has eased substantially while the labor market has remained strong. And that is very good news. But inflation is still too high. Ongoing progress in bringing it down is not assured, and the path forward is uncertain."<span class="ql-inline-citation" data-cite="44"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Still, the Fed signaled today that it expects to reduce its benchmark rate more than once this year. In a quarterly release, the Fed also released its latest "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dot-plot-4581755">dot plot</a>" forecast, which indicates how many rate cuts each Fed member expects we'll see by the end of 2024. The median prediction from today's dot plot is three rate cuts by year-end, for a total rate reduction of 0.75 percentage points.<span class="ql-inline-citation" data-cite="41"></span> That's the same median projection as seen in the December dot plot. </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"> Financial markets currently agree, betting on at least three rate decreases this calendar year, according to the CME Group's FedWatch Tool. A strong majority of traders believe the first cut will arrive in June.<span class="ql-inline-citation" data-cite="39"></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"> Of course, what markets predict today and what the Fed ultimately does may or may not align. But given an assumption of a reduced fed funds rate sometime this year, CD rates are likely to continue drifting lower. Then once it appears a Fed rate decrease is actually forthcoming, CD rate declines will accelerate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The central bank will hold six more rate-setting meetings in 2024, with the next one scheduled for April 30 through May 1.<span class="ql-inline-citation" data-cite="42"></span><br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_53-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Best High-Yield Savings Accounts for May 2024—Up to 5.55%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_55-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-cd-rates-4770214" id="mntl-sc-block-featuredlink__link_2-0" rel="nocaes"><span class="link__wrapper">Best CD Rates for May 2024: Up to 5.51%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_57-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/best-money-market-accounts-5096917" id="mntl-sc-block-featuredlink__link_3-0" rel="nocaes"><span class="link__wrapper">Best Money Market Account Rates for May 2024—Up to 5.35%</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_59-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_60-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher.</p></div></div></div> <span class="heading-toc" id="toc-how-we-find-the-best-cd-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-heading__text"> How We Find the Best CD Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic-insured-account.asp">FDIC</a> for banks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua-insured-institution.asp">NCUA</a> for credit unions), and the CD's minimum initial deposit must not exceed $25,000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816">read our full methodology</a>.<br/> </p></div>

### Key Takeaways * The leading rates across CD terms held steady today, offering top APYs up to 5.55%. * The quiet rates day coincides with the Federal Reserve announcing its fifth consecutive interest-rate hold, as it waits for inflation to get more firmly under control. * The national CD leader is [Newtek Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ), whose 5.55% yield is available for a 6-month term. * Those who can stretch to a jumbo deposit can earn more for longer, with [Hughes Federal Credit Union's](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.hughesfcu.org/products/detail/certificate-accounts&lender=Hughes%20Federal%20Credit%20Uniontype=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) 17-month offer of 5.65% APY. * The [best CD rates](https://www.investopedia.com/best-cd-rates-4770214) have generally been inching lower for the past few months. But they'll likely start falling faster once the Fed appears ready to make a rate cut. Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. ## The Overall Rate Leader Pays 5.55% The top yield across all CD terms on a nationally available certificate fell this week to 5.55% APY, available to lock in with Newtek Bank for [6 months](https://www.investopedia.com/best-6-month-cd-rates-4783267). Previously, a top rate of 5.75% APY had been available since late January. In the 1-year term, you can [earn as much as 5.40% APY](https://www.investopedia.com/best-1-year-cd-rates-4796650), guaranteeing your rate into 2025. You can also score 5.20% into 2026 with the [best 2-year CD](https://www.investopedia.com/best-2-year-cd-rates-4801682) or secure a [5.00% rate as long as 2027](https://www.investopedia.com/best-3-year-cd-rates-4782938). | **CD Terms** | **Yesterday's Top National Rate** | **Today's Top National Rate** | **Day's Change** (percentage points) | **Top Rate Provider** | | --- | --- | --- | --- | --- | | [3 months](https://www.investopedia.com/best-3-month-cd-rates-5272288) | 5.42% APY | 5.42% APY | No change | [TotalDirectBank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.totaldirectbank.com/personal/cds&lender=TotalDirectBank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [6 months](https://www.investopedia.com/best-6-month-cd-rates-4783267) | 5.55% APY | 5.55% APY | No change | [Newtek Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [1 year](https://www.investopedia.com/best-1-year-cd-rates-4796650) | 5.40% APY | 5.40% APY | No change | 6 institutions | | [18 months](https://www.investopedia.com/best-18-month-cd-rates-5272348) | 5.35% APY | 5.35% APY | No change | [Fortera Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://forteracu.com/banking/personal/savings/certificates/fixed-rate-share-certificate&lender=Fortera%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [2 years](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.xcelfcu.org/Explore/Resources/Rates&lender=XCEL%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.20% APY | 5.20% APY | No change | [Credit Human](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [3 years](https://www.investopedia.com/best-3-year-cd-rates-4782938) | 5.00% APY | 5.00% APY | No change | [DollarSavingsDirect](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.dollarsavingsdirect.com/securebanking/cdInfo.do&lender=DollarSavingsDirect&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [4 years](https://www.investopedia.com/best-5-year-cd-rates-4801473) | 4.60% APY | 4.60% APY | No change | [Credit Human](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | | [5 years](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lfcu.org/rates/personal-certificate-rates/&lender=Lafayette%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 4.70% APY | 4.70% APY | No change | [Pelican State Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.pelicanstatecu.com/rates&lender=Pelican%20State%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above. It's true that certificate of deposit (CD) rates have softened since climbing to a record high of 6.50% in October. At the start of February, the number of CDs in our daily ranking that pay a least 5.50% APY was 30. Today that count is down to seven. But don't lose sight of how high CD returns still are relative to the past 20 years. Being able to lock in a return in the 4% to 5% range for a year or more down the road is still a great earning opportunity, especially if future interest rates fall. Also keep in mind that snagging the *highest* APY isn't the only way to win with today's CDs. Since CD rates could fall significantly in 2024 and 2025, locking in a rate soon that's guaranteed far into the future can be a smart move. ## Today's Top Bank, Credit Union, and Jumbo CD Rates Today's best jumbo CD rate remains 5.65% APY on a 17-month term, available from Hughes Federal Credit Union with a deposit of at least $99,000. As always, beware that [the best jumbo CD rates](https://www.investopedia.com/best-jumbo-cd-rates-4797766) don't *always* pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in every term but two below, so it's always wise to shop both certificate types before making a final decision. | **CD Term** | **[Today's Top National Bank Rate](https://www.investopedia.com/best-bank-cd-rates-4801462)** | **[Today's Top National Credit Union Rate](https://www.investopedia.com/best-cd-rates-4770214)** | **[Today's Top National Jumbo Rate](https://www.investopedia.com/best-jumbo-cd-rates-4797766)** | | --- | --- | --- | --- | | 3 months | 5.42% APY\* | 5.30% APY | 5.20% APY | | 6 months | 5.55% APY\* | 5.50% APY\* | 5.51% APY | | 1 year | 5.40% APY | 5.40% APY | 5.51% APY\* | | 18 months | 5.05% APY | 5.35% APY | 5.65% APY\* | | 2 years | 4.91% APY | 5.20% APY\* | 5.05% APY | | 3 years | 5.00% APY\* | 5.00% APY\* | 4.97% APY | | 4 years | 4.55% APY | 4.60% APY\* | 4.52% APY | | 5 years | 4.55% APY | 4.70% APY\* | 4.42% APY | \*Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above. ## Where Are CD Rates Headed in 2024? The Federal Reserve announced today that it is [maintaining rates at their current level](https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723), the fifth meeting in a row it's done so. To combat decades-high inflation, the Fed had aggressively hiked interest rates between March 2022 and July 2023, raising the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp) to its highest level in 22 years. This in turn created historically favorable conditions for CD shoppers, as well as for anyone holding cash in a [high-yield savings](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) or [money market account](https://www.investopedia.com/best-money-market-accounts-5096917). Rates on CDs continued rising to a peak this fall, reaching their highest levels in two decades. [Inflation](https://www.investopedia.com/terms/i/inflation.asp) has since been cooling, allowing the Fed to stop raising interest rates. But it's now in wait-and-see mode, looking for evidence that inflation is falling sufficiently low to justify lowering the federal funds rate. According to the Fed's statement today, that first rate cut could still be a ways off. “The Committee does not expect it will be appropriate to reduce the (fed funds rate) until it has gained greater confidence that inflation is moving sustainably toward 2 percent", the central bank said in the statement, using language identical to its previous statement in January. Additionally, in his post-announcement press conference, Fed Chair [Jerome Powell](https://www.investopedia.com/jerome-powell-5210572) similarly echoed sentiments he's relayed before: "Inflation has eased substantially while the labor market has remained strong. And that is very good news. But inflation is still too high. Ongoing progress in bringing it down is not assured, and the path forward is uncertain." Still, the Fed signaled today that it expects to reduce its benchmark rate more than once this year. In a quarterly release, the Fed also released its latest "[dot plot](https://www.investopedia.com/dot-plot-4581755)" forecast, which indicates how many rate cuts each Fed member expects we'll see by the end of 2024. The median prediction from today's dot plot is three rate cuts by year-end, for a total rate reduction of 0.75 percentage points. That's the same median projection as seen in the December dot plot. Financial markets currently agree, betting on at least three rate decreases this calendar year, according to the CME Group's FedWatch Tool. A strong majority of traders believe the first cut will arrive in June. Of course, what markets predict today and what the Fed ultimately does may or may not align. But given an assumption of a reduced fed funds rate sometime this year, CD rates are likely to continue drifting lower. Then once it appears a Fed rate decrease is actually forthcoming, CD rate declines will accelerate. The central bank will hold six more rate-setting meetings in 2024, with the next one scheduled for April 30 through May 1. [Best High-Yield Savings Accounts for May 2024—Up to 5.55%](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) [Best CD Rates for May 2024: Up to 5.51%](https://www.investopedia.com/best-cd-rates-4770214) [Best Money Market Account Rates for May 2024—Up to 5.35%](https://www.investopedia.com/best-money-market-accounts-5096917) ### Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher. ## How We Find the Best CD Rates Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured ([FDIC](https://www.investopedia.com/terms/f/fdic-insured-account.asp) for banks, [NCUA](https://www.investopedia.com/terms/n/ncua-insured-institution.asp) for credit unions), and the CD's minimum initial deposit must not exceed $25,000. Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, [read our full methodology](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816).

Key Takeaways The leading rates across CD terms held steady today, offering top APYs up to 5.55%. The quiet rates day coincides with the Federal Reserve announcing its fifth consecutive interest-rate hold, as it waits for inflation to get more firmly under control. The national CD leader is Newtek Bank, whose 5.55% yield is available for a 6-month term. Those who can stretch to a jumbo deposit can earn more for longer, with Hughes Federal Credit Union's 17-month offer of 5.65% APY. The best CD rates have generally been inching lower for the past few months. But they'll likely start falling faster once the Fed appears ready to make a rate cut. Below you'll find featured rates available from our partners, followed by details from our ranking of the best CDs available nationwide. The Overall Rate Leader Pays 5.55% The top yield across all CD terms on a nationally available certificate fell this week to 5.55% APY, available to lock in with Newtek Bank for 6 months. Previously, a top rate of 5.75% APY had been available since late January. In the 1-year term, you can earn as much as 5.40% APY, guaranteeing your rate into 2025. You can also score 5.20% into 2026 with the best 2-year CD or secure a 5.00% rate as long as 2027. CD Terms Yesterday's Top National Rate Today's Top National Rate Day's Change (percentage points) Top Rate Provider 3 months 5.42% APY 5.42% APY No change TotalDirectBank 6 months 5.55% APY 5.55% APY No change Newtek Bank 1 year 5.40% APY 5.40% APY No change 6 institutions 18 months 5.35% APY 5.35% APY No change Fortera Credit Union 2 years 5.20% APY 5.20% APY No change Credit Human 3 years 5.00% APY 5.00% APY No change DollarSavingsDirect 4 years 4.60% APY 4.60% APY No change Credit Human 5 years 4.70% APY 4.70% APY No change Pelican State Credit Union To view the top 15–20 nationwide rates in any term, click on the desired term length in the left column above. It's true that certificate of deposit (CD) rates have softened since climbing to a record high of 6.50% in October. At the start of February, the number of CDs in our daily ranking that pay a least 5.50% APY was 30. Today that count is down to seven. But don't lose sight of how high CD returns still are relative to the past 20 years. Being able to lock in a return in the 4% to 5% range for a year or more down the road is still a great earning opportunity, especially if future interest rates fall. Also keep in mind that snagging the highest APY isn't the only way to win with today's CDs. Since CD rates could fall significantly in 2024 and 2025, locking in a rate soon that's guaranteed far into the future can be a smart move. Today's Top Bank, Credit Union, and Jumbo CD Rates Today's best jumbo CD rate remains 5.65% APY on a 17-month term, available from Hughes Federal Credit Union with a deposit of at least $99,000. As always, beware that the best jumbo CD rates don't always pay more than standard certificates. Often, you can do just as well—or better—with a standard CD. That's the case right now in every term but two below, so it's always wise to shop both certificate types before making a final decision. CD Term Today's Top National Bank Rate Today's Top National Credit Union Rate Today's Top National Jumbo Rate 3 months 5.42% APY* 5.30% APY 5.20% APY 6 months 5.55% APY* 5.50% APY* 5.51% APY 1 year 5.40% APY 5.40% APY 5.51% APY* 18 months 5.05% APY 5.35% APY 5.65% APY* 2 years 4.91% APY 5.20% APY* 5.05% APY 3 years 5.00% APY* 5.00% APY* 4.97% APY 4 years 4.55% APY 4.60% APY* 4.52% APY 5 years 4.55% APY 4.70% APY* 4.42% APY *Indicates the highest APY offered in each term. To view our lists of the top-paying CDs across terms for bank, credit union, and jumbo certificates, click on the column headers above. Where Are CD Rates Headed in 2024? The Federal Reserve announced today that it is maintaining rates at their current level, the fifth meeting in a row it's done so. To combat decades-high inflation, the Fed had aggressively hiked interest rates between March 2022 and July 2023, raising the federal funds rate to its highest level in 22 years. This in turn created historically favorable conditions for CD shoppers, as well as for anyone holding cash in a high-yield savings or money market account. Rates on CDs continued rising to a peak this fall, reaching their highest levels in two decades. Inflation has since been cooling, allowing the Fed to stop raising interest rates. But it's now in wait-and-see mode, looking for evidence that inflation is falling sufficiently low to justify lowering the federal funds rate. According to the Fed's statement today, that first rate cut could still be a ways off. “The Committee does not expect it will be appropriate to reduce the (fed funds rate) until it has gained greater confidence that inflation is moving sustainably toward 2 percent", the central bank said in the statement, using language identical to its previous statement in January. Additionally, in his post-announcement press conference, Fed Chair Jerome Powell similarly echoed sentiments he's relayed before: "Inflation has eased substantially while the labor market has remained strong. And that is very good news. But inflation is still too high. Ongoing progress in bringing it down is not assured, and the path forward is uncertain." Still, the Fed signaled today that it expects to reduce its benchmark rate more than once this year. In a quarterly release, the Fed also released its latest "dot plot" forecast, which indicates how many rate cuts each Fed member expects we'll see by the end of 2024. The median prediction from today's dot plot is three rate cuts by year-end, for a total rate reduction of 0.75 percentage points. That's the same median projection as seen in the December dot plot. Financial markets currently agree, betting on at least three rate decreases this calendar year, according to the CME Group's FedWatch Tool. A strong majority of traders believe the first cut will arrive in June. Of course, what markets predict today and what the Fed ultimately does may or may not align. But given an assumption of a reduced fed funds rate sometime this year, CD rates are likely to continue drifting lower. Then once it appears a Fed rate decrease is actually forthcoming, CD rate declines will accelerate. The central bank will hold six more rate-setting meetings in 2024, with the next one scheduled for April 30 through May 1. Best High-Yield Savings Accounts for May 2024—Up to 5.55% Best CD Rates for May 2024: Up to 5.51% Best Money Market Account Rates for May 2024—Up to 5.35% Note that the "top rates" quoted here are the highest nationally available rates Investopedia has identified in its daily rate research on hundreds of banks and credit unions. This is much different than the national average, which includes all banks offering a CD with that term, including many large banks that pay a pittance in interest. Thus, the national averages are always quite low, while the top rates you can unearth by shopping around are often 5, 10, or even 15 times higher. How We Find the Best CD Rates Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the CD's minimum initial deposit must not exceed $25,000. Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.

https://www.investopedia.com/ask/answers/111915/how-do-netspend-cards-work.asp

How Do Netspend Cards Work?

<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Netspend offers prepaid MasterCard and Visa <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit cards</a> requiring no minimum balance and no credit check. All transactions made using Netspend cards are insured by the Federal Deposit Insurance Corporation (FDIC) up to the current coverage limit, and the cards can be used anywhere MasterCard and Visa debit cards are accepted. Cardholders can make in-store purchases, shop over the phone and online, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/112515/can-netspend-cards-be-used-internationally.asp">withdraw cash at ATMs worldwide</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"> Founded in 1999, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/company-insights/082716/how-netspend-works-and-makes-money-tss.asp">Netspend</a> is a leading <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-prepaid-debit-cards-5071798">provider of prepaid debit cards</a> and commercial prepaid card solutions, with more than 10 million customers served in the U.S. There are several <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111915/where-can-you-get-netspend-cards.asp">ways you can apply for a Netspend card</a>. Once you receive your card, you can activate it online or via the phone, just like any other debit or credit card.<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>Netspend provides prepaid debit cards, prepaid Mastercard and Visa debit cards, and commercial prepaid cards.</li><li>Prepaid cards are different from credit cards in that you can only spend funds that you preload onto the card.</li><li>Netspend prepaid cards with Visa or Mastercard logos can be used wherever these forms of payment are accepted.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-netspend-cards"></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 Netspend Cards </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt='Custom illustration shows a hand holding a Netspend card with the title "What To Know About Netspend Cards," and copy that reads: Prepaid debit cards Require no credit check Can only spend preloaded funds Those with Visa or Mastercard logos can be used wherever these forms of payment are accepted.' class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/nMVMwx2pKmI1ERNLQrmGcyffQO4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/nMVMwx2pKmI1ERNLQrmGcyffQO4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg" data-srcset="https://www.investopedia.com/thmb/tUiacmTmT3wfAIS5qqbh7n8Qtpo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt='Custom illustration shows a hand holding a Netspend card with the title "What To Know About Netspend Cards," and copy that reads: Prepaid debit cards Require no credit check Can only spend preloaded funds Those with Visa or Mastercard logos can be used wherever these forms of payment are accepted.' class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/nMVMwx2pKmI1ERNLQrmGcyffQO4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg" srcset="https://www.investopedia.com/thmb/tUiacmTmT3wfAIS5qqbh7n8Qtpo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Tara Anand</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Prepaid debit cards, such as Netspend cards, differ from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/credit-cards/how-to-use-small-business-credit-cards/">credit cards</a> in that you can only spend funds, which you have already preloaded onto the card. In other words, a Netspend card is not a credit card at all but simply a way of making funds that are already in your possession available via credit and debit card electronic payment technology. </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"> Credit cards offer a revolving line of credit, which you can typically pay off over time. In addition, outstanding credit card balances accrue interest, which must also be paid off. With a prepaid card, you're spending your own money, whereas using a credit card is like spending borrowed money, which you are expected to pay back with interest at a later date. </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>Although different from credit cards, prepaid cards can still be used wherever Visa or Mastercard is accepted if the card has one of these logos.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Another difference between prepaid debit cards and credit cards is that many credit cards offer spending rewards in the form of points, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-back.asp">cash back</a>, or airline miles. Most prepaid cards, including the Netspend Small Business Prepaid Mastercard, do not. However, credit card holders typically have to spend a considerable amount on their credit card to really see rewards benefits. </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 biggest similarity between prepaid debit cards and credit cards is that they usually have a card network logo on them like Visa or Mastercard. This means the card can be used at any place that accepts either of these methods of payment. However, one major difference is that using a Netspend card does not impact a person's credit score, such as a credit card does. </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-getting-a-netspend-card"></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"> Getting a Netspend Card </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Netspend applications are quick and simple, just requiring your name, address, and email address. All applicants are guaranteed approval once the applicant's identity is proven, and new cards are sent via mail within seven to 10 business days. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-how-to-use-netspend-cards"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> How to Use Netspend Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Netspend cards can be used just like credit cards or debit cards. You can choose credit at checkout and provide a signature, or you can choose debit and enter a PIN. Each purchase comes with a $1.95 fee regardless of which option you choose. Fees for ATM cash withdrawals are $2.95. </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"> Individual transaction fees can be avoided by subscribing to premium Fee Advantage Plans, which charge $9.95 monthly. This fee can be reduced to $5 by having at least $500 direct deposited to your account each month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <span class="heading-toc" id="toc-how-to-reload-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_27-0"> <span class="mntl-sc-block-heading__text"> How to Reload Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> One of the best features of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111615/how-do-you-cancel-netspend-card.asp">Netspend card</a> is how easy it is to add funds to the card. Funds can be added to Netspend accounts through <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp">direct deposit</a>, bank account transfers, Netspend card account transfers, or through Netspend reload network locations. The only ways to add funds to the account without incurring fees are through direct deposit or through the Netspend online account center. </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-four-benefits-of-netspend-cards"></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"> Four Benefits of Netspend Cards </span> </h2> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> <li><strong>Separate business and personal expenses: </strong>The main reason to get a prepaid business card is it allows you to separate personal expenses from business expenses. This makes life easier at tax time.</li><li><strong>Manage employee (and personal) spending: </strong>A prepaid debit card is a perfect tool for managing the spending of other employees, as you can ensure that nobody using it spends more than you want. With the Netspend Small Business Prepaid Mastercard, you can distribute funds to up to 10 sub-accounts. Spending on a Netspend account is also capped at $5,000 each day. Just remember that additional sub-accounts will cost you $1.95 each per month.</li><li><strong>Allows for business card use: </strong>Running an entirely cash business makes it very difficult to keep track of your money. A prepaid debit card at least allows you to allocate cash for business purposes in an organized way. A prepaid card may also come in handy for business expenses that can’t be paid for in cash.</li><li><strong>No credit check: </strong>No credit check is required for most prepaid business debit cards. All it takes to receive a Netspend Small Business prepaid card is a short application and an ID.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-how-do-you-put-money-on-a-netspend-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Put Money on a Netspend Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are multiple ways to add money to a Netspend card. There is no fee for direct deposits, mobile check uploads, or transfers from a connected bank account. Fees vary for account deposits via Netspend reload locations or Western Union.</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-how-much-does-netspend-charge-you-to-use-the-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Does Netspend Charge You to Use the Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Each purchase comes with a $1.95 surcharge whether you use the card as a debit card or a credit card. This fee is waived if you sign up for a $9.95 monthly plan. The fee for the monthly plan is reduced to $5 if you have at least $500 direct deposited to the account each month.</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-is-netspend-a-real-debit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Netspend a Real Debit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It's a real debit card in the sense that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111915/does-netspend-work-paypal.asp">it can be used just like a debit card</a>. What many people traditionally think of as a debit card is tied to a bank account that must be funded for the debit card to be useful. Netspend cards also must be funded for use.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_39-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Netspend offers prepaid debit cards with Mastercard or Visa branding. Cards can be funded in ways that are similar to how one might manage an online bank account. However, the fees associated with Netspend, whether it is pay-as-you-go or part of a monthly plan, are far greater than what you can get from a typical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-banks-5190371">online bank</a>. </p></div>

Netspend offers prepaid MasterCard and Visa [debit cards](https://www.investopedia.com/terms/d/debitcard.asp) requiring no minimum balance and no credit check. All transactions made using Netspend cards are insured by the Federal Deposit Insurance Corporation (FDIC) up to the current coverage limit, and the cards can be used anywhere MasterCard and Visa debit cards are accepted. Cardholders can make in-store purchases, shop over the phone and online, and [withdraw cash at ATMs worldwide](https://www.investopedia.com/ask/answers/112515/can-netspend-cards-be-used-internationally.asp). Founded in 1999, [Netspend](https://www.investopedia.com/articles/company-insights/082716/how-netspend-works-and-makes-money-tss.asp) is a leading [provider of prepaid debit cards](https://www.investopedia.com/best-prepaid-debit-cards-5071798) and commercial prepaid card solutions, with more than 10 million customers served in the U.S. There are several [ways you can apply for a Netspend card](https://www.investopedia.com/ask/answers/111915/where-can-you-get-netspend-cards.asp). Once you receive your card, you can activate it online or via the phone, just like any other debit or credit card. ### Key Takeaways * Netspend provides prepaid debit cards, prepaid Mastercard and Visa debit cards, and commercial prepaid cards. * Prepaid cards are different from credit cards in that you can only spend funds that you preload onto the card. * Netspend prepaid cards with Visa or Mastercard logos can be used wherever these forms of payment are accepted. ## Understanding Netspend Cards ![Custom illustration shows a hand holding a Netspend card with the title "What To Know About Netspend Cards," and copy that reads: Prepaid debit cards Require no credit check Can only spend preloaded funds Those with Visa or Mastercard logos can be used wherever these forms of payment are accepted.]() :max_bytes(150000):strip_icc()/how-do-netspend-cards-work-8cccae84b648414f9a01a2946e131b40.jpg) Investopedia / Tara Anand Prepaid debit cards, such as Netspend cards, differ from [credit cards](https://www.investopedia.com/credit-cards/how-to-use-small-business-credit-cards/) in that you can only spend funds, which you have already preloaded onto the card. In other words, a Netspend card is not a credit card at all but simply a way of making funds that are already in your possession available via credit and debit card electronic payment technology. Credit cards offer a revolving line of credit, which you can typically pay off over time. In addition, outstanding credit card balances accrue interest, which must also be paid off. With a prepaid card, you're spending your own money, whereas using a credit card is like spending borrowed money, which you are expected to pay back with interest at a later date. ### Although different from credit cards, prepaid cards can still be used wherever Visa or Mastercard is accepted if the card has one of these logos. Another difference between prepaid debit cards and credit cards is that many credit cards offer spending rewards in the form of points, [cash back](https://www.investopedia.com/terms/c/cash-back.asp), or airline miles. Most prepaid cards, including the Netspend Small Business Prepaid Mastercard, do not. However, credit card holders typically have to spend a considerable amount on their credit card to really see rewards benefits. The biggest similarity between prepaid debit cards and credit cards is that they usually have a card network logo on them like Visa or Mastercard. This means the card can be used at any place that accepts either of these methods of payment. However, one major difference is that using a Netspend card does not impact a person's credit score, such as a credit card does. ## Getting a Netspend Card Netspend applications are quick and simple, just requiring your name, address, and email address. All applicants are guaranteed approval once the applicant's identity is proven, and new cards are sent via mail within seven to 10 business days. ## How to Use Netspend Cards Netspend cards can be used just like credit cards or debit cards. You can choose credit at checkout and provide a signature, or you can choose debit and enter a PIN. Each purchase comes with a $1.95 fee regardless of which option you choose. Fees for ATM cash withdrawals are $2.95. Individual transaction fees can be avoided by subscribing to premium Fee Advantage Plans, which charge $9.95 monthly. This fee can be reduced to $5 by having at least $500 direct deposited to your account each month. ## How to Reload Funds One of the best features of a [Netspend card](https://www.investopedia.com/ask/answers/111615/how-do-you-cancel-netspend-card.asp) is how easy it is to add funds to the card. Funds can be added to Netspend accounts through [direct deposit](https://www.investopedia.com/terms/d/directdeposit.asp), bank account transfers, Netspend card account transfers, or through Netspend reload network locations. The only ways to add funds to the account without incurring fees are through direct deposit or through the Netspend online account center. ## Four Benefits of Netspend Cards 1. **Separate business and personal expenses:** The main reason to get a prepaid business card is it allows you to separate personal expenses from business expenses. This makes life easier at tax time. 2. **Manage employee (and personal) spending:** A prepaid debit card is a perfect tool for managing the spending of other employees, as you can ensure that nobody using it spends more than you want. With the Netspend Small Business Prepaid Mastercard, you can distribute funds to up to 10 sub-accounts. Spending on a Netspend account is also capped at $5,000 each day. Just remember that additional sub-accounts will cost you $1.95 each per month. 3. **Allows for business card use:** Running an entirely cash business makes it very difficult to keep track of your money. A prepaid debit card at least allows you to allocate cash for business purposes in an organized way. A prepaid card may also come in handy for business expenses that can’t be paid for in cash. 4. **No credit check:** No credit check is required for most prepaid business debit cards. All it takes to receive a Netspend Small Business prepaid card is a short application and an ID. ## How Do You Put Money on a Netspend Card? There are multiple ways to add money to a Netspend card. There is no fee for direct deposits, mobile check uploads, or transfers from a connected bank account. Fees vary for account deposits via Netspend reload locations or Western Union. ## How Much Does Netspend Charge You to Use the Card? Each purchase comes with a $1.95 surcharge whether you use the card as a debit card or a credit card. This fee is waived if you sign up for a $9.95 monthly plan. The fee for the monthly plan is reduced to $5 if you have at least $500 direct deposited to the account each month. ## Is Netspend a Real Debit Card? It's a real debit card in the sense that [it can be used just like a debit card](https://www.investopedia.com/ask/answers/111915/does-netspend-work-paypal.asp). What many people traditionally think of as a debit card is tied to a bank account that must be funded for the debit card to be useful. Netspend cards also must be funded for use. ## The Bottom Line Netspend offers prepaid debit cards with Mastercard or Visa branding. Cards can be funded in ways that are similar to how one might manage an online bank account. However, the fees associated with Netspend, whether it is pay-as-you-go or part of a monthly plan, are far greater than what you can get from a typical [online bank](https://www.investopedia.com/best-online-banks-5190371).

Netspend offers prepaid MasterCard and Visa debit cards requiring no minimum balance and no credit check. All transactions made using Netspend cards are insured by the Federal Deposit Insurance Corporation (FDIC) up to the current coverage limit, and the cards can be used anywhere MasterCard and Visa debit cards are accepted. Cardholders can make in-store purchases, shop over the phone and online, and withdraw cash at ATMs worldwide. Founded in 1999, Netspend is a leading provider of prepaid debit cards and commercial prepaid card solutions, with more than 10 million customers served in the U.S. There are several ways you can apply for a Netspend card. Once you receive your card, you can activate it online or via the phone, just like any other debit or credit card. Key Takeaways Netspend provides prepaid debit cards, prepaid Mastercard and Visa debit cards, and commercial prepaid cards.Prepaid cards are different from credit cards in that you can only spend funds that you preload onto the card.Netspend prepaid cards with Visa or Mastercard logos can be used wherever these forms of payment are accepted. Understanding Netspend Cards Investopedia / Tara Anand Prepaid debit cards, such as Netspend cards, differ from credit cards in that you can only spend funds, which you have already preloaded onto the card. In other words, a Netspend card is not a credit card at all but simply a way of making funds that are already in your possession available via credit and debit card electronic payment technology. Credit cards offer a revolving line of credit, which you can typically pay off over time. In addition, outstanding credit card balances accrue interest, which must also be paid off. With a prepaid card, you're spending your own money, whereas using a credit card is like spending borrowed money, which you are expected to pay back with interest at a later date. Although different from credit cards, prepaid cards can still be used wherever Visa or Mastercard is accepted if the card has one of these logos. Another difference between prepaid debit cards and credit cards is that many credit cards offer spending rewards in the form of points, cash back, or airline miles. Most prepaid cards, including the Netspend Small Business Prepaid Mastercard, do not. However, credit card holders typically have to spend a considerable amount on their credit card to really see rewards benefits. The biggest similarity between prepaid debit cards and credit cards is that they usually have a card network logo on them like Visa or Mastercard. This means the card can be used at any place that accepts either of these methods of payment. However, one major difference is that using a Netspend card does not impact a person's credit score, such as a credit card does. Getting a Netspend Card Netspend applications are quick and simple, just requiring your name, address, and email address. All applicants are guaranteed approval once the applicant's identity is proven, and new cards are sent via mail within seven to 10 business days. How to Use Netspend Cards Netspend cards can be used just like credit cards or debit cards. You can choose credit at checkout and provide a signature, or you can choose debit and enter a PIN. Each purchase comes with a $1.95 fee regardless of which option you choose. Fees for ATM cash withdrawals are $2.95. Individual transaction fees can be avoided by subscribing to premium Fee Advantage Plans, which charge $9.95 monthly. This fee can be reduced to $5 by having at least $500 direct deposited to your account each month. How to Reload Funds One of the best features of a Netspend card is how easy it is to add funds to the card. Funds can be added to Netspend accounts through direct deposit, bank account transfers, Netspend card account transfers, or through Netspend reload network locations. The only ways to add funds to the account without incurring fees are through direct deposit or through the Netspend online account center. Four Benefits of Netspend Cards Separate business and personal expenses: The main reason to get a prepaid business card is it allows you to separate personal expenses from business expenses. This makes life easier at tax time.Manage employee (and personal) spending: A prepaid debit card is a perfect tool for managing the spending of other employees, as you can ensure that nobody using it spends more than you want. With the Netspend Small Business Prepaid Mastercard, you can distribute funds to up to 10 sub-accounts. Spending on a Netspend account is also capped at $5,000 each day. Just remember that additional sub-accounts will cost you $1.95 each per month.Allows for business card use: Running an entirely cash business makes it very difficult to keep track of your money. A prepaid debit card at least allows you to allocate cash for business purposes in an organized way. A prepaid card may also come in handy for business expenses that can’t be paid for in cash.No credit check: No credit check is required for most prepaid business debit cards. All it takes to receive a Netspend Small Business prepaid card is a short application and an ID. How Do You Put Money on a Netspend Card? There are multiple ways to add money to a Netspend card. There is no fee for direct deposits, mobile check uploads, or transfers from a connected bank account. Fees vary for account deposits via Netspend reload locations or Western Union. How Much Does Netspend Charge You to Use the Card? Each purchase comes with a $1.95 surcharge whether you use the card as a debit card or a credit card. This fee is waived if you sign up for a $9.95 monthly plan. The fee for the monthly plan is reduced to $5 if you have at least $500 direct deposited to the account each month. Is Netspend a Real Debit Card? It's a real debit card in the sense that it can be used just like a debit card. What many people traditionally think of as a debit card is tied to a bank account that must be funded for the debit card to be useful. Netspend cards also must be funded for use. The Bottom Line Netspend offers prepaid debit cards with Mastercard or Visa branding. Cards can be funded in ways that are similar to how one might manage an online bank account. However, the fees associated with Netspend, whether it is pay-as-you-go or part of a monthly plan, are far greater than what you can get from a typical online bank.