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8a6060717011d199da4a59e1dd4da27a | https://www.investopedia.com/articles/optioninvestor/05/051005.asp | How To Manage Bull Put Option Spreads | How To Manage Bull Put Option Spreads
Managing open options positions is a critical dimension to trading, especially if you are an options seller. Here we look at the popular options-writing strategy known as the put credit spread, or bull put spread, and how to manage this type of trade with an effective stop-management technique. It can be helpful in navigating difficult waters, especially when faced with a market moving sharply against a short options position. (For related reading, check out Vertical Bull And Bear Credit Spreads.)
TUTORIAL: Option Spread Strategies
When the market moves down quickly, it is the best and worst of times for put-spread writers. It's the best of times because available premium for selling increases sharply. It's the worst of times because if you are already in a put spread, that spread can widen quickly, leading to unrealized losses in your trading account.
The Set UpLet's begin with a review of the basic strategy using an example of a put spread on the S&P 500 stock index. Say it is currently mid-April 2005, when there was a recent selloff down to the 200-day moving average, accompanied with massive volume and extreme bearish sentiment. As such we feel that the selling has reached the end for now, and we might want to sell a put spread deep out of the money. The VIX index has risen dramatically over the last week, moving from near 11 to as high as 18, representing a more than 60% increase.
A Premium for PutsA high VIX means big fat premiums available for selling, especially on the puts, where there is a reverse volatility skew that makes out-of-the-money puts relatively higher priced. In the trade presented below, the level of implied volatility on the S&P futures options puts is 14.6%, and statistical (historical) volatility is just 11.4%, so the options on these futures are currently selling at a premium to underlying volatility levels.
We could sell a May 1050 x 950 put spread, which has a lot of implied volatility pumped into it due to the selloff. In Table 1, you can view options settlement prices from the close of trading on April 15, 2005. These are option prices for S&P 500 futures.
If we were interested in selling the 1050 put, we could get about 3.10 - this takes two ticks off for the bid-ask spread. We would then buy the 1000 strike for about 1.60 - again this is adjusted for the bid-ask spread. This would give us a credit of 1.50 (3.10-1.60 = 1.50). In dollar-value terms, we would have a net credit amount of $375 as each point of premium is worth $250. Commissions would reduce this some more depending on your commission price.
S&P Strikes Open High Low Settlement Value 1000.00P 0.60 1.80 0.60 1.40s 350.00 1010.00P 0.90 1.65 0.90 1.65s 412.50 1020.00P 1.50 1.95 1.50 1.95s 487.50 1025.00P 1.40 2.10 1.40 2.10s 525.00 1030.00P 1.20 2.50 1.20 2.30s 575.00 1040.00P 1.60 2.75 1.30 2.75s 687.50 1050.00P 2.00 3.50 1.50 3.30s 825.00
Table 1: S&P 500 futures options prices for Friday, April 15, 2005
This trade would cost us about $3,600 in initial margin, and if you follow the simple adjustment rules explained below, this margin should not rise above $7,500.
Outcome of a Bullish MoveThe S&P June futures - which settled at 1143.60 on April 15, down 17 points in a big volume selloff - would have to decline another 8% to reach the short leg in our hypothetical put credit spread. By the current time in mid April 2005, the S&P futures have fallen about 8% from the June contract's recent high reached on Mar 7, 2005. So this provides a nice cushion. But there are no guarantees, and we should always assume the worst and have a plan to deal with it.
The market, for instance, could continue lower after we get into this trade, so how might we handle this? First, if the market trades higher from here going into late May, the spread will shrink fast and we will be able to take a profit. This is the ideal scenario, and if it does happen, we would, with the collected premium declining to zero at expiration, make a profit of just over 5% in 35 days (based on a double margin assumption, not counting commissions). A discount commission per round turn might be about $15 for each leg. Not too shabby a return for a month. This is why they call these spreads bull put spreads - they benefit most from bullish moves. (For more, check out Ratio Writing: A High-Volatility Options Strategy.)
Outcome of a DeclineWhile these put credit spreads can even profit from a drop in the market, a large, quick decline may present a problem. In terms of current levels of volatility and time to expiration, which is May 21 (35 days ahead from our hypothetical present of mid-April), this trade has a 99.3% chance of profit, according to statistical analysis (current level of statistical volatility is approximately 11.4%). In other words, there is just a 0.7% chance of the underlying futures settling below the short strike of 1050 on May 21. Those are pretty good odds, right?
Well, yes, but the devil is always in the details. The analysis above assumes we don't have our hand forced out by a large, quick move lower before expiration. The interim profit/loss picture looks good too: there's an approximate 88% probability of a smaller profit nine days into the trade, and 93% probability 18 days into the trade. Just how far should we let the market drop before we do something about this position?
Even though the odds are in our favor and there's a long way to travel before this spread gets into the money, letting a position like this get near the short strike or, worse, in the money is a definite no-no in terms of risk-reward. After all, this is a 50-point spread. If by expiration nothing is done, the trade will have a maximum loss of $12,500, minus the premium collected. Clearly, this is to be avoided at all costs.
Keeping It SafeA good rule of thumb is to exit the spread if a certain predetermined level of the futures is touched. Some traders prefer a mental stop on the premium of the spread, but that poses certain problems, such as inadvertently permitting the position to get dangerously close to the strike of the short option just ahead of expiration. There is less than 3% chance of the position ever touching the short leg of the spread in the 35 days before expiration, but if we wait too long to adjust the position and happen to reach that level, the spread will have become too large to adjust in a swift down move.
Some prefer to use the first standard deviation level - which in this case is 1105, based on our current levels of historical/statistical volatility - as an adjustment point. There is a 63% chance of the position touching this level before expiration; this higher probability significantly changes the odds of the trade. Nevertheless, we want to be prepared to close the spread at this point. But first we reposition it with an adjustment known as 'rolling for credits'. Let's look at what happens if the position reaches that first standard deviation level, using a few simple assumptions.
The Stop-Management TechniqueWe can make a number of projections about what will happen when we reach the first standard deviation (sigma) level. The longer it takes to reach this level, of course, the more time-value decay has helped us, perhaps even producing a gain if it occurs near the end of the expiration cycle. (For related reading, check out our Option Greeks Tutorial.)
You can see in Figure 1 that small losses occur in time frames T+9 and T+18. If we take the T+9 time frame, for example, and assume we reach the first sigma point within nine days of entering this trade, we show approximately a $375 loss on the position. This number would probably be a little more given additional increases in volatility even though the long leg of this trade would somewhat help against a rise in implied volatility.
Figure 1: May put spread with 35 days to expiration. Created using OptionVue 5 Options Analysis Software.
At nine days into the trade, given the loss shown, a simple plan would be to simply close the spread (buy it back) and sell it again lower, but twice. This adjustment, however, would double our margin requirement to approximately $7,200.
Repositioning the SpreadThere are two choices for repositioning this spread. We could sell it in the same month (May) or in June, which would allow us to go even lower to collect enough premium to cover the initial loss amount (about $375 in our example of an adjustment at T+9 days into the trade) and to cover the cost of the debit we incurred when we closed our first spread. Ideally, you would want to sell it in the same month.
Let's look at how this trade would work out in terms of possible prices. For example, at the first standard deviation level about nine days into the trade, we have to pay approximately 5.60 to buy back the short 1050 put (a loss of 2.50). We then sell three May 1000 put options, which fetches us about 2.60 a piece (remember we were long one, so selling three leaves us short two).
We then roll our long May 1000 put lower and add another, selling at a strike low enough to make sure we have not lowered our initial total net credit, and ideally increase it if possible. Table 2 contains a log of these transactions and the likely prices that would have occurred, which result in a small increase in our original net credit.
The adjustments found in Table 2 show that we have increased our risk by doubling our position and widening the spread to 75 points between the short leg and long leg. That said, our short positions are now (at the present time of mid-April 2005) just over 100 points below the level of the June futures contract price (which has already fallen 38 points), which is assumed at this point to be at 1105 while our short strikes are now at 1000. We are safely kept far away from the money with this adjustment. In fact, based on original statistical calculations, we are beyond sigma three at 1029.80.
May Options Contracts Premium Net Credit Sell 1050 Put +1 3.10 +775 +775 Buy 1000 Put +1 1.60 -400 +375 Buy 1050 Put +1 5.60 -1,400 -1,025 Sell 1000 Put -3 2.60 +1,950 +925 Buy 925 Put +2 1.00 -500 +425
Table 2: Rolling put spread for credits lower on the strike chain.
Finally, if we should go lower again, you would need to buy back the two spreads and roll them out to the next month, even lower down the strike chain. This would lower risk because the additional time premium would allow you to go even farther down the strike chain than what would be possible in the May options.
A backup plan is to not let the spread price double. But remember there is less than an 8% chance for the price to hit our first sigma level (the first standard deviation point of 1105) in the first nine days, so it is not like this happens every day. And by looking at Figure 1, you can see that at T+18 the loss-adjustment amount would be much smaller should we hit the first sigma level. Between T+18 and expiration (the solid line) a profit is showing. We would in this case still follow the rule to roll the position.
Bottom LineOther ways to stay in these trades are to write calls to pay for the adjustments and provide additional downside profitability. But this gets tricky and is best left to professional money managers. The strategy we outlined here is a far simpler plan. In the long run, with an historical upside bias to stock markets, this strategy can really pay off, especially if you do these systematically every month, and diversify across numerous markets. (If you want to know more about options, check out our Options Basics Tutorial.)
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9ac68a2744b9cbdfdc7ceb93669192e7 | https://www.investopedia.com/articles/optioninvestor/06/goldsilverfutures.asp | Trading Gold and Silver Futures Contracts | Trading Gold and Silver Futures Contracts
Gold and silver futures contracts can offer a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge for investors seeking opportunities outside of traditional equity and fixed income securities.
In this article, we'll cover the basics of gold and silver futures contracts and how they are traded, but be forewarned: trading in this market involves substantial risk, which could be a larger factor than their upside return profiles.
Key Takeaways Investors looking to add gold and silver to their portfolio may want to consider futures contracts. With futures, you don't need to actually hold physical metal and you can leverage your purchasing power. Holding futures has no management fees that might be associated with ETFs or mutual funds, and taxes are split between short-term and long-term capital gains. You will, however, need to roll your futures positions over as they expire, otherwise you can expect delivery of physical gold.
What Are Precious Metals Futures Contracts?
A precious metals futures contract is a legally binding agreement for delivery of gold or silver at an agreed-upon price in the future. A futures exchange standardizes the contracts as to the quantity, quality, time, and place of delivery. Only the price is variable.
Hedgers use these contracts as a way to manage price risk on an expected purchase or sale of the physical metal. Futures also provide speculators with an opportunity to participate in the markets without any physical backing.
Two different positions can be taken: a long (buy) position is an obligation to accept delivery of the physical metal, while a short (sell) position is the obligation to make delivery. The great majority of futures contracts are offset before the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.
Advantages of Futures Contracts
Trading futures contracts offers more financial leverage, flexibility, and financial integrity than trading the commodities themselves because they trade at centralized exchanges.
Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with a performance margin, which requires considerably less capital than the physical market. The leverage provides speculators with a higher risk/higher return investment profile.
For example, one futures contract for gold controls 100 troy ounces, or one brick of gold. The dollar value of this contract is 100 times the market price for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 ($600 x 100 ounces). Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.
In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.
Gold and silver futures exchanges offer no counterparty risks to participants; this is ensured by the exchanges' clearing services. The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party default on its responsibilities.
Futures Contract Specifications
One gold future available in the US is COMEX. This is a 100-troy-ounce contract. NYSE Liffe offers a mini contract (33.2 troy ounces).
Silver also has contracts trading at COMEX and NYSE Liffe. The contracts are for 5,000 ounces, and are traded at both exchanges.COMEX also has an e-mini silver future contract for 2,500 ounces.
Gold Futures
Gold is traded in dollars and cents per ounce. For example, when gold is trading at $600 per ounce, the contract has a value of $60,000 ($600 x 100 ounces). A trader that is long at $600 and sells at $610 will make $1,000 ($610 - $600 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $600 and sells at $590 will lose $1,000.
The minimum price movement, or tick size, is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents.
COMEX delivery is to New York area vaults. These vaults are subject to change by the exchange. The most active months traded (according to volume and open interest) are February, April, June, August, October, and December.
To maintain an orderly market, the exchanges will set position limits. A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators.
Silver Futures
Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10 per ounce, the "big" contract has a value of $50,000 (5,000 ounces x $10 per ounce), while the mini would be $10,000 (1,000 ounces x $10 per ounce).
The tick size is $0.001 per ounce, which equates to $5 per big contract and $1 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies.
Like gold, the delivery requirements specify vaults in the New York area. The most active months for delivery (according to volume and open interests) are March, May, July, September, and December. Silver, too, has position limits set by the exchanges.
Hedgers and Speculators in the Futures Market
The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future. The metal futures market helps hedgers reduce the risk associated with adverse price movements in the cash market. Examples of hedgers include bank vaults, mines, manufacturers, and jewelers.
Hedgers take a position in the market that is the opposite of their physical position. Due to the price correlation between futures and the spot market, a gain in one market can offset losses in the other. For example, a jeweler who is fearful that they will pay higher prices for gold or silver would then buy a contract to lock in a guaranteed price. If the market price for gold or silver goes up, they will have to pay higher prices for gold/silver.
However, because the jeweler took a long position in the futures markets, they could have made money on the futures contract, which would offset the increase in the cost of purchasing the gold/silver. If the cash price for gold or silver and the futures prices each went down, the hedger would lose on her futures positions but would pay less when buying her gold or silver in the cash market.
Unlike hedgers, speculators have no interest in taking delivery, but instead, try to profit by assuming market risk. Speculators include individual investors, hedge funds, or commodity trading advisors (CTAs).
Speculators come in all shapes and sizes and can be in the market for different periods of time. Those who are in and out of the market frequently in a session are called scalpers. A day trader holds a position for longer than a scalper does, but usually not overnight. A position trader holds for multiple sessions. All speculators need to be aware that if a market moves in the opposite direction, the position can result in losses.
The Bottom Line
Whether you are a hedger or a speculator, it's crucial to remember that trading involves substantial risk and is not suitable for everyone. Although there can be significant profits for those who get involved in trading futures on gold and silver, keep in mind that futures trading is best left to traders who have the expertise needed to succeed in these markets.
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b676ee3ba3370348103af68d1601e71c | https://www.investopedia.com/articles/optioninvestor/06/inthemoneycallwrite.asp | An Alternative Covered Call Options Trading Strategy | An Alternative Covered Call Options Trading Strategy
Books about option trading have always presented the popular strategy known as the covered-call write as standard fare. But there is another version of the covered-call write that you may not know about. It involves writing (selling) in-the-money covered calls, and it offers traders two major advantages: much greater downside protection and a much larger potential profit range. Read on to find out how this strategy works.
TUTORIAL: Option Spread Strategies
Traditional Covered-Call Write Let's look at an example using Rambus (RMBS), a company that manufactures and licenses chip interface technologies. We can begin by looking at the prices of May call options for RMBS, which were taken after the close of trading on April 21, 2006. RMBS closed that day at 38.60, and there were 27 days left in the May options cycle (calendar days to expiration). Option premiums were higher than normal due to uncertainty surrounding legal issues and a recent earnings announcement. If we were going to do a traditional covered-call write on RMBS, we would buy 100 shares of the stock and pay $3,860, and then sell an at-the-money or out-of-the-money call option. The short call is covered by the long stock (100 shares is the required number of shares when one call is exercised). (To learn more about covered-call strategies, read Covered Call Strategies For A Falling Market.)
At the time these prices were taken, RMBS was one of the best available stocks to write calls against, based on a screen for covered calls done after the close of trading. As you can see in Figure 1, it would be possible to sell a May 55 call for $2.45 ($245) against 100 shares of stock. This traditional write has upside profit potential up to the strike price, plus the premium collected by selling the option.
Figure 1 - RMBS May option prices with the May 25 in-the-money call option and downside protection highlighted.
The maximum return potential at the strike by expiration is 52.1%. But there is very little downside protection, and a strategy constructed this way really operates more like a long stock position than a premium collection strategy. Downside protection from the sold call offers only 6% of cushion, after which the stock position can experience un-hedged losses from further declines. Clearly, the risk/reward seems misplaced.
Alternative Covered Call Construction As you can see in Figure 1, we could move into the money for options to sell, if we can find time premium on the deep in-the-money options. Looking at the May 25 strike, which is in-the-money by $13.60 (intrinsic value), we see that there is some decent time premium available for selling. The May 25 call has $1.20 ($120) in time premium (bid price premium) value. In other words, if we sold the May 25, we would collect $120 in time premium (our maximum potential profit). (Find out about another approach to trading covered call. Read Trade The Covered Call - Without The Stock.)
Looking at another example, a May 30 in-the-money call would yield a higher potential profit than the May 25. On that strike, there is $260 in time premium available.
As you can see in Figure 1, the most attractive feature of the writing approach is the downside protection of 38% (for the May 25 write). The stock can fall 38% and still not have a loss, and there is no risk on the upside. Therefore, we have a very wide potential profit zone extended to as low as 23.80 ($14.80 below the stock price). Any upside move produces a profit.
While there is less potential profit with this approach compared to the example of a traditional out-of-the-money call write given above, an in-the-money call write does offer a near delta neutral, pure time premium collection approach due to the high delta value on the in-the-money call option (very close to 100). While there is no room to profit from the movement of the stock, it is possible to profit regardless of the direction of the stock, since it is only decay-of-time premium that is the source of potential profit.
Also, the potential rate of return is higher than it might appear at first blush. This is because the cost basis is much lower due to the collection of $1,480 in option premium with the sale of the May 25 in-the-money call option.
Potential Return on in-the-Money Call WritesAs you can see in Figure 2, with the May 25 in-the-money call write, the potential return on this strategy is +5% (maximum). This is calculated based on taking the premium received ($120) and dividing it by the cost basis ($2,380), which yields +5%. That may not sound like much, but recall that this is for a period of just 27 days. If used with margin to open a position of this type, returns have the potential to be much higher, but of course with additional risk. If we were to annualize this strategy and do in-the-money call writes regularly on stocks screened from the total population of potential covered-call writes, the potential return comes in at +69%. If you can live with less downside risk and you sold the May 30 call instead, the potential return rises to +9.5% (or +131% annualized) - or higher if executed with a margined account.
Figure 2 - RMBS May 25 in-the-money call write profit/loss.
The Bottom LineCovered-call writing has become a very popular strategy among option traders, but an alternative construction of this premium collection strategy exists in the form of an in-the-money covered write, which is possible when you find stocks with high implied volatility in their option prices. This was the case with our Rambus example. These conditions appear occasionally in the option markets, and finding them systematically requires screening. When found, an in-the-money covered-call write provides an excellent, delta neutral, time premium collection approach - one that offers greater downside protection and, therefore, wider potential profit zone, than the traditional at- or out-of-the-money covered writes.
For further reading, see Come One, Come All - Covered Calls.
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32091adde34f21859942b124ce135a99 | https://www.investopedia.com/articles/optioninvestor/06/ironcondor.asp | Options Trading With The Iron Condor | Options Trading With The Iron Condor
Traders make most investments with the expectation that the price will go up. They make some with the hope that the price will move down. Unfortunately, it is often the case that the price doesn't do a whole lot of moving at all. Wouldn't it be nice if you could make money when the markets didn't move? Well, you can. This is the beauty of options, and more specifically, of the strategy known as the iron condor.
Key Takeaways An Iron Condor options strategy allows traders to profit in a sideways market that exhibits low volatility.The iron condor consists of two option pairs: a bought put OTM and a sold put closer to the money versus a bought call OTM and a sold call closer to the money.Combined with prudent money management, the Iron Condor puts probability, option time premium selling, and implied volatility on the trader's side.
How to Take Off
Iron condors sound complicated and do take some time to learn, but they provide a good way to make consistent profits. In fact, some very profitable traders exclusively use iron condors. So, what is an iron condor? There are two ways of looking at it. The first is as a pair of strangles, one short and one long, at outer strikes. The other way of looking at it is as two credit spreads: a call credit spread above the market and a put credit spread below the market. It is these two "wings" that give the iron condor its name. These can be placed quite far from where the market is now, but the strict definition involves consecutive strike prices on the same expiration month.
A credit spread is essentially an option-selling strategy. Selling options allow investors to take advantage of the time premium and implied volatility that are inherent in options. The credit spread is created by buying a far out-of-the-money (OTM) option and selling a nearer, more expensive option. This creates the credit, with the hope that both options expire worthless, allowing you to keep that credit. As long as the underlying does not cross over the strike price of the closer option, you get to keep the full credit.
Image by Julie Bang © Investopedia 2020
Tips for a Smooth Flight
There are several things to keep in mind when using this strategy. The first is to stick with index options. They provide enough implied volatility to make a nice profit, but they don't have the real volatility that can wipe out your account very quickly.
But there is another thing you must watch out for: you must not ever take a full loss on an iron condor. Your potential loss is much higher than your potential gain. This is because the probability that you are correct is very high. In the above example, it is more than 80% on both sides (using delta as a probability indicator that the market will not close beyond those strike prices).
To avoid taking a full loss, if the market does what it typically does and trades in a range, then you don't need to do anything, and you can let the whole position expire worthless. In this case, you get to keep your full credit. However, if the market moves strongly in one direction or another and approaches or breaks through one of your strikes, then you must exit that side of the position.
Avoiding a Bumpy Landing
There are many ways to get out of one side of an iron condor. One is to simply sell that particular credit spread and hold the other side. Another is to get out of the whole iron condor. This will depend on how long you have left until the expiration. You can also roll the losing side to a further out-of-the-money strike. There are many possibilities here, and the real art of the iron condor lies in the risk management. If you can do well on this side, you have a strategy that puts probability, option time premium selling, and implied volatility on your side.
S&P 500 Iron Condor Spread Example
With the S&P 500 at 3,330, one might buy the March 3,500 call option (orange dot below point four on the above chart) for $2.20 and sell the March 3,450 call (orange dot above point three) for $4.20. This produces a credit of $2 in your account. This transaction does require a maintenance margin. Your broker will only ask that you have cash or securities in your account equal to the difference between the strikes minus the credit you received. In our example, this would be $4,800 (1 x 50 x 100 – $200). If the market closes in September below 3,450, you keep the $200 credit.
To create the full iron condor, all you need to do is similarly add the credit put spread. Buy the September 3,100 put (orange dot below point one) for $5.50, and sell the September 3,150 (orange dot above point two) for $6.50 for another $1 of credit. Here, the maintenance requirement is $4,900, with the $100 credit (1 x 50 x 100 – $100). Now you have an iron condor. If the market stays between 3,150 and 3,450, you keep your full credit, which is now $300. The total maintenance requirement will be $9,700 ($4,800 + $4,900). Because this does not presently meet the Securities And Exchange Commission's (SEC) strict definition of an iron condor, you will be required to have the margin on both sides. If you use consecutive strikes, you will only have to hold margin on one side, but this clearly lowers the probability of success.
The Bottom Line
The iron condor option strategy is one of the best ways for an option trader to profit from an insignificant move in the price of an underlying asset. Many traders believe that a significant move upward or downward is needed for them to make a profit. However, as you've learned from the above strategy, traders can generate handsome returns when the price of the asset is non-directional. The structure of this strategy may seem confusing at first, which is why it is used primarily by experienced traders, but don't let the complicated structure intimidate you away from learning more about this powerful trading method.
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017c009b35c1a5580d75754fe8105416 | https://www.investopedia.com/articles/optioninvestor/06/singlestockfutures.asp | Introduction To Single Stock Futures | Introduction To Single Stock Futures
Single stock futures (SSFs) are contracts between two investors. The buyer promises to pay a specified price for 100 shares of a single stock at a predetermined future point. The seller promises to deliver the stock at the specified price on the specified future date. The contracts have existed since 2002 in the United States and trade on the OneChicago exchange, a joint venture between the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).
History
Futures on individual equities, or single stock futures, traded in England and several other countries for some time but were prohibited in the United States because, in 1982, an agreement between the chairman of the U.S. Securities and Exchange Commission (SEC), John S.R. Shad, and Philip Johnson, chairman of the Commodity Futures Trading Commission (CFTC), banned the trading of futures on individual stocks. The Shad-Johnson Accord was ratified by Congress in the same year.
Key Takeaways Single stock futures started trading in the United States in 2002 after the Commodity Futures Modernization Act (CFMA) of 2000. OneChicago, which was a joint venture between CME and CBOE, is the only exchange to list single stock futures in the U.S. today. Like other futures contracts, SSFs can be used to hedge or speculate. Each contract represents the right to buy or sell 100 shares of the underlying stock. There is a notable lack of trading activity and liquidity in the SSF market.
Although the 1982 accord was originally intended to be a temporary measure, it lasted until Dec. 21, 2000, when President Bill Clinton signed the Commodity Futures Modernization Act (CFMA) of 2000. Under the new law, the SEC and the CFMA worked on a jurisdiction-sharing plan, and SSFs began trading in Nov. 2002.
Initially, SSFs began trading in two U.S. markets: OneChicago and the NQLX. In June 2003, however, Nasdaq transferred ownership of its stake in the NQLX to the London International Financial Futures and Options Exchange (LIFFE). Then, in Oct. 2004, the NQLX consolidated its contracts with those of OneChicago, leaving that organization as the primary trading market for SSFs.
The Single Stock Futures Contract
Each SSF contract is standardized and includes the following basic specifications:
Contract Size: 100 shares of the underlying stock Expiration Cycle: Four quarterly expiration months - March, June, September, and December, plus two consecutive months that are the next two months but not quarterly expirations. Tick Size: 1 cent X 100 shares = $1 Last Trading Day: Third Friday of the expiration month Margin Requirement: Generally 20% of the stock's cash value
The contract terms call for delivery of shares of the stock by the seller at a specified future time, known as the expiration. However, most contracts are closed before expiration. To get out of an open long (buying) position, the investor simply takes an offsetting short position (sells). Conversely, if an investor has sold (short) a contract and wishes to close it out, buying (going long) the contract will offset or close it out.
Making Sense of Margin
When an investor has a long margin account in stock, they are borrowing part of the money to buy stock, using the stock as collateral. In an SSF contract, the margin deposit is more of a good faith deposit, which the brokerage firm holds toward the contract settlement. The margin requirement in an SSF applies to both buyers and sellers.
The 20% requirement represents the initial and maintenance requirement. In an SSF contract, the buyer (long) has not borrowed money and pays no interest. At the same time, the seller (short) has not borrowed stock. The margin requirement for both is the same. The 20% is a federally mandated percentage, but the individual brokerage house can require additional funds.
The margin requirement for SSFs is continuous. Every business day, the broker will calculate the margin requirement for each position. The investor is required to post additional margin funds if the account does not meet the minimum margin requirement.
For example, in an SSF contract on stock X priced at $40, both the buyer and seller have a margin requirement of 20% or $800 (or $40 x 100 shares x 20%). If stock X goes up to $42, the long contract account is credited with $200 ($42 - $40 = $2 x 100 = $200), and the seller's account is debited by the same $200. (Note: For simplicity, we'll be using one contract and the basic 20%. Commissions and transaction fees are not taken into account.)
Speculating
Suppose an investor is bullish on stock Y and goes long one September SSF contract on stock Y at $30. At some point in the near future, stock Y is trading at $36. At that point, the investor sells the contract at $36 to offset the existing (open) long position and makes a $600 profit on the position.
This example seems simple, but let's examine the trade closely. The investor's initial margin requirement was only $600 ($30 x 100 = $3,000 x 20% = $600). This investor had a 100% return on the margin deposit, which illustrates the leverage power of trading SSFs. Of course, had the market moved in the opposite direction, the investor can suffer losses exceeding the margin deposit.
In another example, an investor is bearish on stock Z and goes short an August SSF contract on stock Z at $60. Stock Z performs as the investor had guessed and drops to $50 in July. The investor offsets the short position by buying an August SSF at $50. This represents a gross profit of $10 per share or a total of $1,000.
Again, let's examine the return the investor had on the initial deposit. The initial margin requirement was $1,200 ($60 x 100 = $6,000 x 20% = $1,200) and the gross profit was $1,000. The return on the investor's deposit is 83.33%.
Hedging
An overview of SSFs would not be complete without mentioning the use of these contracts to hedge a stock position. To hedge, an investor with a stock position takes the opposition position in single stock futures; gains in the SSF will offset losses in the stock if shares fall. However, this is only a temporary solution because the SSF will expire.
Let's consider an investor who bought 100 shares of stock N at $30. In July, the stock is trading at $35. The investor is happy with the unrealized gain of $5 per share but is concerned that the gain could be wiped out in one bad day. The investor wishes to keep the stock at least until September, however, because of an upcoming dividend payment. To hedge, the investor sells a $35 September SSF contract. Whether the stock rises or declines, the investor has locked in the $5-per-share gain. In August, the investor sells the stock at the market price and buys back the SSF contract.
September Price Value of 100 Shares Gain or Loss on SSF Net Value $30 $3,000 +$500 $3,500 $35 $3,500 0 $3,500 $40 $4,000 -$500 $3,500
Figure 1 - Tracking the Gains/Losses on Single Stock Futures
Until the SSF expires in September, the investor will have a net value of the hedged position of $3,500. The negative side of this is that if the stock dramatically increases, the investor is still locked in at $35 per share.
SSFs vs. Stock Trading
Compared to directly trading stocks, SSFs provide several major advantages:
Leverage: Compared to buying stock on margin, investing in SSFs is less costly. An investor can use leverage to control more stock with a smaller cash outlay. Margin on stock is typically 50%. Ease of shorting: Taking a short position in SSFs is simpler, can be less costly, and may be executed at any time (there are no uptick rules). Flexibility: SSF investors can use the instruments to speculate, hedge, or create spread strategies.
Single stock futures also have disadvantages. These include:
Risk: An investor who is long in a stock can only lose what has been invested. In an SSF contract, there is the risk of losing significantly more than the initial investment (margin deposit). No stockholder privileges: The SSF owner has no voting rights and no rights to dividends. Required vigilance: SSFs are investments that require investors to monitor their positions more closely than many would like to do. Because SSF accounts are marked to the market every business day, there is the possibility that the brokerage firm might issue a margin call, requiring the investor to decide whether to deposit additional funds or close the position quickly.
While some traders had high hopes for SSFs when OneChicago was launched in 2002, the contracts have never really caught on with investors, and there is consequently a lack of trading activity in the market today. Trading hours are also limited: 9:30 a.m. to 5:30 p.m. ET.
Comparison with Equity Options
Investing in SSFs differs from investing in equity options contracts in several ways:
Long options position: The investor has the right but not the obligation to purchase or deliver stock when in a long call or long put position. In a long SSF position, the investor is obligated to deliver the stock. Movement of the market: Options traders use a mathematical factor, the delta, that measures the relationship between the options premium and the underlying stock price. At times, an option contract's value may fluctuate independently of the stock price. By contrast, the SSF contract will much more closely follow the underlying stock's movement. The price of investing: When an options investor takes a long position, they pay a premium for the contract. The premium is often called a wasting asset and will lose value over time. Then, at expiration, unless the options contract is in the money, it is worthless and the investor has lost the entire premium (however, like single stock futures, options can be closed before expiration). Single stock futures require an initial margin deposit and a specific cash maintenance level.
The Bottom Line
Investing in single stock futures offers some flexibility, leverage, and the possibility of innovative strategies for investors. However, potential investors in SSFs should carefully examine the risk/reward profile these instruments offer and be certain that they are suitable for their personal objectives. In addition, since single stock futures have not caught the fancy of traders compared to some other futures contracts—like crude oil, gold, or S&P 500 Index futures—the lack of trading activity makes them a lot less liquid than the actual stocks that they represent.
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457c776d2bfa82c970212e2e2773f232 | https://www.investopedia.com/articles/optioninvestor/07/affordable-hedging.asp | Using Options as a Hedging Strategy | Using Options as a Hedging Strategy
Hedging strategies are used by investors to reduce their exposure to risk in the event that an asset in their portfolio is subject to a sudden price decline. When properly done, hedging strategies reduce uncertainty and limit losses without significantly reducing the potential rate of return.
Usually, investors purchase securities inversely correlated with a vulnerable asset in their portfolio. In the event of an adverse price movement in the vulnerable asset, the inversely correlated security should move in the opposite direction, acting as a hedge against any losses. Some investors also purchase financial instruments called derivatives. When used in a strategic fashion, derivatives can limit investors' losses to a fixed amount. A put option on a stock or index is a classic hedging instrument.
How Put Options Work
With a put option, you can sell a stock at a specified price within a given time frame. For example, an investor named Sarah buys stock at $14 per share. Sarah assumes that the price will go up, but in the event that the stock value plummets, Sarah can pay a small fee ($7) to guarantee she can exercise her put option and sell the stock at $10 within a one-year time frame.
If in six months the value of the stock she purchased has increased to $16, Sarah will not exercise her put option and will have lost $7. However, if in six months the value of the stock decreases to $8, Sarah can sell the stock she bought (at $14 per share) for $10 per share. With the put option, Sarah limited her losses to $4 per share. Without the put option, Sarah would have lost $6 per share.
Key Takeaways A hedge is an investment that protects your portfolio from adverse price movements. Put options give investors the right to sell an asset at a specified price within a predetermined time frame. The pricing of options is determined by their downside risk, which is the likelihood that the stock or index that they are hedging will lose value if there is a change in market conditions.
Option Pricing Determined by Downside Risk
The pricing of derivatives is related to the downside risk in the underlying security. Downside risk is an estimate of the likeliness that the value of a stock will drop if market conditions change. An investor would consider this measure to understand how much they stand to lose as the result of a decline and decide if they are going to use a hedging strategy like a put option.
By purchasing a put option, an investor is transferring the downside risk to the seller. In general, the more downside risk the purchaser of the hedge seeks to transfer to the seller, the more expensive the hedge will be.
Downside risk is based on time and volatility. If a security is capable of significant price movements on a daily basis, then an option on that security that expires weeks, months or years in the future would be considered risky and would thus would be more expensive. Conversely, if a security is relatively stable on a daily basis, there is less downside risk, and the option will be less expensive.
Call options give investors the right to buy the underlying security; put options give investors the right to sell the underlying security.
Consider Expiration Date and Strike Price
Once an investor has determined on which stock they'd like to make an options trade, there are two key considerations: the time frame until the option expires and the strike price. The strike price is the price at which the option can be exercised. It is also sometimes known as the exercise price.
Options with higher strike prices are more expensive because the seller is taking on more risk. However, options with higher strike prices provide more price protection for the purchaser.
Ideally, the purchase price of the put option would be exactly equal to the expected downside risk of the underlying security. This would be a perfectly-priced hedge. However, if this were the case, there would be little reason not to hedge every investment.
Why Do Most Options Have Negative Average Payouts?
Of course, the market is nowhere near that efficient, precise or generous. For most securities, put options have negative average payouts. There are three reasons for this:
Volatility Premium: Implied volatility is usually higher than realized volatility for most securities. The reason for this is open to debate, but the result is that investors regularly overpay for downside protection. Index Drift: Equity indexes and associated stock prices have a tendency to move upward over time. When the value of the underlying security gradually increases, the value of the put option gradually declines. Time Decay: Like all long option positions, every day that an option moves closer to its expiration date, it loses some of its value. The rate of decay increases as the time left on the option decreases.
Because the expected payout of a put option is less than the cost, the challenge for investors is to only buy as much protection as they need. This generally means purchasing put options at lower strike prices and thus, assuming more of the security's downside risk.
Long Term Put Options
Investors are often more concerned with hedging against moderate price declines than severe declines, as these types of price drops are both very unpredictable and relatively common. For these investors, a bear put spread can be a cost-effective hedging strategy.
In a bear put spread, the investor buys a put with a higher strike price and also sells one with a lower strike price with the same expiration date. This only provides limited protection because the maximum payout is the difference between the two strike prices. However, this is often enough protection to handle either a mild or moderate downturn.
Another way to get the most value out of a hedge is to purchase a long-term put option, or the put option with the longest expiration date. A six-month put option is not always twice the price of a three-month put option. When purchasing an option, the marginal cost of each additional month is lower than the last.
Example of a Long Term Put Option
Available put options on iShares Russell 2000 Index ETF (IWM) Trading at $160.26
Strike Days to Expiry Cost Cost/Day 78 57 3.10 0.054 78 157 4.85 0.031 78 248 5.80 0.023 78 540 8.00 0.015
In the above example, the most expensive option also provides an investor with the least expensive protection per day.
This also means that put options can be extended very cost-effectively. If an investor has a six-month put option on a security with a determined strike price, it can be sold and replaced with a 12-month put option with the same strike price. This strategy can be done repeatedly and is referred to as rolling a put option forward.
By rolling a put option forward, while keeping the strike price below (but close to) the market price, an investor can maintain a hedge for many years.
Calendar Spreads
Adding extra months to a put option gets cheaper the more times you extend the expiration date. This hedging strategy also creates an opportunity to use what are called calendar spreads. Calendar spreads are created by purchasing a long-term put option and selling a short-term put option at the same strike price.
However, this practice does not decrease the investor's downside risk for the moment. If the stock price declines significantly in the coming months, the investor may face some difficult decisions. They must decide if they want to exercise the long-term put option, losing its remaining time value, or if they want to buy back the shorter put option and risk tying up even more money in a losing position.
In favorable circumstances, a calendar spread results in a cheap, long-term hedge that can then be rolled forward indefinitely. However, without adequate research the investor may inadvertently introduce new risks into their investment portfolios with this hedging strategy.
Long Term Put Options Are Cost-Effective
When making the decision to hedge an investment with a put option, it's important to follow a two-step approach. First, determine what level of risk is acceptable. Then, identify what transactions can cost-effectively mitigate this risk.
As a rule, long-term put options with a low strike price provide the best hedging value. This is because their cost per market day can be very low. Although they are initially expensive, they are useful for long-term investments. Long-term put options can be rolled forward to extend the expiration date, ensuring that an appropriate hedge is always in place.
Keep in mind that some investments are easier to hedge than others. Put options for broad indexes are cheaper than individual stocks because they have lower volatility.
It's important to note that put options are only intended to help eliminate risk in the event of a sudden price decline. Hedging strategies should always be combined with other portfolio management techniques like diversification, rebalancing, and a rigorous process for analyzing and selecting securities.
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7566617d8b81bd300df13cfaa3bed4a3 | https://www.investopedia.com/articles/optioninvestor/07/credit-der-index.asp | The Alphabet Soup of Credit Derivative Indexes | The Alphabet Soup of Credit Derivative Indexes
Many fixed-income players seem to be speaking in code. They use terms such as ABX, CMBX, CDX, CDS, MBS, and LCDX. What on earth are they talking about? This article will explain the alphabet soup of credit derivative indices and give you an idea of why market participants might use them.
Key Takeaways The world of credit derivatives is smattered with various acronyms, but ultimately all credit derivatives do is provide some sort of insurance against a credit event.A credit derivative's value is based off the price and credit risk embodied by some underlying security or issuer, known as the reference obligation.Several benchmark indices have been established to create greater transparency and liquidity in the otherwise opaque and esoteric world of credit derivatives.
Digging into Derivatives
To understand credit derivative index products, one first needs to know what a credit derivative is. A derivative is a security the price of which depends on or is derived from one or more underlying assets. Thus, a credit derivative is a security in which the price is dependent on the credit risk of one or more underlying assets.
What does this mean in layman's terms?
The credit derivative, while a security, is not a physical asset. As such, derivatives are not simply bought and sold, as are bonds. With derivatives, the purchaser enters a contract that allows him or her to participate in the market movement of the underlying reference obligation or physical security.
Credit Default Swaps
A credit default swap (CDS) is a type of credit derivative. Single-name (only one reference company) credit default swaps were first created in 1994 but did not trade in any significant volume until the end of that decade. The first CDS index was created in 2002 and was based on a basket of single-issuer credit default swaps. The current index is known as the Credit Default Swap Index (CDX).
As the name implies, in a single-name CDS the underlying asset or reference obligation is a bond of one particular issuer or reference entity. You may hear people say that a CDS is a "bilateral contract." This just means that there are two sides to the swap trade: a buyer of protection and a seller of protection. If the reference entity of a CDS experiences what is known as a credit event (such as a bankruptcy or downgrade), the buyer of protection (who pays a premium for that protection) can receive payment from the seller of protection. This is desirable because the price of those bonds will experience a decrease in value due to the negative credit event. There is also the option of physical, rather than cash, trade settlement, in which the underlying bond or reference obligation actually changes hands, from the buyer of protection to the seller of protection.
What can be a little confusing but important to remember is that, with credit default swaps, buying protection is a short, and selling protection is a long. This is because buying protection is synonymous with selling the reference obligation. The market value of the buy protection leg acts like a short, in that as the price of the CDS goes down, the market value of the trade goes up. The opposite is true of the sell protection leg.
The Major Indices
The major tradable benchmark indices in the credit derivatives space include CDX, ABX, CMBX, and LCDX. The CDX indices are broken out between investment grade (IG), high yield (HY), high volatility (HVOL), and emerging market (EM). For example, the CDX.NA.HY is an index based on a basket of North American (NA) single-name high-yield credit default swaps.
The CDX index rolls over every six months, and its 125 names enter and leave the index as appropriate. For example, if one name is upgraded from "below investment grade" to IG, it will move from the HY index to the IG index when the rebalance occurs.
The ABX and CMBX are baskets of credit default swaps on two securitized products: asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). The ABX is based on ABS home equity loans, and the CMBX on CMBS. So for example, the ticker ABX.HE.AA denotes an index that is based on a basket of 20 ABS Home Equity (HE) credit default swaps whose reference obligations are 'AA'-rated bonds. There are separate ABX indices for ratings ranging from "AAA" to "BBB-." The CMBX is also broken down into indices by ratings but is based on a basket of 25 credit default swaps that reference CMBS securities.
The LCDX is a credit-derivative index with a basket made up of single-name, loan-only credit default swaps. The loans referred to are leveraged loans. The basket is made up of 100 names. Although a bank loan is considered secured debt, the names that usually trade in the leveraged loan market are lower-quality credits. (If they could issue in the normal IG markets, they would.) Therefore, the LCDX index is used mostly by those looking for exposure to high-yield debt.
All of the above indices are administered by IHS Markit. For these indices to work, they must have sufficient liquidity. Therefore, the issuer has commitments from the largest dealers (large investment banks) to provide liquidity in the market.
How the Indices Are Used
Different fixed-income participants use various indices for different reasons. They also vary as to what side of the trade they are taking: buying protection or selling protection. For portfolio managers, single-name credit default swaps are great if you have specific exposure that you would like to hedge. For example, let's say that you own a bond that you believe will suffer a price decline due to the issuer's credit deterioration. You could buy protection on that name with a single-name CDS, which will increase in value if the price of the bond declines.
What is more common, however, is for a portfolio manager to use a credit-derivative index. Let's say you want to gain exposure to the high-yield sector. You could enter a sell protection trade on the CDX.NA.HY (which, if you remember from earlier, would effectively function as a long in high yield). This way, you don't need to have an opinion on certain credits; you don't need to buy several bonds either—one trade will do the job, and you'll be able to enter and exit it quickly. This highlights the main advantages of indices and derivatives in general: the liquidity feature of indices is an advantage in times of market stress. With the CDS indices, you can increase or decrease exposure to a broad category quickly. And, as with many derivatives, you don't have to tie up your cash when entering the trade.
Some market participants are not hedging at all; they are speculating. This means that they will not own the underlying bond at all, but will instead enter the credit derivative contract naked. These speculators are usually hedge funds, which do not have the same restrictions on shorting and leverage as do most other funds.
The Bottom Line
Who are the typical users of the securitized product indexes? It could be a portfolio manager looking to quickly gain or reduce exposure to this segment, or it might be another market participant, such as a bank or financial institution that issues home equity loans. Both parties could use ABX in their hedging strategies.
New credit derivatives are being developed. Demand will determine what is innovated next, so it's always a good idea to keep track of with tools such as IHS Markit.
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b3631ffa53977cde0f842f389b7aea44 | https://www.investopedia.com/articles/optioninvestor/07/grain_market.asp | Grow Your Finances in the Grain Markets | Grow Your Finances in the Grain Markets
Temperature, precipitation and the changing needs of customers all contribute to the supply and demand for commodities like wheat, corn or soybeans. All of these changes greatly affect the price of commodities, and the grain markets are essential to managing these price swings and providing global benchmark prices. Read on to dig into and learn about the seven major products of the grain markets. (See also: Futures Fundamentals.)
What Are Grain Futures Contracts?
Anyone looking to invest in futures should know that the risk of loss is substantial. This type of investment is not suitable for everyone. An investor could lose more than originally invested and, therefore, only risk capital should be used. Risk capital is the amount of money that an individual can afford to invest, which, if lost would not affect the investor's lifestyle.
A grain futures contract is a legally binding agreement for the delivery of grain in the future at an agreed-upon price. The contracts are standardized by a futures exchange as to quantity, quality, time and place of delivery. Only the price is variable.
There are two main market participants in the futures markets: hedgers and speculators. Hedgers use the futures markets for risk management and withstand some risks associated with the price or availability of the actual underlying commodity. Futures transactions and positions have the express purpose of mitigating those risks. Speculators, on the other hand, generally have no use for the commodities in which they trade; they willingly accept the risk involved in investing in futures in return for the prospect of dramatic gains.
Advantages of Futures Contracts
Because they trade at the Chicago Board of Trade (CBOT), futures contracts offer more financial leverage, flexibility and financial integrity than trading the commodities themselves.
Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with performance margin; therefore, it requires considerably less capital than the physical market. Leverage provides speculators a higher risk/higher return investment.
For example, one futures contract for soybeans represents 5,000 bushels of soybeans. Therefore, the dollar value of this contract is 5,000 times the price per bushel. If the market is trading at $5.70 per bushel, the value of the contract is $28,500 ($5.70 x 5,000 bushels). Based on current exchange margin rules, the margin required for one contract of soybeans is only $1,013. So for approximately $1,013, an investor can leverage $28,500 worth of soybeans.
Advantages of Grain Contracts
Because grain is a tangible commodity, the grain market has a number of unique qualities. First, when compared to other complexes like the energies, grains have a lower margin making it easy for speculators to participate. Also, grains generally aren't one of the bigger contracts (in terms of total dollar amount), which accounts for the lower margins.
The fundamentals in the grains are fairly straightforward: like most tangible commodities, supply and demand will determine the price. Weather factors will also have an effect.
Contract Specifications
There are seven different grain products traded at the Chicago Board of Trade: corn, oats, wheat, soybeans, rice, soybean meal and soybean oil.
Similar grain products trade in other commodities markets around the world, such as Minneapolis, Winnipeg, Hong Kong, Brazil and India to name a few.
1. Corn: Corn is used not only for human consumption but to feed livestock such as cattle and pigs. Also, higher energy prices has led to using corn for ethanol production.
The corn contract is for 5,000 bushels, or roughly 127 metric tons. For example, when corn is trading at $2.50 a bushel, the contract has a value of $12,500 (5,000 bushels x $2.50 = $12,500). A trader that is long $2.50 and sells at $2.60 will make a profit of $500 ($2.60 - $2.50 = 10 cents, 10 cents x 5,000 = $500). Conversely, a trader who is long at $2.50 and sells at $2.40 will lose $500. In other words, every penny difference equals a move up or down of $50.
The pricing unit of corn is in dollars and cents with the minimum tick size of $0.0025, (one-quarter of a cent), which equals $12.50 per contract. Although the market may not trade in smaller units, it most certainly can trade in full cents during "fast" markets.
The most active months for corn delivery are March, May, July, September and December.
Position limits are set by the exchange to ensure orderly markets. A position limit is the maximum number of contracts that a single participant can hold. Hedgers and speculators have different limits. Corn has a maximum daily price movement.
Corn traditionally will have more volume than any other grain market. Also, it will be less volatile than beans and wheat.
2. Oats: Oats are not only used to feed livestock and humans, but are also used in the production of many industrial products like solvents and plastics.
An oats contract, like corn, wheat and soybeans, is for the delivery of 5,000 bushels. It moves in the same $50/penny increments as corn. For example, if a trader is long oats at $1.40 and sells at $1.45, he or she would make 5 cents per bushel, or $250 per contract ($1.45 - $1.40 = 5 cents, 5 cents x 5,000 = $250). Oats also trades in quarter-cent increments.
Oats for delivery are traded March, May, July, September and December, like corn. Also like corn, oats futures have position limits.
Oats is a difficult market to trade because it has less daily volume than any other market in the grain complex. Also its daily range is fairly small.
3. Wheat: Not only is wheat used for animal feed, but also in the production of flour for breads, pastas and more.
A wheat contract is for delivery of 5,000 bushels of wheat. Wheat is traded in dollars and cents and has a tick size of a quarter cent ($0.0025), like many of the other products traded at the CBOT. A one-tick price movement will cause a change of $12.50 in the contract.
The most active months for delivery of wheat, according to volume and open interest, are March, May, July, September and December. Position limits also apply to wheat.
Next to soybeans, wheat is a fairly volatile market with big daily ranges. Because it is so widely used, there can be huge daily swings. In fact, it is not uncommon to have one piece of news move this market limit up or down in a hurry.
4. Soybeans: Soybeans are the most popular oilseed product with an almost limitless range of uses, ranging from food to industrial products.
The soybean contract, like wheat, oats and corn, is also traded in the 5,000 bushel contract size. It trades in dollar and cents, like corn and wheat, but is usually the most volatile of all the contracts. The tick size is one-quarter of a cent (or $12.50).
The most active months for soybeans are January, March, May, July, August, September and November.
Position limits apply here as well.
Beans have the widest range of any of the markets in the grain room. Also, it will generally be $2 to $3 more per bushel than wheat or corn.
5. Soybean Oil: Besides being the most widely used edible oil in the United States, soybean oil has uses in the bio-diesel industry that are becoming increasingly important.
The bean oil contract is for 60,000 pounds, which is different from the rest of the grain contracts. Bean oil also trades in cents per pound. For example, let's say that bean oil is trading at 25 cents per pound. That gives a total value for the contract of $15,000 (0.25 x 60,000 = $15,000). Suppose that you go long at $0.2500 and sell at $0.2650; this means that you have made $900 ($0.2650 - 25 cents = $0.015 profit, $0.015 x 60,000 = $900). If the market had gone down $0.015 to .2350, you would lose $900.
The minimum price fluctuation for bean oil is $0.0001, or one one-hundredth of a cent, which equals $6 per contract.
The most active months for delivery are January, March, May, July, August, September, October and December.
Position limits are enforced for this market as well.
6. Soymeal: Soymeal is used in a number of products, including baby food, beer and noodles. It is the dominant protein in animal feed.
The meal contract is for 100 short tons, or 91 metric tons. Soymeal is traded in dollars and cents. For example, the dollar value of one contract of soymeal, when trading at $165 per ton, is $16,500 ($165 x 100 tons = $16,500).
The tick size for soymeal is 10 cents, or $10 per tick. For example, if the current market price is $165.60 and the market moves to $166, that would equal a move of $400 per contract ($166 - $165.60 = 40 cents, 40 cents x 100 = $400).
Soymeal is delivered on January, March, May, July, August, September, October and December.
Soymeal contracts also have position limits.
7. Rice: Not only is rice used in foods, but also in fuels, fertilizers, packing material and snacks. More specifically, this contract deals with long-grain rough rice.
The rice contract is 2,000 hundred weight (cwt). Rice is also traded in dollars and cents. For example, if rice is trading at $10/cwt, the total dollar value of the contract would be $20,000 ($10 x 2,000 = $20,000).
The minimum tick size for rice is $0.005 (one half of a cent) per hundred weight, or $10 per contract. For example, if the market was trading at $10.05/cwt and it moved to $9.95/cwt, this represents a change of $200 (10.05 - 9.95 = 10 cents, 10 cents x 2,000 cwt = $200).
Rice is delivered in January, March, May, July, September and November. Position limits apply in rice as well.
Centralized Marketplace
The primary function of any commodity futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future. There are a lot of hedgers in the grains markets due to the many different producers and consumers of these products. These include, but are not limited to, soybean crushers, food processors, grain and oil seed producers, livestock producers, grain elevators and merchandisers.
Using Futures and Basis to Hedge
The main premise upon which hedgers rely is that although the movement in cash prices and futures market prices may not be exactly identical, it can be close enough that hedgers can lessen their risk by taking an opposite position in the futures markets. By taking an opposite position, gains in one market can offset losses in another. This way, hedgers are able to set price levels for cash market transactions that will take place several months down the line.
For example, let's consider a soybean farmer. While the soybean crop is in the ground in the spring, the farmer is looking to sell his crop in October after the harvest. In market lingo, the farmer is long a cash market position. The farmer's fear is that prices will go down before he can sell his soybean crop. In order to offset losses from a possible decline in prices, the farmer will sell a corresponding number of bushels in the futures market now and will buy them back later when it is time to sell the crop in the cash market. Any losses resulting from a decline in the cash market price can be partially offset by a gain from the short in the futures market. This is known as a short hedge.
Food processors, grain importers and other buyers of grain products would initiate a long hedge to protect themselves from rising grain prices. Because they will be buying the product, they are short a cash market position. In other words, they would buy futures contracts to protect themselves from rising cash prices.
Usually there will be a slight difference between the cash prices and the futures prices. This is due to variables such as freight, handling, storage, transport and the quality of the product as well as the local supply and demand factors. This price difference between cash and futures prices is known as basis. The main consideration for hedgers concerning basis is whether it will become stronger or weaken. The final outcome of a hedge can depend on basis. Most hedgers will take historical basis data into consideration as well as current market expectations.
The Bottom Line
In general, hedging with futures can help the future buyer or seller of a commodity because it can help protect them from adverse price movements. Hedging with futures can help to determine an approximate price range months in advance of the actual physical purchase or sale. This is possible because cash and futures markets tend to move in tandem, and gains in one market tend to offset losses in another.
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aa1a6d506d8ecb4ca02f4f27eab95330 | https://www.investopedia.com/articles/optioninvestor/07/money_management_futures.asp | Risk Management Matters in Futures Trading | Risk Management Matters in Futures Trading
What sets good traders apart from the masses? It isn't necessarily the ability to pick precision entries and exit points, but rather an understanding of risk and risk management.
Risk management when trading futures shares many of the same features as that of stocks - for instance, futures traders are exposed to price risk in the market. But, unlike stocks, futures are derivatives contracts with set expiration dates that require the delivery of the underlying asset. Futures are also much more friendly to the use of leverage on margin that can amplify both gains and losses.
Read on to find out about some of the unique risks that futures trading brings with it, and what you can do to minimize your exposure to them.
Key Takeaways Futures contracts are popular financial instruments, but they differ in important ways from more traditional assets like stocks or bonds, and so your risk management will also differ.Futures are highly marginable, so you can increase your leverage far more than when buying stocks. This can lead to margin calls if you're not careful about setting stops.
Practicing Discipline
Risk management is sometimes an overlooked and misunderstood area of trading. It can sound boring compared to a discussion of stochastics patterns, Fibonacci sequences, and other matters of technical analysis. However, it is critical to any successful trading plan.
Even a trading strategy as simple as a moving average crossover system can be ruinous if proper risk management is not applied. This discussion of risk management will help you build a foundation of concepts you can apply to any trading plan.
A risk and money management plan will help you in another key area—discipline. Many investors don't hesitate to enter a trade, but sometimes have little idea of what to do next and when. Having a plan in place will keep you disciplined and prevent the emotions like fear and greed from taking over and causing you to experience failure.
Starting From Square One
A good place to start is with the concept of risk control. Traders are attracted to futures because of the leverage that is provided—vast sums can be won on very little invested capital. However, the cost of that leverage is the fact that you can lose more than the balance of your account. So, how can you control that risk?
First, consider that the rules regarding margin are about minimums. There are no rules that affect the maximum margin you can apply to a trade. In other words, if you are concerned with the leverage of potential losses of a market, apply more capital. True, you will be reducing your overall return, but this also brings everything into balance. On the other hand, highly leveraged positions can quickly lead to margin calls if the futures market turns even slightly against you in short order.
Example of Margin in Use
If corn is trading at $3 per bushel and a contract is 5,000 bushels, then the full contract value of a single contract of corn is $15,000. The exchange generally requires a minimum margin of around 5%-7%, which would be between $750 and $1,050. This is the minimum. If our trading plan requires that we risk a $0.10 move in corn, we are risking $500, or around 48%-66% of our investment.
However, if half the contract value were applied to the trade, or $7,500, that same $0.10 move would account for only 6.6% of our invested capital. That's quite a difference. Increase that to investing the full contract value and a trader on the long side (buy) removes the possibility of losing more than the initial investment.
Plan Your Trading Risk
So what is the right amount to risk on a trade? There is no hard and fast rule on this, but account size, risk tolerance, financial objectives and how it fits the total trading plan should all be taken into account. You can see from the example above that there is quite a range. Conservative traders generally risk around 5%-7% on a given trade, but this also requires either a larger amount of capital or precise entry and exit points. Increasing that to a 12% risk allows for taking on a little more leverage and wider market swings. More than that amount isn't necessarily wrong—it just depends on other factors of your plan. However, if you're taking on bigger risks, you must also consider whether your profit objective is realistic.
Consider this rule of thumb when you think about where your risk tolerance fits in to the above discussion: If you take a 50% loss on a trade, you need to achieve a 100% return to get it back. For example, if you own 100 shares of a stock at $50 per share and it loses 50%, your $5,000 will drop to $2,500. You must now achieve a 100% return to get back to $5,000. Thinking about risk in this way can put your risk tolerance back into perspective.
Stop Runaway Trading Losses
The importance of the stop-loss order as part of money management cannot be overlooked. A predetermined stop keeps a trader disciplined in executing his or her money management. However, many traders don't understand the "how" of stop placement. Stops cannot be placed arbitrarily—careful consideration must go into where to set a stop.
Traders sometimes set arbitrary stops, but is generally a bad idea. This is when a trader says, "I am placing my stop at a risk of $500 per trade because that is what I am comfortable losing on a trade—no more." Let's assume that this trader employs a system of technical analysis and swing trading. The swing low of the market in question is a move of $750. Does this trader's $500 stop make sense? Absolutely not! Moreover, it is probably as close to a guaranteed loss as you can get. What if the swing low was a $250 move? The $500 risk still doesn't make sense because it is too much risk.
The key to keep in mind when you're setting your stops is that the stop price must fit the market. If the required risk on a trade is too much for the trader's risk tolerance or account size, then the trader should find a market that fits. It is foolish to trade a market with too little capital. There is an old saying that warns against bringing a knife to a gun fight. Likewise, if you come to a market with too little capital, you may as well save everyone a lot of time and cut a check for the trade's counterparty right then and there.
The Bottom Line
Make sure the markets that you are trading in fit with your account size and risk tolerance. Make sure the percentage you are willing to risk per trade fits the plan and the market. And remember that none of these components exists in a vacuum. Focus on one without the other and you are headed for trouble. Weigh these factors together and you will be putting yourself on the track to building a successful trading plan.
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1d391dc673d9d743dc554cf1ca82fdb6 | https://www.investopedia.com/articles/optioninvestor/07/soft_market.asp | Trading The Soft Commodity Markets | Trading The Soft Commodity Markets
The soft commodities markets are made up of perishables such as cocoa, coffee, cotton, orange juice, and sugar, which are also some of the oldest tradable commodities still around today. You can trace their roots in commerce back over thousands of years. It is important to note that trading in this market involves substantial risks and is not suitable for everyone, and only risk capital should be used. In this article, we'll show you how to use this "sweet" market properly, because any investor could potentially lose more than originally invested.
Key Takeaways Soft commodities refers to futures contracts on underlying agricultural products that are grown rather than extracted or mined. Soft commodities are among the oldest traded products in the world, and continue to trade on listed exchanges. Here, we look at futures traded on cocoa, frozen orange juice, sugar, cotton, and coffee.
What Are Soft Futures Contracts?
A soft futures contract is a legally binding agreement for the delivery of cocoa, coffee, cotton, frozen concentrated orange juice and sugar in the future at an agreed upon price. The contracts are listed and standardized by the Intercontinental Exchange (ICE) Futures U.S., previously known as the New York Board of Trade (NYBOT), and regulated by the Commodity Futures Trading Commission, as to quantity, quality, time and place of delivery. Only the price is variable.
Most futures contracts are offset prior to delivery, meaning that most contracts are speculators trying to profit off of price movements.
Advantages of Futures Contracts
Unlike equities, futures contracts can be shorted on a downtick, which gives market participants greater flexibility. This flexibility allows hedgers to protect their physical position and speculators to take a position based on market expectations.
Because the soft commodity markets are traded at an exchange, the clearing services ensure no default risk. This means that the exchange acts as buyer to every seller should a market participant have to default on its responsibilities.
Contract Specifications
Although there are other sugar and coffee contracts that trade around the world, this piece deals only with those traded at the ICE Futures U.S.
Cocoa
Discovered by the natives of South America more than 5,000 years ago, cocoa was originally a luxury for the very rich. Today, most of the world's cocoa is grown in a handful of countries: the Ivory Coast, Ghana, Indonesia, Brazil, Ecuador and Nigeria. Now it is used in everyday foods from hot cocoa to chocolate.
Cocoa is traded in dollars per metric ton and one contract is for 10 metric tons. For example, when cocoa is trading at $1,500/M ton, the contract has a total value of $15,000. If a trader is long at $15,000/M ton, and the markets move to $1,555/lb, that is a move of $550 ($1,500 - $1,555 = $55, and 55 x 10 M ton. = $550).
The minimum price movement, or tick size, is a dollar, or $10 per contract. Although the market frequently will trade in sizes greater than a dollar, one dollar is the smallest amount it can move.
The contracts month for delivery of sugar are March, May, July, September and December. Delivery points include licensed warehouses in the Port of New York District, Delaware River Port District, Port of Hampton Roads, Port of Albany or Port of Baltimore.
Coffee
Coffee was originally discovered in Ethiopia around 850 AD. From Africa, coffee found its way to the Middle East and into coffee houses. It was these coffee houses that gave coffee its exposure to many travelers, which spread its use outside the Arabian borders.
Coffee is traded in cents per pound. One contract of coffee controls 37,500 pounds of coffee. When the price of coffee is trading at $1/pound, the cash value of that contract will be $37,500 ($1.00 x 37,500 = $37,500).
The tick size is 5 cents per pound, which equates to $18.75 per tick. For example, if a trader were to go long at $1.1000 and the markets moved to $1.1550, he would have a profit of $2062.50 ($1.1550 - $1.1000 = $0.0550, and $0.0550 x 37,500 = $2,062.50).
Because it one of the larger contracts in dollar terms, little movements have a big impact on price. Coffee has one of the larger daily ranges of all the softs, making it a very volatile commodity.
Coffee is deliverable in March, May, July, September and December. Delivery points are worldwide in ports around the globe like New Orleans, New York, Houston, Miami, Hamburg, Antwerp and Barcelona.
Cotton
Because cotton has universal appeal and can be used in many different products, it has been one of more influential commodities. Discovered more than 5,000 years ago, cotton has played a vital role in the rise and fall of many countries. It was one of America's first cash crops.
Cotton is traded in 50,000-pound contracts. It is also traded in cents per pound, so if the market is trading at 53 cents per pound, the contract will have a value of $26,500 ($0.53 x 50,000 pounds = $26,500).
The minimum tick size is $0.0001 or $5 per contract. Therefore any 2 cent move in cotton will equate to either a gain or a loss of $1,000. When the price of cotton exceeds 95 cents per pound, the minimum tick movement will expand to $0.0005 to accommodate to the larger daily ranges.
March, May, July, October and December are the contract months for cotton. Delivery points are in Galveston, Houston, New Orleans, Memphis and Greenville/Spartanburg, which isn't too surprising considering that is where most of it is grown.
Frozen Concentrated Orange Juice (FCOJ)
Orange juice is a relative newcomer to the commodity markets. For centuries, OJ was consumed as fresh fruit juice because it had a relatively short shelf life and was susceptible to price shocks due to supply disruptions. Freezing OJ was invented in the 1940s and quickly became the industry standard.
One contract of FCOJ equals 15,000 pounds. If the current market price is 90 cents per pound, the contract has a value of $13,500 ($0.90 x 15,000 pounds = $13,500).
The minimum tick is $0.005, or $7.50 per tick per contract. For example, let's say you buy a contract of FCOJ when the market is at 95 cents, and then sell it for $1. In this transaction, you would make $750 on the 5 cent move in FCOJ.
Oranges that come from Brazil and Florida are deliverable in exchange-licensed warehouses in Florida, New Jersey and Delaware only. FCOJ is most actively traded in January, March, May, July, September and December.
Sugar
It is widely believed that humans first used sugar well over 2,000 years ago. Originally only reserved for the very rich, sugar has become one of the more common staples on the dinner table. Because of its mass appeal, sugar is usually one of the most heavily traded commodities in the world in terms of total volume.
Sugar trades in contracts, sometimes known as "sugar No. 11", representing 112,000 pounds of sugar, and is expressed in terms of cents per pound. If the futures price is $0.1045, the contract has a value of $11,704 ($0.1045/lb x 112,000 pounds = $11,704). If the market moves from $0.1000 to $0.1240, that is equivalent to a dollar move of $2,688.
The minimum price movement for sugar is $0.0001 or $11.20 per contract.
Sugar is only deliverable in March, May, July and October. There are delivery points in each nation where the sugar is produced. These are places like Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji Islands, French Antilles, Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand, Trinidad, United States and Zimbabwe.
The Bottom Line
There are many different opportunities in soft commodities markets. Any person looking to invest should carefully consider the risk involved and be aware of the contract specifications before investing.
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fb48b1fde345b0db251616bdcab9ba7f | https://www.investopedia.com/articles/optioninvestor/07/swaps.asp | An Introduction to Swaps | An Introduction to Swaps
Derivatives contracts can be divided into two general families:
1. Contingent claims (e.g., options)
2. Forward claims, which include exchange-traded futures, forward contracts, and swaps
A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price, or commodity price.
Conceptually, one may view a swap as either a portfolio of forward contracts or as a long position in one bond coupled with a short position in another bond. This article will discuss the two most common and most basic types of swaps: interest rate and currency swaps.
Key Takeaways In finance, a swap is a derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another. Of the two cash flows, one value is fixed and one is variable and based on an index price, interest rate, or currency exchange rate. Swaps are customized contracts traded in the over-the-counter (OTC) market privately, versus options and futures traded on a public exchange. The plain vanilla interest rate and currency swaps are the two most common and basic types of swaps.
The Swaps Market
Unlike most standardized options and futures contracts, swaps are not exchange-traded instruments. Instead, swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties. Firms and financial institutions dominate the swaps market, with few (if any) individuals ever participating. Because swaps occur on the OTC market, there is always the risk of a counterparty defaulting on the swap.
1:48 Credit Default Swaps (CDS)
The first interest rate swap occurred between IBM and the World Bank in 1981. However, despite their relative youth, swaps have exploded in popularity. In 1987, the International Swaps and Derivatives Association reported that the swaps market had a total notional value of $865.6 billion. By mid-2006, this figure exceeded $250 trillion, according to the Bank for International Settlements. That's more than 15 times the size of the U.S. public equities market.
Plain Vanilla Interest Rate Swap
The most common and simplest swap is a plain vanilla interest rate swap. In this swap, Party A agrees to pay Party B a predetermined, fixed rate of interest on a notional principal on specific dates for a specified period of time. Concurrently, Party B agrees to make payments based on a floating interest rate to Party A on that same notional principal on the same specified dates for the same specified time period. In a plain vanilla swap, the two cash flows are paid in the same currency. The specified payment dates are called settlement dates, and the times between are called settlement periods. Because swaps are customized contracts, interest payments may be made annually, quarterly, monthly, or at any other interval determined by the parties.
For example, on Dec. 31, 2006, Company A and Company B enter into a five-year swap with the following terms:
Company A pays Company B an amount equal to 6% per annum on a notional principal of $20 million. Company B pays Company A an amount equal to one-year LIBOR + 1% per annum on a notional principal of $20 million.
LIBOR, or London Interbank Offered Rate, is the interest rate offered by London banks on deposits made by other banks in the Eurodollar markets. The market for interest rate swaps frequently (but not always) used LIBOR as the base for the floating rate until 2020. The transition from LIBOR to other benchmarks, such as the secured overnight financing rate (SOFR), began in 2020. For simplicity, let's assume the two parties exchange payments annually on December 31, beginning in 2007 and concluding in 2011.
At the end of 2007, Company A will pay Company B $1,200,000 ($20,000,000 * 6%). On Dec. 31, 2006, one-year LIBOR was 5.33%; therefore, Company B will pay Company A $1,266,000 ($20,000,000 * (5.33% + 1%)). In a plain vanilla interest rate swap, the floating rate is usually determined at the beginning of the settlement period. Normally, swap contracts allow for payments to be netted against each other to avoid unnecessary payments. Here, Company B pays $66,000, and Company A pays nothing. At no point does the principal change hands, which is why it is referred to as a "notional" amount. Figure 1 shows the cash flows between the parties, which occur annually (in this example).
Figure 1: Cash flows for a plain vanilla interest rate swap
Plain Vanilla Foreign Currency Swap
The plain vanilla currency swap involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap. The two specified principal amounts are set so as to be approximately equal to one another, given the exchange rate at the time the swap is initiated.
For example, Company C, a U.S. firm, and Company D, a European firm, enter into a five-year currency swap for $50 million. Let's assume the exchange rate at the time is $1.25 per euro (e.g., the dollar is worth 0.80 euro). First, the firms will exchange principals. So, Company C pays $50 million, and Company D pays 40 million euros. This satisfies each company's need for funds denominated in another currency (which is the reason for the swap).
Figure 2: Cash flows for a plain vanilla currency swap, Step 1
As with interest rate swaps, the parties will actually net the payments against each other at the then-prevailing exchange rate. If at the one-year mark, the exchange rate is $1.40 per euro, then Company C's payment equals $1,400,000, and Company D's payment would be $4,125,000. In practice, Company D would pay the net difference of $2,725,000 ($4,125,000 – $1,400,000) to Company C. Then, at intervals specified in the swap agreement, the parties will exchange interest payments on their respective principal amounts.
To keep things simple, let's say they make these payments annually, beginning one year from the exchange of principal. Because Company C has borrowed euros, it must pay interest in euros based on a euro interest rate. Likewise, Company D, which borrowed dollars, will pay interest in dollars, based on a dollar interest rate. For this example, let's say the agreed-upon dollar-denominated interest rate is 8.25%, and the euro-denominated interest rate is 3.5%. Thus, each year, Company C pays 1,400,000 euros (40,000,000 euros * 3.5%) to Company D. Company D will pay Company C $4,125,000 ($50,000,000 * 8.25%).
Figure 3: Cash flows for a plain vanilla currency swap, Step 2
Finally, at the end of the swap (usually also the date of the final interest payment), the parties re-exchange the original principal amounts. These principal payments are unaffected by exchange rates at the time.
Figure 4: Cash flows for a plain vanilla currency swap, Step 3
Who Would Use a Swap?
The motivations for using swap contracts fall into two basic categories: commercial needs and comparative advantage. The normal business operations of some firms lead to certain types of interest rate or currency exposures that swaps can alleviate. For example, consider a bank, which pays a floating rate of interest on deposits (e.g., liabilities) and earns a fixed rate of interest on loans (e.g., assets). This mismatch between assets and liabilities can cause tremendous difficulties. The bank could use a fixed-pay swap (pay a fixed rate and receive a floating rate) to convert its fixed-rate assets into floating-rate assets, which would match up well with its floating-rate liabilities.
Some companies have a comparative advantage in acquiring certain types of financing. However, this comparative advantage may not be for the type of financing desired. In this case, the company may acquire the financing for which it has a comparative advantage, then use a swap to convert it to the desired type of financing.
For example, consider a well-known U.S. firm that wants to expand its operations into Europe, where it is less known. It will likely receive more favorable financing terms in the U.S. By using a currency swap, the firm ends up with the euros it needs to fund its expansion.
To exit a swap agreement, either buy out the counterparty, enter an offsetting swap, sell the swap to someone else, or use a swaption.
Exiting a Swap Agreement
Sometimes one of the swap parties needs to exit the swap prior to the agreed-upon termination date. This is similar to an investor selling exchange-traded futures or options contracts before expiration. There are four basic ways to do this:
1. Buy Out the Counterparty: Just like an option or futures contract, a swap has a calculable market value, so one party may terminate the contract by paying the other this market value. However, this is not an automatic feature, so either it must be specified in the swaps contract in advance, or the party who wants out must secure the counterparty's consent.
2. Enter an Offsetting Swap: For example, Company A from the interest rate swap example above could enter into a second swap, this time receiving a fixed rate and paying a floating rate.
3. Sell the Swap to Someone Else: Because swaps have calculable value, one party may sell the contract to a third party. As with Strategy 1, this requires the permission of the counterparty.
4. Use a Swaption: A swaption is an option on a swap. Purchasing a swaption would allow a party to set up, but not enter into, a potentially offsetting swap at the time they execute the original swap. This would reduce some of the market risks associated with Strategy 2.
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67c4648b0e12edfed79d56effd645309 | https://www.investopedia.com/articles/optioninvestor/08/american-european-options.asp | American vs. European Options: What's the Difference? | American vs. European Options: What's the Difference?
American vs. European Options: An Overview
American and European options have similar characteristics but the differences are important. For instance, owners of American-style options may exercise at any time before the option expires. On the other hand, European-style options may exercise only at expiration.
Although most equity options are American style options, many broad-based equity indices, including the S&P 500, have actively traded European-style options.
Key Takeaways Most stocks and exchange-traded funds have American-style options while equity indices, including the S&P 500, have European-style options. European index options stop trading one day earlier, at the close of business on the Thursday preceding the third Friday of the expiration month. The settlement price is the official closing price for the expiration period, establishing which options are in the money and subject to auto-exercise.
American Options
Options are contracts that derive their value from an underlying asset or investment. Options give the owner the right to buy or sell the underlying asset (such as a stock), at a fixed price (called the strike price), on or before a specific expiration date in the future. A call option gives the owner the right to buy a stock, for example, while a put option gives the owner the right to sell the stock. The up-front fee (called the premium) is what the investor pays to purchase the option.
Typically, stock options are for a single stock, while index options are based on a basket of equities that can represent the equity market as a whole or a portion of the market, such as a specific industry. A stock option can be exercised before its expiration date (if it's American-style), while an option on an index can only be exercised on its expiry (if it's European-style). However, investors can unwind an option position by selling it before its expiry, including European-style options, though there could be a gain or loss between the premiums paid and received.
All optionable stocks and exchange-traded funds (ETFs) have American-style options while only a few broad-based indices have American-style options. American index options cease trading at the close of business on the third Friday of the expiration month, with a few exceptions. For example, some options are quarterlies, which trade until the last trading day of the calendar quarter, while weeklies cease trading on Wednesday or Friday of the specified week.
The settlement price is the official closing price for the expiration period, establishing which options are in the money and subject to auto-exercise. Any option that's in the money by one cent or more on the expiration date is automatically exercised unless the option owner specifically requests their broker not to exercise. The settlement price for the underlying asset (stock, ETF, or index) with American-style options is the regular closing price or the last trade before the market closes on the third Friday. After-hours trades do not count when determining the settlement price.
1:31 Explaining American and European Options
With American-style options, there are seldom surprises. If the stock is trading at $40.12 a few minutes before the closing bell on expiration Friday, you can anticipate that 40 puts will expire worthlessly and that 40 calls will be in the money. If you have a short position in the 40 call and don't want to be hit with an exercise notice, you can repurchase those calls. The settlement price may change and 40 calls may move out of the money, but it's unlikely the value will change significantly in the last few minutes.
European Options
European index options stop trading one day earlier, at the close of business on the Thursday preceding the third Friday of the expiration month.
It is not as easy to identify the settlement price for European-style options. In fact, the settlement price is not published until hours after the market opens. The European settlement price is calculated as follows:
On the third Friday of the month, the opening price for each stock in the index is determined. Individual stocks open at different times, with some of these opening prices available at 9:30 a.m. ET while others are determined a few minutes later. The underlying index price is calculated as if all stocks were trading at their respective opening prices at the same time. This is not a real-world price because you cannot look at the published index and assume the settlement price is close in value.
European-style options pose special risks for options traders, requiring careful planning to avoid systemic exposure.
Exercise Rights
When you own an option, you control the right to exercise. Occasionally, it may be beneficial to exercise an option before it expires, to collect a dividend, for example, but it's seldom important. Dividends are cash payments paid to shareholders by companies as a reward to investors. When you sell an American-style option, you sell the option without owning it and are assigned an exercise notice before expiration and are short the stock.
The only time an early assignment carries significant risk occurs with American-style cash-settled index options, suggesting the easiest way to avoid early-exercise risk is to avoid American options. If you receive an assignment notice, you must repurchase that option at the previous night's intrinsic value, placing you at serious risk if the market undergoes a significant move.
Cash Settlement
It's advantageous to all parties when options are settled in cash:
No shares exchange hands. You don't have to worry about rebuilding a complex stock portfolio because you don't lose active positions if assigned an exercise notice on calls you wrote, as in covered call writing or a collar strategy. The option owner receives the cash value and the option seller pays the cash value of the option. That cash value is equal to the option's intrinsic value. If the option is out of the money, it expires worthless and has zero cash value.
These cash-settled options are almost always European-style and assignment only occurs at expiration, thus the option's cash value is determined by the settlement price.
Settlement Price
The settlement price is often a surprise with European-style options because, when the market opens for trading on the morning of the third Friday, a significant price change may occur from the previous night's close. This doesn't happen all the time but it happens often enough to turn the apparently low-risk strategy of holding the position overnight into a gamble.
Here's the scenario faced by European option traders Thursday afternoon on the day before expiration:
If the option is almost worthless, holding on and hoping for a miracle is not a bad idea. Owners of low-priced options, worth a few nickels or less, have earned hundreds or thousands of dollars when the market shifted higher or lower on Friday morning. However, these options expire worthless most of the time. If you own an option that has a significant value, you have a decision to make. The settlement price could make the option worthless or double its value. Do you want to roll the dice? It's a risk-based decision that individual investors need to make for themselves.
When short the option, you face a different challenge:
When short an out-of-the-money option, covering is a wise move. With American-style options, you see the stock approaching the strike and can spend a nickel or two to cover. But with European options, there are no warnings. Any out-of-the-money option can move 10 or 20 points into the money, costing $1,000 to $2,000 per contract when forced to pay the settlement price. It's just not worth the risk.
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6f67df85a9e6283813d3a6fec0a19849 | https://www.investopedia.com/articles/optioninvestor/08/greenshoe-option-ipo.asp | Greenshoe Options: An IPO's Best Friend | Greenshoe Options: An IPO's Best Friend
Companies wanting to venture out and sell shares to the public can stabilize initial pricing through a legal mechanism called the greenshoe option. A greenshoe is a clause contained in the underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price. Investment banks and underwriters that take part in the greenshoe process can exercise this option if public demand exceeds expectations and the stock trades above the offering price.
The Origin of the Greenshoe
The term "greenshoe" arises from the Green Shoe Manufacturing Company (now called Stride Rite Corporation), founded in 1919. It was the first company to implement the greenshoe clause into their underwriting agreement. The legal name is "overallotment option" because, in addition to shares originally offered, additional shares are set aside for underwriters. This type of option is the only SEC-sanctioned method for an underwriter to legally stabilize a new issue after the offering price has been determined. SEC introduced this option to enhance the efficiency and competitiveness of the IPO fundraising process.
Price Stabilization
This is how a greenshoe option works:
The underwriter acts as a liaison, like a dealer, finding buyers for their client's newly-issued shares. Sellers (company owners and directors) and buyers (underwriters and clients).determine a share price. Once the share price is determined, they're ready to trade publicly. The underwriter then uses all legal means to keep the share price above the offering price. If the underwriter finds there's a possibility that shares will fall below the offering price, they can exercise the greenshoe option.
To keep pricing control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company.
For example, if a company decides to sell 1 million shares publicly, the underwriters can exercise their greenshoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply according to initial public demand.
If the market price exceeds the offering price, underwriters can't buy back those shares without incurring a loss. This is where the greenshoe option is useful, allowing underwriters to buy back shares at the offering price, thus protecting them their interests.
If a public offering trades below the offering price, it's referred to as a "break issue." This can generate a public impression the stock being offered might be unreliable, possibly inducing new buyers to sell shares or to refrain from buying additional shares. To stabilize prices in this scenario, underwriters exercise their option and buy back shares at the offering price, returning those shares to the lender (issuer).
Full, Partial and Reverse Greenshoes
The number of shares the underwriter buys back determines if they will exercise a partial greenshoe or a full greenshoe. A partial greenshoe indicates that underwriters are only able to buy back some inventory before the share price rises. A full greenshoe occurs when they're unable to buy back any shares before the share price rises. The underwriter exercises the full option when that happens and buy at the offering price. The greenshoe option can be exercised at any time in the first 30 days after the offering.
A reverse greenshoe option has the same effect on share price as the regular greenshoe option but, instead of buying shares, the underwriter is allowed to buy shares on the open market and sell them back to the issuer, but only if the share price falls below the offering price.
Greenshoe Option in Action
It's common for companies to offer the greenshoe option in their underwriting agreement. For example, Exxon Mobil Corporation (NYSE:XOM) sold an additional 84.58 million shares during an initial public offering, because investors placed orders to buy 475.5 million shares even though the company initially offered only 161.9 million shares. The company took this step because the demand far surpassed the share supply.
The Bottom Line
The greenshoe option reduces the risk for a company issuing new shares, allowing the underwriter to have the buying power to cover short positions if the share price falls, without the risk of having to buy shares if the price rises. In return, this keeps the share price stable, benefiting both issuers and investors.
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849d4edd4f4ebd1fa17809a8c3edad30 | https://www.investopedia.com/articles/optioninvestor/08/manage-interest-rate-risk.asp | Managing Interest Rate Risk | Managing Interest Rate Risk
Interest rate risk exists in an interest-bearing asset, such as a loan or a bond, due to the possibility of a change in the asset's value resulting from the variability of interest rates. Interest rate risk management has become very important, and assorted instruments have been developed to deal with interest rate risk.
This article looks at several ways that both businesses and consumers manage interest rate risk using various interest rate derivative instruments.
Which Investors are Susceptible to Interest Rate Risk?
Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly affects the values of fixed-income securities. Since interest rates and bond prices are inversely related, the risk associated with a rise in interest rates causes bond prices to fall, and vice versa. Bond investors, specifically those who invest in long-term fixed-rate bonds, are more directly susceptible to interest rate risk.
Key Takeaways Interest rate risk is the risk associated with interest rate fluctuations in assets. Interest rates and bond prices are inversely related. Certain products and options, such as forward and futures contracts, help investors hedge interest rate risks. Forward contracts are agreements in which a party can purchase or sell assets at a certain price on a specific future date.
Suppose an individual purchases a 3% fixed-rate 30-year bond for $10,000. This bond pays $300 per year through maturity. If during this time, interest rates rise to 3.5%, new bonds issued pay $350 per year through maturity, assuming a $10,000 investment. If the 3% bondholder continues to hold his bond through maturity, he loses out on the opportunity to earn a higher interest rate.
Alternatively, he could sell his 3% bond in the market and buy the bond with the higher interest rate. However, doing so results in the investor getting a lower price on his sale of 3% bonds as they are no longer as attractive to investors since the newly issued 3.5% bonds are also available.
In contrast, changes in interest rates also affect equity investors but less directly than bond investors. This is because, for example, when interest rates rise, the corporation's cost of borrowing money also increases. This could result in the corporation postponing borrowing, which may result in less spending. This decrease in spending may slow down corporate growth and result in decreased profit and ultimately lower stock prices for investors.
1:26 Managing Interest Rate Risk
Interest Rate Risk Should Not Be Ignored
As with any risk-management assessment, there is always the option to do nothing, and that is what many people do. However, in circumstances of unpredictability, sometimes not hedging is disastrous. Yes, there is a cost to hedging, but what is the cost of a major move in the wrong direction?
One need only look to Orange County, California, in 1994 to see evidence of the pitfalls of ignoring the threat of interest rate risk. In a nutshell, Orange County Treasurer Robert Citron borrowed money at lower short-term rates and lent money at higher long-term rates. The strategy was initially great as short-term rates fell and the normal yield curve was maintained. But when the curve began to turn and approach inverted yield curve status, things changed. Losses to Orange County and the almost 200 public entities for which Citron managed money were estimated at nearly $1.7 billion and resulted in the municipality's bankruptcy. That's a hefty price to pay for ignoring interest rate risk.
Investment Products
Those who want to hedge their investments against interest rate risk have many products to choose from
Forwards: A forward contract is the most basic interest rate management product. The idea is simple, and many other products discussed in this article are based on this idea of an agreement today for an exchange of something at a specific future date.
Forward Rate Agreements (FRAs): An FRA is based on the idea of a forward contract, where the determinant of gain or loss is an interest rate. Under this agreement, one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate. The actual payments are calculated based on a notional principal amount and paid at intervals determined by the parties. Only a net payment is made – the loser pays the winner, so to speak. FRAs are always settled in cash.
FRA users are typically borrowers or lenders with a single future date on which they are exposed to interest rate risk. A series of FRAs is similar to a swap (discussed below); however, in a swap, all payments are at the same rate. Each FRA in a series is priced at a different rate unless the term structure is flat.
Futures: A futures contract is similar to a forward, but it provides the counterparties with less risk than a forward contract – namely, a lessening of default and liquidity risk due to the inclusion of an intermediary.
Swaps: Just like it sounds, a swap is an exchange. More specifically, an interest rate swap looks a lot like a combination of FRAs and involves an agreement between counterparties to exchange sets of future cash flows. The most common type of interest rate swap is a plain vanilla swap, which involves one party paying a fixed interest rate and receiving a floating rate, and the other party paying a floating rate and receiving a fixed rate.
Options: Interest rate management options are option contracts for which the underlying security is a debt obligation. These instruments are useful in protecting the parties involved in a floating-rate loan, such as adjustable-rate mortgages (ARMs). A grouping of interest rate call options is referred to as an interest rate cap; a combination of interest rate put options is referred to as an interest rate floor. In general, a cap is like a call, and a floor is like a put.
Swaptions: A swaption, or swap option, is simply an option to enter into a swap.
Embedded options: Many investors encounter interest management derivative instruments via embedded options. If you have ever bought a bond with a call provision, you too are in the club. The issuer of your callable bond is insuring that if interest rates decline, they can call in your bond and issue new bonds with a lower coupon.
Caps: A cap, also called a ceiling, is a call option on an interest rate. An example of its application would be a borrower going long, or paying a premium to buy a cap and receiving cash payments from the cap seller (the short) when the reference interest rate exceeds the cap's strike rate. The payments are designed to offset interest rate increases on a floating-rate loan.
If the actual interest rate exceeds the strike rate, the seller pays the difference between the strike and the interest rate multiplied by the notional principal. This option will "cap," or place an upper limit, on the holder's interest expense.
The interest rate cap is a series of component options, or "caplets," for each period the cap agreement exists. A caplet is designed to provide a hedge against a rise in the benchmark interest rate, such as the London Interbank Offered Rate (LIBOR), for a stated period.
Floors: Just as a put option is considered the mirror image of a call option, the floor is the mirror image of the cap. The interest rate floor, like the cap, is a series of component options, except that they are put options and the series components are referred to as "floorlets." Whoever is long, the floor is paid upon maturity of the floorlets if the reference rate is below the floor's strike price. A lender uses this to protect against falling rates on an outstanding floating-rate loan.
Collars: A protective collar can also help manage interest rate risk. Collaring is accomplished by simultaneously buying a cap and selling a floor (or vice versa), just like a collar protects an investor who is long on a stock. A zero-cost collar can also be established to lower the cost of hedging, but this lessens the potential profit that would be enjoyed by an interest rate movement in your favor as you have placed a ceiling on your potential profit.
The Bottom Line
Each of these products provides a way to hedge interest rate risk, with different products more appropriate for different scenarios. There is, however, no free lunch. With any of these alternatives, one gives up something – either money, like premiums paid-for options, or opportunity cost, which is the profit one would have made without hedging.
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61718f4f625dbac1fe0b2038139a0563 | https://www.investopedia.com/articles/optioninvestor/08/naked-options.asp | Naked Options Expose You To Risk | Naked Options Expose You To Risk
As investors become more educated and savvy, they look for new and exciting ways to trade the markets. This often leads investors to seek out the concept of selling naked options.
What does it mean to trade options naked? It doesn't mean they are trading from a European beach somewhere getting a line-free tan, but rather, the trader is selling options without having a position in the underlying instrument. For example, if one is writing naked calls, they are selling calls without owning the underlying stock. If they did own the stock, the position is deemed to be clothed or "covered."
The concept of selling naked options is a topic for advanced traders. As with any advanced topic, a short discussion such as this cannot cover every possible aspect of profit potential, risk control and money management. This article is designed to be an introduction to the topic and will attempt to shed some light on the riskiness of these trading setups. This type of trading should only be attempted by advanced traders.
Naked Calls
A naked call position is usually taken when the investor expects the stock price to be trading below the option strike price at expiration. It is important to note that the maximum possible gain is the amount of premium collected when the option is sold. Maximum gain is achieved when the option is held through expiration and the option expires worthless.
A call allows the owner of the call to purchase the stock at a predetermined price (the strike price) on or before a predetermined date (the expiration). If you sell the call without owning the underlying stock and the call is exercised by the buyer, you will be left with a short position in the stock.
When writing naked calls, the risk is truly unlimited, and this is where the average investor generally gets in trouble when selling naked options. Most options seem to expire worthless; therefore, the trader may have more winning trades than losers. But with the unbalanced risk versus reward, a single bad trade can wipe out an entire year's gain (or more). Sound money management and risk control are critical to success when trading this way.
Controlling Risk
The call writer does have some risk-control strategies available. The easiest is to simply cover the position by either buying the offsetting option or, alternatively, the underlying stock. Obviously, if the underlying stock is purchased, the position is no longer naked, and it does incur additional risk parameters. Some traders will incorporate additional risk controls, but these examples require a thorough knowledge of options trading and go beyond the scope of this article.
Generally, writing naked options is best done in months that are closer to expiring rather than later. Time decay (theta) is one of your best friends in this type of trade, as the closer the option gets to expiration, the faster the theta will erode the premium of the option. While it won't change the fact that this trade has unlimited risk, choosing your strike prices wisely can alter your risk exposure. The farther away you are from where the current market is trading, the more the market has to move in order to make that call worth something at expiration.
Example 1:Let's consider stock X for an example of a naked call write. The hypothetical trade mentioned below would be considered by a trader who expected the stock to move lower for the next few months or that the trend would trade sideways. For the sake of simplicity, let's assume X shares are trading at approximately $20 per share at the time of the trade and that the May 22.50 calls were trading at $1. A naked call write would be established by selling the May 22.50 naked (the trader has no position in X stock), bringing in $100 in premium per option sold.
If X stock is below 22.50 at the May expiration, this option will expire worthless and we will keep the $100 premium for each option sold. If it is higher, the option will be exercised and will have to deliver X stock at $22.50 per share. Applying the $1 received for the option against this, the trader's cost basis is short X from $21.50 per share, making the investor's risk the difference between wherever X is trading above $23.50. You can see that makes the maximum risk an unknown. This is why understanding risk management and money management are critical to successfully trading naked calls. Here is a chart of what that would look like:
Image by Julie Bang © Investopedia 2020
(Note: It is important to note that the right part of the chart above showing the risk of loss would extend indefinitely as the stock price continues to climb.)
Because naked call writing is an unlimited-risk proposition, many brokerage firms will require you to have a large amount of capital or high-net worth in addition to a great deal of experience before they will let you make these types of trades. This will be outlined in their options agreement. Once you are approved for trading naked calls, you will also need to familiarize yourself with your firm's margin requirements for your positions. This can vary widely from firm to firm, and if you are trading at a firm that does not specialize in options trading, you may find the margin requirements unreasonable.
Naked Puts
A naked put is a position in which the investor writes a put option and has no position in the underlying stock. Risk exposure is the primary difference between this position and a naked call.
A naked put is used when the investor expects the stock to be trading above the strike price at expiration. As in the naked call position, the potential for profit is limited to the amount of premium received. The investor can make the most if the stock is trading above the strike price at expiration and expires worthless. If this occurs, the trader will keep the entire premium.
While this type of trade is often referred to as having unlimited risk, this is not actually the case. The risk in the naked put is slightly different than that of the naked call in that the trader could lose the most if the stock went to zero. That is still a significant risk when compared to the potential reward. And unlike the naked call, if the put is exercised against you, you will receive the stock (as opposed to receiving a short position in the stock, as is the case of the naked call). This would allow you to simply hold the stock as part of your possible exit strategies.
Example 2:As an example of writing naked puts, we'll consider the hypothetic stock Y. Let's assume that today is March 1 and that the Y is trading at $45 per share. For the sake of simplicity, let's also assume that the May 44 puts are at $1. If we sell a May 44 put, we will receive $100 in premium for each put sold. If Y is trading above $44 per share at expiration, the put will expire worthless and we will achieve our maximum potential profit of $100 per option sold. However, if Y is below this price at expiration, we can expect Y to be assigned to us, 100 shares for each option sold, at a price of $44. Our cost basis is $43 per share ($44 less the premium received), so that is where our losses would begin.
Image by Julie Bang © Investopedia 2020
Contrary to the naked call example, we have a maximum loss on this trade of $4,300 per option sold (100 shares of Y x $43 cost basis). This would only be if the stock (or ETF in this case) went to zero (unlikely in an index ETF, but very possible with an individual stock).
Generally, brokerage requirements will be a little more accommodating with naked puts than with naked calls. The primary reason for this is that if the put is exercised you will be receiving the stock (as opposed to a short stock position, as in the naked call). This makes the maximum risk exposure the value of that stock position less the premium received for the option.
The Bottom Line
Trading naked options can be attractive when considering the number of potential winning trades versus losing trades. However, do not be taken in by the lure of easy money, because there is no such thing. There is a tremendous amount of risk exposure when trading in this manner, and the risk often outweighs the reward. Certainly, there is potential for profit in naked options and there are many successful traders doing it. But make sure you have a sound money management strategy and a thorough knowledge of the risks before you consider writing naked options. If you are new to options trading or you are a smaller trader, you should probably stay away from naked options until you have gained experience and capitalization.
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9197b64b5183e94ec779217c41ac1d68 | https://www.investopedia.com/articles/optioninvestor/08/straddle-strategy.asp | Understanding Straddle Strategy For Market Profits | Understanding Straddle Strategy For Market Profits
In trading, there are numerous sophisticated trading strategies designed to help traders succeed regardless of whether the market moves up or down. Some of the more sophisticated strategies, such as iron condors and iron butterflies, are legendary in the world of options. They require complex buying and selling of multiple options at various strike prices. The end result is to make sure a trader is able to profit no matter where the underlying price of the stock, currency or commodity ends up.
However, one of the least sophisticated option strategies can accomplish the same market neutral objective with a lot less hassle. The strategy is known as a straddle. It only requires the purchase or sale of one put and one call to become activated. In this article, we'll take a look at different the types of straddles and the benefits and pitfalls of each.
Types of Straddles
A straddle is a strategy accomplished by holding an equal number of puts and calls with the same strike price and expiration dates. The following are the two types of straddle positions.
Long Straddle—The long straddle is designed around the purchase of a put and a call at the exact same strike price and expiration date. The long straddle is meant to take advantage of the market price change by exploiting increased volatility. Regardless of which direction the market's price moves, a long straddle position will have you positioned to take advantage of it.Short Straddle—The short straddle requires the trader to sell both a put and a call option at the same strike price and expiration date. By selling the options, a trader is able to collect the premium as a profit. A trader only thrives when a short straddle is in a market with little or no volatility. The opportunity to profit will be based 100% on the market's lack of ability to move up or down. If the market develops a bias either way, then the total premium collected is at jeopardy.
The success or failure of any straddle is based on the natural limitations that options inherently have along with the market's overall momentum.
The Long Straddle
A long straddle is specially designed to assist a trader to catch profits no matter where the market decides to go. There are three directions a market may move: up, down or sideways. When the market is moving sideways, it's difficult to know whether it will break to the upside or downside. To successfully prepare for the market's breakout, there is one of two choices available:
The trader can pick a side and hope the market breaks in that direction.The trader can hedge their bets and pick both sides simultaneously. That's where the long straddle comes in.
By purchasing a put and a call, the trader is able to catch the market's move regardless of its direction. If the market moves up, the call is there; if the market moves down, the put is there. In Figure 1, we look at a 17-day snapshot of the euro market. This snapshot finds the euro stuck between $1.5660 and $1.54.
Image by Sabrina Jiang © Investopedia 2020
While the market looks like it may break through the $1.5660 price, there is no guarantee it will. Based on this uncertainty, purchasing a straddle will allow us to catch the market if it breaks to the upside or if it heads back down to the $1.54 level. This allows the trader to avoid any surprises.
Drawbacks to the Long Straddle
The following are the three key drawbacks to the long straddle.
ExpenseRisk of lossLack of volatility
The rule of thumb when it comes to purchasing options is in-the-money and at-the-money options are more expensive than out-of-the-money options. Each at-the-money option can be worth a few thousand dollars. So while the original intent is to be able to catch the market's move, the cost to do so may not match the amount at risk.
In the figure below, we see the market breaks to the upside, straight through $1.5660.
ATM Straddle (At-The-Money)
Image by Sabrina Jiang © Investopedia 2020
This leads us to the second problem: risk of loss. While our call at $1.5660 has now moved in the money and increased in value in the process, the $1.5660 put has now decreased in value because it has now moved farther out of the money. How quickly a trader can exit the losing side of straddle will have a significant impact on what the overall profitable outcome of the straddle can be. If the option losses mount quicker than the option gains or the market fails to move enough to make up for the losses, the overall trade will be a loser.
The final drawback deals with the inherent makeup of options. All options are comprised of the following two values:
Time value—The time value comes from how far the option is from expiring.Intrinsic value—The intrinsic value comes from the option's strike price being out, in, or at the money.
If the market lacks volatility and does not move up or down, both the put and call option will lose value every day. This will go on until the market either definitively chooses a direction or the options expire worthless.
The Short Straddle
The short straddle's strength is also its drawback. Instead of purchasing a put and a call, a put and a call are sold in order to generate income from the premiums. The thousands spent by the put and call buyers actually fill your account. This can be a great boon for any trader. The downside, however, is that when you sell an option you expose yourself to unlimited risk.
As long as the market does not move up or down in price, the short straddle trader is perfectly fine. The optimum profitable scenario involves the erosion of both the time value and the intrinsic value of the put and call options. In the event the market does pick a direction, the trader not only has to pay for any losses that accrue, but they must also give back the premium they have collected.
The only recourse short straddle traders have is to buy back the options they sold when the value justifies doing so. This can occur anytime during the life cycle of a trade. If this is not done, the only choice is to hold on until expiration.
When Straddles Strategy Works Best
The option straddle works best when it meets at least one of these three criteria:
The market is in a sideways pattern.There is pending news, earnings or another announcement.Analysts have extensive predictions on a particular announcement.
Analysts can have tremendous impact on how the market reacts before an announcement is ever made. Prior to any earnings decision or governmental announcement, analysts do their best to predict what the exact value of the announcement will be. Analysts may make estimates weeks in advance of the actual announcement, which inadvertently forces the market to move up or down. Whether the prediction is right or wrong is secondary to how the market reacts and whether your straddle will be profitable.
After the actual numbers are released, the market has one of two ways to react: The analysts' prediction can add either to or decrease the momentum of the actual price once the announcement is made. In other words, it will proceed in the direction of what the analyst predicted or it will show signs of fatigue. A properly created straddle, short or long, can successfully take advantage of just this type of market scenario. The difficulty occurs in knowing when to use a short or a long straddle. This can only be determined when the market will move counter to the news and when the news will simply add to the momentum of the market's direction.
Conclusion
There is a constant pressure on traders to choose to buy or sell, collect premium or pay premiums, but the straddle is the great equalizer. The straddle allows a trader to let the market decide where it wants to go. The classic trading adage is "the trend is your friend." Take advantage of one of the few times you are allowed to be in two places at once with both a put and a call.
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b351692fd406fc95e4f0dca2a5ad1830 | https://www.investopedia.com/articles/optioninvestor/08/strangle-strategy.asp | Get A Strong Hold On Profit With Strangles | Get A Strong Hold On Profit With Strangles
The word "strangle" conjures up murderous images of revenge. However, a strangle in the world of options can be both liberating and legal. In this article, we'll show you how to get a strong hold on this strangle strategy.
An option strangle is a strategy where the investor holds a position in both a call and put with different strike prices, but with the same maturity and underlying asset.
Another option strategy, which is quite similar in purpose to the strangle, is the straddle. A straddle is designed to take advantage of a market's potential sudden move in price by having a trader have a put and caltl option with both the same strike price and maturity date. While both of the straddle and the strangle set out to increase a trader's odds of success, the strangle has the ability to save both money and time for traders operating on a tight budget. (For more on straddles, read Straddle Strategy A Simple Approach To Market Neutral.)
Key Takeaways A strangle is an options combination strategy that involves buying (selling) both an out-of-the-money call and put in the same underlying and expiration.A long strangle pays off when the underlying asset moves strongly either up or down by expiration, making it ideal for traders who believe there will be high volatility but are unsure about direction.A short strangle pays off if the underlying does not move much, and is best suited for traders who believe there will be low volatility.
Types Of Strangles
The strength of any strangle can be found when a market is moving sideways within a well-defined support and resistance range. A put and a call can be strategically placed to take advantage of either one of two scenarios:
If the market has the potential make any sudden movement, either long or short, then a put and a call can be purchased to create a "long strangle" position.If the market is expected to maintain the status quo, between the support and resistance levels, then a put and a call can be sold to profit from the premium; this is also known as a "short strangle".
No matter which of these strangles you initiate, the success or failure of it is based on the natural limitations that options inherently have along with the market's underlying supply and demand realities.
Image by Sabrina Jiang © Investopedia 2021
Factors That Influence All Strangles
There are three key differences that strangles have from their straddle cousins:
Out-of-the-money options
The first key difference is the fact that strangles are executed using out-of-the-money (OTM) options. OTM options may be up to or even over 50% less expensive than their at-the-money (ATM) or in-the-money (ITM) option counterparts. This is of significant importance depending on the amount of capital a trader may have to work with.
If a trader has put a long strangle on, then the discount allows them to trade both sides of the fence at 50% of the costs of putting on a long straddle. If a trader is determined to put a short straddle on, then they are collecting 50% less premium while still being exposed to the problem of unlimited loss that selling options exposes a trader to.
Risk/reward of limited volatility
A second key difference between a strangle and a straddle is the fact that the market may not move at all. Since the strangle involves the purchase or sale of options that are OTM, there is an exposure to the risk that there may not be enough fundamental change to the underlying asset to make the market move outside of its support and resistance range. For those traders that are long the strangle, this can be the kiss of death. For those that are short the strangle, this is the exact type of limited volatility needed in order for them to profit.
Use of Delta
Finally, the Greek option-volatility tracker delta plays a significant role when making your strangle purchase or sale decisions. Delta is designed to show how closely an option's value changes in relation to its underlying asset. An OTM option may move 30% or $0.30 for every $1 move in the underlying asset. This can only be determined by reviewing the delta of the options you may want purchase or sell.
If you are long a strangle, you want to make sure that you are getting the maximum move in option value for the premium you are paying. If you are short a strangle, you want to make sure that the likelihood of the option expiring, as indicated by a low delta, will offset the unlimited risk. (For a refresher on how to use the Greeks when evaluating options, read Using the Greeks to Understand Options)
The Long Strangle
A long strangle involves the simultaneous purchase and sale of a put and call at differing strike prices. How the different strike prices are determined is beyond the scope of this article. A myriad of choices that revolve around volatility, overbought/oversold indicators, or moving averages can be used. In the example below, we see that the euro has developed some support at the $1.54 area and resistance at the $1.5660 area.
Image by Sabrina Jiang © Investopedia 2021
A long-strangle trader can purchase a call with the strike price of $1.5660 and a put with the strike price of $1.54. If the market breaks through the $1.5660 price, the call goes ITM; if it collapses and breaks through $1.54, the put goes ITM.
In the follow-up chart, we see that the market breaks to the upside, straight through $1.5660, making the OTM call profitable. Depending on how much the put option costs, it can either be sold back to the market to collect any built-in premium or held until expiration to expire without worth.
Image by Sabrina Jiang © Investopedia 2021
The Short Strangle
Using the same chart, a short-strangle trader would have sold a call at the $1.5660 are and sold a put at the $1.54. Once the market breaks through the $1.5660 strike price, the sold call must be bought back or the trader risks exposure to unlimited losses in the event the market continues to run up in price.
Image by Sabrina Jiang © Investopedia 2021
The premium that's retained from selling the $1.54 put may or may not cover all of the loss incurred by having to buy back the call. One fact is certain: the put premium will mitigate some of the losses that the trade incurs in this instance. Had the market broken through the $1.54 strike price, then the sold call would have offset some of the losses that the put would have incurred.
Shorting a strangle is a low-volatility, market-neutral strategy that can only thrive in a range-bound market. It faces a core problem that supersedes its premium-collecting ability. This can take one of two forms:
choosing a very close range to collect an expensive premium with the odds in favor of the market breaking through the rangepicking such a large range that whatever little premium is collected is disproportionately small compared to the unlimited risk involved with selling options
The Bottom Line
Strangle trading, in both its long and short forms, can be profitable. It takes careful planning in order to prepare for both high- and low-volatility markets to make it work. Once the plan is successfully put in place, then the execution of buying or selling OTM puts and calls is simple. There is little need to choose the market's direction; the market simply activates the successful side of the strangle trade. This is the ultimate in being proactive in when it comes to making trading decisions.
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008ecae323d0d934708f21e51fc7a6d2 | https://www.investopedia.com/articles/optioninvestor/08/synthetic-options.asp | Understanding Synthetic Options | Understanding Synthetic Options
Options are touted as one of the most common ways to profit from market swings. Whether you are interested in trading futures, currencies or want to buy shares of a corporation, options offer a low-cost way to make an investment with less capital.
While options have the ability to limit a trader's total investment, options also expose traders to volatility, risk, and adverse opportunity cost. Given these limitations, a synthetic option may be the best choice when making exploratory trades or establishing trading positions.
Key Takeaways A synthetic option is a way to recreate the payoff and risk profile of a particular option using combinations of the underlying instrument and different options.A synthetic call is created by a long position in the underlying combined with a long position in an at-the-money put option.A synthetic put is created by a short position in the underlying combined wit a long position in an at-the-money call option.Synthetic options are viable due to put-call parity in options pricing.
Options Overview
There is no question that options have the ability to limit investment risk. If an option costs $500, the maximum that can be lost is $500. A defining principle of an option is its ability to provide an unlimited opportunity for profit with limited risk.
However, this safety net comes with a cost because many studies indicate the vast majority of options held until expiration expire worthless. Faced with these sobering statistics, it is difficult for a trader to feel comfortable buying and holding an option for too long.
Options "Greeks" complicate this risk equation. The Greeks—delta, gamma, vega, theta, and rho—measure different levels of risk in an option. Each one of the Greeks adds a different level of complexity to the decision-making process. The Greeks are designed to assess the various levels of volatility, time decay and the underlying asset in relation to the option. The Greeks make choosing the right option a difficult task because there is the constant fear that you are paying too much or that the option will lose value before you have a chance to gain profits.
Finally, purchasing any type of option is a mixture of guesswork and forecasting. There is a talent in understanding what makes one option strike price better than another strike price. Once a strike price is chosen, it is a definitive financial commitment and the trader must assume the underlying asset will reach the strike price and exceed it to book a profit. If the wrong strike price is chosen, the entire strategy will most likely fail. This can be quite frustrating, particularly when a trader is right about the market's direction but picks the wrong strike price.
Synthetic Options
Many problems can be minimized or eliminated when a trader uses a synthetic option instead of purchasing a vanilla option. A synthetic option is less affected by the problem of options expiring worthless; in fact, adverse statistics can work in a synthetic's favor because volatility, decay and strike price play a less important role in its ultimate outcome.
There are two types of synthetic options: synthetic calls and synthetic puts. Both types require a cash or futures position combined with an option. The cash or futures position is the primary position and the option is the protective position. Being long in the cash or futures position and purchasing a put option is known as a synthetic call. A short cash or futures position combined with the purchase of a call option is known as a synthetic put.
A synthetic call lets a trader put on a long futures contract at a special spread margin rate. It is important to note that most clearing firms consider synthetic positions less risky than outright futures positions and therefore require a lower margin. In fact, there can be a margin discount of 50% or more, depending on volatility.
A synthetic call or put mimics the unlimited profit potential and limited loss of a regular put or call option without the restriction of having to pick a strike price. At the same time, synthetic positions are able to curb the unlimited risk that a cash or futures position has when traded without offsetting risk. Essentially, a synthetic option has the ability to give traders the best of both worlds while diminishing some of the pain.
How a Synthetic Call Works
A synthetic call, also referred to as a synthetic long call, begins with an investor buying and holding shares. The investor also purchases an at-the-money put option on the same stock to protect against depreciation in the stock's price. Most investors think this strategy can be considered similar to an insurance policy against the stock dropping precipitously during the duration that they hold the shares. A synthetic call is also known as a married call or protective call.
How a Synthetic Put Works
A synthetic put is an options strategy that combines a short stock position with a long call option on that same stock to mimic a long put option. It is also called a synthetic long put. Essentially, an investor who has a short position in a stock purchases an at-the-money call option on that same stock. This action is taken to protect against appreciation in the stock's price.
Image by Julie Bang © Investopedia 2019
Disadvantages of Synthetic Options
While synthetic options have superior qualities compared to regular options, that doesn't mean that they don't generate their own set of problems.
If the market begins to move against a cash or futures position it is losing money in real time. With the protective option in place, the hope is that the option will move up in value at the same speed to cover the losses. This is best accomplished with an at-the-money option but they are more expensive than an out-of-the-money option. In turn, this can have an adverse effect on the amount of capital committed to a trade.
Even with an at-the-money option protecting against losses, the trader must have a money management strategy to determine when to get out of the cash or futures position. Without a plan to limit losses, he or she can miss an opportunity to switch a losing synthetic position to a profitable one.
Also, if the market has little to no activity, the at-the-money option can begin to lose value due to time decay.
Example of a Synthetic Call
Assume the price of corn is at $5.60 and market sentiment has a long side bias. You have two choices: you can purchase the futures position and put up $1,350 in margin or buy a call for $3,000. While the outright futures contract requires less than the call option, you'll have unlimited exposure to risk. The call option can limit risk but is $3,000 is a fair price to pay for an at-the-money option and, if the market starts to move down, how much of the premium will be lost and how quickly will it be lost?
Let's assume a $1,000 margin discount in this example. This special margin rate allows traders to put on a long futures contract for only $300. A protective put can then be purchased for only $2,000 and the cost of the synthetic call position becomes $2,300. Compare this to the $3,000 for a call option alone, booking is an immediate $700 savings.
Put-Call Parity
The reason that synthetic options are possible is due to the concept of put-call parity implicit in options pricing models. Put-call parity is a principle that defines the relationship between the price of put options and call options of the same class, that is, with the same underlying asset, strike price, and expiration date.
Put-call parity states that simultaneously holding a short put and long European call of the same class will deliver the same return as holding one forward contract on the same underlying asset, with the same expiration, and a forward price equal to the option's strike price. If the prices of the put and call options diverge so that this relationship does not hold, an arbitrage opportunity exists, meaning that sophisticated traders can theoretically earn a risk-free profit. Such opportunities are uncommon and short-lived in liquid markets.
The equation expressing put-call parity is:
C+PV(x)=P+Swhere:C=price of the European call optionPV(x)=the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rateP=price of the European putS=spot price or the current market value of the un-\begin{aligned}&C+PV(x)=P+S\\&\textbf{where:}\\&C=\text{price of the European call option}\\&PV(x)=\text{the present value of the strike price } (x),\\&\qquad\qquad\ \,\text{discounted from the value on the expiration}\\&\qquad\qquad\ \,\text{date at the risk-free rate}\\ &P=\text{price of the European put}\\&S=\text{spot price or the current market value of the un-}\\&\qquad\text{derlying asset}\end{aligned}C+PV(x)=P+Swhere:C=price of the European call optionPV(x)=the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rateP=price of the European putS=spot price or the current market value of the un-
The Bottom Line
It's refreshing to participate in options trading without having to sift through a lot of information in order to make a decision. When done right, synthetic options have the ability to do just that: simplify decisions, make trading less expensive and help to manage positions more effectively.
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d24f5e7e521b5e823e88208b59ed1001 | https://www.investopedia.com/articles/optioninvestor/09/buying-options.asp | The Basics of Option Prices | The Basics of Option Prices
Options are contracts that give option buyers the right to buy or sell a security at a predetermined price on or before a specified day. The price of an option, called the premium, is composed of a number of variables. Options traders need to be aware of these variables so they can make an informed decision about when to trade an option.
When investors buy options, the biggest driver of outcomes is the price movement of the underlying security or stock. Call option buyers of stock options need the underlying stock price to rise, whereas put option buyers need the stock's price to fall.
However, there are many other factors that impact the profitability of an options contract. Some of those factors include the stock option price or premium, how much time is remaining until the contract expires, and how much the underlying security or stock fluctuates in value.
Key Takeaways Options prices, known as premiums, are composed of the sum of its intrinsic and time value. Intrinsic value is the price difference between the current stock price and the strike price. An option's time value or extrinsic value of an option is the amount of premium above its intrinsic value. Time value is high when more time is remaining until expiry since investors have a higher probability that the contract will be profitable.
Understanding the Basics of Option Prices
Options contracts provide the buyer or investor with the right, but not the obligation, to buy and sell an underlying security at a preset price, called the strike price. Options contracts have an expiration date called an expiry and trade on options exchanges. Options contracts are derivatives because they derive their value from the price of the underlying security or stock.
A buyer of an equity call option would want the underlying stock price to be higher than the strike price of the option by expiry. On the other hand, a buyer of a put option would want the underlying stock price to be below the put option strike price by the contract's expiry.
There are many factors that can impact the value of an option's premium and ultimately, the profitability of an options contract. Below are two of the key components that comprise of an option's premium and ultimately whether it's profitable, called in the money (ITM), or unprofitable, called out of the money (OTM).
Intrinsic Value
One of the key drivers for an option's premium is the intrinsic value. Intrinsic value is how much of the premium is made up of the price difference between the current stock price and the strike price.
For example, let's say an investor owns a call option on a stock that is currently trading at $49 per share. The strike price of the option is $45, and the option premium is $5. Because the stock price is currently $4 more than the option's strike price, then $4 of the $5 premium is comprised of intrinsic value.
In the example, the investor pays the $5 premium upfront and owns a call option, with which it can be exercised to buy the stock at the $45 strike price. The option isn't going to be exercised until it's profitable or in-the-money. We can figure out how much we need the stock to move in order to profit by adding the price of the premium to the strike price: $5 + $45 = $50. The break-even point is $50, which means the stock must move above $50 before the investor can profit (excluding broker commissions).
In other words, to calculate how much of an option's premium is due to intrinsic value, an investor would subtract the strike price from the current stock price. Intrinsic value is important because if the option premium is primarily made up intrinsic value, the option's value and profitability are more dependent on movements in the underlying stock price. The rate at which a stock price fluctuates is called volatility.
Measuring Intrinsic Value
An option's sensitivity to the underlying stock's movement is called delta. A delta of 1.0 tells investors that the option will likely move dollar for dollar with the stock, whereas a delta of 0.6 means the option will move approximately 60 cents for every dollar the stock moves.
The delta for puts is represented as a negative number, which demonstrates the inverse relationship of the put compared to the stock movement. A put with a delta of -0.4 should increase by 40 cents in value if the stock drops $1 per share.
Time Value
The time remaining until an option's expiration has a monetary value associated with it, which is known as time value. The more time that remains before the option's expiry, the more time value is embedded in the option's premium.
In other words, time value is the portion of the premium above the intrinsic value that an option buyer pays for the privilege of owning the contract for a certain period. As a result, time value is often referred to as extrinsic value.
Investors are willing to pay a premium for an option if it has time remaining until expiration because there's more time to earn a profit. The longer the time remaining, the higher the premium since investors are willing to pay for that extra time for the contract to become profitable or have intrinsic value.
Remember, the underlying stock price needs to move beyond the option's strike price in order to have intrinsic value. The more time that remains on the contract, the higher the probability the stock's price could move beyond the strike price and into profitability. As a result, time value plays a significant role, in not only determining an option's premium but also the likelihood of the contract expiring in-the-money.
Time Decay
Over time, the time value decreases as the option expiration date approaches. The less time that remains on an option, the less incentive an investor has to pay the premium since there's less time to earn a profit. As the option's expiration date draws near, the probability of earning a profit becomes less likely, resulting in an increasing decline in time value. This process of declining time value is called time decay.
Typically, an options contract loses approximately one-third of its time value during the first half of its life. Time value decreases at an accelerating pace and eventually reaches zero as the option's expiration date draws near.
Time value and time decay both play important roles for investors in determining the likelihood of profitability on an option. If the strike price is far away from the current stock price, there needs to be enough time remaining on the option to earn a profit. Understanding time decay and the pace at which time value erodes is key in determining whether an option has any chance of having intrinsic value.
Options with more extrinsic value are less sensitive to the stock's price movement while options with a lot of intrinsic value are more in sync with the stock price.
Measuring Time Value
Time value is measured by the Greek letter theta. Option buyers need to have particularly efficient market timing because theta eats away at the premium. A common mistake option investors make is allowing a profitable trade to sit long enough that theta reduces the profits substantially.
For example, a trader may buy an option for $1, and see it increase to $5. Of the $5 premium, only $4 is intrinsic value. If the stock price doesn't move any further, the premium of the option will slowly degrade to $4 at expiry. A clear exit strategy should be set before buying an option.
Time Value and Volatility
The rate at which a stock's price fluctuates, called volatility, also plays a role in the probability of an option expiring in the money. Implied volatility, also known as vega, can inflate the option premium if traders expect volatility.
Implied volatility is a measure of the market's view of the probability of stock's price changing in value. High volatility increases the chance of a stock moving past the strike price, so options traders will demand a higher price for the options they are selling.
This is why well-known events like earnings are often less profitable for option buyers than originally anticipated. While a big move in the stock may occur, option prices are usually quite high before such events, which offsets the potential gains.
Conversely, when a stock price is very calm, option prices tend to fall, making them relatively cheap to buy. However, unless volatility expands again, the option will stay cheap, leaving little room for profit.
The Bottom Line
An option's value or premium is determined by intrinsic and extrinsic value. Intrinsic value is the moneyness of the option, while extrinsic value has more components. Before booking an options trade, consider the variables in play and have an entry and exit strategy.
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08e60cf167bcece2dcdcfc7f82ab635d | https://www.investopedia.com/articles/optioninvestor/09/naked-short-selling.asp | Commentary: The Truth About Naked Short Selling | Commentary: The Truth About Naked Short Selling
The basic form of short selling is selling stock that you borrow from an owner and do not own yourself. In essence, you deliver borrowed shares. Another form is to sell stock that you do not own and are not borrowing from someone. Here you owe the shorted shares to the buyer but "fail to deliver." This form is called naked short selling.
Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed before they sell it short. Due to various loopholes in the rules, and discrepancies between paper and electronic trading systems, naked shorting continues to happen.
These short sales are almost always done only by options market makers because they allegedly need to do so in order to maintain liquidity in the options markets. However, these options market makers are often brokers or large hedge funds who abuse the options market maker exemption.
Shorting Without Failing to Deliver
There is another form of short selling, which I describe as synthetic short selling. This involves selling calls and/or buying puts. Selling calls makes you have negative deltas (a negative stock equivalent position) and so does buying puts. Neither of these positions requires borrowing stock or "failing to deliver" stock.
A collar is nothing more than a simultaneous sale of an out-of-the-money call and a purchase of an out-of-the-money put with the same expiration date. Another way to short sell is to sell a single stock future, which is equivalent to naked short selling. No shares are borrowed, however, and no shares are failed to deliver.
Prepaid forwards and swaps are sometimes used to carry out short sales. However, these are done directly between the customer and some bank or insurance company, many of which have become suspect in terms of their ability to guarantee the other side.
Holding any one of the above positions alone or in combination with another essentially gives you a negative delta position whereby you will profit if the stock goes down.
Margin Requirements and Money Transfers
The following is exactly what happens when you do a short sale as mentioned above. You decide to sell some shares that you do not have because you may wish to reduce the risk of other long positions that you may hold or you wish to make naked bets that the stock will go down.
For example, you borrow shares that you wish to sell short and you instruct your broker to sell 1,000 shares at $50. Upon the sale, the $50,000 is credited to your broker's account (not your account as some may think. This distinction is important). Then you must advance the required initial margin into your account to guarantee to the broker that there is money in your account to cover any loss you may incur if you lose on the short sale. The short seller must maintain the minimum maintenance requirement in his margin account. Of course, if the short seller is the broker, then both the broker's account and the short seller's account is essentially the same.
The broker earns interest on the lending of the proceeds of the short sale to other margin customers. That lender becomes the short seller when the broker is the short seller. When the broker acting as an options market maker does a naked short sale, he need not borrow shares and instead collects all of the interest on the proceeds for himself.
If the stock goes down after the sale of the 1,000 shares at $50—say to $45—then $5,000 is moved from the broker's account to the short seller's account, which can be removed by the short seller. His margin requirement goes down by 50% of the $5,000. On the other hand, if the stock goes up to $55, then $5,000 is moved from the short seller's margin account to the broker's account and the short seller's minimum maintenance requirement will increase.
These money transfers take place exactly the same way whether you do a regular short sale or a naked short sale. There are similar future transfers if you have sold calls or sold single stock futures. When you buy puts and fully pay for them, there are none of these money transfers after the purchase, although the value of your account certainly fluctuates as the value of the puts fluctuates.
All of the above ways to obtain negative deltas cause pressure on the value of the stock similar to how straight sales of long stock puts pressure on the price of the stock. In addition, these short-selling methods are sometimes used by those who have inside information about some negative future event to illegally profit by selling or shorting stock prior to the announcement of that future event. Combinations of the above positions with long positions, where summed net short equivalent stock positions are created, are often used to disguise illegal insider trades.
Media Pundits
Naked short selling is often in the news today and is criticized by journalists and other pundits who claim that naked short sellers allied with "rumor mongers" caused the collapse of Bear Stearns and Lehman Brothers. They cite the large "failure to deliver" for a stock as evidence of naked short sales days after the stock had dropped. Although the naked short sales happened after the collapse, they still hold onto the idea that those after-the-event naked short sales caused the collapse.
In my opinion, those who believe that naked short sales caused the collapse of Bear Stearns and Lehman Brothers are misdirecting the attention of the illegal inside traders and their allied manipulators.
The large volumes of "fail to deliver" stock and the naked short sales after the collapses of Bear Stearns and Lehman Brothers leads me to believe there is an explanation for those large volumes. However, that strategy did not cause the collapse of those companies.
The Bottom Line
Selling short can be done in a myriad of ways. And, although naked short selling is often given a bad reputation in the media because it is frequently abused, it is not as nefarious as its critics suggest.
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22f3c48019bf7cef5ce3a03d3cc5ec88 | https://www.investopedia.com/articles/optioninvestor/09/profit-out-of-the-money-butterfly.asp | Setting Profit Traps With Butterfly Spreads | Setting Profit Traps With Butterfly Spreads
Individuals trade options for a variety of reasons. Some people trade them in order to speculate on the expectation of a given price moment, while others use options to hedge an existing position. Others use more advanced strategies in hopes of generating extra income on a regular basis. All of these are valid objectives and can be successful if done correctly. Still, there is a whole range of unique strategies along the option trading strategy spectrum that offer outstanding reward-to-risk potential for those willing to consider the possibilities. One such strategy is the out-of-the-money butterfly spread (heretofore referred to as the OTM butterfly).
What Is a Butterfly Spread?
Before delving into the OTM butterfly, lets first define what a basic butterfly spread is; a butterfly spread represents a strategy completely unique to option trading. The most basic form of a butterfly spread involves buying one call option at a particular strike price while simultaneously selling two call options at a higher strike price and buying one other call option at an even higher strike price. When using put options, the process is to buy one put option at a particular strike price while simultaneously selling two put options at a lower strike price and buying one put option at an even lower strike price.
The net effect of this action is to create a "profit range," a range of prices within which the trade will experience a profit over time. A butterfly spread is most typically used as a "neutral" strategy. In Figure 1 you see the risk curves for a neutral at-the-money butterfly spread using options on First Solar (Nasdaq:FSLR).
Figure 1 - FSLR 110-130-150 Call Butterfly.
The trade displayed in Figure 1 involves buying one 110 call, selling two 130 calls and buying one 150 call. As you can see, this trade has limited risk on both the upside and the downside. The risk is limited to the net amount paid to enter the trade (in this example: $580).
The trade also has limited profit potential, with a maximum profit of $1,420. This would only occur if FSLR closed exactly at $130 on the day of option expiration. While this is unlikely, the more important point is that this trade will show some profit as long as FSLR remains between roughly 115 and 145 through the time of option expiration. (Be sure to check out the Buying Options section of our Simulator How-To Guide to learn how to buy options like these.)
OTM Butterfly Spreads
The trade displayed in Figure 1 is known as a "neutral" butterfly spread, because the price of the option sold is at the money. In other words, the option sold is close to the current price of the underlying stock. So, as long as the stock does not move too far in either direction, the trade can show a profit. An OTM butterfly is built the same way as a neutral butterfly, by buying one call, selling two calls at a higher strike price and buying one more call option at a higher strike price.
The critical difference is that with the OTM butterfly, the option that is sold is not the at-the-money option but rather an out-of-the-money option. To put it another way, an OTM butterfly is a "directional" trade. This simply means that the underlying stock must move in the anticipated direction in order for the trade to ultimately show a profit. If an OTM butterfly is entered using an out-of-the-money call, then the underlying stock must move higher in order for the trade to show a profit. Conversely, if an OTM butterfly is entered using an out-of-the-money put option then the underlying stock must move lower in order for the trade to show a profit.
Figure 2 displays the risk curves for an OTM call butterfly.
Figure 2 - FSLR 135-160-185 OTM Call Butterfly.
With FSLR trading at about $130, the trade displayed in Figure 2 involves buying one 135 call, selling two 160 calls and buying one 185 call. This trade has a maximum risk of $493 and a maximum profit potential of $2,007. At expiration, the stock must be above the breakeven price of $140 a share in order for this trade to show a profit. Nevertheless, a look at the risk curves indicates that an early profit of 100% or more may be available for the taking if the stock moves higher prior to expiration. In other words, the idea is not necessarily to hold on until expiration and hope that something near the maximum potential is reached, but rather to find a good profit-taking opportunity along the way.
When to Use an OTM Butterfly Spread
An OTM butterfly is best entered into when a trader expects the underlying stock to move somewhat higher, but does not have a specific forecast regarding the magnitude of the move. For example, if the trader anticipates that the stock is about to move sharply higher, they would likely be better off buying a call option, which would afford an unlimited profit potential. However, if the trader merely wishes to speculate that the stock will move somewhat higher, the OTM butterfly strategy can offer a low-risk trade, with an attractive reward-to-risk ratio and a high probability of profit if the stock does in fact move higher (when using calls).
Most often, a trader is better off establishing an OTM butterfly when implied option volatility is low. Because this trade costs money to enter, the implication of low implied volatility is that there is relatively less time premium built into the price of the options traded, and thus the lower the implied volatility, the lower the total cost of the trade.
The Bottom Line
The primary disadvantage of the OTM butterfly spread is that ultimately, the trader needs to be correct about market direction. If one enters into an OTM call butterfly spread and the underlying security trades lower without moving to higher ground at any point prior to option expiration, then a loss will undoubtedly occur.
Nevertheless, the OTM butterfly spread offers option traders at least three unique advantages. First off, an OTM butterfly spread can almost always be entered at a cost that is far less than would be required to buy 100 shares of the underlying stock. Secondly, if the trader pays close attention to what they paid to enter the trade, they can obtain an extremely favorable reward-to-risk ratio. Finally, with a well-positioned OTM butterfly spread, a trader can enjoy a high probability of profit by virtue of having a relatively wide profit range between the upper and lower breakeven prices. In the wide spectrum of trading strategies, not many offer all three of these advantages.
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2523861933564e72896390ba0759d73d | https://www.investopedia.com/articles/optioninvestor/09/selling-options.asp | The Ins and Outs of Selling Options | The Ins and Outs of Selling Options
In the world of buying and selling stock options, choices are made in regards to which strategy is best when considering a trade. Investors who are bullish can buy a call or sell a put, whereas if they're bearish, they can buy a put or sell a call.
There are many reasons to choose each of the various strategies, but it is often said that "options are made to be sold." This article will explain why options tend to favor the options seller, how to get a sense of the probability of success in selling an option, and the risks associated with selling options.
Key Takeaways Selling options can help generate income in which they get paid the option premium upfront and hope the option expires worthless.Option sellers benefit as time passes and the option declines in value; in this way, the seller can book an offsetting trade at a lower premium.However, selling options can be risky when the market moves adversely, and there isn't an exit strategy or hedge in place.
Intrinsic Value, Time Value, and Time Decay
For review, a call option gives the buyer of the option the right, but not the obligation, to buy the underlying stock at the option contract's strike price. The strike price is merely the price at which the option contract converts to shares of the security. A put option gives the buyer of the option the right, but not the obligation, to sell the stock at the option's strike price. Every option has an expiration date or expiry.
There are multiple factors that go into or comprise an option contract's value and whether that contract will be profitable by the time it expires. The current price of the underlying stock as it compares to the options strike price as well as the time remaining until expiration play critical roles in determining an option's value.
Intrinsic Value
An option's value is made up of intrinsic and time value. Intrinsic value is the difference between the strike price and the stock's price in the market. The intrinsic value relies on the stock's movement and acts almost like home equity.
If an option is extremely profitable, it's deeper in-the-money (ITM), meaning it has more intrinsic value. As the option moves out-of-the-money (OTM), it has less intrinsic value. Options contracts that are out-of-the-money tend to have lower premiums.
An option premium is the upfront fee that is charged to a buyer of an option. An option that has intrinsic value will have a higher premium than an option with no intrinsic value.
Time Value
An option with more time remaining until expiration tends to have a higher premium associated with it versus an option that is near its expiry. Options with more time remaining until expiration tend to have more value because there's a higher probability that there could be intrinsic value by expiry. This monetary value embedded in the premium for the time remaining on an options contract is called time value.
In other words, the premium of an option is primarily comprised of intrinsic value and the time value associated with the option. This is why time value is also called extrinsic value.
Time Decay
Over time and as the option approaches its expiration, the time value decreases since there's less time for an option buyer to earn a profit. An investor would not pay a high premium for an option that's about to expire since there would be little chance of the option being in-the-money or having intrinsic value.
The process of an option's premium declining in value as the option expiry approaches is called time decay. Time decay is merely the rate of decline in the value of an option's premium due to the passage of time. Time decay accelerates as the time to expiration draws near.
Higher premiums benefit option sellers. However, once the option seller has initiated the trade and has been paid the premium, they typically want the option to expire worthless so that they can pocket the premium.
In other words, the option seller doesn't usually want the option to be exercised or redeemed. Instead, they simply want the income from the option without having the obligation of selling or buying shares of the underlying security.
How Option Sellers Benefit
As a result, time decay or the rate at which the option eventually becomes worthless works to the advantage of the option seller. Option sellers look to measure the rate of decline in the time value of an option due to the passage of time–or time decay. This measure is called theta, whereby it's typically expressed as a negative number and is essentially the amount by which an option's value decreases every day.
Selling options is a positive theta trade, meaning the position will earn more money as time decay accelerates.
During an option transaction, the buyer expects the stock to move in one direction and hopes to profit from it. However, this person pays both intrinsic and extrinsic value (time value) and must make up the extrinsic value to profit from the trade. Because theta is negative, the option buyer can lose money if the stock stays still or, perhaps even more frustratingly, if the stock moves slowly in the correct direction, but the move is offset by time decay.
However, time decay works well in favor of the option seller because not only will it decay a little each business day; it also works weekends and holidays. It's a slow-moving moneymaker for patient sellers.
Remember, the option seller has already been paid the premium on day one of initiating the trade. As a result, option sellers are the beneficiaries of a decline in an option contract's value. As the option's premium declines, the seller of the option can close out their position with an offsetting trade by buying back the option at a much cheaper premium.
Volatility Risks and Rewards
Option sellers want the stock price to remain in a fairly tight trading range, or they want it to move in their favor. As a result, understanding the expected volatility or the rate of price fluctuations in the stock is important to an option seller. The overall market's expectation of volatility is captured in a metric called implied volatility.
Monitoring changes in implied volatility is also vital to an option seller's success. Implied volatility is essentially a forecast of the potential movement in a stock's price. If a stock has a high implied volatility, the premium or cost of the option will be higher.
Implied Volatility
Implied volatility, also known as vega, moves up and down depending on the supply and demand for options contracts. An influx of option buying will inflate the contract premium to entice option sellers to take the opposite side of each trade. Vega is part of the extrinsic value and can inflate or deflate the premium quickly.
Implied volatility graph. Image by Sabrina Jiang © Investopedia 2020
An option seller may be short on a contract and then experience a rise in demand for contracts, which, in turn, inflates the price of the premium and may cause a loss, even if the stock hasn't moved. Figure 1 is an example of an implied volatility graph and shows how it can inflate and deflate at various times.
In most cases, on a single stock, the inflation will occur in anticipation of an earnings announcement. Monitoring implied volatility provides an option seller with an edge by selling when it's high because it will likely revert to the mean.
At the same time, time decay will work in favor of the seller too. It's important to remember the closer the strike price is to the stock price, the more sensitive the option will be to changes in implied volatility. Therefore, the further out of the money or the deeper in the money a contract is, the less sensitive it will be to implied volatility changes.
Probability of Success
Option buyers use a contract's delta to determine how much the option contract will increase in value if the underlying stock moves in favor of the contract. Delta measures the rate of price change in an option's value versus the rate of price changes in the underlying stock.
However, option sellers use delta to determine the probability of success. A delta of 1.0 means an option will likely move dollar-per-dollar with the underlying stock, whereas a delta of .50 means the option will move 50 cents on the dollar with the underlying stock.
An option seller would say a delta of 1.0 means you have a 100% probability the option will be at least 1 cent in the money by expiration and a .50 delta has a 50% chance the option will be 1 cent in the money by expiration. The further out of the money an option is, the higher the probability of success is when selling the option without the threat of being assigned if the contract is exercised.
Probability of expiring and delta comparison. Image by Sabrina Jiang © Investopedia 2020
At some point, option sellers have to determine how important a probability of success is compared to how much premium they are going to get from selling the option. Figure 2 shows the bid and ask prices for some option contracts. Notice the lower the delta accompanying the strike prices, the lower the premium payouts. This means an edge of some kind needs to be determined.
For instance, the example in Figure 2 also includes a different probability of expiring calculator. Various calculators are used other than delta, but this particular calculator is based on implied volatility and may give investors a much-needed edge. However, using fundamental evaluation or technical analysis can also help option sellers.
Worst-Case Scenarios
Many investors refuse to sell options because they fear worst-case scenarios. The likelihood of these types of events taking place may be very small, but it is still important to know they exist.
First, selling a call option has the theoretical risk of the stock climbing to the moon. While this may be unlikely, there isn't upside protection to stop the loss if the stock rallies higher. Call sellers will thus need to determine a point at which they will choose to buy back an option contract if the stock rallies or they may implement any number of multi-leg option spread strategies designed to hedge against loss.
However, selling puts is basically the equivalent of a covered call. When selling a put, remember the risk comes with the stock falling. In other words, the put seller receives the premium and is obligated to buy the stock if its price falls below the put's strike price.
The risk for the put seller is that the option is exercised and the stock price falls to zero. However, there's not an infinite amount of risk since a stock can only hit zero and the seller gets to keep the premium as a consolation prize.
It is the same in owning a covered call. The stock could drop to zero, and the investor would lose all the money in the stock with only the call premium remaining. Similar to the selling of calls, selling puts can be protected by determining a price in which you may choose to buy back the put if the stock falls or hedge the position with a multi-leg option spread.
The Bottom Line
Selling options may not have the same kind of excitement as buying options, nor will it likely be a "home run" strategy. In fact, it's more akin to hitting single after single. Just remember, enough singles will still get you around the bases, and the score counts the same.
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6f998e454db0cc8c8d237d7002a49261 | https://www.investopedia.com/articles/optioninvestor/09/write-covered-calls-increase-income.asp | Write Covered Calls to Increase Your IRA Income | Write Covered Calls to Increase Your IRA Income
Investors looking for a relatively low-risk alternative to increase their investment returns may want to consider writing covered calls on the stock they have in their IRAs. This conservative approach to trading options can produce additional revenue, regardless of whether the stock price rises or falls, as long as the proper adjustments are made, however, it also limits the upside potential of the stocks if they continue to rise.
Key Takeaways A covered call involves selling an upside call option representing the exact amount of a pre-existing long position in some asset or stock.The writer of the call earns in the options premium, enhancing return, and is a common strategy for investors in their retirement accounts.A covered call will, however, limit upside potential, and does not protect against the portfolio losing value in a down market.In an IRA, the taxes on profits generated from covered call writing can be deferred or exempt.
Call Options: An Overview
A single option, whether put or call, represents a round lot, or 100 shares, of a given underlying stock. Call options are traditionally bullish bets by nature, at least from a buyer's perspective. Investors who purchase a call option believe that the price of the underlying stock is going to rise, perhaps dramatically, but they may not have the cash to purchase as much of the stock as they would like. They can, therefore, pay a small premium to a seller (or writer) who believes that the stock price will either decline or remain constant. This premium, in exchange for the call option, gives the buyer the right, or option, to buy the stock at the option's strike price, instead of at the anticipated higher market price.
The strike price is the price at which the buyer of a call can purchase the shares. Options also have two kinds of value: time value and intrinsic value. For example, a call option with a strike of $20 and a current market price of $30 has an intrinsic value of $10. The time value is determined by the amount of time that is left until the option expires, so if the option in this example is selling for more than $10, the excess of that price is the time value.
Options are decaying assets by nature as they lose value over time (all else equal); every option has an expiration date, which can be months or years away. The closer the option is to expiring, the less weighty its time value, as it gives the buyer that much less time for the stock to rise in price and produce a profit.
Covered Call Writing
As mentioned, covered call writing is a conservative (and also quite common) way to use options. Investors who write (i.e. sell) covered calls get paid a premium in return for assuming the obligation to sell the stock at a predetermined strike price.
The worst that can happen is that they are called to sell the stock to the buyer of the call at a price somewhere below the current market price. The call buyer wins in this case because he or she paid a premium to the seller in return for the right to "call" that stock from the seller at the predetermined strike price.
This strategy is known as "covered" call writing because the writer/investor owns the stock that the call is written against (as opposed to a “naked call” where he doesn't own the stock). Therefore, if the stock is called, the seller simply delivers the stock already on hand instead of having to come up with the cash to buy it at the current market price and then sell it to the call buyer at the lower strike price.
An Example of a Covered Call
Let's say Harry owns 1,000 shares of ABC Company, which has a current share price of $40. His research indicates that the price of the stock is not going to rise materially any time in the near future. He decides to sell 10x $40 calls to profit from this. The current premium on this option is $3, and they are due to expire in six months. Harry is therefore paid a total of $3,000 for taking on the obligation to sell the stock at $40 to the buyer if the buyer chooses to exercise the option.
If the stock price stays the same or declines, Harry walks away with the premium free and clear. If the price were to rise to $55, the buyer would exercise the option and buy the shares from Harry for $40, when they are worth $55 in the market.
Normally, though, most investors would sell calls that are out of the money (that is, with a strike price that is higher than the market price of the underlying asset), such as $45 or $50 call options, to try to avoid being called, if they plan on hanging on to the shares for the long term. They will receive a smaller premium but will also be able to participate in some of the upside if the stock appreciates. If the price of the underlying asset rises significantly and crosses the strike price, the call option goes “in-the-money." In such a situation, the buyer will exercise the option to buy the asset at the pre-decided price, which is now lower than the current market price, thus benefiting from the contract. But, the call writer is left with modest gains from the premiums earned.
Advantages of Covered Call Writing
One of the most attractive features of writing covered calls is that it can often be done in any kind of market, although doing so when the underlying stock is relatively stable is somewhat easier. Writing covered calls is an especially good method of generating extra investment income when the markets are down or flat.
If Harry in the above example were to repeat this strategy successfully every six months, he would reap thousands of extra dollars per year in premiums on the stock he owns, even if it declines in value. Covered call writers also retain voting and dividend rights on their underlying stock.
Limitations of Covered Call Writing
In addition to having to deliver your stock at a price below the current market price, getting called out on a stock generates a reportable transaction. This can be a major issue to consider for an investor who writes calls on several hundred or even a thousand shares of stock. Most financial advisors will tell their clients that, while this strategy can be a very sensible way to increase their investment returns over time, it should probably be done by investment professionals, and only experienced investors who have had some education and training in the mechanics of options should try to do it themselves.
There are other issues to consider as well, such as commissions, margin interest, and additional transaction fees that may apply. Covered call writers are also limited to writing calls on stocks that offer options, and, of course, they must already own at least a round lot of any stock upon which they choose to write a call. Therefore, this strategy is not available for bond or mutual fund investors.
IRA Advantages
The possibility of triggering a possible reportable capital gain makes covered call writing an ideal strategy for either a traditional or Roth IRA. This allows the investor to buy back the stock at an appropriate price without having to worry about tax consequences, as well as generate additional income that can either be taken as distributions or reinvested.
The Bottom Line
Although the strategy can be somewhat involved, covered call writing can provide a means of generating income in a portfolio that cannot be obtained otherwise. There are no hard and fast parameters that show how profitable this can be, but if done carefully and correctly, it can easily increase the overall yield on an equity holding—or even an ETF—by at least a percent or two per year.
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c6385714e20091913bbf23d6c1659d60 | https://www.investopedia.com/articles/optioninvestor/10/binary-options.asp | What You Need To Know About Binary Options Outside the U.S | What You Need To Know About Binary Options Outside the U.S
What Do You Need To Know About Binary Options Outside the U.S?
Binary options let traders profit from price fluctuations in multiple global markets, but it's important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.
Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.
The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors "to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches."
Key Takeaways Binary options have a clear expiration date, time, and strike price. Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges. Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange. While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.
Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.
Understanding Binary Options Outside the U.S
What Are Binary Options?
Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.
These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market's direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.
The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.
The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.
1:20 Binary Options Outside the US
Foreign Versus U.S. Binary Options
Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an "all-or-nothing" payout structure.
Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).
The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.
These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.
They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.
High-Low Binary Option Example
Your analysis indicates the Standard & Poor's 500 index will rally for the rest of the trading day and you to buy an index call option. It's currently trading at 1,800 so you're wagering the index's price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.
You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.
Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.
In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.
If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader's account when the position is closed.
Other Types of Binary Options
The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.
These include "one-touch" options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.
Meanwhile, a "range" binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.
As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade's outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.
Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won't lose their entire investment.
The Upside and Downside
Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They're simple to use and there's only one decision to make: Is the underlying asset going up or down?
In addition, there are also no liquidity concerns because the trader doesn't own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.
On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.
While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.
Finally, OTC markets are unregulated outside the U.S. and there is little government oversight in the case of a trade discrepancy. While brokers often use external sources for quotes, traders may still find themselves susceptible to unscrupulous practices.
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9e70071f4945e7b8aca4d482b68427aa | https://www.investopedia.com/articles/optioninvestor/10/derivatives-101.asp | Derivatives 101 | Derivatives 101
Investing has grown more complicated in recent decades, with the creation of numerous derivative instruments offering new ways to manage money. The use of derivatives to hedge risk and improve returns has been around for generations, particularly in the farming industry, where one party to a contract agrees to sell goods or livestock to a counter-party who agrees to buy those goods or livestock at a specific price on a specific date. This contractual approach was revolutionary when first introduced, replacing the simple handshake.
The simplest derivative investment allows individuals to buy or sell an option on a security. The investor does not own the underlying asset but they make a bet on the direction of price movement via an agreement with counter-party or exchange. There are many types of derivative instruments, including options, swaps, futures, and forward contracts. Derivatives have numerous uses while incurring various levels of risks but are generally considered a sound way to participate in the financial markets.
Key Takeaways A derivative is a security whose underlying asset dictates its pricing, risk, and basic term structure. Investors typically use derivatives to hedge a position, to increase leverage, or to speculate on an asset's movement. Derivatives can be bought or sold over-the-counter or on an exchange. There are many types of derivative contracts including options, swaps, and futures/forward contracts.
A Quick Review of Terms
Derivatives are difficult for the general public to understand partly because they have a unique language. For instance, many instruments have counterparties who take the other side of the trade. Each derivative has an underlying asset that dictates its pricing, risk, and basic term structure. The perceived risk of the underlying asset influences the perceived risk of the derivative.
The pricing of the derivative may feature a strike price. This is the price at which it may be exercised. There may also be a call price with fixed income derivatives, which signifies the price at which an issuer can convert a security. Many derivatives force the investor to take a bullish stance with a long position, a bearish stance with a short position, or a neutral stance with a hedged position that can include long and short features.
How Derivatives Can Fit into a Portfolio
Investors typically use derivatives for three reasons—to hedge a position, to increase leverage, or to speculate on an asset's movement. Hedging a position is usually done to protect against or to insure the risk of an asset. For example, the owner of a stock buys a put option if they want to protect the portfolio against a decline. This shareholder makes money if the stock rises but also loses less money if the stock falls because the put option pays off.
Derivatives can greatly increase leverage. Leveraging through options works especially well in volatile markets. When the price of the underlying asset moves significantly and in a favorable direction, options magnify this movement. Many investors watch the Chicago Board Options Exchange Volatility Index (VIX) to measure potential leverage because it also predicts the volatility of S&P 500 Index options. For obvious reasons, high volatility can increase the value and cost of both puts and calls.
Derivatives can greatly increase leverage—when the price of the underlying asset moves significantly and in a favorable direction, options magnify this movement.
Investors also use derivatives to bet on the future price of the asset through speculation. Large speculative plays can be executed cheaply because options offer investors the ability to leverage their positions at a fraction of the cost of an underlying asset.
2:00 Derivatives 101
Trading Derivatives
Derivatives can be bought or sold in two ways—over-the-counter (OTC) or on an exchange. OTC derivatives are contracts that are made privately between parties, such as swap agreements, in an unregulated venue. On the other hand, derivatives that trade on an exchange are standardized contracts. There is counterparty risk when trading over the counter because contracts are unregulated, while exchange derivatives are not subject to this risk due to clearing houses acting as intermediaries.
Types of Derivatives
There are three basic types of contracts. These include options, swaps, and futures/forward contracts—all three have many variations. Options are contracts that give the right but not the obligation to buy or sell an asset. Investors typically use option contracts when they don't want to take a position in the underlying asset but still want to increase exposure in case of large price movement.
There are dozens of options strategies but the most common include:
Long Call: You believe a security's price will increase and buy the right (long) to own (call) the security. As the long call holder, the payoff is positive if the security's price exceeds the exercise price by more than the premium paid for the call. Long Put: You believe a security's price will decrease and buy the right (long) to sell (put) the security. As the long put holder, the payoff is positive if the security's price is below the exercise price by more than the premium paid for the put. Short Call: You believe a security's price will decrease and sell (write) a call. If you sell a call, the counterparty (the holder of a long call) has control over whether or not the option will be exercised because you give up control as the short. As the writer of the call, the payoff is equal to the premium received by the buyer of the call if the security's price declines. But you lose money if the security rises more than the exercise price plus the premium. Short Put: You believe the security's price will increase and sell (write) a put. As the writer of the put, the payoff is equal to the premium received by the buyer of the put if the security's price rises, but if the security's price falls below the exercise price minus the premium, you lose money.
Swaps are derivatives where counterparties exchange cash flows or other variables associated with different investments. A swap occurs many times because one party has a comparative advantage, like borrowing funds under variable interest rates, while another party can borrow more freely at fixed rates. The simplest variation of a swap is called plain vanilla—the most simple form of an asset or financial instrument—but there are many types, including:
Interest Rate Swaps: Parties exchange a fixed-rate loan for one with a floating rate. If one party has a fixed-rate loan but has floating rate liabilities, they may enter into a swap with another party and exchange a fixed rate for a floating rate to match liabilities. Interest rate swaps can also be entered through option strategies while a swaption gives the owner the right but not the obligation to enter into the swap. Currency Swaps: One party exchanges loan payments and principal in one currency for payments and principal in another currency. Commodity Swaps: A contract where party and counterparty agree to exchange cash flows, which are dependent on the price of an underlying commodity.
Parties in forward and future contracts agree to buy or sell an asset in the future for a specified price. These contracts are usually written using the spot or the most current price. The purchaser's profit or loss is calculated by the difference between the spot price at the time of delivery and the forward or future price. These contracts are typically used to hedge risk or to speculate. Futures are standardized contracts that trade on exchanges while forwards are non-standard, trading over the counter.
The Bottom Line
Investors looking to protect or assume risk in a portfolio can employ long, short, or neutral derivative strategies that seek to hedge, speculate, or increase leverage. The use of a derivative only makes sense if the investor is fully aware of the risks and understands the impact of the investment within a broader portfolio strategy.
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26499f317451f50d9d1621fc418c6f78 | https://www.investopedia.com/articles/optioninvestor/10/etf-options-v-index-options.asp | ETF Options vs. Index Options: What's the Difference? | ETF Options vs. Index Options: What's the Difference?
ETF Options vs. Index Options: An Overview
In 1982, stock index futures trading began. This marked the first time traders could actually trade a specific market index itself, rather than the shares of the companies that comprised the index. First came options on stock index futures, then options on indexes, which could be traded in stock accounts.
Next came index funds, which allowed investors to buy and hold a specific stock index. The latest burst of growth began with the advent of the exchange-traded fund (ETF) and has been followed by the listing of options for trading against a wide swath of these new ETFs.
Key Takeaways An exchange-traded fund (ETF) is essentially a mutual fund that trades like a stock.ETF options are traded the same as stock options, which are "American style" and settle for shares of the underlying ETF.Index options are settled “European style,” which means they are settled in cash.Index options cannot be exercised early while ETF options can.
1:45 ETF Options Vs Index Options
ETFs and ETF Options
An ETF is essentially a mutual fund that trades like an individual stock. As a result, anytime during the trading day, an investor can buy or sell an ETF that represents or tracks a given segment of the markets. The vast proliferation of ETFs has been another breakthrough that has greatly expanded the ability of investors to take advantage of many unique opportunities. Investors can now take long and/or short positions—as well as in many cases, leveraged long or short positions the following types of securities:
Foreign and Domestic Stock Indexes (large-cap, small-cap, growth, value, sector, etc.)Currencies (yen, euro, pound, etc.)Commodities (physical commodities, financial assets, commodity indexes, etc.)Bonds (treasury, corporate, munis international)
As with index options, some ETFs have attracted a great deal of options trading volume while the majority have attracted very little. Figure 2 displays some of the ETFs that enjoy the most attractive option trading volume on the CBOE.
ETF Ticker SPDR Trust SPY iShares Russell 2000 Index Fund IWM PowerShares QQQ Trusts QQQQ iShares MSCI Emerging Markets Index EEM SPDR Gold Trust GLD Financial Select SPDR XLF Energy Select SPDR XLE SPDR Dow Jones Industrial Average ETF DIA Market Vector Semiconductors ETF SMH Market Vector Oil Services ETF OIH Figure 2: ETFs with Active Option Trading Volume
A reason to consider volume is that many ETFs track the same indexes that straight index options track, or something very similar. Therefore, you should consider which vehicle offers the best opportunity in terms of option liquidity and bid-ask spreads.
Index Options
The listing of options on various market indexes allowed many traders for the first time to trade a broad segment of the financial market with one transaction. The Chicago Board Options Exchange (CBOE) offer listed options on over 50 domestic, foreign, sector, and volatility-based indexes.
The first thing to note about index options is that there is no trading going on in the underlying index itself. It is a calculated value and exists only on paper. The options only allow one to speculate on the price direction of the underlying index, or to hedge all or some part of a portfolio that might correlate closely to that particular index.
Key Differences
There are several important differences between index options and options on ETFs. The most significant of these revolves around the fact that trading options on ETFs can result in the need to assume or deliver shares of the underlying ETF (this may or may not be viewed as a benefit by some). This is not the case with index options.
The reason for this difference is that index options are "European" style options and settle in cash, while options on ETFs are "American" style options and are settled in shares of the underlying security.
American options are also subject to "early exercise," meaning that they can be exercised at any time prior to expiration, thus triggering a trade in the underlying security. This potential for early exercise and/or having to deal with a position in the underlying ETF can have major ramifications for a trader.
Index options can be bought and sold prior to expiration; however, they cannot be exercised since there is no trading in the actual underlying index. As a result, there are no concerns regarding early exercise when trading an index option.
Special Considerations
The amount of options trading volume is a key consideration when deciding which avenue to go down in executing a trade. This is particularly true when considering indexes and ETFs that track the same, or similar, security.
For example, if a trader wanted to speculate on the direction of the S&P 500 Index using options, theye have several choices available. SPX, SPY, and IVV each track the S&P 500 Index. Both SPY and SPX trade in great volume and in turn enjoy very tight bid-ask spreads. This combination of high volume and tight spreads indicate that investors can trade these two securities freely and actively.
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7a3d63d607002cfb550264b4ff1fafbf | https://www.investopedia.com/articles/optioninvestor/10/lure-of-cheap-options.asp | The Dangerous Lure of Cheap Out-of-the-Money Options | The Dangerous Lure of Cheap Out-of-the-Money Options
Out-of-the-money (OTM) options are more cheaply priced than in-the-money (ITM) or in-the-money options because the OTM options require the underlying asset to move further in order for the value of the option (called the premium) to substantially increase. Out-of-the-money options are ones whereby the strike price is unfavorable when compared to the underlying stock's price.
In other words, out-of-the-money options don't have any profit embedded in them at the time of purchase.
Key Takeaways Out-of-the-money (OTM) options are cheaper than other options since they need the stock to move significantly to become profitable. The further out of the money an option is, the cheaper it is because it becomes less likely that underlying will reach the distant strike price. Although OTM options are cheaper than buying the stock outright, there's an increased chance of losing the upfront premium.
However, a significant move in the underlying stock's price could bring the option into profitability. Since the probability is low that the stock could make such a dramatic move before the option's expiration date, the premium to buy the option is lower than those options that have a higher probability of profitability.
What looks cheap isn't always a good deal, because often things are cheap for a reason. That said, when an OTM option is properly selected and bought at the right time, it can lead to large returns, hence the allure.
While buying out of the money options can be a profitable strategy, the probability of making money should be evaluated against other strategies, such as simply buying the underlying stock, or buying in-the-money or closer to the money options.
The Lure of Out-of-the-Money Options
Call Options
A call option provides the buyer the right, but not the obligation, to buy the underlying stock at the pre-set strike price before the option's expiry. Call options are considered out-of-the-money if the strike price of the option is above the current price of the underlying security. For example, if a stock is trading at $22.50 per share, and the strike price is $25, the call option would be currently "out-of-the-money."
In other words, investors wouldn't buy the stock at $25 if they could buy it at $22.50 in the market.
Put Options
A put option provides the buyer the right, but not the obligation, to sell the underlying stock at the pre-set strike price before the option's expiry. Put options are considered to be OTM if the strike price for the option is below the current price of the underlying security. For example, if a stock is trading at a price of $22.50 per share and the strike price is $20, the put option is "out-of-the-money."
In other words, investors wouldn't sell the stock at $20 if they could sell it at $22.50 in the market.
Degrees of OTM and ITM
Degrees of being OTM (and ITM) vary from case to case. If the strike price on a call option is 75, and the stock is trading at $50, that option is way out of the money, and the price of that option would cost very little. On the other hand, a call option with a 55 strike is much closer to the $50 current price, and therefore that option would cost more than the 75 strike.
The further out of the money an option is, the cheaper it is because it becomes more likely that underlying will not be able to reach the distant strike price. Likewise, OTM options with a closer expiry will cost less than options with an expiry that is further out. An option that expires shortly has less time to reach the strike price and is priced more cheaply than OTM option with longer until expiry.
OTM options also have no intrinsic value, which is another big reason they are cheaper than ITM options. Intrinsic value is the profit from the difference between the stock's current price and the strike price. If there is no intrinsic value, the premium of the option will be lower than those options that have intrinsic value embedded in them.
On the positive side, OTM options offer great leverage opportunities. If the underlying stock does move in the anticipated direction, and the OTM option eventually becomes an in-the-money option, its price will increase much more on a percentage basis than if the trader bought an ITM option at the onset.
As a result of this combination of lower cost and greater leverage, it is quite common for traders to prefer to purchase OTM options rather than ATM or ITM options. But as with all things, there is no free lunch, and there are important tradeoffs to consider. To best illustrate this, let's look at an example.
Buying the Stock
Let's assume that a trader expects a given stock will rise over the course of the next several weeks. The stock is trading at $47.20 a share. The most straightforward approach to taking advantage of a potential up move is to buy 100 shares of the stock. This would cost $4,720. For each dollar, the stock goes up or down, the trader gains or loses $100.
Image by Julie Bang © Investopedia 2019
Buying an In-the-Money Option
Another alternative is to purchase an ITM call option with a strike price of $45. This option has just 23 days left until expiration and is trading at a price of $2.80 (or $280 for one contract, which controls 100 shares). The breakeven price for this trade is $47.80 for the stock ($45 strike price + $2.80 premium paid).
At any price above $47.80, this option will gain, point for point, with the stock. If the stock is below $45 a share at the time of option expiration, this option will expire worthless, and the full premium amount will be lost.
This clearly illustrates the effect of leverage. Instead of putting up $4,720 to buy the stock, the trader puts up just $280 for the premium. For this price, if the stock moves up more than $0.60 a share (from the current price of $47.20 to breakeven of $47.80), the options trader will make a point-for-point profit with the stock trader who is risking significantly more money. The caveat is that the gain has to occur within the next 23 days, and if it doesn't, the $280 premium is lost.
Image by Julie Bang © Investopedia 2019
Buying an Out-of-the-Money Option
If a trader is highly confident that the underlying stock is soon to make a meaningful up move, an alternative would be to buy the OTM call option with a strike price of $50. Because the strike price for this option is almost three dollars above the price of the stock ($47.20), with only 23 days left until expiration, this option trades at just $0.35 (or $35 for one contract of 100 shares).
A trader could purchase eight of these 50 strike price calls for the same cost as buying one of the 45 strike price ITM calls. By so doing, she would have the same dollar risk ($280) as the holder of the 45 strike price call. The downside risk is the same, although there is a greater percentage probability for losing the entire premium.
In exchange for this, there is much larger profit potential. Notice the right side of the x-axis on the graph below. The profit numbers are significantly higher than what was seen on the previous graphs.
Image by Julie Bang © Investopedia 2019
The catch in buying the tempting "cheap" OTM option is balancing the desire for more leverage with the reality of simple probabilities. The breakeven price for the 50 call option is $50.35 (50 strike price plus 0.35 premium paid). This price is 6.6% higher than the current price of the stock. So to put it another way, if the stock does anything less than rally more than 6.6% in the next 23 days, this trade will lose money.
Comparing Potential Risks and Rewards
The following chart displays the relevant data for each of the three positions, including the expected profit—in dollars and percent.
The key thing to note in the table is the difference in returns if the stock goes to $53, as opposed to if the stock only goes to $50 per share. If the stock rallied to $53 per share by the time of option's expiration, the OTM 50 call would gain a whopping $2,120, or +757%, compared to a $520 profit (or +185%) for the ITM 45 call option and +$580, or +12% for the long stock position.
However, in order for this to occur the stock must advances over 12% ($47.20 to $53) in just 23 days. Such a large swing is often unrealistic for a short time period unless a major market or corporate event occurs.
Now consider what happens if the stock closes at $50 a share on the day of option expiration. The trader who bought the 45 call closes out with a profit of $220, or +70%. At the same time, the 50 call expires worthless, and the buyer of the 50 call experiences a loss of $280, or 100% of the initial investment. This is despite the fact that she was correct in her forecast that the stock would rise, it just didn't rise enough.
The Bottom Line
It is acceptable for a speculator to bet on a big expected move. However, it's important to first understand the unique risks involved in any position. It's also important to consider alternatives that might offer a better tradeoff between profitability and probability. While the OTM option may offer the biggest bang for the buck, if it works out, the probability of a far out-of-the-money option becoming worth a lot is a low probability.
These graphs are just examples of profit and loss potential for various scenarios. Each trade is different, and option prices are constantly changing as the price of the other underlying and other variables change.
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8b6e541a2025e3606e01e73141c70c13 | https://www.investopedia.com/articles/optioninvestor/10/modified-butterfly-spread.asp | Advanced Option Trading: The Modified Butterfly Spread | Advanced Option Trading: The Modified Butterfly Spread
The majority of individuals who trade options start out simply buying calls and puts in order to leverage a market timing decision, or perhaps writing covered calls in an effort to generate income. Interestingly, the longer a trader stays in the options trading game, the more likely they are to migrate away from these two most basic strategies and to delve into strategies that offer unique opportunities.
One strategy that is quite popular among experienced options traders is known as the butterfly spread. This strategy allows a trader to enter into a trade with a high probability of profit, high-profit potential, and limited risk.
Key Takeaways Butterfly spreads use four option contracts with the same expiration but three different strike prices spread evenly apart using a 1:2:1 ratio. Butterfly spreads have caps on both potential profits and losses, and are generally low-risk strategies. Modified butterflies use a 1:3:2 ratio to create a bullish or bearish strategy that has greater risk, but a higher potential reward, than a standard butterfly
The Basic Butterfly Spread
Before looking at the modified version of the butterfly spread, let's do a quick review of the basic butterfly spread. The basic butterfly can be entered using calls or puts in a ratio of 1 by 2 by 1. This means that if a trader is using calls, they will buy one call at a particular strike price, sell two calls with a higher strike price and buy one more call with an even higher strike price. When using puts, a trader buys one put at a particular strike price, sells two puts at a lower strike price, and buys one more put at an even lower strike price. Typically the strike price of the option sold is close to the actual price of the underlying security, with the other strikes above and below the current price. This creates a "neutral" trade whereby the trader makes money if the underlying security remains within a particular price range above and below the current price. However, the basic butterfly can also be used as a directional trade by making two or more of the strike prices well beyond the current price of the underlying security.
Figure 1 displays the risk curves for a standard at-the-money, or neutral, butterfly spread. Figure 2 displays the risk curves for an out-of-the-money butterfly spread using call options.
Figure 1: Risk curves for an at-the-money, or neutral, butterfly spread.
Source: Optionetics Platinum
Figure 2: Risk curves for an out-of-the-money butterfly spread.
Source: Optionetics Platinum
Both of the standard butterfly trades shown in Figures 1 and 2 enjoy a relatively low and fixed-dollar risk, a wide range of profit potential, and the possibility of a high rate of return.
The Modified Butterfly
The modified butterfly spread is different from the basic butterfly spread in several important ways:
Puts are traded to create a bullish trade and calls are traded to create a bearish trade. The options are not traded in 1:2:1 fashion but rather in a ratio of 1:3:2. Unlike a basic butterfly that has two breakeven prices and a range of profit potential, the modified butterfly has only one breakeven price, which is typically out-of-the-money. This creates a cushion for the trader. One negative associated with the modified butterfly versus the standard butterfly: While the standard butterfly spread almost invariably involves a favorable reward-to-risk ratio, the modified butterfly spread almost invariably incurs a great dollar risk compared to the maximum profit potential. Of course, the one caveat here is that if a modified butterfly spread is entered properly, the underlying security would have to move a great distance in order to reach the area of maximum possible loss. This gives alert traders a lot of room to act before the worst-case scenario unfolds.
Figure 3 displays the risk curves for a modified butterfly spread. The underlying security is trading at $194.34 a share. This trade involves:
Buying one 195 strike price put Selling three 190 strike price puts Buying two 175 strike price puts
Figure 3: Risk curves for a modified butterfly spread.
Source: Optionetics Platinum
A good rule of thumb is to enter a modified butterfly four to six weeks prior to option expiration. As such, each of the options in this example has 42 days (or six weeks) left until expiration.
Note the unique construction of this trade. One at-the-money put (195 strike price) is purchased, three puts are sold at a strike price that is five points lower (190 strike price) and two more puts are bought at a strike price 20 points lower (175 strike price).
There are several key things to note about this trade:
The current price of the underlying stock is 194.34. The breakeven price is 184.91. In other words, there are 9.57 points (4.9%) of downside protection. As long as the underlying security does anything besides declining by 4.9% or more, this trade will show a profit. The maximum risk is $1,982. This also represents the amount of capital that a trader would need to put up to enter the trade. Fortunately, this size of loss would only be realized if the trader held this position until expiration and the underlying stock was trading at $175 a share or less at that time. The maximum profit potential for this trade is $1,018. If achieved this would represent a return of 51% on the investment. Realistically, the only way to achieve this level of profit would be if the underlying security closed at exactly $190 a share on the day of option expiration. The profit potential is $518 at any stock price above $195—26% in six weeks' time.
Key Criteria to Consider in Selecting a Modified Butterfly Spread
The three key criteria to look at when considering a modified butterfly spread are:
Maximum dollar risk Expected percentage return on investment Probability of profit
Unfortunately, there is no optimum formula for weaving these three key criteria together, so some interpretation on the part of the trader is invariably involved. Some may prefer a higher potential rate of return while others may place more emphasis on the probability of profit. Also, different traders have different levels of risk tolerance. Likewise, traders with larger accounts are better able to accept trades with a higher maximum potential loss than traders with smaller accounts.
Each potential trade will have its own unique set of reward-to-risk criteria. For example, a trader considering two possible trades might find that one trade has a probability of profit of 60% and an expected return of 25%, while the other might have a probability of profit of 80% but an expected return of only 12%. In this case, the trader must decide whether they put more emphasis on the potential return or the likelihood of profit. Also, if one trade has a much greater maximum risk/capital requirement than the other, this too must be taken into account.
The Bottom Line
Options offer traders a great deal of flexibility to craft a position with unique reward-to-risk characteristics. The modified butterfly spread fits into this realm. Alert traders who know what to look for and who are willing and able to act to adjust a trade or cut a loss if the need arises, may be able to find many high probability modified butterfly possibilities.
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f99b2a1359c8cd919597360fe974668e | https://www.investopedia.com/articles/optioninvestor/11/how-to-be-a-successful-options-trader.asp | 10 Traits of a Successful Options Trader | 10 Traits of a Successful Options Trader
Options are one of the most versatile instruments in the financial markets. Their flexibility allows the trader to leverage their position to boost returns. These products also allow the user to manage risk by using them for hedging or to make a profit from the upside, downside, and sideways movement in the market.
Despite its many benefits, options trading carries substantial risk of loss, and it is very speculative in nature. Not everyone can become a successful options trader. Like any other business, becoming a successful options trader requires a certain skill set, personality type, and attitude.
1. Be Able to Manage Risk
Options are high-risk instruments, and it is important for traders to recognize how much risk they have at any point in time. What is the maximum downside of the trade? What is the implicit or explicit position with respect to volatility? How much of my capital is allocated to the trade? These are some of the questions traders always have to keep in their minds.
Traders also need to take appropriate measures to control risk. In particular, if you are a short-term options trader, you will regularly come across loss-making trades. For example, if you hold a position overnight, your bet may go bad because of adverse news. You need to be able to minimize the risk of your positions at any time. Some traders do so by limiting their trade size and diversifying into many different trades so all their eggs aren't in the same basket.
An options trader also has to be an excellent money manager. They need to use their capital wisely. For example, it wouldn't be wise to block 90% of your capital in a single trade. Whatever strategy you adopt, risk management and money management cannot be ignored.
2. Be Good With Numbers
While trading in options, you are always dealing with numbers. What's the implied volatility? Is the option in the money or out of the money? What's the break-even of the trade? Options traders are always answering these questions. They also refer to option Greeks, such as the delta, gamma, vega, and theta of their options trades. For example, a trader would want to know if his trade is short gamma.
3. Have Discipline
To become successful, options traders must practice discipline. Doing extensive research, identifying opportunities, setting up the right trade, forming and sticking to a strategy, setting up goals, and forming an exit strategy are all part of the discipline. A simple example of deviating from the discipline is following the herd. Never trust an opinion without doing your own research. You can't skip your homework and blame the herd for your losses. Instead, you must devise an independent trading strategy that works in order for it to be a successful options strategy.
While formal education in the form of higher degrees can be associated with elite traders, it is not necessarily the case for all. But you must be educated about the market. Successful traders take time to learn the basics and study the market—various scenarios, different trends—anything and everything about how the market works. They are not usually novices who have taken a three-hour trading seminar on “How to get rich quick trading,” but rather take the time to learn from the market.
4. Be Patient
Patience is one quality all options traders have. Patient investors are willing to wait for the market to provide the right opportunity, rather than trying to make a big win on every market movement. You will often see traders sitting idle and watching the market, waiting for the perfect time to enter or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control their emotions, and they will be quick to enter and exit trades.
5. Develop a Trading Style
Each trader has a different personality and should adopt a trading style that suits his or her traits. Some traders may be good at day trading, where they buy and sell options several times during the day to make small profits. Some may be more comfortable with position trading, where they form trading strategies to take advantage of unique opportunities, such as time decay and volatility. And others may be more comfortable with swing trading, where traders make bets on price movement over periods lasting five to 30 days.
6. Interpret the News
It is crucial for traders to be able to interpret the news, separate hype from reality and make appropriate decisions based on this knowledge. You will find many traders eager to put their capital in an option with promising news, and the next day they will move on to the next big news. This distracts them from identifying bigger trends in the market. Most successful traders will be honest with themselves and make sound personal decisions, rather than just going by the top stories in the news.
7. Be an Active Learner
The Chicago Board of Trade (CBOT) reported 90% of options traders will realize losses. What separates successful traders from average ones is successful traders are able to learn from their losses and implement what they learn in their trading strategies. Elite traders practice…and practice some more until they learn the lessons behind the trade, understand the economics behind the market and see the market behavior as it is happening.
The financial markets are constantly changing and evolving; you need to have a clear understanding of what's happening and how it all works. By becoming an active learner, you will not only become good at your current trading strategies, but you will also be able to identify new opportunities others might not see or may pass over.
8. Be Flexible
You cannot stake a claim on the market but must go with the market or leave it when it is not the type that suits you. You must accept losses occur and that it is inevitable that you will lose. Acceptance rather than fighting the market is paramount to understanding, clarity and finally winning.
9. Plan Your Trades
An options trader who plans is more likely to succeed than one who operates on instinct and feel. If you don't have a plan, you will place random trades, and consequently, you'll be directionless. On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about what your goals are and how you plan to achieve them. You will also know how to cover your losses or when to book profits. You can see how the plan has worked (or not worked) for you. All these steps are essential to developing a strong trading strategy.
10. Maintain Records
Most successful options traders keep diligent records of their trades. Maintaining proper trade records is an essential habit to help you avoid making costly decisions. The history of your trade records also provides a wealth of information to help you improve your odds of success.
The Bottom Line
Top options traders get a thrill from scouting and watching their trades. Sure, it's great to see a pick come out on top, but much like sports fans, options traders enjoy watching the whole game unfold, not just finding out the final score. These characteristics will not guarantee your success in the options trading world, but they will definitely increase your chances at it.
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f1a823590ef6866cce06f54359aaebd1 | https://www.investopedia.com/articles/optioninvestor/11/intro-weekly-options.asp | Weekly Options | Weekly Options
What Are Weekly Options?
Weekly options behave like monthly options in every respect except they only exist for eight days. They are introduced each Thursday and they expire eight days later on Friday (with adjustments for holidays). Investors who historically enjoyed 12 monthly expirations on the third Friday of each month can now enjoy 52 expirations per year.
Key Takeaways Weekly options are similar to monthly options, except they expire every Friday instead of the third Friday of each month. Weeklys are introduced on Thursdays and expire eight days later on Friday. They have become extremely popular for trading, allowing traders to capitalize on short-term news. There are various weekly options on major indices and ETFs.
How Weekly Options Works
In 1973, the Chicago Board Options Exchange (CBOE) introduced the standard call options that we know today. In 1977, the put option was introduced. They have proven to be extremely popular as trading volume has grown handily over the decades. In 2005, 32 years after introducing the call option, the Chicago Board Options Exchange (CBOE) began a pilot program with weekly options.
Special Considerations
Virtually any strategy you can implement with the longer-dated options you can also do with weeklys. For premium sellers who like to take advantage of the rapidly accelerating time decay curve in an option's final week of its life, the weeklys are a bonanza.
Now you can get paid 52 times per year instead of 12. Whether you enjoy selling naked puts and calls, covered calls, spreads, condors or any other type, they all work with weeklys as they do with the monthlies, just on a shorter timeline.
Advantages and Disadvantages of Weekly Options
Advantages
In addition, during three out of four weeks, the weeklys offer something you can't accomplish with the monthlies—the ability to make a very short-term bet on a particular news item or anticipated sudden price movement.
Let's imagine it's the first week of the month and you expect XYZ stock to move because their earnings report is due out this week. While it would be possible to buy or sell the XYZ monthlies to capitalize on your theory, you would be risking three weeks of premium in the event you're wrong and XYZ moves against you. With the weeklys, you only have to risk one week's worth of premium. This will potentially save you money if you are wrong, or give you a nice return if you are correct.
Although the open interest and the volume of the weeklys are large enough to produce reasonable bid-ask spreads, they are usually not as high as the monthly expirations. The well-known pinning action that takes place in monthlys, where a stock tends to gravitate toward a strike price on expiration day, does not seem to happen as much or as strongly with the weeklys.
Disadvantages
There are a couple of negatives regarding weekly. First, because of their short duration and rapid time decay, you rarely have time to repair a trade that has moved against you by adjusting the strikes or just waiting for some kind of mean revision in the underlying security.
Second, although the open interest and volume are good, that is not necessarily true for every strike in the weekly series. Some strikes will have very wide spreads, and that is not good for short-term strategies.
Example of Weekly Options
Indexes with weeklys available include:
CBOE Dow Jones Industrial Average Index (DJX)S&P 500 Index (SPX)
Popular exchange-traded funds (ETFs) for which weeklys are available include:
SPDR Gold Trust ETF (GLD)iShares MSCI Emerging Markets Index ETF(EEM)iShares Russell 2000 Index Fund (IWM)PowerShares QQQ (QQQQ)SPDR S&P 500 ETF (SPY)Financial Select Sector SPDR ETF (XLF)
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5b8d9fc11c5c63bb2d910e4c13c2dffc | https://www.investopedia.com/articles/optioninvestor/11/predict-earnings-with-options.asp | How To Use Options To Make Earnings Predictions | How To Use Options To Make Earnings Predictions
The famous physicist Niels Bohr once said that "prediction is very difficult, especially about the future." While true for many aspects of quantum mechanics, traders and investors have several tools to help make accurate predictions in the financial markets. Oftentimes, these tools are derivative financial instruments that can help provide an aggregate picture of future market sentiment - tools like options.
Such predictions can be particularly useful for active traders during earnings season when stock prices are most volatile. During these times, many traders and investors use options to either place bullish bets that lever their positions or hedge their existing positions against potential downside. In this article, we'll look at a simple three-step process for making effective earnings predictions using options.
Step 1: Analyze the Chain for Opportunities
The first step in analyzing options to make earnings predictions is to identify unusual activity and validate it using open interest and average volume data. The goal in this step is to find some specific options that may be telling for the future and create an initial list of targets for further analysis.
Finding these target options is a two-step process:
Look for the Unusual: Look for call or put options with current volume that is in excess of the average daily trading volume, particularly in near-term months.Compare Open Interest: Make sure that the current volume exceeds the prior day's open interest, which indicates that today's activity represents new positions.
In Practice: Baidu
If we visit the Yahoo! Finance options analysis page for Baidu ADR (Nasdaq:BIDU), we may find an options chain like this:
An options analysis page for Baidu (BIDU). Source: Created with Yahoo! Finance Options Tool.
Notice that the highlighted near-month call options are trading with volumes significantly higher than their open interest, which suggests that the options are being accumulated by traders and/or investors. We could also look at the current day's volume and compare it to the average daily volume to draw similar conclusions, but open interest is generally considered to be the most important to watch.
Step 2: Determine the Magnitude with Straddles
The second step in analyzing options to make earnings predictions is to determine the magnitude of the anticipated move. Since most options appreciate in value when volatility increases, implied volatility can tell us when the market is anticipating a big move to the upside or downside. Luckily, straddles are designed to take advantage of implied volatility, so we can use them to calculate an exact magnitude.
Straddles represent an options strategy that involves purchasing call and put options with the same strike price and expiration date. By purchasing an at-the-money straddle, options traders are positioning themselves to profit from an increase in implied volatility. Therefore, looking at the price of the at-the-money straddle can tell us the magnitude of this implied volatility.
In Practice: Google
If we purchase one at-the-money Google (Nasdaq:GOOG) call option for $1,200 per contract and one at-the-money GOOG put option for $1,670 per contract, then the cost of the at-the-money straddle will be $2,870 plus any commissions paid. With GOOG's underlying shares trading at $575.50 per share, this means that we can expect a move of approximately 5% or $2,870 / ($575.50 x 100).
The at-the-money straddle for GOOG will then look something like this:
An at-the-money straddle for Google. Image by Julie Bang © Investopedia 2020
Step 3: Decide on Hedging or Leveraging
The third and last step in analyzing options to make earnings predictions is to determine the direction of the move. While we only really have access to trading volume, we can use the bid and ask prices and trading data to make fairly accurate assumptions. Simply put, trades hitting the bid price are likely selling transactions, while those hitting the ask price are likely buying transactions.
Traders and investors can also look at the option chain for various types of options strategies that are most likely to occur around earnings season. For example, similar volumes in put and call options in the same price and expiration dates may signal a straddle bet on volatility, while call options being sold could indicate long-term investors hedging their positions by selling calls – a bearish indicator.
Traders and investors can find this information by looking at real-time trades through their brokerage platforms or by using one of many websites that provide real-time trading information - or by simply using delayed data from websites like Investopedia or Yahoo! Finance.
Bottom Line
While using options data to predict earnings moves may be part art and part science, many financial experts find it invaluable when predicting not only earnings moves, but also mergers and acquisitions and other anticipated price movements. Using this simple three-step process, you can make your own earnings predictions using options data:
Identify unusual options trades and validate them by comparing the current day's volume to the open interest and/or daily trading volume.Determine the magnitude of the move higher by calculating the cost of an at-the-money straddle, which provides an idea of anticipated volatility.Discover the direction of the trade by looking at the bid and ask prices, as well as analyzing the overall option chain to look for the potential types of trades being placed.
As you put this technique to use, you'll find that the future becomes much easier to predict.
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33da86a35bb6dfd3d3bf6b5e8956a71e | https://www.investopedia.com/articles/optioninvestor/11/understanding-counterparty-risk.asp | Introduction To Counterparty Risk | Introduction To Counterparty Risk
Counterparty risk is the risk associated with the other party to a financial contract not meeting its obligations. Every derivative trade needs to have a party to take the opposite side.
Credit default swaps, a common derivative with counterparty risk, are often traded directly with another party, as opposed to trading on a centralized exchange. Since the contract is directly connected with the other party, there is a greater risk of counterparty default since both parties may not have full knowledge of the financial health of the other (and their ability to cover obligations). This differs from products listed on an exchange. In this case, the exchange is the counterparty, not the single entity on the other side of the trade.
Counterparty risk gained visibility in the wake of the global financial crisis. AIG famously leveraged its AAA credit rating to sell (write) credit default swaps (CDS) to counterparties who wanted default protection (in many cases, on CDO tranches). When AIG could not post additional collateral and was required to provide funds to counterparties in the face of deteriorating reference obligations, the U.S. government bailed them out.
Regulators were concerned that defaults by AIG would ripple through the counterparty chains and create a systemic crisis. The issue was not only individual firm exposures but the risk that interconnected linkages via derivative contracts would jeopardize the whole system.
A Credit Derivative Has Counterparty Risk
While a loan has default risk, a derivative has counterparty risk. Counterparty risk is a type (or sub-class) of credit risk and is the risk of default by the counterparty in many forms of derivative contracts. Let's contrast counterparty risk to loan default risk. If Bank A loans $10 million to Customer C, Bank A charges a yield that includes compensation for default risk. But the exposure is easy to ascertain; it's roughly the invested (funded) $10 million.
A credit derivative, however, is an unfunded bilateral contract. Aside from the posted collateral, a derivative is a contractual promise that might be broken, thus exposing the parties to risk. Consider an over-the-counter (OTC) option sold (written) by Bank A to Customer C. Market risk refers to the fluctuating value of the option; if it is daily-mark-to-market, its value will be a function largely of the underlying asset price but also several other risk factors. If the option expires in-the-money, Bank A owes the intrinsic value to Customer C. Counterparty risk is the credit risk that Bank A will default on this obligation to Bank C (for example, Bank A might go bankrupt).
Understanding Counterparty Risk with an Interest Rate Swap Example
Let's assume two banks enter into a vanilla (non-exotic) interest rate swap. Bank A is the floating-rate payer and Bank B is the fixed-rate payer. The swap has a notional value of $100 million and a life (tenor) of five years; it is better to call the $100 million notional instead of principal because the notional is not exchanged, it is merely referenced to compute the payments.
To keep the example simple, assume the LIBOR/swap rate curve is flat at 4%. In other words, when the banks begin the swap, spot interest rates are 4% per annum for all maturities.
The banks will exchange payments at six months intervals for the swap's tenor. Bank A, the floating-rate payer, will pay six-month LIBOR. In exchange, Bank B will pay the fixed rate of 4% per annum. Most importantly, the payments will be netted. Bank A cannot predict its future obligations but Bank B has no such uncertainty. At each interval, Bank B knows it will owe $2 million: $100 million notional * 4% / 2 = $2 million.
Let's consider counterparty exposure definitions at two points in time - at swap inception (T = 0), and six months later (T = + 0.5 years).
At the Start of the Swap (Time Zero = T0) Unless a swap is off market, it will have an initial market value of zero to both counterparties. The swap rate will be calibrated to ensure a zero market value at swap inception.
The market value (at T = 0) is zero to both counterparties. The flat spot rate curve implies 4.0% forward rates, so the floating-rate payer (Bank A) expects to pay 4.0% and knows it will receive 4.0%. These payments net to zero, and zero is the expectation for future netted payments if interest rates do not change.Credit exposure (CE): This is the immediate loss if the counterparty defaults. If Bank B defaults, the resulting loss to Bank A is Bank A's credit exposure. Therefore, Bank A only has credit exposure if Bank A is in-the-money. Think of it like a stock option. If an option holder is out-of-the-money at expiration, default by the option writer is inconsequential. The option holder only has credit exposure to default if she is in-the-money. At swap inception, as the market value is zero to both, neither bank has credit exposure to the other. For example, if Bank B immediately defaults, Bank A loses nothing.Expected exposure (EE): This is the expected (average) credit exposure on a future target date conditional on positive market values. Bank A and Bank B both have expected exposure at several target future dates. Bank A's 18-month expected exposure is the average positive market value of the swap to Bank A, 18 months forward, excluding negative values (because default won't hurt Bank A under those scenarios). Similarly, Bank B has a positive 18 month expected exposure, which is the market value of the swap to Bank B but conditional on positive values to Bank B. It helps to keep in mind that counterparty exposure exists only for the winning (in-the-money) position in the derivative contract, not for the out-of-money position! Only a gain exposes the bank to counterparty default.Potential future exposure (PFE): PFE is the credit exposure on a future date modeled with a specified confidence interval. For example, Bank A may have a 95% confident, 18-month PFE of $6.5 million. A way of saying this is, "18-months into the future, we are 95% confident that our gain in the swap will be $6.5 million or less, such that a default by our counterparty at the time will expose us to a credit loss of $6.5 million or less." (Note: by definition the 18-month 95% PFE must be greater than the 18-month expected exposure (EE) because EE is only a mean.) How is the $6.5 million figured? In this case, Monte Carlo simulation showed that $6.5 million is the upper fifth percentile of simulated gains to Bank A. Of all simulated gains (losses excluded from the results because they do not expose Bank A to credit risk), 95% are lower than $6.5 million and 5% are higher. So, there is a 5% chance that, in 18 months, Bank A's credit exposure will be greater than $6.5 million.
Does potential future exposure (PFE) remind you of value at risk (VaR)? Indeed, PFE is analogous to VaR, with two exceptions. First, while VaR is an exposure due to a market loss, PFE is a credit exposure due to a gain. Second, while VaR typically refers to a short-term horizon (for example, one or 10 days), PFE often looks years into the future.
There are different methods to calculating VaR. VaR is a quantile-based measure of risk. For a certain portfolio and time horizon, VaR provides the probability of a certain amount of loss. For example, a portfolio of assets with a one-month 5% VaR of $1 million has a 5% probability of losing more than $1 million. Thus, the VaR can at least provide a hypothetical measure of the risk of counterparty default on a credit default swap.
The most common method to calculate VaR is historical simulation. This method determines the historical distribution of profit and losses for the portfolio or asset being measured over a previous period. Then, the VaR is determined by taking a quantile measurement of that distribution. Although the historical method is commonly used, it has significant drawbacks. The main problem is this method assumes that the future return distribution for a portfolio will be similar to that of the past. This may not be the case, especially during periods of high volatility and uncertainty.
Go Forward Six Months in Time (T = + 0.5 years)Let's assume the swap rate curve shifts down from 4.0% to 3.0%, but remains flat for all maturities so it is a parallel shift. At this time, the swap's first payment exchange is due. Each bank will owe the other $2 million. The floating payment is based on the 4% LIBOR at the beginning of the six month period. In this way, the terms of the first exchange are known at swap inception, so they perfectly offset or net to zero. No payment is made, as planned, at the first exchange. But, as interest rates changed, the future now looks different...better to Bank A and worse to Bank B (who is now paying 4.0% when interest rates are only 3.0%).
Current exposure (CE) at time T + 0.5 years: Bank B will continue to pay 4.0% per annum but now expects to receive only 3.0% per annum. Since interest rates have dropped, this benefits the floating-rate payer, Bank A. Bank A will be in-the-money and Bank B will be out-of-the-money.
Under this scenario, Bank B will have zero current (credit) exposure; Bank A will have positive current exposure.
Estimating the current exposure at six months: We can simulate the future current exposure by pricing the swap as two bonds. The floating-rate bond will always be worth approximately par; its coupons are equal to the discount rate. The fixed-rate bond, at six months, will have a price of about $104.2 million. To get this price, we assume a 3.0% yield, nine semi-annual periods remaining and a $2 million coupon. In MS Excel the price = PV(rate = 3%/2, nper = 9, pmt = 2, fv = 100); with a TI BA II+ calculator, we input N = 9, I/Y = 1.5. PMT = 2, FV = 100 and CPT PV to get 104.18. So if the swap rate curve shifts in parallel from 4.0% to 3.0%, the market value of the swap will shift from zero to +/- $4.2 million ($104.2 – $100). The market value will be +$4.2 million to in-the-money Bank A and -$4.2 million to out-of-the-money Bank B. But only Bank A will have current exposure of $4.2 million (Bank B loses nothing if Bank A defaults). In regard to expected exposure (EE) and potential future exposure (PFE), both will be re-calculated (actually, re-simulated) based on the freshly observed, shifted swap rate curve. However, as both are conditional on positive values (each bank includes only the simulated gains where credit risk can exist), they will both be positive by definition. As interest rates shifted to the benefit of Bank A, Bank A's EE and PFE are likely to go up.
Summary of the Three Basic Counterparty Metrics
Credit exposure (CE) = MAXIMUM (Market Value, 0)Expected exposure (EE): AVERAGE market value on future target date, but conditional only on positive valuesPotential future exposure (PFE): Market value at specified quantile (for example, the 95th percentile) on future target date, but conditional only on positive values
How Are EE and PFE Calculated?
Because derivative contracts are bilateral and reference notional amounts which are insufficient proxies for economic exposure (unlike a loan where the principal is real exposure), in general, we must use Monte Carlo simulation (MCS) to produce a distribution of market values on a future date. The details are beyond our scope, but the concept is not as difficult as it sounds. If we use the interest rate swap, four basic steps are involved:
1. Specify a random (stochastic) interest rate model. This is a model that can randomize underlying risk factor(s). This is the engine of the Monte Carlo Simulation. For example, if we were modeling a stock price, a popular model is geometric Brownian motion. In the example of the interest rate swap, we might model a single interest rate to characterize an entire flat rate curve. We could call this a yield.
2. Run several trials. Each trial is a single path (sequence) into the future; in this case, a simulated interest rate years into the future. Then we run thousands more trials. The chart below is a simplified example: each trial is a single simulated path of an interest rate plotted ten years forward. Then the random trial is repeated ten times.
Image by Sabrina Jiang © Investopedia 2020
3. The future interest rates are used to value the swap. So, just as the chart above displays 10 simulated trials of future interest rate paths, each interest rate path implies an associated swap value at that point in time.
4. At each future date, this creates a distribution of possible future swap values. That's the key. See the chart below. The swap is priced based on the future random interest rate. At any given future target date, the average of the positive simulated values is the expected exposure (EE). The relevant quantile of the positive values is the potential future exposure (PFE). In this way, EE and PFE are determined from the upper half (the positive values) only.
Image by Sabrina Jiang © Investopedia 2020
Dodd-Frank Act
Defaults on swap agreements were one of the main causes of the 2008 financial crisis. The Dodd-Frank Act enacted regulations for the swaps market. It included provisions for public disclosures of swap trades, as well as authorizing creation of centralized swap execution facilities. Trading swaps on centralized exchanges reduces counterparty risk. Swaps traded on exchanges have the exchange as the counterparty. The exchange then offsets the risk with another party. Since the exchange is the counterparty to the contract, the exchange or its clearing firm will step in to meet the obligations of the swap agreement. This dramatically reduces the likelihood of counterparty default risk.
The Bottom Line
Unlike a funded loan, the exposure incurred in a credit derivative is complicated by the issue that value can swing negative or positive for either party to the bilateral contract. Counterparty risk measures assess current and future exposure, but Monte Carlo simulation is typically required. In counterparty risk, exposure is created with a winning in-the-money position. Just as value at risk (VaR) is used to estimate market risk of a potential loss, potential future exposure (PFE) is used to estimate the analogous credit exposure in a credit derivative.
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ca477c38130ca30d44a9e74fe2b32745 | https://www.investopedia.com/articles/optioninvestor/120401.asp | Prices Plunging? Buy a Put! | Prices Plunging? Buy a Put!
Investors may buy put options when they are concerned that the stock market will fall. That's because a put—which grants the right to sell an underlying asset at a fixed price through a predetermined time frame—will typically increase in value when the price of its underlying asset goes down.
If you own a put, you will benefit from a down market—either as a short speculator or as an investor hedging losses against a long position.
So, whether you own a portfolio of stocks, or you simply want to bet that the market will go down, you can benefit from buying a put option.
Key Takeaways A put option gives the owner the right, but not the obligation, to sell the underlying asset at a specific price through a specific expiration date. A protective put is used to hedge an existing position while a long put is used to speculate on a move lower in prices. The price of a long put will vary depending on the price of the stock, the volatility of the stock, and the time left to expiration. Long puts can be closed out by selling or by exercising the contract, but it rarely makes sense to exercise a contract that has time value remaining.
1:37 Prices Plunging? Buy A Put!
Speculative Long Puts vs. Protective Puts
If an investor is buying a put option to speculate on a move lower in the underlying asset, the investor is bearish and wants prices to fall. On the other hand, the protective put is used to hedge an existing stock or a portfolio. When establishing a protective put, the investor wants prices to move higher, but is buying puts as a form of insurance should stocks fall instead. If the market falls, the puts increase in value and offset losses from the portfolio.
Opening a long put position involves "buying to open" a put position. Brokers use this terminology because when buying puts, the investor is either buying to open a position or to close a (short put) position. Opening a position is self-explanatory, and closing a position simply means buying back puts that you had sold to open earlier.
Long Put. Image by Julie Bang © Investopedia 2019
Practical Considerations
Besides buying puts, another common strategy used to profit from falling share prices is to sell stock short. Short sellers borrow the shares from their broker and then sell the shares. If the price falls, the stock is bought back at the lower price and returned to the broker. The profit equals the sale price minus the purchase price.
In some cases, an investor can buy puts on stocks that cannot be found for short sales. Some stocks on the New York Stock Exchange (NYSE) or Nasdaq cannot be shorted because the broker does not have enough shares to lend to people who would like to short them.
Importantly, not all stocks have listed options and so some stocks that are not available for shorting might not have puts either. In some cases, however, puts are useful because you can profit from the downside of a "non-shortable" stock. In addition, puts are inherently less risky than shorting a stock because the most you can lose is the premium you paid for the put, whereas the short seller is exposed to considerable risk as the stock moves higher.
Like all options, put options have premiums whose value will increase with greater volatility. Therefore, buying a put in a choppy or fearful market can be quite expensive—the cost of the downside protection may be higher than is worthwhile. Be sure to consider your costs and benefits before engaging in any trading strategy.
An Example: Puts at Work
Let's consider stock ABC, which trades for $100 per share. Its one-month puts, which have a $95 strike price, trade for $3. An investor who thinks that the price of ABC shares are too high and due to fall within the next month can buy the puts for $3. In such a case, the investor pays $300 ($3 option quote x 100, which is known as the multiplier and represents how many shares one option contract controls) for the put.
The breakeven point of a $95-strike long put (bought for $3) at expiration is $92 per share ($95 strike price minus the $3 premium). At that price, the stock can be bought in the market at $92 and sold through the exercise of the put at $95, for a profit of $3. The $3 covers the cost of the put and the trade is a wash.
Profits grow at prices below $92. If the stock falls to $80, for example, the profit is $12 ($95 strike - $80 per share - the $3 premium paid for the put = $12). The maximum loss of $3 per contract occurs at prices of $95 or higher because, at that point, the put expires worthless.
The distinction between the payoffs for a put and a call is important to remember. When dealing with long call options, profits are limitless because a stock can go up in value forever (in theory). However, a payoff for a put is not the same because a stock can only lose 100% of its value. In the case of ABC, the maximum value that the put could reach is $95 because a put at a strike price of $95 would reach its profit peak when ABC shares are worth $0.
Close vs. Exercise
Closing out a long put position on stock involves either selling the put (sell to close) or exercising it. Let us assume that you are long the ABC puts from the previous example, and the current price on the stock is $90, so the puts now trade at $5. In this case, you can sell the puts for a profit of $200 ($500-$300).
Options on stocks can be exercised any time prior to expiration, but some contracts—like many index options—can only be exercised at expiration.
If you wished to exercise the put, you would go to the market and buy shares at $90. You would then sell (or put) the shares for $95 because you have a contract that gives you that right to do so. As before, the profit, in this case, is also $200.
The value of a put option in the market will vary depending on, not just the stock price, but how much time is remaining until expiration. This is known as the option's time value. For example, if the stock is at $90 and the ABC $95-strike put trades $5.50, it has $5 of intrinsic value and 50 cents of time value. In this case, it is better to sell the put rather than exercise it because the additional 50 cents in time value is lost if the contract is closed through exercise.
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33247b7bd7459c98621631d1035c4fe0 | https://www.investopedia.com/articles/people/083016/who-are-top-5-bitcoin-millionaires.asp | 5 of the World's Top Bitcoin Millionaires | 5 of the World's Top Bitcoin Millionaires
Bitcoin is a digital asset and payment system with a market capitalization of around $180 billion as of September 2019. It is considered by many to be one of the most successful digital currencies ever created. Its atmospheric rise since launching in 2009 left billions of dollars up for grabs for virtually anyone, so it was only natural that the game-changing cryptocurrency created such a diverse—and surprising—field of millionaires.
Of course, nobody knew it at the time - indeed it was, and still is, a risky asset class to get involved in - although a few in the list below were not only early adopters but also predicted its economic opportunity.
Key Takeaways Launched in 2009, Bitcoin is the first and remains the most successful blockchain-based cryptocurrency in the world.The price of Bitcoin is volatile, ranging from under $10 in 2010 to just under $20,000 in early 2018. The price now hovers around $10,000 per bitcoin.This overall price increase has produced a handful of Bitcoin billionaires. These are the early adopters who recognized a lucrative opportunity and started accumulating or mining in the early days and held on.
Barry Silbert
Barry Silbert is the Chief Executive Officer and founder of Digital Currency Group. The company's mission is to accelerate the development of the global financial system, and it accomplishes this mission by building and supporting Bitcoin and blockchain companies. In a recent transaction, Digital Currency Group acquired CoinDesk, a leading source of Bitcoin news, which runs the annual Bitcoin industry conference. The firm has invested in more than 100 Bitcoin-related companies and is the world's leading firm for investing in Bitcoin-related companies, landing Barry Silbert the enviable nickname "The King of Crypto."
Silbert's company also owns Genesis, a trading firm focused on digital currencies, and Grayscale, a company focused on digital currency investing. Silbert also started the Bitcoin Investment Trust (OTC: GBTC), an exchange-traded fund (ETF) that tracks the price of Bitcoin.
Blythe Masters
Blythe Masters is a former Managing Director at J.P. Morgan Chase & Co. (NYSE: JPM). Currently, she is the CEO of Digital Asset Holdings (DAH). The company builds encryption-based processing tools that improve the efficiency, security, compliance, and settlement speed of securities trading, specifically Bitcoin. In May of 2018, DAH entered into what appears to be a lucrative partnership with Google Cloud, bringing her company's tools to developers so they will not have to code them from scratch.
Digital Asset Holdings seeks to apply the blockchain technology to the typical activities of Wall Street. The company has raised over $150 million in funding and, interestingly, its first client is J.P. Morgan Chase, which has tested its own blockchain technology as a possible way to settle transactions more quickly. Many people think Masters gave bitcoin a lot of legitimacy with Digital Asset Holdings, considering her past, illustrious reputation on Wall Street, where she rose to Managing Director of J.P. Morgan Chase at the age of 28. As of October 2018, her company operates six offices on three continents.
Dan Morehead
Dan Morehead is the founder of Pantera Capital, the world’s first investment focused exclusively on cryptocurrencies. In 2013, Pantera launched its first crypto fund and, as of late 2018, was one of the largest institutional owners of cryptocurrencies. The fund has delivered a more-than-24,000% return for investors since its debut. Their investments in cryptocurrency-related companies range from exchanges and investment firms, such as Polychain Capital and Bitstamp, to coin trading services, such as Augur.
A former Goldman Sachs trader, Morehead was also head of macro trading and CFO at Tiger Management. Morehead is on the board of Bitstamp, a cryptocurrency trading exchange that is used by CME as an input for spot prices.
Tyler and Cameron Winklevoss
Tyler and Cameron Winklevoss parlayed the millions they earned after settling their Facebook lawsuit into cryptocurrencies and became the first billionaires from a late-2017 surge in Bitcoin prices.
They claim to own approximately 1% of all Bitcoins in circulation and have devised an elaborate system to store their private key for their assets.
The Winklevoss twins are focused on building an ecosystem to attract institutional investors and day traders to the cryptocurrency. To that end, they launched Gemini, the world’s first regulated exchange for cryptocurrencies. The exchange is used to set Bitcoin spot prices for futures contracts at the Chicago Board Options Exchange (CBOE). The Winklevoss brothers also applied to set up a Bitcoin ETF to make the cryptocurrency accessible to retail investors, but, as of mid-2019, have been denied by the SEC for the second time.
Michael Novogratz
Billionaire Michael Novogratz has invested approximately 30 percent of his fortune in cryptocurrencies. He began investing in 2015 and announced a $500 million cryptofund, which includes $150 million of his own fortune, in 2017. Novogratz has also become a prominent pundit on Bitcoin’s price movements, having forecast a (missed) price target of $40,000 for the cryptocurrency by the end of 2018.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.001 bitcoin.
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bbf0e85bf0c96f0c013f7059d471f103 | https://www.investopedia.com/articles/personal-finance/010215/hotels-vs-airbnb-new-york-city-visitors.asp | Hotels Vs. Airbnb For New York City Visitors | Hotels Vs. Airbnb For New York City Visitors
Do you love visiting New York City, but hate the sky-high hotel prices? Here’s an alternative: Rent a privately owned room from a city resident. Several online services have recently sprung up to facilitate this, most notably Airbnb, which launched in 2008.
Log on to Airbnb.com to view approximately over 50,000 listings for New York City and the surrounding boroughs. Filters help narrow your search by type of accommodation (shared, private room, or entire place), price, and location. You can view photos and read descriptions and user reviews.
Once you’ve created your profile, you book through the site and wait for the host to confirm your reservation. Your payment goes to Airbnb (via a major credit card or PayPal) and is forwarded to the host (minus the service fee) 24 hours after you check-in.
Most of the time (and especially in New York), an Airbnb room costs considerably less than a hotel room. However, it means you’re staying in somebody else’s apartment. Whether the owner is home or you’re taking over the whole place, there are pluses and minuses, and we’ll get to that. But first, let’s look at some options.
Key Takeaways Hotels can be costly in New York City. However, the amenities offered by a hotel are not typically provided by Airbnb hosts. There are 50,000 plus listings on Airbnb for New York City. Renting a room for a few days in someone's home via Airbnb is cheaper than renting out the whole apartment, but renting an entire apartment is often less expensive than New York City-based luxury hotels. In New York City and elsewhere, some Airbnb listings may be illegal under local laws.
The following examples compare hotel rooms with Airbnb rentals in three New York City neighborhoods. We looked at a room for two on a three-day weekend from March 13 to 16, 2020.
Midtown Manhattan
Hotel
The Chatwal. A glamorous 76-room hotel on West 44th Street, in the middle of the theater district, set in a restored 1905 Beaux-Arts building. Guests enjoy 400-thread-count Frette linens. The hotel's restaurant, The Lambs Club, is run by celeb chef Geoffrey Zakarian. What you pay: A queen room starts at $535 per night. (For all NYC hotel listings, expect to add as much as 14.75% or more in room taxes.)
Airbnb:
"Gorgeous Room. Close to Time Square". This "gorgeous room in a luxury building" with a double bed is just "minutes to Times Square" and offers shared amenities like a shared balcony space. What you pay: $135 per night, a $79 service fee for the three-night stay, and a $75 cleaning fee.
Many Airbnb listings in New York City are one-room rentals within an apartment, meaning you may be sharing common spaces, including a bathroom with the lease-holder or homeowner.
SoHo Neighborhood
Hotel
Crosby Street Hotel. An 86-room property in a warehouse-style building. Decorator Kit Kemp, known for his colorful, contemporary take on the classic English look, has filled the place with antiques and surprising art. What you pay: A “luxury” room starts at $755 per night.
Airbnb
'Heart of Soho. Cute studio with clean finishes." Studio apartment in the heart of Soho has a "comfortable queen bed with a 50" smart TV on the wall," and "linens and towels provided." What you pay: $225 per night (for whole studio apartment), plus a $123 service fee and $75 cleaning fee.
Williamsburg, Brooklyn
Hotel
The Wythe Hotel. As befits the hipster neighborhood, this boutique property manages to look vintage without being retro. Some rooms have full views of the Manhattan skyline, as does the rooftop bar. What you pay: A queen room starts at $272.
Airbnb
"Sunny room in Williamsburg". A bedroom in a top-floor corner loft apartment with "views of Manhattan" in South Williamsburg with "air conditioning" and a "laptop-friendly workspace." What you pay: $70 per night, plus a $39 service fee and a $25 cleaning fee.
So What’s the Catch?
In most cases, the tradeoff is pretty apparent. But saving money isn't the only reason to consider Airbnb. Here are some of the pros and cons.
Less flexibility: Most Airbnb hosts require a minimum stay of two or three nights. And check-in times might be inconvenient for late arrivals, unlike at a typical hotel, but that can be negotiated with your host.
Fewer—or more—amenities: Business travelers tend to prefer speedy check-in and no surprises, and they may need a business center, hotel bar, or restaurant. But Airbnb renters are often invited to use the kitchen, which could come stocked with breakfast goodies. And Wi-Fi is usually free.
Personal contact: Through Airbnb, you get to meet a local who’ll likely be happy to point you to the best neighborhood delis, bars, and restaurants – and the nearest train station. In fact, your host might hang out with you. Or, in one case, “He baked us one of the best carrot cakes I have ever had.”
Is trust an issue? According to Airbnb, “Guests and hosts verify their IDs by connecting to their social networks and scanning their official ID.” Both hosts and renters establish an online reputation since everyone can see how others rate them. And you can use the site’s messaging system to get more info from hosts or other guests.
The Airbnb Backlash
For the last few years, home-rental companies, including Airbnb, have been struggling with regulations in major cities like New York. Airbnb critics have often raised alarms that instead of individuals renting out rooms or homes for personal income, commercial outfitters have bought up large swaths of apartments in cities and used them as illegal hotels for visitors.
According to a 2019 New York Times article: "New York City is Airbnb’s largest domestic market, with more than 50,000 apartment rental listings. But under state law, it is illegal in most buildings for an apartment to be rented out for less than 30 days unless the permanent tenant is residing in the apartment at the same time."
Some New Yorkers object to Airbnb, claiming that it’s illegal to rent out rooms in your apartment and that many hosts are commercial operators. (When the owner/renter continues to occupy the space, short-term rentals are not illegal, although some buildings/leases may not allow them.)
The real fear is that landlords will seek to cash in on Airbnb by converting affordable rental apartments to hotel rooms, thus diminishing the city’s already tight housing market. Airbnb insists that both hosts and guests benefit, with approximately 62% or more of New York hosts using the service to help cover their rent, according to Airbnb.
The Bottom Line
Airbnb offers (mostly) affordable rates for travelers, especially in expensive cities like New York. Airbnb hosts can be quirkier than hotel staff, but they also can be friendlier and make your visit to a city more personal.
On the other hand, the standardized services found in hotels can be appealing to business travelers and others who look for the predictability of those services. (For more savings tips for New York City, read Which Are Most Expensive U.S. Cities For Tourists?)
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b2969b0479d6a5ed3e87325d087a2835 | https://www.investopedia.com/articles/personal-finance/010416/critical-illness-insurance-who-needs-it.asp | Critical Illness Insurance: What Is It and Who Needs It? | Critical Illness Insurance: What Is It and Who Needs It?
If you’re lucky, you’ve probably never had to use critical illness insurance (sometimes called catastrophic illness insurance). You’ve maybe never even heard of it. But in the event of a big health emergency, such as cancer, heart attack or stroke, critical illness insurance could be the only thing protecting you from financial ruin. Many people assume they’re fully protected with a standard health insurance plan, but the exorbitant costs of treating life-threatening illnesses are usually more than any plan will cover. Read on to learn more about critical illness insurance and whether it's something you and your family should consider.
Key Takeaways Critical illness insurance provides additional coverage for medical emergencies like heart attack, stroke, or cancer. Because these emergencies or illnesses often incur greater than average medical costs, these policies pay out cash to help cover those overruns where traditional health insurance may fall short. These policies come at a relatively low cost. However, the instances that they will cover are generally limited to a few illnesses or emergencies.
Critical Illness Insurance 101
As the average life expectancy in the United States continues to increase, insurance brokers are finding ways to make sure Americans can afford the privilege of getting older. Critical illness insurance was developed in 1996, as people realized that surviving a heart attack or stroke could leave a patient with insurmountable medical bills.
“Even with excellent medical insurance, just one critical illness can be a tremendous financial burden,” says CFP Jeff Rossi of Peak Wealth Advisors, LLC. Critical illness insurance provides coverage if you experience one or more of the following medical emergencies:
Heart attack Stroke Organ transplants Cancer Coronary bypass
Because these illnesses require extensive medical care and treatment, their costs can outstrip a family’s medical insurance policy quickly. If you don’t have an emergency fund or health savings account (HSA), you’ll have an even harder time paying those bills out of pocket.
Many people are now choosing high-deductible health plans, which can be something of a double-edged sword: Consumers benefit from relatively affordable monthly premiums but could find themselves in a real pinch if a serious illness were to strike.
Critical illness insurance can pay for costs not covered by traditional insurance. The money can also be used for non-medical costs related to the illness, including transportation, child care, etc. Typically, the insured will receive a lump sum to cover those costs. Coverage limits vary – you could be eligible for a few thousand dollars all the way up to $100,000, depending on your policy. Policy pricing is impacted by a number of factors, including the amount and extent of coverage, the sex, age and health of the insured, and family medical history.
There are exceptions to critical illness insurance coverage. Some types of cancer may not be covered, while chronic illnesses are also frequently exempted. You may not be able to receive a payout if a disease comes back or if you suffer a second stroke or heart attack. Some coverage might end once the insured reaches a certain age. So, like any form of insurance, make sure to read the policy carefully. The last thing you want to worry about is your emergency plan.
Why It May Be Important
You can purchase critical illness insurance on your own or through your employer (many offer it as a voluntary benefit). Adding it to a current life insurance plan may also save you money.
One of the reasons companies have been keen to add these plans is that they recognize employees are worried about high out-of-pocket expenses with a high-deductible plan. Unlike other health care benefits, workers generally bear the entire cost of critical illness plans. That makes it a money saver for companies, as well as workers.
A big draw of critical illness insurance is that the money can be used for a variety of things, such as:
To pay for critical medical services that might otherwise be unavailable. To pay for treatments not covered by a traditional policy. To pay for daily living expenses, enabling the critically ill to focus their time and energy on getting well instead of working to pay their bills. Transportation expenses, such as getting to and from treatment centers, retrofitting vehicles to carry scooters or wheelchairs, and installing lifts in homes for critically ill patients who can no longer navigate staircases. Terminally ill patients, or those simply in need of a restful place to recuperate, can use the funds to take a vacation with friends or family.
Low Cost, Limited Coverage
Part of what makes these policies appealing is that they generally don’t cost a lot, especially when you get them through an employer. Some smaller plans run as little as $25 a month, which looks like a bargain compared to the cost of a typical, low-deductible health insurance policy.
Despite these plans’ low price tag, some health care experts are skeptical as to whether they really are a good deal for consumers. One overarching concern is that they’ll only reimburse you for a somewhat narrow range of illnesses. If the illness you’re diagnosed with doesn’t fit the definition of a covered illness, you’re out of luck.
The more illnesses that are covered on your plan, the more you’ll pay in premiums. A 45-year-old female with an individual, cancer-only plan may pay $40 a month for $25,000 of coverage. That same woman may pay twice that a month if she expanded the coverage to include coronary illnesses, organ transplants, and certain other conditions.
Like all insurance policies, critical illness policies are also subject to a host of stipulations. Not only do they only cover the conditions listed in the policy, they only cover them under the specific circumstances noted in the policy. A diagnosis of cancer, for example, may not be enough to trigger payment of the policy if the cancer has not spread beyond the initial point of discovery or is not life-threatening. A diagnosis of a stroke may not trigger a payment unless the neurological damage persists for more than 30 days. Other restrictions may include a specific number of days the policyholder must be ill or must survive after diagnosis.
Seniors should be particularly careful about these policies. There may be limits for payout on some policies, with persons over a certain age (such as 75) being ineligible for payment, or they may include so-called “age reduction schedules,” which means your potential insurance payout shrinks as you get older.
It is important to note that many of these policies do not provide a guaranteed payment. For example, a typical insurance company discloses that in its critical illness policy "the expected benefit ratio for this policy is 60%. This ratio is the portion of future premiums that the company expects to return as benefits when averaged over all people with this policy." If 60% of the premiums are eventually paid out in claims, 40% of the premiums are never paid out at all.
Alternatives to Critical Illness Insurance
Insiders point out that there are alternative forms of coverage without all these restrictions. Disability insurance, for example, provides income when you can’t work for medical reasons and financial protection isn’t limited to a narrow set of illnesses. This is an especially good option for anyone whose livelihood would take a significant hit from a prolonged work absence.
Consumers with a high-deductible plan can also make contributions to either a health savings account or flexible spending account (FSA), both of which offer tax benefits when used for qualified expenses.
You can also build a separate savings account to cover non-medical outlays that could arise if you have cancer, for example, and have taken leave from your job.
The Bottom Line
Since medical bills are a common cause of bankruptcy in the United States, protecting yourself against that fate should be given consideration, especially if you have a family history of any of the illnesses mentioned above. Critical illness insurance can alleviate financial worry in the event that you become too sick to work. It provides flexibility in that the money paid out can be used as you wish, to cover a wide variety of potential needs. There are some drawbacks and stipulations to this type of insurance coverage, though. As with all types of insurance, you should shop around to find the policy that best meets your needs and situation.
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f143cbf33177f1fda6a254c73a4a9cc0 | https://www.investopedia.com/articles/personal-finance/010516/salary-negotiation-strategies-can-backfire.asp | Salary Negotiation Strategies That Can Backfire | Salary Negotiation Strategies That Can Backfire
Negotiating an acceptable salary is a crucial part of accepting a new position, but if candidates botch this step, it may cost them the job. And even if the fallout isn’t quite as severe, the company may have lingering regrets that may affect the employee’s ability to succeed at work.
Many candidates are confident in their negotiating skills, but according to Dennis Theodorou, Detroit, Michigan-based managing director of JMJ Phillip Executive Search, this confidence is misplaced. Theodorou says, “People look for a job every three years on average and negotiate a salary once or twice every three years, which means they're not experts in salary negotiations.”
And this lack of knowledge can result in missteps. Below are some of the negotiation strategies that have the potential to backfire.
Key Takeaways Don't negotiate your salary until you have a firm offer; jumping the gun and trying to negotiate for more money when they haven't even made you an offer is bound to backfire.Don't try to get one company to match another company's offer; no two companies are alike and there are a variety of reasons for different salaries.Don't take the salary estimate on a salary site as factual; location, size of the company, number of employees, your experience and other factors are all relevant.Don't fixate only on money; if the company won't budge in negotiating the cash portion of the compensation, see if you can ask for more vacation days or other perks.Don't agree to certain conditions, when there has been a verbal offer, and then no longer agree once the written offer arrives, or attempt to negotiate after you've accepted the offer.
Negotiating Too Soon
The first mistake candidates make is trying to negotiate their salary before the company has even extended an offer of employment. Steven Rothberg, president and founder of College Recruiter in Minneapolis, Minnesota, tells Investopedia, “The best time to negotiate your starting salary and other components of your total compensation is after receiving but before accepting the offer of employment.” Approaching this topic too soon could be a potential job interview deal breaker.
Leveraging One Offer to Get a Counter Offer
You may have interviewed with more than one company. However, don’t assume that companies are willing to match another employer’s offer, and don’t make the salary the determining factor. Kristin Scarth, a career services manager at Employment BOOST in Detroit, Mich., warns that trying to leverage one job offer against another offer might be a short-sighted approach. “No two jobs are apple-to-apple, and if you're trying to get one company to come up another $5,000 just because you have a better offer, it doesn't mean that they’re going to comply—and it doesn’t mean that you should choose the highest-paying job.” Scarth advises candidates to weigh the pros and cons of each company and choose the organization that offers the best overall employment situation.
Failing to Do Your Homework
One popular trend that may backfire is trying to negotiate without doing your homework. Theodorou says that many people request a certain amount because a salary website stated this was their worth. “This never works out. If you're making $65,000, and the new job is offering $70,000, and your rebuttal is that Google says that you should be making $82,000, this situation will likely not end well,” warns Theodorou.
It is important to conduct market research, but there are various other factors that determine salaries, such as years of experience, company size, industry, and location. According to Katie Weigel, Reno, Nevada-based division director with Robert Half Finance & Accounting, “You should know if what you are asking for is at or above competitive compensation for your location.” And if your requirements seem unreasonable to the potential employer, Weigel says it could cost you that job, especially if the hiring manager has interviewed other candidates that also made favorable impressions.
Regarding a salary range, Theodorou warns that asking for more than a 5% to 10% raise when switching jobs usually doesn't produce the desired result. “We see roughly 3% to 5% when getting a new job that's local, and 5% to 10% when having to relocate.” However, Theodorou says there are exceptions, for example, if you currently manage three people, and the new job involves managing 50 people, there is a reasonable expectation of a higher salary.
Negotiating Solely for Money
If more money is out of the question, Rothberg recommends negotiating other aspects of the job that can help you achieve a healthy work-life balance. “Rather than asking for Friday afternoons off, ask if you can work an extra hour the other four days of the week so that you're still working 40 hours a week.”
Bait and Switch
One terrible salary strategy is to agree to a verbal offer and then request more after receiving the written offer. According to Steven Lindner, executive partner of The WorkPlace Group in New York City, “Agreeing to a lower compensation just to get a foot in the door, hoping that once they meet you and see how terrific you really are that they will pay you what you really want is a waste of everyone's time.” Lindner also says this is a surefire way to have the job offer rescinded.
Once you have a job, don't threaten to quit as a way to try to force a raise; your employer may take you up on the offer and let you quit, or give you the raise because of the threat but now see you as someone with one foot out the door.
Missteps by Current Workers
Sometimes current employees try to renegotiate their salaries by threatening to leave if they don’t receive a raise. Lindner says this is a sure way to end up in the unemployment line. “Managers prefer to advocate for individuals who are engaged, passionate and committed to them and the business.” And if you show that money is your primary concern, he says that managers know you will leave when a better offer is presented by another company.
By failing to follow the company’s guidelines for promotions and raises, these workers may end up jeopardizing their careers. "Sure, you may get the raise from your current employer but according to most companies polled, they will make note of this occurrence, never forgetting it and will likely be looking to replace you,” says Lindner.
The Bottom Line
While salary is an important part of accepting a new job, don’t let it become an obstacle that prevents you from seeing the big picture. While it’s normal to want a job that pays well, failing to understand when, how and why to negotiate your salary may cause the company to look for other candidates.
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468dd6592430e5463e5d3043db8674d8 | https://www.investopedia.com/articles/personal-finance/010616/pros-cons-using-roboadvisor.asp | Pros & Cons of Using a Robo-Advisor | Pros & Cons of Using a Robo-Advisor
Pros & Cons of Using a Robo-Advisor
Robo-advisors are shiny new investment platforms. But what are their advantages and disadvantages? Can all digital financial advisors be painted with a broad brush?
Robo-advisors differ from brokerage to brokerage. The catch-all term includes a class of investment managers and software that uses complicated computer algorithms to administer your investment portfolios. Some robo-advisors are completely automated, while others offer access to human assistance as well. Regardless of the model, they all provide customer service to assist you through the process.
The robo-advisor's overriding assertion is that each company's proprietary algorithm claims to take the emotion out of investing and will grant the investor better returns for a lower cost than traditional (that is, human) financial advisors. Yet, each advisor can't have the "best" proprietary algorithm. Let's look under the hood at the pros and cons of using this new and ever-expanding type of investment management.
Key Takeaways Robo-advisors—automated investment services aimed at ordinary investors—are an increasingly popular way to get access to the markets. On the plus side, robo-advisors are very low-cost and often have no minimum balance requirements. They also tend to follow optimized indexed strategies that are best suited for most investors. On the downside, robo-advisors do not offer many options for investor flexibility, they tend to throw mud in the face of traditional advisory services, and there is a lack of human interaction.
Pros: What's to Like About Robo-Advisors?
1. Low Fees
Prior to the introduction of the robo-advisor platforms, investors were lucky to receive professionally managed investment assistance for less than 1% of assets under management (AUM). The robos have significantly changed that paradigm. From a cost of zero for Charles Schwab Corp.'s Intelligent Portfolios to 0.25% for a Betterment portfolio (after the first free year), there are many low-cost robos to choose from. Wealthfront and Betterment's models favor the cost-conscious consumer.
2. Nobel Prize-Winning Investment Models
Betterment and many of the robo-advisor's algorithms rely on Nobel Prize-winning investment theory to drive their models. As Betterment.com put it in 2013, "When the Nobel committee announced… that Eugene Fama and Robert Shiller would share this year's prize for economics, it was a great moment for their research in the field of investing—and validation for Betterment, which relies on many of their insights."
In general, best practices investment theory strives to create an investment portfolio with the greatest return for the smallest risk. From 1990 Nobel Prize winner Harry Markowitz to 2013 Fama and Shiller winners, the robos use cutting edge investment portfolio research informed by these luminaries to drive their products.
3. Access to Robo-Advisor Services Through a Financial Advisor
It's becoming more common for traditional financial planning practices to "white label" robo-advisors' platforms for their clients. This takes out of their hands the cumbersome task of choosing assets, so that the financial advisor may spend more time with their clients addressing individual tax, estate, and financial planning issues.
In the Dec. 23, 2014, Advisor Perspectives article, "Three Reasons Why Robo-Advisors are a Huge Benefit to the Advisory Profession," Bob Veres cites Betterment, Motif, and Trizic as robos with ready-made portfolios available to the advisors. Jemstep also white labels its platform for advisors. This trend gives the consumer an opportunity for lower-cost investment management while retaining the personal touch of an advisor.
4. Expanding the Market for Financial Advice
Some consumers, younger investors or those with lower net worth, may not have considered professional financial advice. The robo-advisors are growing the existing market of financial advisory clients. Because of the easy access and lower fee models for professional financial management, more consumers may choose robo-advisors' professional management in lieu of the DIY model.
5. Robo-Advisors Aren't One-Size Fits All
There are low-fee robo-advisors for different types of clients. For example, if you're interested in a certain sector or investment theme, then Motif's 151 existing portfolios offer a platform for you. Veres' article mentions that Motif excels at giving their users many idea-based portfolios, from a "shale gas" portfolio to a "fight fat" offering for investors interested in weight loss companies to a caffeine portfolio that culls coffee-related companies for you. If your primary concern is rock-bottom fees, there are several robo-advisors with broadly diversified low-fee ETF portfolios.
Some robo-advisors claim rebalancing and tax-loss harvesting in their arsenal. There are single approach and hybrid-style robo-advisors. Others such as Rebalance IRA and Personal Capital have higher barriers to entry with, respectively, $100,000 to a recently lowered $50,000 minimum entry fees. That said, even the robos with high entry requirements are more accessible than the financial advisors with $1 million portfolio minimums.
6. Low Minimum Balances
It's a boon for investors with a small net worth to get professional robo-advisory management. Zero minimum balance technology-enhanced robo-advisors include Folio Investing and Wise Banyan. Betterment has no minimum balance as well. Other robo-advisors are accessible with $1,000 to $5,000 to get started. And Personal Capital is free for those interested in access to portfolio monitoring, with the higher-balance tiers reserved for exposure to a dedicated financial advisor.
Cons: What's Wrong with Robo-Advisors?
1. They Aren’t 100% Personalized (Yet)
You're more than just an investment portfolio. You have many goals, both for the near and long-term. While many robo-advisors now allow you to set and edit your goals using their financial planning software, you also have money-related issues and concerns which may benefit from a chat with a human being.
Most (although not all) robo-advisors will not hold your hand and talk you off the ledge after a significant market drop. The human financial advisor is there to assuage your fears and explain how the investment markets work. A financial planner works to integrate your finances, taxes, and estate plans. The advisor’s office may have a diverse pool of other advisors to help with many aspects of life beyond just "money" concerns.
If you want to sell call options on an existing portfolio or buy individual stocks, most robo-advisors won't be able to help you. There are sound investment strategies that go beyond an investing algorithm. Sophisticated and newbie investors may want a broader investment portfolio with a wider range of asset classes than the typical robo-advisor offers.
2. They Tend to Bash Advisors' Price Schedules
It's true that most robo-advisors have low price schedules, but not all. It's not true that all financial advisors are expensive. There are financial advisors who charge approximately 1% of assets under management (AUM) for their services. This fee is comparable to those of several robo-advisors.
There are other advisors who will charge an hourly rate, or a fee for service. This practice gives the consumer a chance to control costs while receiving more personalized information. The newer "web-based" personal advisors can forgo the cost of a fancy office and serve you personally via web chat for lower fees. Additionally, there are advisors that "lease" robo-advisors' platforms and combine them with their own advisory services, thereby cutting fees and charges.
3. They Falsely Claim They're the Only Resource for Newbies
There are financial-advisor alternatives for those without big bucks or those just starting out. The XY Planning Network is a fee-only financial planning collection of advisors with an affordable monthly fee structure. The XY Planning Network advisors also cater to a younger clientele.
A fee-for-service advisor will put a cap on the client's charges. Trade infrequently with an advisor paid by commission, and your costs can remain low. With the multitude of financial advisors, there are pay models and investment approaches to fit every type of investor.
4. No Face-to-Face Meetings
If you're someone that wants a relationship with your financial advisor, then most robo-advisors aren't for you. The robos don't have an office where a client walks in and talks directly to an advisor. This type of personal contact is relegated to the traditional financial advisory models.
The Bottom Line
The robo-advisory sphere is just getting started. The new entrants into the landscape benefit the consumer by lowering fees while contributing many paths to professional asset management. As with any life choice, the investor should figure out what type of investment guidance they need and select a robo-advisor or financial professional to suit his individual style.
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968bc11032ec4d8d8f3190b6f9c81da7 | https://www.investopedia.com/articles/personal-finance/010715/7-top-ways-earn-airline-miles.asp | 7 Top Ways to Earn Airline Miles | 7 Top Ways to Earn Airline Miles
Since they first took off more than 30 years ago, frequent flyer programs have undergone as many changes as the airline industry itself. While it’s still possible to reap some major rewards—or to waste time collecting points you’ll never use—today’s programs look very different from those of even a few years ago.
A huge shift, notes Brian Kelly, who calls himself “The Points Guy” and runs the website ThePointsGuy.com, has been in the way many airlines now calculate their rewards. Often called a “revenue-based model,” it rewards travelers for the amount of money they spend rather than the miles they fly. In other words, frequent flyer programs are becoming serious spender programs.
That can be a good thing or a bad one depending on the type of traveler you are. If you typically fly in economy class, you’re likely to benefit less than before. On the other hand, Kelly says, “just a couple of trips a year in a premium class of service” could mean many thousands of miles added to your account.
Though there may be more changes on the horizon, here are some of today’s best ways to earn airline miles.
Key Takeaways Earning frequent flyer miles can land you free flights, upgrades, and other travel perks.The most basic way to earn points is to fly often and with the same carrier.You can earn points without flying by signing up for a rewards credit card and using it and shopping with program partners.
1. Focus on Where You Fly
You’re most likely to earn enough points to actually get something in return if you concentrate on just a couple of airlines that ply the routes you expect to fly. It’s better to have 100,000 points with one carrier than 10,000 each with 10. Note, too, that points may expire if your account is inactive for a certain period (typically 18 months). You’ll need to monitor any account you open or risk losing your miles—another reason to keep the number manageable.
2. Consider their Partners
Many airlines belong to networks of domestic and foreign carriers, such as Oneworld, SkyTeam, and Star Alliance. These organizations, which you become part of by signing up for a member airline’s frequent flyer program, allow you to earn, combine, and redeem miles on any partner airline. Again, which of these you might want to become part of will depend on the airlines you primarily fly. Their partners are listed on their sites.
3. Bag a Bonus
To entice you to sign up for credit cards co-branded with airlines, credit card issuers frequently offer bonus miles, sometimes enough for a reward all by themselves. Of course, that’s in the big print on their promotions. In the smaller print, you’ll find the terms. For example, some require you to spend a certain amount of money within a certain time to get rewards.
Most frequent flyer programs are free to join, so there’s no harm in signing up for a flock of them. If you sign up for a miles credit card, you may earn initial bonus miles, but your card may carry an annual fee in addition to typical credit card interest and charges.
Alina Comoreanu, a research analyst with the finance website WalletHub.com, says that these cards are attractive if you are planning a big trip in the near future and already expect to spend a certain amount of money. Bear in mind that they often have hefty interest rates—16.5% or higher is common. So, unless you pay your bill off each month, you need to weigh the value of your bonus against the interest charges.
4. Choose the Right Credit Card
Using a rewards credit card for all of your purchases (and paying it off each month) can be another way to rack up enough miles for a reward. There are two basic types of cards to consider: the co-branded cards affiliated with an airline and more general rewards cards that offer an assortment of awards, including airline miles. “The main difference between the cards would be that the airline-affiliated cards are more rewarding when used with said airline, while the generic one offers a larger spectrum of redeeming options,” Comoreanu says.
For example, the more general rewards cards typically allow you to use your miles on a variety of airlines, rather than just one. If you know you’re unlikely to use your miles for travel, you can redeem them for other things, including cash. “Straight up cash back is always more reliable,” Comoreanu says. “Points can devalue easily and customers may find themselves receiving less than when they first applied for the card.”
5. Dine Out
Another good way to pile up points and keep them from expiring is to link your credit card to a frequent flyer plan’s dining program, Kelly notes. When you charge a meal on that card at a participating restaurant, you’ll earn points based on the size of the tab.
6. Use Shopping Portals
Many airlines also have shopping portals on their frequent-flyer websites. By going to that page first and clicking through to a participating merchant, you can earn points on your purchases.
1,200,000 The number of miles civil engineer David Phillips earned after purchasing $3,150 worth of pudding (12,150 cups, which he donated to the Salvation Army and local food banks), taking advantage of an unusual and ill-conceived mileage-earning promotion.
7. Fly
Yes, you can still earn miles by flying, a fact easily overlooked among all the other ways to earn them. Because of the move to revenue-based programs, a costly ticket may get you more miles than a cheap one, even if the latter’s route covers a greater distance. That, of course, is rarely a good reason to spring for a crazy high fare, especially if you’re the one paying the bill. The value of miles varies from airline to airline, but figure they’re worth about a penny apiece on average. That makes it pretty easy to compare fares and do the math.
The Bottom Line
Frequent flyer programs are changing to reward high rollers, but there are still ways to earn miles without overpaying for them.
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0dd56342ead8886851f8fdd3f5429fe0 | https://www.investopedia.com/articles/personal-finance/010715/key-differences-between-uber-and-lyft.asp | Lyft vs. Uber: What's the Difference? | Lyft vs. Uber: What's the Difference?
Lyft vs. Uber: An Overview
Sometimes it's safer or more convenient to leave the driving and traffic headaches to someone else. This is the thought that eventually grew into Uber Technologies Inc. and Lyft Inc., the two quintessential transportation-service companies.
In a race to the finish line, Uber released its long-awaited initial public offering (IPO) prospectus about two weeks after rival Lyft debuted on the public markets. These two taxi alternative services may seem interchangeable, but there are differences between the two largest transportation network services in the United States.
Key Takeaways Uber and Lyft both offer innovative alternatives to taxis and long-established private transportation services. Both give passengers a convenient and innovative way to request and pay for rides through their smartphones. The companies have considerable differences in their service areas, offerings, and culture. Because each company's drivers are independent contractors with varying vehicle types and personalities, even if you consistently use the same service in the same city, each trip will be different.
Lyft operates in the United States and Canada. They set specific requirements on the vehicles used by drivers and have several different categories or levels of service. The Lyft app for smartphones and the dashboard Amp sign notify passengers of the driver's arrival and give the passenger an estimated cost in advance.
Uber serves not only in the United States and Canada but also provides service in many cities worldwide, including those in the European Union, Central and South America, Africa, Asia, Australia, and New Zealand. Uber also sets vehicle requirements and lists several different categories of service. The Uber app helps passengers and drivers find one another and estimates the cost of the ride in advance.
Lyft
Lyft Inc. (LYFT) was launched as a service in 2012. It was spawned from Zimride, a company founded by Logan Green and John Zimmer. Zimride, a peer-to-peer rideshare matchmaker for people looking to carpool long distances securely, was sold so that the duo could focus on Lyft. Green is currently chief executive, and Zimmer is the company's president.
Going Public and Market Share
On Dec. 6, 2018, Lyft announced that the company had officially filed paperwork with the U.S. Securities and Exchange Commission (SEC) to go public in March 2019. It now trades on the Nasdaq.
Uber's smaller rival said in a filing that it expected to raise $2 billion in its IPO and would offer 30.8 million shares at $62-$68 per share. The company priced its shares at $72, and they traded up before falling back and closing at just over $78.
The company was valued at $15 billion in 2018, when it raised $600 million in a Series I financing round led by Fidelity Management & Research Company.
As reported by CNBC, in May 2018, Lyft revealed market share figures for the first time, suggesting that it had 35% of the U.S. ridesharing market and that it has a majority of the share in multiple markets across the country.
Reuters estimates the market share figure to be closer to 40%, as of February 2019. Lyft might have gained market share from Uber as a result of several controversies, many of which took place in the months leading up to the IPO announcement.
Operation and Services
Lyft's website shows the cities where the ride service operates in Canada and the United States, where it serves all 50 states and the District of Columbia. The company has a set minimum vehicle requirement, and the drivers must pass two background checks before approval with the company.
Automobiles must have four doors with a minimum of five seatbelts. The age and condition of the vehicle, among other requirements, vary by state.
Lyft offers several service classes, which vary by city.
Original Lyft provides rides in regular vehicles for up to four passengers. Lyft XL provides rides in regular vehicles for up to six passengers. Lyft Lux provides premium black car service in luxury vehicles. Lyft Black is a premium black car service including luxury vehicles. Lyft Black XL provides rides in premium black SUV service for up to four people.
The Cost of Lyft Services
According to a 2015 study by "Money.com," the average cost of a Lyft ride came in at $12.53. The fee for service varies by city and the class or category of vehicle service chosen. Fees have a base charge for each ride and additional calculations for total miles traveled and the minutes of travel time. Also, prime-time service will increase the base price.
Any passenger changes to a ride, once it is underway, will affect the total price. Customers pay through the company's smartphone app.
Lyft App and Amp
Lyft originally identified its vehicles with furry pink mustaches on the front—called "carstashes"—but it now uses a more subtle system called the Amp. The Amp is a small module that sits on the driver’s dashboard and lights up in a particular color. Waiting passengers get notification of the Amp color in the Lyft app, which is especially helpful when getting a ride after dark or when leaving a venue where everyone is using a rideshare app to get home.
All Lyft vehicles have stickers displaying the Lyft logo in the front and rear windshields. Retiring its mustaches may have been a move toward adopting a more professional look in order to compete with Uber.
The Lyft app gives the passenger an estimated total cost for a ride at booking. In some cities, the app can show the exact price of the door-to-door service.
Lyft and Food Delivery
Lyft has gotten into the food delivery game; its major fast-food partner is Taco Bell. In July 2017, the company tested a new feature called Taco Mode, which allowed a user, currently in Lyft transit, to press a button on their app and direct the driver to the nearest Taco Bell. Interestingly, the service was only available between 9 p.m. and 2 a.m. Taco Mode was expected to be rolled out to all devices in 2018, but many drivers and customers expressed disapproval, both because of issues like messiness in vehicles, as well as a general concern about the company’s focus on driver satisfaction.
Lyft Driver Environment
Lyft riders can tip their drivers through the app at the time of destination payment or up to 72 hours after the ride is completed. Drivers keep 100% of their tips. Also, Lyft passengers can split the cost of a ride with fellow passengers through the app, as long as they do so during the ride and not after.
Lyft has so far managed to avoid many of the controversies faced by fellow ride service Uber. Perhaps this is partially due to the company's smaller size and limited operation sphere. However, in 2017, a New York labor group accused Lyft of wage theft. A story in The Washington Post states drivers claimed the service was cheating them on their fare by deducting money for driver's trips on interstate highways.
Uber
Uber was founded in 2009 by Travis Kalanick and Garrett Camp as UberCab. After Kalanick's resignation as CEO in 2017, Dara Khosrowshahi took his place. Ronald Sugar was named chairman in August 2018. Kalanick remains on the firm's board of directors.
Uber is a much larger company than Lyft and has received negative press for everything from sexual harassment lawsuits to its use of software to track Lyft drivers. As reported by National Public Radio, Uber settled a class-action suit brought forward by former and current employees of color and female workers. The claim cited events of discrimination and harassment. The $10 million settlement came after the firm fired 20 employees for harassment in 2017.
Also in 2017, the FBI opened a probe into Uber's use of software to track Lyft's drivers. An April 2017 article by The Wall Street Journal reported on USA Today states that investigators were looking into the use of software by Uber to get information on drivers who work for both companies and discover information about Lyft's charges for service.
Going Public and Market Share
Uber filed paperwork for its documents for IPO on Dec. 6, 2018. After delays, the company filed final documents to be listed on the New York Stock Exchange (NYSE) using the ticker symbol UBER. According to CNBC, the offering was expected to be one of the largest of 2019. The multinational ride-hailing company was valued at $120 billion by Wall Street banks and reported $11.27 billion in 2018 revenue.
Uber may have also lost market share in the early months of the leadership of CEO Dara Khosrowshahi, who assumed the top spot at the company following the departure of co-founder and former CEO Travis Kalanick in June 2017. A 2019 survey completed by BusinessOfApps.com found Uber's market share to be around 69%. The company's S-1 IPO filing shows the service provided 1.49 billion trips in the fourth quarter of 2018 alone.
Operations and Services
Uber serves hundreds of cities in dozens of countries, including the U.S. and Canada, as well as other cities around the globe in Central and South America, Africa, Asia, Australia, New Zealand, and the E.U. Depending on your location, Uber may be your only taxi alternative option. In the U.S. the service lists over 300 cities, from Las Vegas, Chicago, and New York to Fargo, Pensacola, and Kalamazoo.
Like its counterpart Lyft, Uber offers several classes of service whose availability varies by city.
UberX is the basic sedan service for everyday rides for up to four people. UberComfort provides newer cars with additional legroom. UberXL provides affordable SUV service for groups of up to six people. UberSUV provides luxury SUV service for groups of up to six people. UberPool allows customers with different starting and ending points who are traveling in the same direction to share rides in sedans and share the cost. UberBlack provides rides with professional drivers in black town cars for up to four people. UberBlack SUV provides luxury rides by professional drivers for up to five passengers UberWAV provides rides in wheelchair- and scooter-accessible vehicles by drivers trained in assisting passengers. UberSelect provides stylish, high-end cars with top-rated drivers for up to four people for special occasions. UberTaxi lets you hail a yellow cab from the Uber app. UberPet provides affordable rides for you and your pet.
Even if you choose UberX, the lowest-cost option, you will not get picked up in a clunker. Uber has minimum vehicle requirements for drivers in each city. For example, in Los Angeles, vehicles must be no more than 15 years old and have four doors. The automobile must be in good condition with no cosmetic damage and it must have working air conditioning. Further, the car cannot be commercially branded and must have passed a vehicle inspection in the location of operation.
The Cost of Uber Services
Uber’s fares consist of a base fare plus a time and distance rate, and fares vary by vehicle type and by the city of service. Surge pricing during times of peak demand will increase the fare.
Each vehicle class has a minimum fare so that it is worth a driver’s time to pick customers up, even for very short rides. In some cities, Uber does not provide up-front fare estimates but rather calculates the total charge after the ride. The UberSUV option is the most expensive of the offerings; UberX charges the least expensive fares.
Uber App and Beacon
Uber uses a light-up Beacon, similar to Lyft’s Amp, to help passengers identify their ride. Mounted in the front, passenger side windshield, the Beacon allows passengers to spot their ride from a distance easily. Drivers also display placards with the Uber logo in their front and back windshields. The apps themselves help drivers and riders identify each other as well, providing license plate numbers and descriptions of the cars.
After requesting a ride, the Uber app shows all nearby drivers, their photos, automobile specifications, and the license number of the car. The app also allows customers to estimate their fares in advance and determine driver arrival and location.
Uber and Food Delivery
Uber launched Uber Eats in 2014 to compete with other services, like GrubHub and Postmates. Uber gained a major partnership when McDonald's announced in December 2016 that it would venture into delivery with Uber Eats. In December 2017, the company announced the service was profitable in 40 out of 165 cities in which it operated. As of October 2020, Uber Eats was available in close to 500 cities worldwide.
Uber Driver Environment
According to Ridester.com, as of December 2018, Uber has 3.9 million registered and approved drivers globally. Uber drivers are a combination of professional drivers and non-professionals who have passed driving record checks and background checks. They submit photos for a badge ID and the notification app.
Uber did not solicit tips earlier, but as of 2017, it lets customers add tips to their fare and allows drivers to accept cash tips. Uber allows riders to split fares with friends through the app.
Workers have claimed low wages and poor workplace culture, but Uber is working toward improving situations. In the U.S. they instituted a program of driver rewards based on the number of lifetime trips drivers make.
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0890390d924e810e4663075803bb6ba0 | https://www.investopedia.com/articles/personal-finance/010815/why-credit-karma-free-how-it-makes-money.asp | How Credit Karma Makes Money | How Credit Karma Makes Money
Credit Karma offers consumers access to credit scores and other credit information from TransUnion and Equifax, as well as tools for consumers to improve their rating. Users can access Credit Karma's information for free and as frequently as they desire, without registering with a credit card. By contrast, the three major credit bureaus provide complete credit score information for free to consumers only once a year, charging a fee for added requests. Credit Karma makes money by recommending financial products such as credit cards based on your credit information, and gets a commission if you buy a recommended product. Credit Karma recently has expanded by offering free tax preparation assistance as well as a high-yield savings account through a partnership with MVB Bank.
Key Takeaways Credit Karma offers free access to TransUnion and Equifax credit data, as well as offering tax preparation assistance, and other services. It makes money by receiving a fee every time a user purchases a product or service it recommends. Credit Karma is a fintech startup focusing on providing credit information. On February 24, 2020, Intuit announced it was purchasing Credit Karma for $7.1 billion.
Credit Karma's Industry
Credit Karma is a fintech services company. Unlike some companies in the industry, Credit Karma and its immediate competitors do not sell your data to third parties. In addition to providing credit scores, Credit Karma also guides consumers regarding what next steps to take after they have accessed their initial credit information. For example, the company recommends credit cards that are tailored to each consumer based on the odds of approval. It also provides users with guidance about tailored personal, home, and auto loans based on income and credit scores.
Credit Karma's competitors include NerdWallet, Credit Sesame, and Mint, which also offer free credit score information and financial tools.
Fundraising and Financials
Credit Karma includes more than 100 million members in the U.S., Canada, and the U.K. as of February 2020. According to Crunchbase, Credit Karma has raised $868 million over 8 funding rounds, the most recent of which was in March of 2018. The company at that time was valued at $4 billion. Its lead investors include Silver Lake Partners and SV Angel.
History and Leadership
San Francisco-based Credit Karma was founded in 2007, offering its first free credit scores in 2008. The company was founded by Ken Lin, current CEO, who spent the early part of his career at E-Loan, an online lender specializing in debt consolidation, and UPromise, a subsidiary of student loan service Sallie Mae which runs a customer loyalty program focused on saving for college and paying down student loans.
Recent Developments
On February 24, 2020 Intuit Inc. (INTU), maker of Turbotax and QuickBooks, announced that it was purchasing Credit Karma for $7.1 billion in cash and stock.
On November 25, 2020, Intuit and Credit Karma announced that they had received clearance from the U.S. Department of Justice (DOJ) to go ahead with the previously announced merger. The DOJ stipulated that one of the conditions that must be met in order for the acquisition to take place is that Credit Karma must divest its Credit Karma Tax business to Square Inc. (SQ).
In October 2020, Credit Karma announced that it would begin offering checking accounts to members that already hold a savings account with the company.
How Credit Karma Reports Diversity & Inclusiveness
As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Credit Karma and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Credit Karma releases. It shows Credit Karma does not disclose any data about the diversity of its board of directors, C-Suite, general management, and employees overall. It also shows Credit Karma does not reveal the diversity of itself by race, gender, ability, veteran status, or LGBTQ+ identity.
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aff72ed17b9efdef89d68c938e583d38 | https://www.investopedia.com/articles/personal-finance/010816/pitfalls-medicare-advantage-plans.asp | Pitfalls of Medicare Advantage Plans | Pitfalls of Medicare Advantage Plans
We publish unbiased product reviews; our opinions are our own and are not influenced by payment we receive from our advertising partners. Learn more about how we review products and read our advertiser disclosure for how we make money.
A Medicare Advantage Plan, also called a Part C or an MA Plan, may sound enticing. It combines Medicare Part A (hospital insurance), Medicare Part B (medical insurance), and usually Medicare Part D (prescription drug coverage) into one plan. These plans cover all Medicare services, and some offer extra coverage for vision, hearing, and dental. They are offered by private companies approved by Medicare.
Still, while many offer $0 premiums, the devil is in the details. You will find that most have unexpected out-of-pocket expenses when you get sick, and what they pay can differ depending upon your overall health. Here's a look at some of the disadvantages of Medicare Advantage Plans.
Key Takeaways A Medicare Advantage (MA) Plan, known as Medicare Part C, provides Part A and B benefits, and sometimes Part D (prescription) and other benefits.All Medicare Advantage providers must accept Medicare-eligible enrollees.Sick participants may find that medical care costs skyrocket under a Medicare Advantage plan due to copayments and out-of-pocket expenses.Medicare Advantage customers can switch back to Original Medicare during an annual enrollment period.Prospective Medicare Advantage customers should research plans, copays, out-of-pocket costs, and eligible providers.
Coverage Choices for Medicare
If you're older than 65 (or turning 65 in the next three months) and not already getting benefits from Social Security, you have to sign up for Medicare Part A and Part B. It doesn't happen automatically. However, if you already get Social Security benefits, you'll get Medicare Part A and Part B automatically when you first become eligible (you don't need to sign up).
There are two main ways to get Medicare coverage:
Original MedicareA Medicare Advantage Plan
Original Medicare
Original Medicare includes Part A (hospital insurance) and Part B (medical insurance). To help pay for things that aren't covered by Medicare, you can opt to buy supplemental insurance known as Medigap (or Medicare Supplement Insurance). These policies are offered by private insurers and cover things that Medicare doesn't, such as copayments, deductibles, and healthcare when you travel abroad.
Medigap policies vary, and the most comprehensive coverage is offered through Medigap Type F, which covers all copays and deductibles. But as of Jan. 2, 2020, the two plans that cover deductibles—plans C and F—cannot be sold to new Medigap beneficiaries. Be aware that with Original Medicare and Medigap, you will still need Part D prescription drug coverage, and that if you don't buy it when you first become eligible for it—and are not covered by a drug plan through work or a spouse—you will be charged a lifetime penalty if you try to buy it later.
Medicare Advantage Plans
A Medicare Advantage Plan is intended to be an all-in-one alternative to Original Medicare. These plans are offered by private insurance companies that contract with Medicare to provide Part A and Part B benefits, and sometimes Part D (prescriptions). Most plans cover benefits that Original Medicare doesn't offer, such as vision, hearing, and dental. You have to sign up for Medicare Part A and Part B before you can enroll in Medicare Advantage Plan.
Disadvantages of Medicare Advantage Plans
In general, Medicare Advantage Plans do not offer the same level of choice as a Medicare plus Medigap combination. Most plans require you to go to their network of doctors and health providers. Since Medicare Advantage Plans can’t pick their customers (they must accept any Medicare-eligible participant), they discourage people who are sick by the way they structure their copays and deductibles.
Author Wendell Potter explains how many Medicare Advantage enrollees don’t find out about the limitations of their Medicare Advantage plans until they get sick:
“Although Mom saw her MA premiums increase significantly over the years, she didn’t have any real motivation to disenroll until after she broke her hip and required skilled care in a nursing facility. After a few days, the nursing home administrator told her that if she stayed there, she would have to pay for everything out of her own pocket. Why? Because a utilization review nurse at her MA plan, who had never seen or examined her, decided that the care she was receiving was no longer ‘medically necessary.’ Because there are no commonly used criteria as to what constitutes medical necessity, insurers have wide discretion in determining what they will pay for and when they will stop paying for services like skilled nursing care by decreeing it ‘custodial.’”
Consider Premiums—and Your Other Costs
To see how a Medicare Advantage Plan cherry-picks its patients, carefully review the copays in the summary of benefits for every plan you are considering. To give you an example of the types of copays you may find, here are some details of in-network services from a popular Humana Medicare Advantage Plan in Florida:
Ambulance—$300Hospital stay—$175 per day for the first 10 daysDiabetes supplies—up to 20% copayDiagnostic radiology—up to $125 copayLab Services—up to $100 copayOutpatient x-rays—up to $100 copayTherapeutic radiology—$35 or up to 20% copay depending on the serviceRenal dialysis—20% of the cost
As this non-exhaustive list of copays demonstrates, out-of-pocket costs will quickly build up over the year if you get sick. The Medicare Advantage Plan may offer a $0 premium, but the out-of-pocket surprises may not be worth those initial savings if you get sick. “The best candidate for Medicare Advantage is someone who's healthy," says Mary Ashkar, senior attorney for the Center for Medicare Advocacy. "We see trouble when someone gets sick."
Switching Back to Original Medicare
While you can save money with a Medicare Advantage Plan when you are healthy, if you get sick in the middle of the year, you are stuck with whatever costs you incur until you can switch plans during the next open season for Medicare. At that time, you can switch to an Original Medicare plan with Medigap. If you do, keep in mind that Medigap may charge you a higher rate than if you had enrolled in a Medigap policy when you first qualified for Medicare.
Most Medigap policies are issue-age rated policies or attained-age rated policies. This means that when you sign up later in life, you will pay more per month than if you had started with the Medigap policy at age 65. You may be able to find a policy that has no age rating, but those are rare.
More Disadvantages of Medicare Advantage Plans
In 2012, Dr. Brent Schillinger, former president of the Palm Beach County Medical Society, pointed out a host of potential problems he encountered with Medicare Advantage Plans as a physician. Here's how he describes them:
Care can actually end up costing more, to the patient and the federal budget, than it would under original Medicare, particularly if one suffers from a very serious medical problem.Some private plans are not financially stable and may suddenly cease coverage. This happened in Florida in 2014 when a popular MA plan called Physicians United Plan was declared insolvent, and doctors canceled appointments.One may have difficulty getting emergency or urgent care due to rationing.The plans only cover certain doctors, and often drop providers without cause, breaking the continuity of care.Members have to follow plan rules to get covered care.There are always restrictions when choosing doctors, hospitals, and other providers, which is another form of rationing that keeps profits up for the insurance company but limits patient choice.It can be difficult to get care away from home.The extra benefits offered can turn out to be less than promised.Plans that include coverage for Part D prescription drug costs may ration certain high-cost medications.
The CARES Act of 2020
On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. It expands Medicare's ability to cover treatment and services for those affected by COVID-19. The CARES Act also:
Increases flexibility for Medicare to cover telehealth services.Authorizes Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists.Increases Medicare payments for COVID-19-related hospital stays and durable medical equipment.
For Medicaid, the CARES Act also clarifies that non-expansion states can use the Medicaid program to cover COVID-19-related services for uninsured adults who would have qualified for Medicaid had the state chosen to expand. Other populations with limited Medicaid coverage are also eligible for coverage under this state option.
The Bottom Line
Shop very carefully if you are thinking of using a Medicare Advantage plan. Be sure to read the fine print, and get a comprehensive list of all co-pays and deductibles before choosing one. Also, be sure to find out if all your doctors accept the plan and that all the medications you take (if it's a plan that also wraps in Part D prescription drug coverage) will be covered. If the plan doesn't cover your current physicians, be sure that its doctors are acceptable to you and are taking new patients covered by the plan.
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8734fd63bc9be6d47635c2b256dec869 | https://www.investopedia.com/articles/personal-finance/010915/cost-studying-new-york-university-nyu.asp | The Cost of Studying at New York University (NYU) | The Cost of Studying at New York University (NYU)
The pace at which the cost of college tuition is increasing is not slowing down, and the price of an education at New York University (NYU), with its main campus in Manhattan's Greenwich Village, is no exception. The 2020-21 tuition is approximately $54,880 per year for an undergraduate student taking 12 to 18 credits per semester. (This figure may be slightly higher or lower depending on the college attended and the number of credits enrolled in. For 12 to 18 credits, there is a flat tuition fee).
Add in room and board costs that can amount to $19,244, $1,100 for transportation costs, $718 for books and supplies, and $2,790 for personal expenses. That price rises to $78,742.
Key Takeaways New York University (NYU) is the largest private university in the United States with a total undergraduate and graduate enrollment of over 58,000 students at its domestic and international campuses. Undergraduate tuition at NYU for the 2020-21 academic year is approximately $54,880. While tuition at NYU is expensive, the PayScale College Salary Report estimates an NYU undergraduate degree will yield a 20-year net return on investment (ROI) of $459,000 (comparing the median pay of an NYU graduate versus a high school graduate over 20 years).
NYU Tuition Compared to Other Universities
NYU is an expensive option, even compared to other non-public institutions. According to the College Board, an average college budget for an in-state public college for the 2020-21 academic year was $26,820. This includes tuition and fees, room and board, books, supplies, transportation, and other expenses.
An average budget at a private college was $54,880. NYU can charge higher prices because of its reputation and because it ranks high in surveys. For example, U.S. News & World Report puts NYU at No. 29 among national universities for 2020.
In addition, NYU, founded in 1831, offers a unique cultural experience. One of its biggest draws is its urban New York City campus, located in one of the city's trendiest neighborhoods. It is the largest private university in the country, with more than 58,000 total students at its domestic and international campuses. The school also has degree-conferring campuses in Abu Dhabi and Shanghai, in addition to 11 global academic centers and research programs in more than 25 countries.
1470 The average SAT score for the freshman class of 2020-2021 at NYU.
Financial Aid at NYU
Most financial aid awarded by NYU comes in the form of need-based grants and scholarships. To determine eligibility, students must complete both the FAFSA (Free Application for Federal Student Aid) and a separate form called the CSS/Financial Aid PROFILE.
NYU has no separate application for merit scholarships for students who demonstrate exceptional academic ability. Students are automatically considered for "any scholarships where merit is considered" when they send in their application. For first-year students, the average scholarship for attendance in 2019 was nearly $37,000.
NYU also offers a limited number of awards to non-U.S. citizens, who make up a sizable portion of the student body. In this case, the university uses both financial need and academic achievement to determine a financial aid package. To be considered, international students need only to complete the CSS/Financial Aid PROFILE.
Is an NYU Education a Worthwhile Expenditure?
Despite its steep price, research indicates that education from NYU is a good value overall. That’s because the odds are that students will secure a competitive salary once they graduate. According to the 2020 College Salary Report from the data firm PayScale, the median salary for an alum with just a four-year degree is $55,600 at the start and $77,900 by mid-career.
That trend seems to hold over the long run. PayScale estimates an NYU undergraduate degree will yield a 20-year net return on investment (ROI) of $481,000. The ROI estimate is calculated based on the difference between the 20-year median pay for an NYU graduate with a bachelor's degree and the 24-year median pay for a high school graduate minus the total four-year cost of an NYU education. Note that these are overall figures; the PayScale survey shows that income depends on the college major.
NYU's COVID-19 Response
Although some colleges and universities elected to hold all of their classes virtually in fall 2020, NYU invited students, faculty, administrators, and staff back to its campus. However, not all students are attending classes in-person and all of NYU's courses, including those that are in-person, may be attended remotely. According to a statement by NYU spokesman John Beckman, slightly more than one-third of undergraduates attended classes remotely in fall 2020. NYU also reported that, despite the pandemic, its enrollment numbers for fall 2020 were ahead of its enrollment for fall 2019.
The University has developed an evolving evidence-informed, multilayered public health strategy to reduce the risks to their community. As a part of this strategy, NYU is testing individuals studying and working on-site, requiring daily symptom check for on-campus access, contact tracing, restricting university-sponsored travel, and has implemented enhanced cleaning procedures. All NYU students who are attending classes in-person must wear face coverings when on NYU property or in NYU facilities, and they are encouraged to wear them at all times when outside of their places of residence.
Students that were offered admission as a first-year student to NYU could request to defer their enrollment for one full year. If approved, they were guaranteed readmission for the following year without having to file a new application. However, the university has a policy that students admitted from the waitlist and transfer students cannot defer their enrollment.
For students who live in countries where COVID-19-related travel restrictions impacted their ability to travel to and from NYU's New York City campus, the University offered a "Go Local" option for fall 2020. This program allowed undergraduates students who met certain requirements to enroll and take a number of in-person classes at another NYU location. NYU canceled all upcoming, non-essential, international travel sponsored by the University and, per the U.S. Center for Disease Control (CDC) recommendations, asks all students to quarantine for 14 days following international travel.
For students returning to campus for the spring semester, NYU required a negative COVID-19 test result in the 14-day period prior to when students were planning on entering any campus building. According to the University's website, all individuals planning on accessing NYU academic and administrative facilities from January 25 onwards must be tested.
Columbia University Ranked #3 by U.S. News Ranking Ivy League Secluded campus in the Upper West Side of New York City 6,245 undergraduate students Average alumni starting salary: $67,500 Fall 2019 acceptance rate: 5% 4-year graduation rate: 87% Tuition: $64,380 Average total indebtedness of 2019 graduating class: $27,595 New York University Ranked #30 by U.S. News Report Campus located in Greenwich Village- "in and of the city" 26,981 undergraduate students in 2020 Average alumni starting salary: $59,100 Fall 2019 acceptance rate: 16% 4-year graduation rate: 76% Tuition: $54,880 Average total indebtedness of 2019 graduating class: $29,242
Source: U.S. News & World Report
NYU Tuition FAQs
How Much Does It Cost To Go to NYU for Four Years?
New York City is one of the most expensive cities in the world and NYU is one of the most expensive colleges in the world. The cost of tuition for the most recent school year, 2020-2021 is $54,880. Including room and board, books and supplies, transportation, and personal expenses, that number increases to $78,742. These costs can be even higher depending on what program a student enrolls in. Although the cost of tuition and the cost of living both increase incrementally every year, a student paying full price to attend NYU could expect to pay at least $314,968 to attend the University for four years.
Why Is NYU So Expensive?
NYU is notoriously expensive; its tuition and fees are among the highest in the U.S. Plus, New York City is one of the most expensive cities in the country, a major driver of housing and meal prices for students. One of the reasons that tuition at NYU is so high is that operating a complex research and teaching enterprise in the city is very expensive. Its endowment, which was $4.35 billion in 2019, is relatively small compared to other top private research universities on a per-student basis (NYU has approximately 58,000 students). Plus, NYU, like all universities, has high personnel costs. As a result, it relies on student tuition to fund much of its operations.
Does NYU Have in State Tuition?
NYU is a private university so it does not offer in-state tuition.
Does NYU Give Good Financial Aid?
Every year, approximately 20% of NYU students receive Pell Grants, and, according to data reported to the Department of Education, 51% of NYU students receive financial aid. Of those students that receive financial aid, the average grant and scholarship total is $29,480 and the average net price is $39,935. According to reports by NYU, the average scholarship amount awarded to first-year students is closer to $37,000.
How Much Is Room and Board at NYU?
The cost of room and board at NYU is approximately $19,244 for the 2020-21 academic year.
The Bottom Line
Students without financial aid can expect to pay above-average tuition to attend NYU. Graduates tend to obtain good salaries, which can offset the cost. Return on investment is not the only reason to choose a school (or a field of study), but the PayScale survey can show whether there are lower-cost choices that might yield a similarly good return.
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f807719a63ce94fd51bd01b0acaf3010 | https://www.investopedia.com/articles/personal-finance/010915/parttime-versus-fulltime-mba.asp | Part-Time vs. Full-Time MBA: What's the Difference? | Part-Time vs. Full-Time MBA: What's the Difference?
Part-Time vs. Full-Time MBA: An Overview
Earning a Master's Degree in Business Administration (MBA) is an important step in climbing the corporate ladder. Whether you seek a promotion at a financial firm or aim to become an entrepreneur with your own startup, an MBA can help you achieve those goals. Graduates from MBA programs typically earn higher salaries, and, as a result, the top business schools are highly competitive.
In general, there are two routes a prospective student can take when pursuing an MBA: a full-time or a part-time program. Although both options will lead to a degree, there are tradeoffs that should be taken into consideration when choosing between the two.
Key Takeaways There are tradeoffs to consider when choosing between a part-time and full-time MBA. There are two main part-time MBA programs—the executive MBA and the part-time MBA. Executive MBA programs are often smaller than full-time programs and cost more.
Part-Time MBA
There are two main types of part-time MBA programs. The executive MBA (EMBA) is designed for students with years of work experience in executive or leadership roles—typically, these students are between 32 and 42-years-old. EMBA programs focus on networking, and there is generally little interaction between EMBA and other MBA students. These programs are often smaller than full-time programs and carry a heftier sticker price, as employers are expected to foot some or all of the student’s tuition bill.
The other option is the part-time MBA, which is geared towards employees who work full-time and don’t yet hold leadership positions. These students tend to be 24 to 35-years-old and take classes after work, either in the evenings or on weekends. Part-timers usually share the same faculty and can take many of the same courses as their full-time counterparts. However, few scholarships are given to part-time students, so they must rely on personal savings, loans, and or employer sponsorship to pay for tuition.
Part-time MBA programs are often seen as less competitive than full-time programs and can take longer than two or three years to complete. The main challenge for part-timers is balancing work and school, many times at the expense of social or family time. Business schools located in large cities with financial hubs tend to attract part-time MBA candidates more easily, as school tends to be close in work.
Students needing MBA scholarships or fellowships can benefit from full-time enrollment.
Full-Time MBA
If you enter an MBA program as a full-time student, you won't make much money for two to three years as you won’t be able to hold a full-time job while enrolled. These programs are thus most popular with younger students who have recently obtained their bachelor's degree. Full-time MBA programs are structured for 23- to 30-year-olds who can afford to leave the workforce for a while. There is also the expectation that students will live on or near campus and regularly attend classes. The workload in a full-time MBA program is greater and the class schedule more demanding than in a part-time program.
Full-time students account for over 90 percent of all MBA scholarships and fellowships, so those seeking financial aid or reduced tuition will benefit from full-time enrollment. Additionally, a university's business school reputation depends on its ranking as a full-time MBA program, so more investment and selectivity is focused on full-time programs.
Key Differences
Receiving an MBA can help you advance your career and earn promotions or pay raises due to the level of achievement and knowledge such a degree confers. Deciding between a full-time or a part-time MBA program is a matter of weighing the costs and benefits each option has to offer.
Full-time MBAs are ideal for new graduates who can afford to delay working, but they can expect to land better paying and higher-ranking jobs than those without an MBA. Working individuals who are eager to enhance their existing career path might choose a part-time MBA program in order to remain employed while studying. For those in managerial or leadership roles, the executive MBA might be a more suitable part-time option.
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ad5d3fe553bb27172e2992e767699e54 | https://www.investopedia.com/articles/personal-finance/011116/i-make-100k-year-how-much-rent-can-i-afford.asp | I Make $100k a Year: How Much Rent Can I Afford? | I Make $100k a Year: How Much Rent Can I Afford?
You’ve landed a new job with an annual salary of $100,000, and you’re going apartment hunting. What an exciting time! Although your first question might be, “How much rent can I afford to pay?” That question has two answers: one that might be considered more "technical," and one that might be considered more "practical."
Key Takeaways If you earn $100,000 a year before taxes, you could technically afford $3,000–$3,250 a month in rent.A more practical approach that appraises lifestyle, the potential for financial hiccups, and unique expenses may lower that amount.Depending on what city or region you live in will also affect the type of residence you can afford to live in.
The Technical Answer
The technical answer to the question of how much you can afford to pay in rent relies on estimates based on one of several rules of thumb. These estimates are technical because property owners use them to pre-qualify you for the rent they believe you can afford.
One rule of thumb involves dividing your pretax earnings by 40. This means that if you make $100,000 a year, you should be able to afford $2,500 per month in rent.
Another rule of thumb is the 30% rule. If you take 30% of $100,000, you will get $30,000. Divide that figure by 12 (the number of months in a year) and the answer is also $2,500 per month.
There’s also a rule-of-thumb approach called 50/30/20. This guideline suggests you spend 50% of your after-tax income on fixed costs such as rent, utilities, and transportation; 30% on day-to-day expenses; and 20% on debt, retirement, and emergency savings.
Under this approach, if your take-home pay is, say, $75,000 (taking into account taxes and retirement-plan contributions on your gross salary of $100,000), spending half on rent, utilities and transportation would amount to $37,500. That works out to $3,125 per month, but the rent allocation will probably be lower to account for transportation and utility costs.
The Practical Answer
The problem with all technical rules of thumbs is that they don’t take into account your specific financial situation. Just because a landlord is willing to rent a $2,500 apartment to you doesn’t mean you should sign that contract.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
The practical answer requires some calculation based on your finances. The process begins by compiling a list of household living expenses, not including rent.
Compile a List of Household Living Expenses
Utilities
If you’re relocating to an area where you already live, you can likely estimate utilities easily using past bills as a point of reference.
If you are in a new locale, ask co-workers, locals, or even potential landlords. Most will be willing to share information with you about the average expected cost of utilities in your area. Make sure you know what is included in a rental payment, too—such as water, gas, oil, or electricity.
Food and Incidentals
This includes groceries, cleaning supplies, and incidental expenses such as toothpaste. If you are not familiar with prices in the area, visit a couple of large grocery stores, price items, and compare that with what you’ve spent in the past to arrive at an expected total.
Transportation
This expense takes into account your car payment and insurance, gasoline, maintenance, parking, and tolls. It can also include the cost of public transportation and any other expenses associated with work-related or non-work-related travel.
Communication
This category includes landline, cell phone, and/or Internet-use fees. Any means you use to communicate with others should be accounted for here.
Clothing
Clothing costs can be estimated, based on past experience. Alternatively, if you are starting a new job that requires a clothing upgrade—suits instead of casual wear, for example—take that into account as part of your planning.
Debt
Most people have debt. It could be student loans, credit cards, or payments on a jet ski. Those payments have to be made and you should plan accordingly.
Be sure to allow for more than the minimum payment when it comes to types of revolving debt, such as credit cards. If you can't pay your card balance in full, you should pay it off in the fewest possible months to avoid overpaying on interest.
Retirement and Savings
Don’t shortchange yourself in this department. If you have a company-sponsored 401(k), list the amount you contribute. Also, make sure you hold back funds for a rainy day or an emergency savings account.
Renter’s Insurance
Renting an apartment does not eliminate the need to protect your belongings in the event of a loss. Nor does it remove your responsibility to protect yourself from liability in case someone is injured in your new apartment.
Extras
The last part of your living expenses list is for the extras, like cable TV, Netflix, movies, dining out, gym membership, or expenses related to hobbies you have. These things are the most flexible part of your living expenses, but you need to list them.
While you’re at it, prioritize these extras. That way, if you find you need to cut expenses, you will have already decided which things are least important.
Do the Math
Starting with your actual monthly take-home pay, subtract your total monthly living expenses. The amount left over is what’s available for rent.
That doesn’t mean you should actually obligate yourself to that amount. It makes sense to leave yourself a little room to account for expenses you failed to take into account or unexpected expenses down the road.
The Bottom Line
If the actual amount you can afford is well below the amount you get using “rule of thumb” measures, this might be a good time to reassess living expenses and trim or eliminate where possible.
In some big cities, like New York and San Francisco, the price of a rental apartment may require a greater proportion of your budget. If that is the case, you may need to find one or more roommates or consider living in a less expensive neighborhood.
Knowing your limits before your search will save time and put you in a new apartment that fits your finances with far less hassle.
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83d7942fcc6d4acfd91cc3611140c9be | https://www.investopedia.com/articles/personal-finance/011215/10-best-cities-florida-retirement.asp | 10 Best Florida Retirement Cities | 10 Best Florida Retirement Cities
Between its warm climate and gorgeous beaches, it’s no wonder Florida is such an attractive state for retirees. It doesn’t hurt that the state has no tax on income and has a relatively low cost of living.
Undoubtedly, part of what makes Florida a big draw for older adults is the number of cities with different living styles. Based on factors such as location, recreation opportunities, home prices, and crime rates, the following are 10 of the best destinations for those looking to relocate to the Sunshine State.
All population statistics are from the U.S. Census Bureau, as of 2019, the most recent year information was available.
Key Takeaways Florida is one of the most popular places to retire in America, offering a variety of reasonably-priced options for those who love the city, the beach, and everything in between. The best of the larger cities on the list include Hialeah, outside Miami, Orlando, home of Disney World, St. Petersburg, home of the Dali Museum, and Tampa, home of Busch Gardens; all four cities have populations in excess of 200,000. Cape Coral, Fort Lauderdale, Port St. Lucie, and Pembroke Pines all boast beautiful beaches and ample entertainment and nightlife; all four cities have populations between 170,000 and 190,000. At just 23,376 people, Venice is the smallest city on our list, but with its connection to Florida's Gulf Coast and safe, affordable neighborhoods, it's a good option for retirees as well.
Cape Coral
2019 Population: 194,295
Cape Coral has a lot to offer for those in their retirement years, including some stunning Gulf Coast beaches. It also has enough golf courses, parks, and nature preserve to help residents maintain a fun, active lifestyle.
Daytona Beach
2019 Population: 69,186
Daytona Beach has a modest population, but the fact that it belongs to the larger Daytona/Deltona/Ormond Beach region means retirees always have plenty to do. One of the favorite haunts for locals is Jackie Robinson Park, where the minor league Daytona Cubs play. With the housing crash dramatically lowering real estate prices, the median price for homes sold in Daytona is now approximately $173,872, according to January 2021 Zillow.com estimates.
Fort Lauderdale
2019 Population: 182,427
Fort Lauderdale boasts—among other things—a pleasant, semi-tropical climate and a bustling arts scene. Residents can take a stroll down the charming Riverwalk and take in attractions like the Broward Center for the Performing Arts, Museum of Art, and Museum of Discovery and Science. A short drive from Miami and Palm Beach, the city, is situated conveniently on the state’s southeast coast.
19.1% The number of people aged 65 or older living in Florida, the highest percentage in the country, according to a study from the Pew Center for Research.
Hialeah
2019 Population: 233,339
According to Google Maps, the sixth-largest city in the state, Hialeah, is approximately 11.5 miles northwest of Miami. One of the city’s highlights is the historic Hialeah Park, a venue for quarter horse racing undergoing a major revitalization. The culturally diverse municipality has long been a refuge for immigrants from Latin America. Many of its residents come from Cuba, Puerto Rico, Mexico, and other Spanish-speaking countries.
Orlando
2019 Population: 287,857
The home of Disney World and Universal Orlando Resort, Orlando isn’t just a popular spot for tourists – it’s also a favored location for retirees and others. Years of overbuilding before the housing market crash have only made the area more affordable. According to January 2021 Zillow data, the median listing price of homes listed in the city is just $275,857.
The Sunshine State offers plenty of options for older adults seeking warm weather and a favorable cost of living.
Pembroke Pines
2019 Population: 173,591
Location is one of the prime benefits of living in Pembroke Pines. You’re just a half-hour car ride from both Miami and Fort Lauderdale – and Everglades National Park is only an hour to the west. If you’re a shopping enthusiast, you’ll find plenty to do right in town – it has 8.5 million square feet of retail property. One negative is the town's comparatively steep real estate; as of January 2021, the typical listing price of homes is $339,307, according to Zillow.
Port St. Lucie
2019 Population: 201,846
Port St. Lucie is located on the state’s Atlantic coast. With a typical home price of $251,601, it’s easy to find affordable housing in this fast-growing city. Sports fans, in particular, will find a lot to love here. In addition to being the New York Mets' spring training home , it’s also the site of three public PGA golf courses.
St. Petersburg
2019 Population: 265,351
Sure it has the Dalí Museum, the Museum of Fine Arts, and Tropicana Field, the home of baseball’s Tampa Bay Rays. But it might be St. Petersburg’s year-round warm weather that’s its biggest draw. The median age of residents is 42.6, proving it’s home to more than seniors.
Tampa
2019 Population: 399,700
Looking to keep busy in retirement? If so, Tampa is probably worth some serious consideration. With attractions like Busch Gardens and the Museum of Science and Industry, this city is ideal for adults looking for adventure. Seniors age 65 and older make up approximately 12.3% of Tampa's population.
Venice
2019 Population: 23,985
Compared to other destinations on the list, Venice is fairly diminutive. But with its favorable location on Florida’s Gulf Coast and low crime rates, the city is in the midst of considerable growth. Known as the "Shark Tooth Capital of the World,” Venice hosts an annual festival to celebrate the millions of shark teeth that wash up on its beaches.
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577c44f6979e6f743cde8d15697cfd5d | https://www.investopedia.com/articles/personal-finance/011215/which-safer-paypal-or-credit-card.asp | Which Is Safer: PayPal or a Credit Card? | Which Is Safer: PayPal or a Credit Card?
PayPal has been around since 1998 when it emerged as a popular way to pay for purchases on eBay. But many still ask, is PayPal safe? If PayPal wasn't as safe or safer to use than a credit card, cash, or a check, it would have been consigned to the rubbish heap of dead websites long ago.
In fact, it could be said that enabling safe transactions is PayPal's only job. But the job keeps growing and the challenges are never-ending. PayPal now has an estimated 360 million users around the world and offers several products. Every one of those products is designed to make it safe to send or receive money, electronically or in person.
So, is Paypal safe? That's not quite the right question. Paypal has a range of weapons in place to keep other people's paws off your money. But the weapons are most effective when you, the PayPal customer, take some basic precautions as well.
Key Takeaways PayPal's business model is based on enabling safe transactions between buyers and sellers. It is state-of-the-art.Credit card issuers have a pretty good incentive to make transactions safe, too. You're not responsible for fraudulent purchases beyond a maximum of $50.There are basic security measures that a customer can take to guard against fraud whether using PayPal or a credit card.
What PayPal Offers
To this day, PayPal is the default payment option for eBay purchases. But it also is the fifth most-used payment method at all online retailers, after Visa, MasterCard, American Express, and Discover.
360 million ...The number of PayPal users globally.
It has a number of other products that enable its customers to send or receive money. Some of them are:
The PayPal mobile app, which enables contactless payments at real-world retailers.The Venmo mobile app, which is primarily used for person-to-person money transfers and routine day-to-day transactions.Xoom, a person-to-person payment app that is used to make electronic money transfers globally.The PayPal Cash Card, a debit card for use online or in-store, issued in a co-branding deal with MasterCard.A PayPal credit card, issued with CitiBank.
Every one of these products is designed with the sole purpose of transferring money securely.
How Safe Is PayPal?
Here's the problem: PayPal is safe from hackers, but you aren't. They are looking for vulnerabilities in your purchasing activity, online and in the real world.
All PayPal transaction data are sent with end-to-end encryption designed to thwart any hacker seeking to capture private information as it moves from buyer to seller. This means your financial information isn't revealed even to the recipient.
24% The increase in credit card fraud from 2017 to 2018, according to the Federal Trade Commission. PayPal recommends a number of counter-measures small businesses can take to keep their businesses safe.
PayPal app users can employ a second authorization factor to make each transaction safer. After enabling the SecurityKey feature, you'll get a temporary security code by text message to enter in addition to your password.
PayPal's Security Measures
PayPal has other policies that are designed to address some of the fraudulent activities and miscellaneous shenanigans that evolved with web commerce:
The PayPal Purchase Protection policy ensures that users are reimbursed in full, including shipping costs, if a product purchased online using PayPal arrives and is "significantly different from its description." It doesn't cover absolutely all purchases, but If you order a wedding gown and get a dishrag, you're covered.If an order paid using PayPal doesn't arrive, you can report it and get a refund.If an unauthorized purchase is made on your account, you're not liable for it if it is reported within 60 days.
PayPal vs. Credit Cards: Which Is Safer?
PayPal's procedures are pretty much the top of the industry standard for electronic transactions these days. That doesn't mean that every bank that issues a credit card meets the industry standard.
Slava Gomzin, author of "Hacking Point of Sale: Payment Application Secrets, Threats, and Solutions," supports PayPal's claims for safety. “If you have a choice on the web, always select PayPal,” Gomzin says.
PayPal even pays hackers if they find vulnerabilities in its systems. According to Dean Turner, director of security intelligence at PayPal, "If you care about the product [and] you care about your customers, you care about your customers' security—this is what you have to do."
How Safe Are Credit Cards?
Credit card companies have been known to be resistant to some of the cybersecurity practices that PayPal employs. According to the Financial Services Roundtable, the banking industry does not pay hackers to alert them to security flaws, for example.
The chip embedded in newer credit cards makes them safer by encrypting transaction data. If you come across the older "swipe" technology, avoid using it.
PayPal, on the other hand, is the Holy Grail for hackers. Just because the company hasn’t ever been seriously hacked doesn’t mean that it never will be.
The Basics of Credit Card Fraud
In the world of consumer credit fraud protection, there are two broad categories of fraud: "card present" and "card not present." The first means that a physical card was stolen and used by a human being. The latter means the information was stolen and used. And that, increasingly, means it was used to make transactions on the web quickly, before the theft can be detected.
The companies that issue credit cards have the most incentive to prevent both types of fraud. That's because your liability is limited to $50 under U.S. law, regardless of how much is charged. That said, there are other big downsides for the customer in credit card security breaches, including some serious inconvenience and possible credit rating damage.
Credit Card Security Measures
Most credit card companies have invested heavily in leading security technology to match those adopted by PayPal and other industry leaders. Not every credit card company is the same though. Some, notably Chase, American Express, and Bank of America, are more advanced than others.
The biggest change in "card present" anti-fraud technology is the switchover to a card that uses a chip that is inserted into a reader to make a transaction rather than a magnetic stripe that is swiped along the side of the reader. The microchip in the card sends encrypted data, making the information harder to steal.
This improved technology, called EMV, has made it safer to use a credit card in a store by preventing the theft of your information as it is transmitted to complete the transaction.
This leaves some responsibility for the user to take their own security precautions, particularly when making online purchases.
PayPal and Credit Card Security Breaches
Breaches of credit card data appear to be flowing at a greater rate than ever. The fault seems to lie with the retailers who accept credit cards, not with the credit card issuers. Krebs on Security, a blog devoted to breaches, has noted recent events involving some locations of Buckle Stores, Noodles & Co., and, possibly, Dairy Queen.
The problem in these and most other cases appears to be malware targeted at point-of-sale devices. That is, the retailer is storing credit card information in a way that makes it vulnerable to theft by hackers.
The only reported major hack of PayPal data occurred in late 2017, when the company revealed that personal information on about 1.6 million users had "potentially been compromised" at its TIO Networks unit, a digital bill-payment tools provider that it had recently acquired. The TIO systems were entirely separate from the PayPal platform and no PayPal customers were affected. Still, PayPal closed TIO down in response.
In another incident, reported in early 2020, a researcher discovered a flaw in the site's security that could have been used to allow hackers to capture users' login information. PayPal patched the problem and paid the researcher a $15,300 reward.
Tips for Protecting Yourself
When it comes right down to it, much of the responsibility for account security needs to be taken by the user, not the issuer. And that's true whether the company is PayPal or American Express, and whether it's a virtual account or a plastic card.
Here's the problem: PayPal is safe from hackers, but you aren't. They are looking to exploit the vulnerabilities that you create in your online activities.
Consider those two categories of fraud, "card present" and "card not present."
When Using a Credit Card
A few tips for protecting yourself when using plastic credit cards:
Cut up any card you still have that doesn't have a chip in it. If you come across a reader that requires you to swipe the card, because the chip reader is malfunctioning or the store has an out-of-date-machine, avoid using it.Use only bank-owned ATMs to get cash.Pay for gas inside the station, not at the pump. (Gas pumps are notoriously easy to outfit with a card skimmer that steals account information as it is used.)
When Using PayPal Or a Credit Card Online
Make online purchases only on secure sites. These usually have a url that starts with "https" (rather than "http") and display a symbol of a lock. These are signals that the connection between your web browser and the site's server is encrypted. This is by no means guaranteed protection but it closes off one avenue for fraud.Don"t use the public wifi available at coffee shops and airports. Use a virtual private network (VPN) instead.Don't store your credit card information online at your favorite retailers. Type it in every time.Beware of phishing attacks. These usually arrive via an email or text message promising you something great, if you only click this link.Change the passwords on your credit card accounts (and your PayPal account) frequently, and don't use your name, your kids' birth dates, or any other too-obvious password.
A Special Precaution When Using PayPal
As noted above, PayPal has a safety feature called SecurityKey. After enabling this key feature, you'll get a temporary security code by text message to enter in addition to your password.
So, even if someone breaks into your account, no transaction can be made.
Who Is PayPal Anyway?
PayPal Holdings Inc. is now a public company listed on the Nasdaq. It rolled out its first initial public offering in 2002 but was then acquired by eBay.
At one point, PayPal was growing faster than its parent company. eBay decided to spin it off in 2014, and it again became a separate public company.
In addition to Xoom, PayPal has acquired several other companies. These include Honey Science Corp., an online couponing site, iZettle, a payments processor, and Braintree, yet another mobile payments app.
FAQs
Here are some brief answers to a few burning questions about PayPal and credit card security.
Is It Safer to Use PayPal or a Credit Card?
PayPal is at the top of the heap, security-wise. That's not surprising since it evolved with the web, and has had to keep up with every fraudulent scheme that evolved with it. It has some additional features to give online shoppers ease of mind, such as a money-back guarantee if your online purchase turns out to be nothing like the description.
The credit card companies have spent a great deal of money and time putting security measures in place, as well they should. They are legally on the hook for all but the first $50 of any purchase fraudulently made through your account.
For any and all of these companies, thwarting fraudsters is a never-ending battle. Their customers can help by being careful how they use their accounts, whether it's a plastic credit card or an electronic app.
Is PayPal Safe to Link to a Bank Account?
To use PayPal, you have to link to a bank account or credit card, or deposit money directly to PayPal, or some combination of all of these.
When any of these is used, the transaction is accomplished using encrypted data, meaning that your private account information is not revealed, even to the recipient of the money.
It's cheaper to pay directly from your bank account. No additional fees are charged.
Can You Get Scammed with PayPal?
There are plenty of scam artists online who will accept PayPal or any other form of payment and deliver nothing in return, or nothing that resembles what you paid for. In that case, the PayPal Protection program promises to fully reimburse your loss.
This is a generous policy, and there are at least two good reasons for it: PayPal can then collect enough information to report the malefactors to the authorities, and it can provide the confidence that its users need to use the PayPal platform.
One other type of scam to watch out for: If you get an email suggesting you download a new version of the PayPal app, don't click on it. Go to the PayPal site and confirm that there is a new version.
Is PayPal Safe for Debit Cards?
Same as above. When you pay using the debit card option, the information is transmitted only in encrypted form.
Is PayPal Safe to Receive Money?
Yes, and you can transfer it directly to your checking account from there.
The Bottom Line
PayPal or a credit card, or a PayPal credit card, can be used online and offline for routine transactions between buyers and sellers. Choosing which to use is also a matter of convenience, the special features that come with the account, and the interest rates charged by the institution.
Whichever you use, some of the responsibility for safety rests with you. Use tough passwords and change them occasionally. Choose web retailers you use wisely. Avoid public wifi. And, log into your account frequently to check for mystery purchases.
To the question, "Is PayPal safe?" the only good answer is, PayPal is working to keep it safe as if the company's very life depends on it, and it does.
If you want an alternative to PayPal, you might consider one of its big rivals. They include Google Pay, Stripe, Payoneer, and Skrill.
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c185fbbd5e400c0c3bfcc358c693a5c8 | https://www.investopedia.com/articles/personal-finance/011216/3-best-retirement-calculators-2016.asp | 2 of the Best Retirement Calculators | 2 of the Best Retirement Calculators
As American workers began to shoulder more of the responsibility for funding their retirement, retirement calculators proliferated across the Internet. A Google search for “online retirement calculator” garners tens of thousands of hits. People are anxious about their retirement readiness, concerned about whether they will have enough money to last through their lifetime.
Key Takeaways There are many retirement calculators available on the Internet, but some are better (or more confusing) than others. Having your financial information at hand will make using a retirement calculator quicker and easier. The T. Rowe Price Retirement Income calculator and the ESPlannerBASIC are two superior examples.
Understanding Retirement Calculators
A retirement calculator can be a helpful tool to steer you in the right direction for a comfortable retirement, but some of them can easily throw you off track. The most effective and useful calculators let you model different retirement scenarios, taking into account the variables that can affect how long your money will last so that you can save and invest accordingly.
The following free online retirement calculators do the best overall job we've seen of translating sophisticated retirement income planning methods into an understandable and easy-to-use layperson’s planning tool.
T. Rowe Price Retirement Income Calculator
The T. Rowe Price Retirement Income Calculator has been widely lauded for its strong emphasis on income planning, enabling you to project your monthly retirement income based on various planning scenarios. For each scenario, it projects your monthly shortfall, if any, and shows the likelihood of your savings lasting throughout your retirement. It then offers options for making up potential shortfalls.
You can compare scenarios side by side while changing the variables and assumptions to see their effect. It also has a built-in Monte Carlo simulation tool to help you see how your retirement savings will fare in various market conditions. The major drawback is that it calculates only one retirement age at a time. If you and a spouse plan to retire at different points, you would need to run two separate calculations.
For the level of sophistication this tool employs, the presentation is straightforward. The interview process is somewhat involved, but there is plenty of pop-up support along the way. You can expect to spend up to 20 minutes inputting data if you have all of your financial information at hand.
ESPlannerBASIC (Now Called MaxiFi Planner)
Many retirement calculators do not allow for the varying tax consequences of different sources of income, which can have a significant impact on projecting your retirement income. The ESPlannerBASIC calculator allows for variable taxation that can help you work to achieve greater tax efficiency. It also allows for spouses to plan for two different retirement dates.
The first thing you may notice when using the ESPlannerBASIC calculator is the detail of the input screens. The added detail allows for greater flexibility in using planning assumptions. It requires some upfront reading to understand the process. You can choose from several different planning modes, such as Conventional or Economics, which are both free. It offers two other modes, Upside Investing and Monte Carlo, which you need to purchase. A self-help guide can be accessed by clicking on any underlined word.
ESPlannerBASIC’s has the following noteworthy features:
It provides separate inputs for the assets of each member of a couple. It assigns a different tax status to each asset, such as after-tax, pre-tax, no-tax, etc. It calculates income taxes automatically based on your inputs. It allows for variable inputs of expenses and income to account for temporary situations or anticipated changes in the future, such as downsizing, the sale of a business, an inheritance, paying for college, etc.
Once all the assumptions and variables are finalized, the program goes to work with a simple click. You may find the detailed output a little difficult to understand at first, but it provides several pages of numbers and graphs that begin to clarify themselves.
The only real negative is that you have to assume age 100 for life expectancy, and you cannot specify the payout type for a pension, such as single life or joint life. Also, if you are not inclined to spend a lot of time reading and combing through financial details, ESPlannerBASIC may not be for you.
3% to 5% The percentage of your assets that most calculators assume you can safely spend each year in retirement.
The Bottom Line
Online retirement calculators are good for determining how much you need to save to provide sustainable income for your lifetime, and the T. Rowe Price Retirement Income Calculator and ESPlannerBASIC are two of the best free tools. It is important to keep in mind that retirement calculators rely on accurate information and realistic assumptions.
In other words, if you put garbage in, you get garbage out. Before using any planning calculator, plan to have all of your relevant financial and benefits information on hand and spend some time thinking about your goals for retirement.
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fd570a50e5cc42eaad4ac5514826c7c3 | https://www.investopedia.com/articles/personal-finance/011216/average-retirement-savings-age-2016.asp | Average Retirement Savings by Age Group | Average Retirement Savings by Age Group
If you're like the majority of people, you probably need to step up your retirement savings efforts. A 2015 report from the Government Accountability Office (GAO) found that the median retirement savings for Americans between age 55 and 64 was $104,000. The GAO notes this sum would only translate into a $310 monthly payment if it was invested in an inflation-protected annuity.
Key Takeaways Retirement savings have dramatically increased since their pre-recession levels, including among millennials. Aim to save at least 15% of your pre-tax income and make sure you contribute enough to your 401(k) to get the full benefit of your employer match, if it's offered. It is never too early in your career to put a retirement plan together, but it's never too late to start, either.
Household savings in all retirement accounts have dramatically increased since their pre-recession levels, including among millennials ($9,000 in 2007 to $36,000 in 2017), Generation X ($32,000 to $71,000), and baby boomers ($75,000 to $157,000), according to a Sept. 2018 report from the Transamerica Center for Retirement Studies.
However, by Transamerica's 2019 report, conducted in Oct. 2018, savings for all three groups had dropped: millennials to $23,000, Gen X to $66,000, and boomers to $152,000. Let's look at what people in various age groups have saved for retirement and how it stacks up to what the experts recommend.
Twentysomethings
If you're in your 20s and just starting in your career, your paycheck probably reflects that fact. You're also likely to be carrying a good amount of student loan debt. The average monthly student loan payment for someone in their 20s was $393, according to a 2016 report from the Federal Reserve Bank of Cleveland. High levels of debt combined with an entry-level salary help explain why the average twentysomething has an estimated median amount of $16,000 socked away.
On the bright side, those in their 20s should have around 40 years before they retire, which is a lot of time to make up a shortfall. The single most important thing to do is to contribute to your employer-sponsored retirement plans, such as a 401(k) plan or 403(b) plan. You can contribute up to $19,500 in both 2020 and 2021.
Investment management firm Fidelity recommends that you put aside at least 15% of your pre-tax income a year for retirement. If you can't save 15% of your salary, save as much as you can, and make sure you save enough to get the full benefit of your company's matching contribution if one is offered. Don't turn away free money.
1:43 Nashville: How Do I Invest for Retirement?
Thirtysomethings
If you're in your 30s, you've likely moved up the ranks at your company or you've gained enough experience to get out of those entry-level pay grades. But life may be more complicated now. You might be married, have a few kids, maybe a home, and you're likely still paying off your student loans. With everything from the mortgage to soccer cleats to that unexpected car repair taking a bite out of your paycheck, saving for retirement may fall by the wayside.
Transamerica data shows thirtysomethings have a median of $45,000 saved. Depending on your age and annual salary, you might be okay. According to Fidelity, you should have about the equivalent of your annual salary saved as a nest egg at age 30, twice your salary at age 35, and three times your salary by the time you exit your 30s.
To reach these goals, it is a good idea to tighten up your family budget where you can and try to increase the percentage of your salary that you're saving annually, if at all possible. If you haven't started saving yet, you will need to save a higher percentage of your annual income.
For instance, if you don't start saving until you are 30, Fidelity recommends you put aside 18% of your salary a year, while someone starting at age 35 should try to save 23% a year. Putting aside nearly a quarter of your income for retirement is a tall order for anyone with monthly bills and debt, and this underscores the importance of saving early.
Finally, don't be too conservative with your investing choices. You're still young enough to weather big market downswings—even the kind in the wake of the pandemic—because your portfolio has time to recover.
Fortysomethings
If you're in your 40s, you're probably in the prime of your career. You've paid your dues and now, one hopes, you have a salary that reflects that. With any luck, you'll come to the end of those student loan payments sometime in this decade, freeing up more money.
But the house is bigger, the kids are older and may need help buying a car or paying for school—and, if you're honest, you might be blowing money on things you could do without.
Statistically, most Americans are dangerously behind at this point, with an estimated median savings of only $63,000. Remember that Fidelity recommends that you have three times your annual salary saved by the time you reach 40. So, if you're making $55,000, you should have a balance of $165,000 already banked. At age 45, it is recommended you have four times your annual salary saved and six times that level by the time you reach 50.
If you are behind (and even if you're not), you should try to max out your 401(k) contributions. If you don't already have an Individual Retirement Account (IRA), start one and try to max that out as well. The amount you can contribute to an IRA is $6,000 for both 2020 and 2021. To reach these goals, consider putting any raises you get toward retirement savings. And if you no longer have student loan payments, commit those sums to your nest egg as well.
Fiftysomethings
If you're in your 50s, you're nearing retirement age but have time to save. You also might be paying your children's college tuition and helping them with car payments, gasoline, and any number of other expenses. The house may be getting older and need fixing up, and your medical bills are almost certainly rising.
The estimated median savings of fiftysomethings is about $117,000—far shy of the desirable six to eight times annual income that Fidelity recommends.
If you are 50 or older, for 2020 and 2021, you can contribute an extra $1,000 a year to your IRA and an extra $6,500 a year to your 401(k) or 403(b) in what is known as a catch-up contribution. Besides taking advantage of catch-up contributions, consider downsizing by selling your home and collecting any appreciated value.
If you have company stock options or other assets, don't forget to consider those as part of your retirement balance, even if they don't sit in a retirement account. Consider meeting with a financial planner, especially one who specializes in retirement, to get things in order.
Sixtysomethings
This is typically the decade when you begin to reap the rewards of decades of saving. By the time you reach 60, you should have eight times your annual salary saved, according to Fidelity, while those who are 67 should have 10 times their salary saved.
Unfortunately, Transamerica reports the estimated median savings for sixtysomethings is $172,000. At this point, it’s harder to save enough to make up for any shortfall. If you are behind on your savings, take a hard look at your assets and see what can be monetized at some point to help sustain you.
This is also the decade you can start receiving Social Security benefits. Most seniors find this to be a significant source of monthly income. For instance, the average monthly benefit for a retired worker in 2021 was $1,543 per month.
The Bottom Line
The amount needed for retirement is different for everyone. Nevertheless, there are benchmarks you can try to hit at every decade of your life. It's never too early in your career to put a plan together, but it's never too late to start, either.
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7cd048199679ae41470cd66572c528af | https://www.investopedia.com/articles/personal-finance/011216/business-vs-consumer-credit-reports-whats-difference.asp | Business Credit Reports vs. Consumer Credit Reports: What's the Difference? | Business Credit Reports vs. Consumer Credit Reports: What's the Difference?
Business Credit Reports vs. Consumer Credit Reports: An Overview
Business and consumer credit reports have similar purposes: to inform prospective lenders about your creditworthiness and allow them to assess what risk they are taking should they give you a loan or credit card or extend “buy now, pay later” terms to you or your business. They differ in the types of information they contain and how they are used.
Business credit reports contain specific information regarding the business, such as ownership information, subsidiaries, company finances, risk scores, and any liens or bankruptcies. A business's credit report begins once it is incorporated and receives a federal tax identification number. Unlike consumer credit reports, business credit reports are public information and for anyone to access.
Consumer credit reports reflect only the information regarding an individual, such as their credit accounts ( loans and credit cards), closed accounts, delinquent accounts, and any liens or bankruptcies.
Key Takeaways A business credit report is solely for a business and lists all pertinent information, such as company finances, liens, subsidiaries, and vendor payment data. Anyone can access a company's business credit report as it is public information. Consumer credit reports focus only on an individual's personal credit and list information such as loans, credit cards, delinquent accounts, and any liens. Consumer credit reports can only be accessed by the individual and only those with a "permissible purpose." The three main credit bureaus for business credit reports are Equifax, Experian, and Dun & Bradstreet. For consumer credit reports, they are Experian, TransUnion, and Equifax.
Business Credit Reports
Businesses need to be more proactive than consumers to establish their own credit histories so they can obtain credit separately from the personal credit of the business owner. Once an incorporated or LLC business obtains a federal tax identification number, the business credit bureaus can begin tracking trade credit and other credit activities.
Trade credit transactions occur when a supplier lets a business buy now and pay later. Payments on trade credit are reported to the business credit bureaus.
A business credit report includes the following information:
Business background information, including ownership and subsidiaries Company financial information Banking, trade, and collection history Liens, judgments, and bankruptcies Risk scores
The three business credit bureaus—Equifax, Experian, and Dun & Bradstreet—generate business credit scores from the above-listed information, as does FICO. Unlike consumer credit scores, which use standard methods and algorithms for scoring, each of the business credit bureaus uses completely different methods for scoring business credit risk, with different score ranges.
For instance, Dun & Bradstreet's PAYDEX focuses on how promptly a business pays its bills; useful information for vendors and suppliers when they’re extending trade terms. Experian’s Intelliscore Plus reports on the chance of your business falling seriously behind on its bills in the next 12 months, something lenders want to know.
Business credit reports must be purchased from the credit bureaus, and unlike consumer credit reports, they are public, available to anyone who pays the fee. There is no federally mandated free annual business credit report for businesses. You'll have to pay to get a copy of your report from each agency, although some free information is available from websites such as CreditSignal.com (for Dun & Bradstreet) and Nav.com.
Consumer Credit Reports
When you first apply for credit, the three major credit bureaus—Experian, TransUnion, and Equifax—begin to compile a credit profile based on your credit activities. Only people with a “permissible purpose,” as defined by the Fair Credit Reporting Act, may request your credit report. When they do, the bureaus generate a report that includes the following:
A list of your credit accounts, including loans and credit cards The balance owed and the current monthly payment on each account An indication that the accounts are current and properly paid, or delinquent with the number of days past due A list of closed accounts Public records of liens, judgments, and bankruptcies Information on past and current employers History of residential addresses
The credit bureaus analyze the information to generate a credit score, which lenders use as a measure of your creditworthiness. Although your credit score may differ slightly among the three credit bureaus, all three generally use standard methods and algorithms established by the Fair Isaac Corporation, which generates your FICO score.
Consumers are entitled by law to receive one free credit report each year from each of the credit bureaus. (You can access it at annualcreditreport.com, the official website.) The credit score is not included with the credit report and must be obtained separately.
Special Considerations
It’s important for business owners to establish separate credit profiles for their businesses. Without a business credit profile, lenders rely on the business owner's personal credit profile for determining credit risk, which can limit the business's capacity to borrow what it needs.
Until a business establishes a business credit profile, the owner will be personally liable for any loan obligations, even if the business is a separate legal entity. It's rare for a new business to be able to get a loan without a signed personal guarantee by the business owner.
Business owners need to take deliberate steps to establish and build their business credit profiles as early in their development as possible.
Create a separate legal entity for the business, such as an S Corp, partnership, or LLC. Separate business and personal bank accounts and record keeping. Apply for a D-U-N-S number from Dun & Bradstreet. (It will establish your file with that bureau.) Establish trade credit accounts with vendors and suppliers. Obtain a business credit card; it could start with a gas card. If a bank offers a business credit card, make sure it reports payments to the business credit bureaus. Make all payments on time. Order business credit reports regularly to see that they are updated correctly.
Business credit reports can also be very useful management tools. Each of the business credit bureaus offers premium reporting services that can provide in-depth analysis for managing credit risk and business forecasting. A good business credit score means your business will have access to the financing it needs to grow at lower interest rates, more favorable payment terms from vendors, and lower rates on some commercial insurance.
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06572d56824a38ca474e7ae29d5b03d7 | https://www.investopedia.com/articles/personal-finance/011415/when-mba-worth-it.asp | When Is an MBA Worth It? | When Is an MBA Worth It?
Earning a Master's in Business Administration (MBA) can help professionals enhance their career opportunities, receive increased compensation, and job promotions. An MBA can provide the skills and knowledge necessary to start a new business, and many employers require an MBA for certain management or leadership positions.
On the other hand, an MBA from a top business school can cost nearly $100,000—a substantial expense for recent graduates and substantial time out of the workforce for early-career professionals. The question becomes, is earning an MBA worth the cost? It all depends.
1:40 When Is An MBA Worth It?
Understanding the MBA Degree
MBA coursework involves a broad spectrum of business-related topics including accounting, statistics, economics, communications, management, and entrepreneurship. MBA programs not only prepare students to work for financial institutions, but they also prepare them for management positions or as founders of startup companies.
Excelling in academics serves as a solid foundation, but business school is geared toward real-world professional outcomes. That's why many schools value relevant work experience in their decision-making process. For instance, EMBA programs are designed specifically for older individuals who are already in the workforce in management or leadership roles. EMBA admissions know that academic records will be stale and put a much heavier weight on work experience and the professional networks applicants bring to the table.
Part-time and EMBA programs are designed to allow full-time employees to earn their MBA at the same time by offering evening and weekend classes. Employers often pay for a student's tuition in full or in part if they believe that their new degree will make them a more valuable asset to the company.
Full-Time vs. Part-Time Programs
There are two routes one can take to earn their MBA. The first is a full-time or a part-time program. Although both result in an MBA, there are trade-offs to consider. A full-time student will find it difficult to work while they go to school. These programs are the most popular with younger students who have earned their bachelor's degree and can afford to study full time on campus.
Part-time MBA programs typically come in two flavors. The executive MBA (EMBA) is designed for students who have been in the workforce in executive or leadership roles and who are typically between 32 and 42. These programs can be very expensive, and students expect that their employer will pick up the tab. The part-time MBA is geared for employees who work full time, but are not yet in leadership positions. These students tend to be 24 to 35 years old and take classes after work, in the evenings, or on weekends.
Grades and GMAT Scores
Earning a bachelor's degree with a 4.0 GPA is undoubtedly an applaudable achievement. But not getting straight A's doesn't blemish your chances at getting into a respectable program. Getting a 3.5 or better GPA (B+ to A-) is typically the range from which these schools choose. The very best and top-rated programs demand a higher GPA than mid- or lower-tier ones.
The best business schools generally demand the highest Graduate Management Admission Test (GMAT) test scores. The average score among top-tier programs is between 720 and 730 (out of a possible 800). A perfect score of 800 can make an applicant stand out. Poets & Quants have compiled a list of average GMAT scores for some top MBA programs in the United States.
MBA Degree Pros and Cons
An MBA is only worth the expense, time, and effort when the graduate plans to work in a business-related field, in management, or as a company founder. An MBA may not be useful for those working in other industries unless they are in management or leadership roles.
Not all MBA degrees are created equal. The number of colleges, universities, and business schools that offer MBAs is increasing, making the space quite crowded. Unless a student earns a degree from a respectable program, it might not be as valuable as expected. Recruiters and hiring managers are not likely to view an MBA earned from an unknown or online-only educator to hold the same weight as from a top-10 school. For professionals going back to school at a second- or third-tier school could end up wasting their time, money, and opportunity.
Hiring managers also know that an MBA doesn't automatically make them an ideal hire. Some believe that people who have achieved leadership positions with the degree would also have done so without it. Furthermore, having an MBA won't make a candidate stand out if they're already flawed in other ways, like being obtuse, slow to adapt, or bossy.
While many entrepreneurs hold MBAs, startup companies do not always look to hire other MBA holders. Instead, they often hire out-of-the-box thinkers who can innovate and offer a perspective different from their own.
An MBA might help in getting a job interview, but it will not guarantee the applicant will land that job. On the other hand, people with work experience looking to give their career a boost can open avenues for growth and promotion with a part-time or EMBA program.
Pros Graduating with an MBA can earn you a higher salary. You'll have a leg up on your competition if you earn your MBA from a top-tier school. An MBA gives you the skills and knowledge you need to advance in your field. Cons Having an MBA doesn't necessarily make you an ideal hire. Going to an online or unknown school will not get you noticed. An MBA isn't worth it if you don't intend to work in a business or management-related field.
What MBA Degree Program Alumni Think
The Graduate Management Admission Council (GMAC) issues regular research reports on how graduates from business schools rate their experience during and after school. The survey results are encouraging.
Their 2018 Alumni Perspectives Survey Report shows that 96% of MBAs regarded their degree as good, excellent, or outstanding value. Only 4% reported that their expectations from their education were met. Moreover, 90% of alumni would still pursue a graduate management degree if they had to do it all over again knowing what they do today.
While business school alumni rate their degrees positively, the return on investment (ROI) has gone down as investment costs, such as tuition, have increased at a much higher rate than salaries.
All MBAs aren't created equally, so make sure you choose your program and your school wisely.
MBA Degree Alternatives
There are some alternatives that can help with a career in finance, business, or management for those who aren't interested in an MBA. The Master of Finance degree is finance-specific, taking only one year to complete. It provides graduates with the skills needed in trading, investments, asset management, or risk management.
Other graduate degrees in related fields are also good options for somebody looking to focus on economics, statistics, applied mathematics, or accounting.
The Chartered Financial Analyst (CFA) program is a self-study program that offers a comprehensive curriculum covering three levels of study. Each level is tested by challenging exams. The curriculum is considered by many to be equivalent to graduate education, and charter holders often are deemed valuable in the hiring process.
Other self-study programs are just as coveted, such as the Financial Risk Manager (FRM) designation and the SOA actuarial exams.
Is an MBA Worth it FAQs
How Much Does an MBA Increase Your Salary?
According to MBA.com, new hires with an MBA can earn as much as $115,000 as a starting salary, compared to a new hire with an undergraduate degree at $65,000. But the impact your MBA has on your salary depends on a number of factors, including your school, the chosen field, your position, and your past experience.
How Many Years Does It Take To Get an MBA Degree?
The estimated length of a full-time MBA program is generally to years. Some schools offer accelerated programs for individuals who want to graduate earlier, which can take anywhere between 12 to 18 months. Part-time MBA programs, on the other hand, can take as long as three to four years, depending on how many courses you take every year.
What Is the Best Age To Do an MBA?
There's no real age requirement to do an MBA. Most students generally pursue a graduate degree like this when they're in their mid- to late-20s. Being in this age group gives them a good chance to gain some work experience, as well as some time and flexibility to determine where they'd like to work after they graduate from business school.
What Does MBA Stand For?
MBA is an acronym for Master of Business Administration.
Is an MBA a Master's Degree?
Because an MBA is a Master of Business Administration, it is a master's degree. It is a field of graduate study that specializes in business administration after a student receives their undergraduate degree.
The Bottom Line
Earning an MBA can enhance one's career path or help land a high-paying job. Typically, however, the expense is only offset if the degree is earned from a top-tier business school and if the career path sought is business-related. Despite the cost-benefit analysis, the great majority of business school alumni self-report very positive experiences and high value from their MBA degrees.
If somebody cannot afford the cost, cannot get into a top program or does not have the time to juggle work and study, there are fortunately other good options to pursue such as the CFA or a Master's degree in Finance or Economics.
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d977ed159731567eb7c3213cc08bdba3 | https://www.investopedia.com/articles/personal-finance/011416/dallas-texas-5-best-retirement-communities.asp | Dallas, Texas: The 5 Best Retirement Communities | Dallas, Texas: The 5 Best Retirement Communities
The Dallas/Fort Worth metro area of Texas is quickly becoming one of the most popular retirement destinations for individuals over the age of 55. There are a variety of neighborhoods that offer a living environment for every taste and activity level. The downtown area is full of shops and eateries, and a number of museums and concert halls host various cultural attractions. The city also has one of the largest public transportation systems in the country, including a large, mass transit, light rail system. The area also has an ideal climate and low cost of living that make it an attractive retirement destination. The five best retirement communities in the Dallas/Fort Worth area are Frisco Lakes, Heritage Ranch, Villas in the Park, The Village at Prestonwood, and The Cottages at Lyndhurst.
Frisco Lakes
Frisco Lakes is one of the most upscale retirement communities in the Dallas/Fort Worth area, and one of the largest with 3,000 homes ranging from $200,000 to $600,000. There are many styles of homes available to buyers on a resale basis. All homes have two to four bedrooms, up to three bathrooms, and a garage that fits two to three cars. The homes are designed specifically to be low-maintenance and to suit the needs of retired individuals.
The central focus of Frisco Lakes is a 28,000 square foot Village Center and Sports Complex. This clubhouse offers residents various amenities, including a fitness center, indoor walking track, pool, and computer lab. Outdoors, residents may also use a resort-style pool, several tennis courts, and miles of walking and biking trails. Also available is a highly-praised 18-hole golf course.
Heritage Ranch
Heritage Ranch is located on 575 acres of land. This gated community holds 1,144 homes ranging from $100,000 to $500,000. These resale-only homes come in several styles with floor plans that range from 1,300 square feet to nearly 3,500 square feet. Most of the homes have two to four bedrooms, up to three bathrooms, and attached garages that fit up to three cars.
A 24,000 square foot clubhouse is located at the heart of the community and provides residents with many amenities. Amenities include rooms for arts and crafts, a library, a fitness center, and an indoor lap pool. Outdoors, residents can use several tennis courts, an outdoor pool, and miles of hiking and biking trails. An 18-hole golf course is also available.
Villas in the Park
Villas in the Park is a more intimate community whose real estate includes just over 220 homes, ranging from $200,000 to $300,000. The homes are constructed with open floor plans to accommodate those of retirement age. Most homes have two bedrooms, while some have three. All homes have two or three bathrooms and attached garages. The largest of the homes are nearly 2,600 square feet.
Villas in the Park’s central feature is a large clubhouse that offers many amenities to residents. Such amenities include exercise rooms and a large multipurpose room for community activities and events. Outdoors, residents may use a pool, a basketball court, and many walking and biking trails.
The Village at Prestonwood
The Village at Prestonwood is another small, gated community with just under 130 homes ranging from the low- to mid-$200,000s. The community was built in two years, and features attached homes which range from 1,330 square feet to just under 2,000 square feet. All of the homes have two or three bedrooms, a minimum of two bathrooms, and an attached garage that fits at least two cars.
The centerpiece of this community is an intimate clubhouse that offers residents a 24-hour exercise room, a catering kitchen, and a conference room available for rent. Outdoors, residents can utilize the modest pool or one of many walking paths throughout the community.
The Cottages at Lyndhurst
The Cottages at Lyndhurst is one of the smallest and most intimate communities in the Dallas/Fort Worth area. This retirement community is comprised of 20 attached homes ranging from the low- to mid-$300,000s. These homes range from 1,986 square feet to 2,019 square feet and offer two bedrooms, two bathrooms, and an attached garage that fits two cars.
This community has no clubhouse, but it does offer residents amenities relative to its size. There are several courtyards throughout the community, and all of the homes feature private patios and backyard space ideal for small get-togethers among residents and their families.
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613013c1b2de53aa167dd0fa2e85427f | https://www.investopedia.com/articles/personal-finance/011815/how-walmart-model-wins-everyday-low-prices.asp | How Walmart Model Wins With "Everyday Low Prices" | How Walmart Model Wins With "Everyday Low Prices"
Walmart's (WMT) success is the stuff of legend, but there is no mystique at the core of its mammoth success. Walmart's ability to provide customers with "everyday low prices" and its presence as an economic and political force of gigantic size and influence, is the result of a process that was built on some core principles and procedures. Looking at Walmart's history and present operations helps investors understand the methodology that enables this sizeable chain to do what it's known to do best – sell cheap.
As of March 2020, Walmart operates over 11,500 retail units under scores of banners in an increasing number of countries and has e-commerce websites in several more. It employs millions of associates around the world, with over 1.5 million of these residing in the U.S. It reportedly grossed 514 billion dollars in the fiscal year ending January 2019. It's also been noted that Walmart's revenue constituted 81% of what the National Restaurant Association says the entire U.S. restaurant industry made in 2013. In fact, the author of the Walmart Effect, Mr. Charles Fishman, has noted that the company is 2% of the United States economy, all by itself. (For related reading, see: How Wal-Mart Makes Its Money.)
On March 29, 2018, it was reported that Walmart was in early-stage talks to buy the U.S. health insurer Humana Inc., according to WSJ.
Foundation Philosophy and First Moves
As staggering as it is, Walmart's standing can be attributed to the way it started -- the approach taken by its founder Sam Walton, who opened his first five-and-dime store in 1950 with a business model that was focused on keeping prices as low as possible. That strategy of offering low prices hinged on another key cornerstone on which so much of Walmart's advantage is built: scale/volume. Walton was aware that even if his margins were slimmer than his competitors, he could make up for that through the volume of his sales. In time that volume would permit economies of scale, and a level of bargaining power that would enable Walmart to remake the supply sector and the retail landscape, to suit its own schemes.
The third principle on which Walton based his operation is the minimization of operating costs. Walton kept a tight fist and pinched his pennies. It's been noted that he continued to drive an old pickup truck and to share budget hotel rooms on business trips even after he had acquired great wealth due to Walmart's success.
What's worth noting, though, is that this model – built on low prices, on a large scale, at minimal cost – was never changed, but instead gained momentum, building on each success, resulting in an ever-wider spread of operations and constantly increasing leverage for this retail entity, which would in turn use the power gained to acquire even more clout and to provide even lower prices, at an even larger scale, at even less cost to itself. The result would seem to be a magnificent retail mountain to some, and a merciless mercenary monster to others.
Walmart's Modern Operations: Strategies and Systems Built Onto the Original Model
Walmart continues to offer very low prices and this is possible due to (1) its huge volume of sales that's possible due to the spread of its operation and its wide customer base, (2) a supply chain management system that maximizes efficiencies and reduces outlays, (3) minimization of overhead and operational costs and (4) leveraging of its bargaining power to force suppliers to lower prices:
1. Sales volume, scope of operation and wide customer base: Walmart has been able to capture a huge market share by selling almost everything and being almost everywhere. It has endeavored to meet the demand of various segments of the market, and to present a huge swath of buying opportunities, compressed into single locations. It actually has a multiple-store format that extends its market reach, and it sells goods through four types of stores: discount stores, Walmart Supercenters, Sam's Club warehouses (which sell bulk items), and neighborhood markets.
It's also worth noting that, as observed by Charles Fishman, 90% of Americans live within 15 miles of a Walmart store. There is an omnipresence to the WalMart store that allows it to increase its penetration in customers' lives and increase the probability of a purchase.
Its large volume of sales enables it to make substantial profits, even in instances where individual margins on single items may be slimmer than those of its competitors, like Target or CostCo.
2. Supply chain management based on electronic product information, vendor role in distribution, and layout of warehouses: Walmart has a supply chain system that is regarded in multiple quarters as one of the most technologically advanced and efficient. Whether in the case of barcodes or RFID tags (radio frequency identification technology), WalMart was a pioneer in getting detailed product information electronically attached to products so that such information could be relayed to its database and could inform its inventory management system. The goal, according to one commentator, was to master the art of knowing what it needed, how much was needed and when it needed it. During the first eight months of 2005, Walmart reportedly experienced a 16% drop in its out-of-stock merchandise at its RFID-equipped stores.
Another key strategy by Walmart has been its move in the 1980's to deal directly with manufacturers. Suppliers at that time became responsible for managing inventory in its warehouses. This shift in responsibility for inventory management from Walmart to the suppliers, which constituted a vendor-managed inventory system, was said to have created a smoother flow of inventory, with less irregularities and helped ensure that products requested by customers have always been available on the shelves. All of this has resulted in a more cost-effective process, with these savings being translated as well into lower prices in the Walmart stores.
Information such as point-of-sales data, as well as warehouse inventory and real-time sales are all sent to, and stored in, a centralized database that is shared with suppliers who know when to ship more products. Walmart also, according to CIO online, has the largest private satellite system that enables the easy transfer of this information among all participants in its supply chain process and allows voice and data communication among all units and offices of the company in various locations.
Also key to the cost-effectiveness of Walmart's supply chain strategy and distribution network is the positioning of its nearly 173 distribution centers, which cover almost 126 million square feet and are all within 134 miles of the stores they supply. (Regional distribution centers have been placed at locations that offer lower labor and transportation costs.) They have thus been able to carry out cross-docking at their warehouses, a process in which products are taken from a truck upon its arrival and packed in a truck headed to a store without spending time in the warehouse. This in turn has resulted in reduced costs for inventory storage and has lowered transportation costs.
What amplifies the effectiveness of all of this is that in its early years Walmart followed a backward expansion strategy, opening stores in small, rural towns first before entering metropolitan areas. This resulted in lower operating expenses, and ensured that all stores' locations were within just over a hundred miles of their distribution centers. It became cost-prohibitive for competitors which had focused on large towns to enter regions Walmart had already saturated later on. This constituted a barrier to entry.
Walmart also uses its own trucking fleet and drivers, who are required to have 30 months of driving experience. The impact of all these supply chain mechanisms on Walmart's bottom line and its ability to offer lower prices is pronounced. By 1989, its distribution costs were 1.7% of its sales, or less than half of Kmart's costs, and just under a third of what Sears (SHLD) was spending-- according to Arkansas Business.
3. Minimization of overhead and operational costs: Continuing the model Walton established for a low-cost operation, Walmart still keeps its overhead low. Its executives reportedly fly coach and share hotel rooms with colleagues. Its meager wages and low-benefit healthcare plans which are offered to rank-and-file employees have been publicized and protested against, although it should be noted that the company announced in January 2018 that it would be raising the starting wage to its employees to $11 an hour. (See: Employee Benefits: How To Know What To Choose.) The company has even been accused of demanding that hourly workers put in overtime without pay. It has also been said that Walmart staff are expected to keep costs at a minimum, even for heating and cooling of the buildings.
4. Leveraging of Its bargaining power to force suppliers to lower prices: Many well-known companies rely on Walmart for more than 20% of their revenue. Walmart, as the number one supplier-retailer of most of our consumer goods, wields considerable power over their bottom line and in fact wields this power over almost all the consumer goods industries in the U.S. In adhering to a strategy of keeping prices low (experts estimate that Walmart saves shoppers at least 15% on a typical cart of groceries), Walmart is constantly pushing its suppliers to cut prices. In the Walmart Effect, author Charles Fishman discusses how the price of a four-pack of GE light bulbs decreased from $2.19 to 88 cents during a 5-year period.
The pressure on suppliers to lower prices has resulted in layoffs at certain factories, changes in manufacturing inputs and processes, and even the transfer of manufacturing processes to foreign countries like China where labor is cheap.
A clear example of the results of the application of such pressure is Lakewood Engineering & Manufacturing Company, a fan manufacturer in Chicago. In the early 1990s the cost of a 20-inch fan was $20. After Walmart pushed for the lowering of the price, Lakewood automated its production process, which resulted in the layoff of workers. It also put pressure on its own suppliers to slash the prices of parts and it opened a factory in China where workers earned 25 cents an hour. By 2003, the price of a fan in Walmart had dropped to $10.
The Bottom Line
The latter two strategies have somewhat tarnished Walmart's image in the public eye, and have surely impacted some consumers' purchasing choices, but the question is whether consumers' quest for a product that is backed by a conscientious process overrides their desire for good prices.
It could be said that consumers with more disposable income are more inclined to make purchasing choices that reflect social responsibility. For other consumers, though, being able to stretch a small paycheck is the goal and in such instances, Walmart's low-pricing strategy wins. There are also other questions. Is the size of the middle class, that portion of the Walmart market segment with more disposable income and more willingness to demand conscientious policies, shrinking?
What is clear is that Sam Walton, according to Mr. Charles Fishman, believed that Americans will change their behavior to save a bit of money and Walmart's supply chain mechanism, business model and supplier negotiations bank on this being true.
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bcf73243fe4bb014fbce7f15c0c4e03b | https://www.investopedia.com/articles/personal-finance/011916/best-retirementplanning-apps.asp | The Best Retirement-Planning Apps | The Best Retirement-Planning Apps
Find a Retirement App
Developing a retirement strategy can be burdensome. Fortunately, however, in today's hyper-connected world, there are many tools that make planning for retirement easier. Generally, these come with advice, goals, and progress reports at your fingertips.
Key Takeaways The are many online tools and apps that can make planning for retirement easier. Although all of these apps are designed with retirement planning in mind, each provides different services and methods for reaching that goal. It is worth it to keep searching until you find the tool that meets your needs and makes retirement planning an easy and almost painless experience.
Here, we present an overview of some of the best retirement-planning apps that are available now.
1. Retirement Planner App
This free Android app is a useful tool when you are in the midst of making choices about how to structure your retirement savings. This app allows you to compare projections for investing in a 401(k), Roth 401(k), Roth IRA, or traditional IRA.
The Retirement Planner App also shows how saving today will impact your retirement income in the future. Finally, it allows you to see if you are reaching your retirement goals or if you should reevaluate your long-term plan.
2. Mint
This free popular financial tracking tool can be used online—or on iOS or Android devices—to help you set and track your retirement goals. Mint is commonly used to track spending and budgets, but it also shows your net worth and long-term trends and tracks your investments in one location.
Mint also makes it easy to set financial goals (including retirement savings goals) by giving you regular alerts about your savings each month and helping you visually track your progress with graphic images and other pictorial aides.
A retirement app can be useful but if you have questions about your retirement portfolio, it may be wise to consult an expert financial planner.
3. Financial Engines Social Security Planner
This app is available for free online from Financial Engines. It requires you to enter a fairly simple set of information, then gives you recommendations for ways to maximize your Social Security benefits. The app uses mathematical algorithms to take some of the guesswork out of when to start claiming benefits.
Deciding when to begin claiming benefits is often a balancing act between waiting to claim a higher benefit versus taking advantage of more years to receive Social Security income, and this app will help you make decisions to maximize your benefits. It's especially useful if you or your spouse are flexible about when you can start drawing on Social Security benefits.
4. Vanguard Retirement Nest Egg Calculator
This free online app is for people who are nearing or who have entered retirement, to help determine if their portfolio will cover expenditures for the number of years they expect to be retired. It is statistically rigorous and uses a Monte Carlo analysis to determine if the user's retirement savings and portfolio will or will not be sufficient to last for the length of their retirement.
5. Retirement Goal Planning System
This free iPad app draws on behavioral economics to help you understand your own preferences when dealing with the complex problem of planning for retirement. It breaks down the problem into "thinking steps." When you have gone through the program you will emerge with a personalized set of retirement goals, which you may use to craft your own retirement plan or share with a financial planner.
6. Retirement Outlook Estimator
This simple online or free iOS app adds a bit of charm to the retirement-planning process. Once basic information is entered, the app provides you with a "weather report" analysis of your savings plan—your outlook may be rainy, cloudy, partly cloudy, or sunny—along with expected dollar amounts for retirement income.
This app also provides you with suggestions about how your outlook will change if you invest more or less per year.
7. ING STRUCT® App (for U.K. Residents)
This app is unique because it is structured as a game rather than a tool. The goal of the STRUCT game is to learn the concepts of risk, diversification, goal setting, and long-term progress. The elements of the game represent investments in cash, bonds, and stocks, and the player can choose to play as a conservative, moderate, or risk-loving investor.
Although this app may not be useful for those looking to track their own retirement investments, it helps understand the concepts behind retirement planning and helps people to determine the types of investments and risks they are interested in making for their financial futures. This app is available for free for iOS systems but only in the U.K. app store.
The Bottom Line
There are many available apps to help you plan for retirement. From fun educational games to apps that help you determine your priorities, from rigorous statistics to simple graphs—there's an app for everyone's planning style. It is worth it to keep searching until you find the tool that meets your needs and makes retirement planning an easy and almost painless experience.
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bf54c408e59481151fa51ea06145b1dd | https://www.investopedia.com/articles/personal-finance/011916/mutual-vs-publically-traded-insurance-companies.asp | Mutual vs. Stock Insurance Companies: What's the Difference? | Mutual vs. Stock Insurance Companies: What's the Difference?
Mutual vs. Stock Insurance Companies: An Overview
Insurance companies are classified as either stock or mutual depending on the ownership structure of the organization. There are also some exceptions, such as Blue Cross/Blue Shield and fraternal groups which have yet a different structure. Still, stock and mutual companies are by far the most prevalent ways that insurance companies organize themselves.
Worldwide, there are more mutual insurance companies, but in the U.S., stock insurance companies outnumber mutual insurers.
When selecting an insurance company, you should consider several factors including:
Is the company stock or mutual?What are the company’s ratings from independent agencies such as Moody’s, A.M. Best, or Fitch?Is the company’s surplus growing, and does it have enough capital to be competitive?What is the company's premium persistency? (This is a measure of how many policyholders renew their coverage, which is an indication of customer satisfaction with the company’s service and products.)
Learn how stock and mutual insurance companies differ and which type to consider when purchasing a policy.
Key Takeaways Insurance companies are most often organized as either a stock company or a mutual company.In a mutual company, policyholders are co-owners of the firm and enjoy dividend income based on corporate profits.In a stock company, outside shareholders are the co-owners of the firm and policyholders are not entitled to dividends.Demutualization is the process whereby a mutual insurer becomes a stock company. This is done to gain access to capital in order to expand more rapidly and increase profitability.
Stock Insurance Companies
A stock insurance company is a corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. Policyholders do not directly share in the profits or losses of the company. To operate as a stock corporation, an insurer must have a minimum of capital and surplus on hand before receiving approval from state regulators. Other requirements must also be met if the company's shares are publicly traded.
Some well-known American stock insurers include Allstate, MetLife, and Prudential.
Mutual Insurance Companies
The idea of mutual insurance dates back to the 1600s in England. The first successful mutual insurance company in the U.S.—the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire—was founded in 1752 by Benjamin Franklin and is still in business today.
Mutual companies are often formed to fill an unfilled or unique need for insurance. They range in size from small local providers to national and international insurers. Some companies offer multiple lines of coverage including property and casualty, life, and health, while others focus on specialized markets. Mutual companies include five of the largest property and casualty insurers that make up about 25% of the U.S. market.
A mutual insurance company is a corporation owned exclusively by the policyholders who are "contractual creditors" with a right to vote on the board of directors. Generally, companies are managed and assets (insurance reserves, surplus, contingency funds, dividends) are held for the benefit and protection of the policyholders and their beneficiaries.
Management and the board of directors determine what amount of operating income is paid out each year as a dividend to the policyholders. While not guaranteed, there are companies that have paid a dividend every year, even in difficult economic times. Large mutual insurers in the U.S. include Northwestern Mutual, Guardian Life, Penn Mutual, and Mutual of Omaha.
Key Differences
Like stock companies, mutual companies have to abide by state insurance regulations and are covered by state guaranty funds in the event of insolvency. However, many people feel mutual insurers are a better choice since the company’s priority is to serve the policyholders who own the company. With a mutual company, they feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders.
While mutual insurance policyholders have the right to vote on the company’s management, many people don’t, and the average policyholder really doesn’t know what makes sense for the company. Policyholders also have less influence than institutional investors, who can accumulate significant ownership in a company.
Sometimes pressure from investors can be a good thing, forcing management to justify expenses, make changes, and maintain a competitive position in the market. The Boston Globe newspaper has run illuminating investigations questioning executive compensation and spending practices at Mass Mutual and Liberty Mutual, showing excesses occur at mutual companies.
Once established, a mutual insurance company raises capital by issuing debt or borrowing from policyholders. The debt must be repaid from operating profits. Operating profits are also needed to help finance future growth, maintain a reserve against future liabilities, offset rates or premiums, and maintain industry ratings, among other needs. Stock companies have more flexibility and greater access to capital. They can raise money by selling debt and issuing additional shares of stock.
Demutualization
Many mutual insurers have demutualized over the years, including two large insurers—MetLife and Prudential. Demutualization is the process by which policyholders became stockholders and the company’s shares begin trading on a public stock exchange. By becoming a stock company, insurers are able to unlock value and access capital, allowing for more rapid growth by expanding their domestic and international markets.
The Bottom Line
Investors are concerned with profits and dividends. Customers are concerned with cost, service, and coverage. The perfect model would be an insurance company that could meet both needs. Unfortunately, that company does not exist.
Some companies promote the benefits of owning a policy with a mutual insurer, and others focus on the cost of coverage and how you can save money. One possible way to deal with this dilemma is based on the kind of insurance you are buying. Policies that renew annually, such as auto or homeowner’s insurance, are easy to switch between companies if you become unhappy, so a stock insurance company may make sense for these types of coverage. For longer-term coverage such as life, disability, or long-term care insurance, you may want to select a more service-oriented company, which would most likely be a mutual insurance company.
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fbb05e18aaf9ad9ad765bda7f6401c38 | https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp | How to Consolidate Student Loans | How to Consolidate Student Loans
Do you feel weighed down by student loan debt? If so, you might consider consolidating or refinancing your loans to lower your monthly payments. In many cases, that can be a smart financial move. But before decide to consolidate or refinance, it pays to take a close look at the pros and cons.
Please note that due to the COVID-19 pandemic, student loan payments—including principal and interest—have been automatically suspended on federally held student loans through Sept. 30, 2021. However, federal student loans held by the Department of Education are allowed the suspension of payments.
Also, the Department of Education stopped the collection of defaulted federal student loans or loans in nonpayment. Garnishment of wages and any offset of tax refunds and Social Security benefits have also been stopped through Sept. 30, 2021.
The loan payment suspension began as part of the pandemic response in March of 2020 and was instituted by President Trump and the Department of Education. The suspension extension does not apply to private student loans but only federal loans and expires on Sept. 30, 2021.
Key Takeaways Consolidating, or refinancing, high-interest private student loans into a single loan with another private lender can lower your monthly payments.Due to the coronavirus pandemic, student loan payments—including principal and interest—have been automatically suspended on federally held student loans through Sept. 30, 2021.If you have federal student loans, another option may be to consolidate them through the government's Direct Loan Program.If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans have to offer.
How Does Student Loan Consolidation Work?
There are two basic ways to consolidate your student loans—through a private lender or through the federal government. Only federal loans are eligible for federal consolidation.
In the case of a private student loan consolidation (often referred to a refinancing), a private lender, such as a bank, pays off your private or federal student loans and issues you a new loan at a new rate and with a new repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan.
However, with federal student loans, you have another option, which is to combine them into a new direct consolidation loan, through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans, and you will remain eligible for some of the special features of federal loans, as we'll explain later.
While you can't consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate the private ones with a private lender and consolidate the federal ones through the government program.
Here's a look at the major pros and cons for both private and federal loan consolidations.
Pros and Cons of Student Loan Consolidation
Pros Lower monthly payments You can release a cosigner from the loan You'll have fewer monthly payments to make Repayment terms can be flexible Cons You could pay more in the long run You could lose a federal loan's advantages Any existing grace periods may go away
Pro: Lower Monthly Payments
A private loan consolidation can help reduce your monthly loan payments in two ways. First, the refinanced loan may carry a better interest rate, which not only means lower payments but can also save you money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores have improved since they first applied for a loan.
Another way that a private consolidation or refinancing can cut your monthly payments is by extending the length of your loan. For example, if you refinance a 10-year student loan into a 20-year loan, you will see a dramatic cut in your monthly payments. But signing up for a longer loan also comes with a big caveat, as we explain in the following Con.
In the case of a federal loan consolidation, you may be able to reduce your monthly payments if you qualify for one of the government's income-based repayment plans. These plans set your monthly payments according to how much you earn or how much you can afford to pay.
Con: You Could Pay More in the Long Run
While a longer-term loan can mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan because of the accruing interest.
Pro: You Can Release a Cosigner From the Loan
Another benefit of refinancing your private loans is that you might be eligible to sign for the loan on your own. Dropping a cosigner, who is typically a parent or another close family member, not only gets them off the hook for your debt, but it may raise their credit score and allow them to access new lines of credit if they need to. Federal loans don't typically involve cosigners.
Con: You Could Lose a Federal Loan's Advantages
If you consolidate a federal student loan with a private lender, you'll lose the option to sign up for an income-based repayment plan. You'll also no longer be eligible for the federal loan forgiveness and cancellation programs. These are major reasons to consolidate your federal loans only through the federal program.
If your student loan is still within its grace period, wait until that ends before you refinance it.
Pro: You'll Have Fewer Monthly Payments to Make
Keeping track of multiple student loan payments, on top of all your other bills, can be a hassle. Consolidating will reduce your student loan bills to just one (or two, if you consolidate your private and federal loans separately, as is advisable). Many private lenders even offer a slightly lower interest rate if you enroll in an automatic payment plan. This option saves you a small amount of money each month, and it helps you to avoid ever forgetting a payment.
Con: Any Existing Grace Periods May Go Away
As soon as you take out a refinanced loan with a private lender, you must start repaying it. With many student loans, you can delay payments while you are still in school or if you have entered a graduate program. If your current loan is still within its grace period, wait until that period ends before starting the refinancing process.
Pro: Repayment Terms Can Be Flexible
When you consolidate your loans with a private lender, you can choose how long you want the loan to last and whether it carries a fixed or variable rate. Choosing a variable rate can be riskier since rates can go up anytime, but it can also get you a lower interest rate at the start of the loan. Federal consolidation loans carry a fixed interest rate.
How to Consolidate Student Loans
You can consolidate your student loans through many financial institutions, including your local bank or credit union, as well as lenders that specialize in these types of loans. Among the well-known names in the field are Earnest, LendKey, and SoFi.
You can find more information about the steps for consolidating your federal loans on the Federal Student Aid website.
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64fa0635d55445f5479537e831dbe4b0 | https://www.investopedia.com/articles/personal-finance/012015/study-abroad-budget-australia.asp | Study Abroad: Budget for Australia | Study Abroad: Budget for Australia
Want to study in Australia? We have both good and bad news. Australia is one of the 10 most sought-after destinations for U.S. students who go abroad. And there are a few very good reasons. Many of its universities rank among the world's top 100, and the country is home to a number of the 30 best student cities in the world. The government invests $200 million a year in international student scholarships and U.S. students are exempt from foreign language requirements.
The bad news is all about the price tag. The average cost of a year of independent study in Australia is expensive, reaching as high as $40,000 including tuition and living expenses. The infographic on hotcoursesabroad.com breaks down tuition for undergraduate and graduate degree programs and some sample living costs in different countries. But if you need more information about the pros and cons of studying in Australia, keep reading.
Key Takeaways Although it is expensive, studying in Australia can provide a unique experience with no foreign language requirements. The total cost of studying at the University of Melbourne for the 2020 spring semester was over $60,000 including tuition, books, meals, local travel, and excursions. An Australian student work visa allows you to work while you're in school. Consider applying for scholarships and grants to offset the costs of studying abroad in Australia.
Is the Hefty Investment Worth It?
Before you even sit down to apply to Australian schools, there are some things you'll need to consider. Are you going to complete your entire degree or coursework at an Australian school or are you going to study for one term through your American university?
Having said all this, is a study abroad experience worth the price? According to Daniel Obst, former deputy vice president of the Institute of International Education (IIE), the answer is a resounding yes.
“We know that employers are now looking for candidates [who] can negotiate local and international challenges,” he said. “These are the skills that will be essential for all careers.”
Strategies for Defraying the Cost
To help pay for your education in Australia, check out the excellent roundup of available grants for study abroad at IIEPassport. Keep in mind that federal law requires American universities and colleges to continue dispensing federal funds to students enrolled in approved study abroad programs.
Students enrolled in approved study abroad programs can receive federal funds from American colleges and universities.
Here's another way to defray the costs. An Australian student visa allows you to work up to 40 hours every two weeks during the academic term and full-time during the holidays—an uncommon perk for students studying abroad. You'll have to offset the earnings from the cost of the visa, which is about $400.
How to Choose the Right Program
Whether your study abroad experience proves enriching depends on your choosing the right experience for you. IIE Passport lists 398 programs of study in Australia available to U.S. students. StudyAbroad101.com lists 282, complete with Yelp-style reviews. For useful independent study information, check out the Australian government’s website. For a listing of Australian colleges and universities and the courses they offer, be sure to check out hotcourses.com.au. If you have a study abroad adviser on your home campus, take advantage of their expertise. The best introduction to the field is IIE’s “Student Guide to Study Abroad," which costs $14.95.
Cost of a Sponsored Program
To give you an idea of a typical semester-long sponsored study-abroad opportunity in Australia, we’ve chosen the program at the University of Melbourne offered by The College of Global Studies at Arcadia University as an example. With a vast number of courses to choose from—400 subjects in the arts faculty alone—participants in the 2020 spring semester paid $45,300 for tuition and shared accommodations. Additional expenses—including books, meals, local travel, excursions, and others—are estimated at $15,880.
According to Caitlin Barnett, assistant director of Arcadia's New Zealand programs, enrolling in a university on your own will save money, “but you will not have nearly the same support system before you leave and once you arrive.” That route is best ”for students who are very independent and willing to do a lot of work on their own.”
Now for the Budget Details
Here’s what you’ll need to budget for your stay in Australia—some extras that you’ll want and some of the necessities that you can’t avoid. Prices given are for Melbourne, but will not vary substantially in other cities except in Sydney, where higher rents boost the overall cost of living 17% higher.
Round-Trip Airfare
Traveling in economy class can cost as much as $2,000. Depending on when you book and how flexible you are about stopovers, as well as departure and arrival times, you may be able to get a better deal. Remember that many lower-cost fares come with strict cancellation and change policies, so figure travel insurance into your budget.
Housing
Living on campus is not the norm for Australian students. “Most Australians stay local for university, and many continue to live at home during their studies,” according to Erin Baldwin, senior programming manager at the American Council on Education and former education manager at the Australian Trade Commission.
The best solution for a foreign student is to rent a room in a private house—lots of homes near universities offer this option. You can also stay in a student apartment complex run by companies like Campus Living Villages and Urbanest. Both offer studios and shared accommodations to rent near campuses. But they’re not cheap. An inexpensive sublet may cost about $200 per week, but expect to pay as much as $400 or $500 a week for something else.
School Books
They’re generally less expensive than in the United States, and borrowing from the university library will save money. Budget about $80 to $120 for books and supplies.
Local Transportation
In Melbourne, trams are best. They're easy to use and they go all over the city. In other cities, the bus, train, and ferry systems are all good forms of transport. Students pay about $3 for a full-day pass—half the full fare.
Mobile Phone
Buy a basic phone for about $40. A plan will cost you about $24/month for 500MB of data, plus calls and texts. If you unlock your own smartphone and buy a SIM card, service will cost about $32/month for 2GB of data, plus calls and texts.
Slush Fund
This is the money you hope you’ll never have to use. To be safe, put aside about $1,000 for emergencies, like a plane ticket home. If you’re on a sponsored program, the provider will usually be able to make an emergency loan.
Other Costs
Dinner splurge: At about $40 per person, they’ll have to be very good friends if you’re treating. Surfing lessons: You can’t possibly return to the States without a selfie in a wetsuit. A two-hour group lesson for beginners costs about $50 or $120 for a private session. Renting a wetsuit will add another $8. Trip to Sydney: It’s best to fly as it’s a 9½-hour drive overland. In mid-February, the fare will be about $226 round-trip, while you'll spend about $60 less at other times of the year. Beer in a pub: About $6, or $12 to $16 if you add food to the tab. A lot of bars have special student nights, so there's no cover charge. You'll also be able to score cheap pitchers and mixed drinks with your student ID. Wine: In Australia, this will be a bag-in-a-box called a goon for about $8. A bottle will cost twice as much. Coffee: $3.25 for a small.
The Bottom Line
Australia may be an expensive place to live and study compared to some other parts of the world, but many U.S. students are attracted to its high-quality universities, its wide-open spaces, and the exemption of foreign language requirements. And it’s not only U.S. students who gravitate to Australia—almost one in four university students in Australia are international students, opening up a global network of future contacts for you. Accommodations in Australia are pricey and you can keep other living costs in check by taking advantage of student discounts and following the lead of local students.
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e4bf146c319f4b73a16073d0f63ae56d | https://www.investopedia.com/articles/personal-finance/012016/how-use-limited-purpose-fsa.asp | How to Use a Limited Purpose FSA | How to Use a Limited Purpose FSA
What Is a Limited Purpose Flexible Spending Account (LPFSA)?
A limited purpose flexible spending account (LPFSA) is a special type of flexible spending account (FSA) that may be available to consumers that have enrolled in a health savings account (HSA). An HSA is a type of savings account that lets consumers set aside money on a pre-tax basis to pay for qualified medical expenses. Consumers are typically given the option to enroll in LPFSAs and HSAs through their employers; employers act as sponsors for these types of savings accounts.
Normally, the Internal Revenue Service (IRS) allows you to have either an HSA or an FSA—but not both. However, you can have an HSA and an LPFSA if your employer allows it.
Consumers can use LPFSAs to pay for vision and dental expenses before they've met their insurance deductible. In some cases, a LPFSA can also be used for regular qualified medical expenses after you meet your deductible. However, this depends on the rules your employer has established for the LPFSA account that is offered.
Key Takeaways An LPFSA pays for vision and dental expenses before you reach your deductible and sometimes for certain qualified expenses after you reach it.Unlike a standard FSA, it can be used in tandem with an HSA.An LPFSA is funded with pretax dollars.
Typically, consumers that have an HSA are not eligible to open a regular FSA. A regular FSA is different than an LPFSA. A regular FSA lets you use pretax dollars to pay for qualified medical expenses, including dental and vision expenses. An LPFSA lets you use pretax dollars to pay for qualified dental and vision expenses, such as dental cleanings, fillings, vision exams, contact lenses, lens solution/cleaner, and prescription glasses.
A LPFSA also lets you use pretax dollars to pay for preventive care expenses that your health plan doesn’t cover. You can only use an LPFSA to pay for any qualified medical expenses after you meet your health insurance deductible, and only if your employer has set up its plan to allow this use of LPFSA funds.
In addition, LPFSAs, like FSAs, are only available to you if your employer offers them; you can’t open an account on your own. Under federal law, both also have an annual contribution limit of $2,750 for 2020. The amount is usually increased each year to account for inflation. However, employers can choose to place a lower limit on contributions.
It’s your employer’s choice to offer an LPFSA; you can’t open one on your own.
Limited Purpose Flexible Savings Account (LPFSA) vs. Health Savings Account (HSA)
While you can’t use your LPFSA balance to pay for qualified medical expenses that aren’t dental or vision costs, you can use your HSA balance to pay for these expenses. Just like an LPFSA, an HSA has the advantage of letting you contribute pretax dollars, so it’s a good way to make your out-of-pocket medical expenses more affordable.
Also, even though your employer will withdraw your LPFSA contributions in equal amounts from each paycheck throughout the year, the entire balance is available to you at the beginning of the year. The same is not true of your HSA balance, which only becomes available as funds are deposited. To use the funds you’ve contributed to your LPFSA, your plan administrator will give you a payment card, let you request reimbursement by check or direct deposit by submitting a claim form, or both.
Example of an LPFSA
You should carefully consider how much to contribute to your LPFSA. Let’s say your employer’s plan only allows you to use it for qualified dental and vision expenses. Look over your out-of-pocket dental and vision expenses from the last year or two and determine which ones are considered qualified using your employer’s summary plan document. Then you can use that information to create a list of your projected qualified dental and vision expenses for the coming year.
Your list of the previous year’s expenses might look something like this:
Dental cleaning number one: $0 (100% covered by insurance as a preventive service)Dental cleaning number two: $0 (100% covered by insurance as a preventive service)Full set of dental X-rays: $0 (100% covered by insurance as a preventive service)Two composite fillings: $100 each, $200 total (50% covered by insurance)Eye exam: $50 (80% covered by insurance; you pay extra for contact and glasses fittings)Prescription eyeglasses: $200 (not covered by insurance)Prescription sunglasses: $150 (not covered by insurance)Contact lenses: $100 (not covered by insurance)Prescription eye drops: $20 (80% covered by insurance)
Total: $720
You know that next year, you’ll likely have two dental cleanings and a full set of X-rays again. You don’t anticipate any fillings because you have good teeth and rarely need dental work. You’ll get your annual eye exam, and you’ll need another year’s worth of contact lenses. But you won’t need new glasses or sunglasses because you just got them. The prescription eye drops were for an eye infection that you don’t anticipate coming back. Neither your dentist nor your eye doctor has given you a reason to believe that you’ll need anything out of the ordinary in the coming year.
If you take a conservative estimate, you may decide to contribute $720 to your LPFSA. With this amount, you can be fairly confident that you will spend the entire balance. If you want to take a chance on having some extra money to cover something you aren’t anticipating, you might contribute another couple of hundred dollars.
$500 The amount of money in an FSA or LPFSA that you can roll over to the following year.
Special Considerations
You don’t want to contribute excessively to your LPFSA. Like a regular FSA, you’ll lose any unused balance at–or shortly after–the end of the year. Some plans allow you to roll over up to $500 for the following plan year. If that’s the case with your plan, in this example you could safely contribute $1,220.
Other plans might have a two-and-a-half-month grace period at the beginning of the following year to let you finish spending the previous year’s balance. However, a plan won’t have both a rollover provision and a grace period. (And the plan might not have either a rollover option or a grace period.)
The only good news about any unused balance you lose is that you’ll be losing pretax dollars. If you’re in the 24% federal tax bracket, that means you’re losing the equivalent of $76 that you could have gotten in take-home pay (for every $100 you contributed to your LPFSA over the $500 rollover amount.)
That being said, if you’ve only contributed a small overage, you might be able to spend it down by purchasing an extra pair of glasses, pre-purchasing next year’s contact lenses, buying extra contact lens solution, or making other qualified purchases. Maybe you don’t really need a second pair of glasses, but you might decide that having them is better than just throwing away the money you've saved.
If your employer’s LPFSA allows you to spend the balance on any qualified medical expense once you’ve met your deductible, the calculation gets a bit more complicated. You’ll definitely want to look at your medical expenses for the last year (or two). Do the expenses that you’re likely to incur next year add up to more than your deductible?
For example, let’s say your high-deductible health insurance plan has a deductible of $3,000, and your projected medical expenses are $3,500. If so, you might want to contribute an additional $500 to your LPFSA (in addition to the vision and dental expenses and any cushion you already calculated).
The Bottom Line
LPFSAs can be a great way to reduce your dental and vision expenses–and in some instances your other qualified medical expenses–when you have an HSA. These arrangements mean that you don’t have to entirely give up the benefits of an FSA when you have an HSA.
Read your employer’s summary plan description to make sure you know what you can use LPFSA funds for and whether or not your employer's option has a rollover provision or a grace period. At this point, it's in your best interest to do the math and make sure that you contribute enough money to maximize your tax savings (without contributing more than you’ll be able to spend during the year).
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ee3efcac42bb8ba9fc7cd736b9028981 | https://www.investopedia.com/articles/personal-finance/012114/taxsmart-ways-help-your-kidsgrandkids-pay-college.asp | Tax-Smart Ways to Help Your Kids or Grandkids Pay for College | Tax-Smart Ways to Help Your Kids or Grandkids Pay for College
Your child (or grandchild) might be just a two-year-old, but it's not too early to start figuring out how you'll pay for college. Here's why: According to the College Savings Plans Network, it's estimated that it will cost $244,667.00 to send a child who is a toddler in 2021 to an in-state, public college for four years, including tuition, fees, room, and board. Are you thinking about a private college? That’s going to run $553,064 by the time your toddler is ready for higher education!
Key Takeaways The cost of college keeps rising each year, so it's wise for parents and grandparents to start savings plans when kids/grandkids are young. A 529 plan is one of the best, tax-advantaged ways to save for higher education costs. Traditional and Roth IRAs can be used to pay for college expenses, but parents should be sure their retirement needs are covered. Coverdell ESAs allow you to set aside $2,000 per beneficiary per year. Parents and grandparents can set up custodial accounts to fund higher education, but these assets may limit a student's financial aid.
Cost of Going to College
College costs tend to increase at about two times the rate of inflation each year—a trend that is expected to continue indefinitely. Here’s what you can expect to pay for each year of tuition, fees, and room and board by the time your kids (or grandkids) are ready to head off to college (assuming a steady 6% college cost inflation rate):
Estimated Annual Future College Costs Current Age In-State Public Out-of-State Public Private 16 $24,737 $43,377 $55,918 14 $27,795 $48,738 $62,830 12 $31,230 $54,762 $70,595 10 $35,090 $61,531 $79,321 8 $39,428 $69,136 $89,125 6 $44,301 $77,681 $100,141 4 $49,777 $87,283 $112,518 2 $55,929 $98,071 $126,426
Note: Want to see an estimate of how much it will cost to send your child or grandchild to college? Use the College Cost Calculator at the College Savings Plans Network.
Keep in mind, these numbers represent a single year of costs; the number of years your child attends college will depend on the degree(s) they are seeking. While many students will qualify for financial aid, scholarships, and grants to help cover college costs, there are still a number of ways to further reduce college costs.
One of the easiest ways is to invest the money you’ve set aside for your child or grandchild’s college years in tax-smart investment vehicles. These plans and accounts allow you to efficiently save for your child or grandchild’s education while shielding the savings from the IRS as much as possible.
529 Plans
“One of the best ways to help a child financially while limiting your own tax liability is to use a 529 college plan,” says Sam Davis, partner/financial advisor with TBH Global Asset Management. A 529 plan is a tax-advantaged investment plan that lets families save for the future college costs of a beneficiary.
Plans have high limits on contributions, which are made with after-tax dollars. You can contribute up to the annual exclusion amount each year, which is $15,000 in 2020 (the "annual exclusion" is the maximum amount you can transfer by gift, in the form of cash or other assets, to as many people as you wish, without incurring a gift tax). All withdrawals from the 529 are free from federal income tax as long as they are used for qualified education expenses (most states offer tax-free withdrawals, as well).
Those who have the funds can "superfund" a 529 plan by contributing five years of gifts at once, per child, per person without being subject to the gift tax. This means, for example, that a pair of super-wealthy grandparents could contribute $75,000 each ($150,000 per couple) when a child is young and let that money grow to cover their entire costs. There are complicated rules about how to do this, so don't try it without detailed tax advice.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law by President Donald Trump in December 2019, created multiple provisions intended to improve retirement and savings plans. Under the new law, 529 plan funds can now be used to pay off up to $10,000 in student loans, and the funds can also be used to pay for expenses related to registered apprenticeship programs.
There are two types of 529 plans:
College Savings Plans
These savings plans work like other investment plans, such as 401(k)s and individual retirement accounts (IRAs), in that your contributions are invested in mutual funds or other investment products. Account earnings are based on the market performance of the underlying investments, and most plans offer age-based investment options that become more conservative as the beneficiary nears college age. The 529 savings plans can only be administered at the state level.
Prepaid Tuition Plans
Prepaid tuition plans (also called guaranteed savings plans) allow families to lock in today’s tuition rate by pre-purchasing tuition. The program pays out at the future cost to any of the state's eligible institutions when the beneficiary is in college. If the beneficiary ends up going to an out-of-state or private school, you can transfer the value of the account or get a refund. Prepaid tuition plans can be administered by states and higher education institutions, though a limited number of states have them.
“I strongly advise my clients to fund 529 plans for the unsurpassed income tax breaks,” Davis says. “Although the contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free.”
Traditional and Roth IRAs
An IRA is a tax-advantaged savings account where you keep investments such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can adjust the investments as your needs and goals change.
Under the SECURE Act, you can now wait until age 72 to begin taking required minimum distributions (RMDs), and the law removed the age requirement for depositing money into a traditional IRA, so you can continue making contributions at any age if you are still working. In general, if you withdraw from your IRA before you are 59½ years old, you will owe a 10% additional tax on the early distribution.
However, you can withdraw money from your traditional or Roth IRA before reaching age 59½ without paying the 10% additional tax to pay for qualified higher education expenses for yourself, your spouse, or your children or grandchildren in the year the withdrawal is made. The waiver applies to the 10% penalty only; you will still owe income tax on the distribution unless it's a Roth IRA.
Using your retirement funds to pay for your child or grandchild’s college tuition does come with a couple of drawbacks:
It takes money out of your retirement fund—money that can’t be put back in (unless you are still working)—so you need to make sure you are well-funded for retirement outside of the IRA. IRA distributions can be counted as income on the following year’s financial aid application, which can affect eligibility for need-based financial aid.
To avoid dipping into your own retirement, you may be able to set up a Roth IRA in your child's or grandchild’s name. The catch: Your child (not you) must have earned income from a job during the year for which a contribution is made. You can actually fund their annual contribution, up to the maximum amount, but only if they have earnings.
The IRS doesn’t care where the money comes from as long as it does not exceed the amount your child earned. If your child earns $500 from a summer job, for example, you can make the $500 contribution to the Roth IRA with your own money, and your child can do something else with their earnings.
Here's how to do it: If your child is a minor (younger than 18 or 21 years old, depending on the state in which you live), many banks, brokers, and mutual funds will let you set up a custodial or guardian IRA. As the custodian, you (the adult) control the assets in the custodial IRA until your child reaches the age of majority, at which point the assets are turned over to them.
Coverdells
A Coverdell Education Savings Account (ESA) can be set up at a bank or brokerage firm to help pay the qualified education expenses of your child or grandchild. Like 529 plans, Coverdell ESAs allow money to grow tax-deferred and withdrawals are tax-free at the federal level (and in most cases, the state level) when used for qualifying education expenses.
Coverdell ESA benefits apply to higher education expenses, as well as elementary and secondary education expenses. If the money is used for nonqualified expenses, you will owe tax and a 10% penalty on earnings.
Coverdell ESA contributions are not deductible, and contributions must be made before the beneficiary reaches age 18 (unless the child is a special needs beneficiary, as defined by the IRS). While more than one Coverdell ESA can be set up for a single beneficiary, the maximum contribution per beneficiary—not per account—per year is limited to $2,000.
To contribute to a Coverdell ESA, your modified adjusted gross income (MAGI) must be less than $110,000 as a single filer or $220,000 as a married couple filing jointly for tax tears 2020 & 2021.
Custodial Accounts
Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts that allow you to put money and/or assets in trust for a minor child or grandchild. As the trustee, you manage the account until the child reaches the age of majority (18 to 21 years of age, depending on your state). Once the child reaches that age, they own the account and can use the money in any manner they wish. That means they don't have to use the money for educational expenses.
Although there are no limits on contributions, parents and grandparents can cap individual annual contributions at $15,000 per individual ($30,000 per married couple) to avoid triggering the gift tax. One thing to be aware of is that custodial accounts count as students' assets (rather than parents'), so large balances can limit eligibility for financial aid. The federal financial-aid formula expects students to contribute 20% of savings, versus a maximum of 5.6% of savings for the parents.
Cash
The annual exclusion allows you to give $15,000 in 2020 in cash or other assets each year to as many people as you want. Spouses can combine annual exclusions to give $30,000 to as many individuals as they like—tax-free. As a parent or grandparent, you can gift a child up to the annual exclusion each year to help pay for college or other higher education costs. Gifts that exceed the annual exclusion count against the lifetime exemption, which is $11.58 million per individual in 2020.
Concerned about the lifetime exemption? As a grandparent, you can help your grandchild pay for college while limiting your own tax liability by making a payment directly to their higher-education institution. As Joanna Foster, MBA, CPA explains, “Grandparents can pay the educational expense directly to the provider, and that does not count against the annual exclusion of $15,000.” So, even if you send $20,000 a year to your grandchild’s college, the amount over $15,000 ($5,000 in this case) would not count against the lifetime exemption.
The Bottom Line
Many people approach saving for college the same way they approach retirement: They do nothing because the financial obligations seem insurmountable. Many people say their retirement plan is never to retire (not a real plan, needless to say, unless you die young). Similarly, parents might joke (or assume) that the only way their kids are going to college is if they get a full scholarship.
Aside from the obvious flaw with this plan, it’s a back-seat approach to a situation that really needs a front-seat driver. Even if you can save only a small amount of money in a 529 or Coverdell plan, it’s going to help.
For most families, paying for college is not as simple as writing a check each quarter. Instead, it’s an amalgamation of financial aid, scholarships, grants, and money that the child has earned as well as money that parents and grandparents have contributed to tax-smart college savings vehicles.
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aff21d63440dc6e619d3a6234a26abb4 | https://www.investopedia.com/articles/personal-finance/012115/how-target-credit-card-works.asp | How the Target Credit Card Works | How the Target Credit Card Works
The Target credit card, called the RedCard, is a credit card that can be used in Target's retail stores and on the store's website. The Target RedCard features and benefits include a 5% discount on purchases at Target, no annual fee, and an extra 30 days for returns and exchanges. However, the Target credit card's interest rate or annual percentage rate (APR) is over 20%. As a result, if you tend to carry high balances on your credit cards for multiple months, the interest charges could wipe out any savings from the discount.
While Target offers a 5% savings on purchases, other credit cards offer cash back, which is when the credit card issuer refunds the cardholder a percentage of the amount spent on purchases. Before applying, please use this guide to aid in your research as to whether the Target RedCard is right for you or whether other cards with their rewards or cash-back features are a better fit for your spending patterns.
Key Takeaways The Target RedCard is available as a store charge card, a Target Mastercard, and a debit card.The Target RedCard benefits include a 5% discount on purchases at Target, no annual fee, and an extra 30 days for returns and exchanges.However, the high-interest rate on the Target RedCard could cause the interest charges to wipe out any savings earned from the discount.The Target credit card is ideal for those who shop frequently at Target.For those who mostly shop elsewhere, a traditional rewards credit card might be a better option.
How the Target Credit Card Works
The Target RedCard comes in multiple forms: a Target credit card (a store charge card) and a Target Mastercard (a traditional credit card). Target also offers a debit card that automatically draws from your checking account. Each card has similar perks. Retailers like Target typically partner with a financial institution to offer a branded credit card in which the store and bank share in the interest and fees paid by the customer. Target credit cards are issued by TD Bank USA, N.A.—a subsidiary of The Toronto-Dominion Bank of Toronto, Canada, it is one of the largest banks in the United States.
The Target RedCard charge card can be used at Target retail locations and for online purchases on Target's website. The RedCard with the Mastercard logo can be used anywhere. Typically, there are sign-up incentives for those who have been recently approved for a new RedCard, including $50 off a future purchase of $100 or more, which was offered from Jan. 17 to Feb. 21, 2021.
Please note that store charge cards can be issued as “private label” or “closed-loop” cards, which are different from general-use credit cards that carry the Visa or Mastercard logo. Store charge cards may only be used at the store's retail locations and the store's website, while cards that carry the Visa or Mastercard logo can be used at any merchant.
Rewards and Benefits
The Target RedCard doesn't offer card rewards, points, or cash back from purchases. Instead, you get a 5% discount every time you use the card at a Target store or their website. Although it may seem to be less of an incentive than building up points for a cash value with other cards, the 5% discount allows customers to receive their rewards right away through a discounted price.
Other benefits of the Target RedCard include:
No annual feeFree two-day shipping on many items, although shipping times could be delayed due to the coronavirus pandemicAdditional 30 days for returns and exchangesExclusive offers for special items, gifts, and moreSign-up bonuses have included $50 off a future qualifying purchase of $100 or more when approved for a credit or debit RedCard—offer expired on Feb. 20, 2021. Please see the Target website for the latest offer.
You don’t get the discount on prescription drugs, but there’s a separate program through Target’s pharmacy that can help. However, when you use the debit card, you can get as much as a $40 cash withdrawal when you check out.
Where Can Someone Get the Target Card
New applicants can apply for the Target RedCard by completing an application for credit. The mail-in application is found on Target's website, which requires identification and financial information, including your driver's license number, social security number, and annual gross income. You can also apply and submit an online application through Target's online form.
What Kind of Credit Is Required for the Target Credit Card
The credit information for how T.D. Bank approves credit applications is not specifically outlined on Target's website. Typically, store charge cards are more lenient with the credit and income requirements compared to traditional credit cards. However, the credit limit might be lower for a charge card if you have spotty credit since it helps reduce the risk of financial loss to the bank issuing the card.
Although the credit score ranges may not be disclosed, typically, a consumer's credit history to get approved for a charge card needs to be fair-to-good. A credit score is a numerical representation of a person's ability to manage their debts and pay their loan and credit card payments on time. A person's credit history impacts their credit score, which can include how long their credit accounts have been open, how many late payments, and the amount of outstanding debt.
A person's credit score usually determines, in part, whether they get approved for a charge card and the interest rate that's charged on outstanding balances. Although Target doesn't specifically state what credit score is needed, typically, a person would need a credit score above 600 to be approved for a charge card or credit card—although stores have approved cards for consumers with lower scores. If your credit score is below 600, you likely get charged a higher interest rate and have a lower credit limit if approved.
Where Can the Target Credit Card Be Used?
The Target RedCard and debit cards are private-label or closed-loop cards, meaning they can only be used at Target stores and online through Target's website. However, the Target Mastercard can be used at any merchant that accepts Mastercard. If you're going to use the card at other merchants, please be aware the 5% discount on purchases only applies to purchases at Target and on its website.
Alternatives to the Target Credit Card
Since Target offers both a store charge card and a traditional Mastercard credit card, you can apply for whichever one suits your needs. Traditional credit cards with the Mastercard logo can be used anywhere that they're accepted, which is why they're called open-loop cards.
Other Types of Rewards Cards
If you're looking for cash back, points, or discounts from purchases at other merchants, it may be more advantageous to get an open-loop card. For example, rewards cards are usually open-loop cards that can be used anywhere versus a store charge card. The rewards can include cash back, airline miles, and hotel rewards. There are also cashback credit cards in which consumers get a percentage of the amount they spent using the card.
What card is right for you depends largely on the types of purchases you'll make and which benefits you'd like to receive from the credit card issuer. For example, there are travel cards that are specifically designed to offer travel points or discounts on airfare and hotels allowing your purchases to build points over time. If you drive a lot of miles, a card that offers gas points might be best for you since some oil companies and banks offer gas credit cards designed to reduce the cost of fueling up your vehicle.
Credit Cards Offered by Target's Competitors
Before applying, be sure to shop around and compare the various credit cards offered by stores that compete with Target, because you might find a better deal. Target's competitors include the Sam's Club Mastercard, Costco Visa, and the Amazon Prime Rewards Visa card. Each of these cards has pros and cons associated with them.
The Target RedCard comes in the form of a store charge card or a credit card with the Mastercard logo. The 5% discount applies to both cards but only for purchases made at Target. As a result, if most of your purchases are outside of Target, you may lose out on discounts from other card issuers.
Terms and Conditions of the Target RedCard
The Target RedCard offers no low introductory interest rate and the card's APR of 22.90%, which is high, but standard for most store cards. It will vary based on the prime rate since Target adds a percentage to the prime rate to arrive at the card's APR. Since interest rates are low in 2021, we can expect the APR to move higher in the coming years.
You have 25 days after your billing cycle ends to pay all charges and avoid interest. The late payment fee is up to $40, depending on your payment history, and will be assessed when any amount due is not paid by the payment due date. In other words, there's no grace period, but there is no penalty APR and no annual fee. However, a returned payment fee of $29 is charged if you make a payment, such as a written check, and it doesn't clear the bank.
The card doesn't offer any balance transfers from other cards. So, if you’re looking for a card that allows you to earn rewards on purchases anywhere, this isn’t the card for you. In fact, there are several excellent cashback cards currently available that have far more favorable APRs.
When applying for the Target RedCard, you'll need to provide your financial and personal information that includes:
Name and addressEmail address and phone numberDate of birthSocial Security numberDriver's license or state ID numberAnnual gross income, meaning your income before income taxes are taken out of your payIf you apply online through Target's website, they ask you to create a PIN number, which is used to authorize purchases at the store.
Once the application is completed and submitted, it is sent to TD Bank USA, N.A., and Target Corporation.
Who Should Consider the Target Credit Card
The Target RedCard can provide a lot of savings with their 5% discount on purchases at Target stores and on their website, particularly if you do a lot of your shopping at Target. If you have a family or kids to purchase for, the cost of supplies—such as paper towels, cleaning supplies, and groceries—can add up to thousands of dollars per year.
For example, spending $1,000 to $1,500 per month on supplies would add up to $12,000 to $18,000 per year respectively. The 5% discount on all of those purchases would equal $600 to $900 in annual savings (.05 * $12,000 or .05 * $18,000).
For consumers who purchase most of their goods at other stores, they might be better off with a traditional credit card that offers points and specific discounts that are tailored to the customer's purchase behavior. Travel cards that partner with airlines and gas rewards are two types of credit cards in which companies partner with banks to offer a branded credit card.
The Bottom Line
The Target RedCard offers consumers the choice of a charge card—Target purchases only—or a credit card with the Mastercard logo—purchases allowed anywhere Mastercard is accepted. The 5% discount is straightforward and is applied to every purchase, but only at Target. There are no rewards points to keep track of and if someone purchases a significant amount from Target frequently, the savings can add up over time.
However, the interest rate is high as is the case for most store-branded cards. Also, please note that if the balance is not paid in full each month, the APR on the Target RedCard and the resulting interest charges could wipe out the savings earned from the discount. However, for those who purchase a lot from Target and are likely to pay off the balances quickly, the Target RedCard could be a good choice with its 5% discount and no annual fee.
Frequently Asked Questions
Below are some of the most commonly asked questions about the Target RedCard credit card.
Is the Target RedCard a Credit Card?
The Target RedCard comes in multiple forms. The Target RedCard charge card can only be used at Target stores and on the company's website. The Target credit card with the Mastercard logo can be used at any merchant, store, or website. However, the 5% discount feature only applies to purchases made at Target's retail locations and on its website. The Target RedCard also comes in the form of a debit card, which is not a credit card since the purchases are debited from your bank's checking account that's linked to the card.
What Credit Score Is Needed for a Target RedCard?
Target doesn't state the minimum credit score needed to be approved for a Target credit card. Some banks approve store cards for those with a fair credit history or slightly above a 600 credit score. However, there are banks that approve credit cards for those who have credit scores in the 500's. If your score is low, you might still be approved, but you might be charged a higher interest rate on the balances and be offered a lower credit limit than those who have higher credit scores.
What Do I Need to Apply for a Target Credit Card?
Some of the information that you'll need to provide when applying for a credit card at Target include:
Your Social Security numberNameAddressDate of birthDriver's license number State ID number Your annual gross income, meaning all of your income for the year before taxes have been deducted
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b1a8813cd9902c6501aea0b5438c5039 | https://www.investopedia.com/articles/personal-finance/012116/6-funds-maximize-your-income-while-youre-retired.asp | 6 Funds to Maximize Your Income While You're Retired | 6 Funds to Maximize Your Income While You're Retired
You can find plenty of recommendations on great funds for your portfolio before retirement, but what works once your saving is mostly complete and you’re drawing on the accounts? We asked several financial advisors for some fund recommendations for the retiree.
Our experts mostly liked Vanguard funds, for their low cost and high performance, and cautioned that any of those named below should be part of a balanced portfolio catered to your specific financial situation. Also, as you research these names, remember that just because a fund performed well in the past doesn’t mean it will in the future. Most of these funds received Morningstar’s five-star rating.
Vanguard Wellesley Income Admiral Fund
Gage DeYoung, CFP and founder of Prudent Wealthcare, likes two Vanguard funds. The first is the Vanguard Wellesley Income Admiral Fund (VWIAX), which has about 60% of its assets allocated to bonds, 39.18% to U.S. stocks, and about 4% in non-U.S. stocks. The rest is in cash and other investments. This is an actively managed fund with a minimum investment of $50,000 and an expense ratio of only 0.16%.
Vanguard Wellesley Income Fund Investor Shares
If $50,000 is too high for you, DeYoung recommends checking out the Vanguard Wellesley Income Fund Investor Shares (VWINX). It’s mostly the same fund but has a minimum investment of only $3,000, with a slightly higher expense ratio of 0.23%. According to DeYoung, “Vanguard Wellesley does carry over a 35% weighting in equities currently. Vanguard Wellesley would be for a retiree who is not withdrawing more than 3% annually from it. If a client sought a greater withdrawal rate or was past the age of 80, I would probably be directing them to an equity weighting of 20% or less.”
Vanguard Equity Income Fund Investor Shares
Scott Stratton, CFP and president of Good Life Wealth Management, likes the Vanguard Equity Income Fund Investor Shares (VEIPX). The fund invests about 90% of its assets in domestic stocks and the rest in cash and non-U.S. stocks. This is an actively managed fund with an expense ratio of 0.27% and a minimum investment of $3,000.
Vanguard Wellington Fund Investor Shares
Most retirees will find that a 90% weighting toward stocks is too high, but they’re likely to have other funds to balance it out. Another of Stratton’s favorites is the Vanguard Wellington Fund Investor Shares (VWELX). The fund is a more balanced product, with about 65% in U.S. stocks, 33% in bonds, 10.5% in non-U.S. stocks, and the rest in cash and other investments. Also an actively managed fund, it has an expense ratio of 0.25%.
Stratton gives this caution to retirees: “Many retirees seek out a fund with the highest yield, but that’s often a mistake. Funds with the highest yield are often less diversified and higher risk than funds with a more average yield. In the long run, the highest yielding funds often underperform and frequently have larger losses in bear markets because they tend to be concentrated in just a few sectors.”
Dodge & Cox Stock Fund
The Dodge & Cox Stock Fund (DODGX) is another favorite of advisors. The fund invests 80% of its assets in U.S. stocks, 10.7% in non-U.S. stocks, and the rest in cash and other assets. Its expense ratio is noticeably higher, at 0.52%, and it has a minimum investment of $2,500, or $1,000 in an IRA. This is another fund that is weighted too highly in stocks for most retirees, but it works just fine in a balanced portfolio.
Vanguard PRIMECAP Fund Investor Shares
Finally, the Vanguard PRIMECAP Fund Investor Shares (VPMCX) invests 85% of its assets in U.S. stocks, 16% in non-U.S. stocks, and the rest in cash and other assets. It has an expense ratio of 0.40%, and its largest holdings are healthcare stocks. Again, use it alongside funds highly weighted toward bonds.
The Bottom Line
Remember that you shouldn’t go out and buy these funds because of our recommendation. Research the funds and then talk to a financial professional before buying in. In addition, because many of these funds are highly weighted in stocks, you should add these to a portfolio of other funds that might be more weighted toward bonds or safer investments. A financial advisor can help you properly weight your portfolio and avoid any overlap of investments in each fund.
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fd77e7280c399f35be34e4f631c7c0a1 | https://www.investopedia.com/articles/personal-finance/012215/how-bad-my-credit-score.asp | How Bad Is My Credit Score? | How Bad Is My Credit Score?
If you have really bad credit or really good credit, you probably know it already. But there's a vast middle area where your score is too low to get you the best offers. If you want to sign up for a new credit card, take out a loan at a car dealership, get a mortgage to buy a house, or borrow money for some other purpose, the quality of your credit score makes a serious difference.
Key Takeaways If you have a bad credit score, you'll generally pay higher interest rates on loans and credit cards—and may have trouble getting them at all. A bad credit score can also raise your insurance premiums and even hamper your ability to rent an apartment or get a job. Your credit score is determined by a number of factors, the most important of which is whether you pay your bills on time.
Why Credit Scores Matter
With a bad score, few banks will take a chance on you. Those that do will likely offer you only their highest rates. Even a so-so score may jack up rates compared to those offered to people with excellent credit.
A bad credit score can also increase your insurance rates or cause insurers to reject you altogether. It can stand between you and the apartment you want to rent. Negative items in your credit report can even hurt you when you apply for a job.
Let’s take a look at what is considered a bad credit score, how you might have gotten there, and what you can do to fix it.
Do You Have a Good or Bad Credit Score?
Credit scores, which may range from 300 to 850, take into account a number of factors in five areas to determine your creditworthiness: your payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
A bad credit score is a FICO score in the range of 300 to 579. (FICO stands for Fair Isaac Corporation, the company that originated the most widely used credit scoring system.) Some score charts subdivide that range, calling “bad credit” a score of 300 to 550 and “subprime credit” a score of 550 to 620. Regardless of labeling, you’ll have trouble obtaining a good interest rate or getting a loan at all with a credit score of 620 or lower. In contrast, an excellent credit score falls in the 740 to 850 range.
Things That Can Hurt Your Score
Borrowers with bad credit usually have one or more of the following negative items on their credit reports:
Delinquent payments Charge-offs An account in collections A foreclosure A short sale of real estate, such as a home A deed in lieu of foreclosure A bankruptcy
Your payment history counts for 35% of your score, so missing your payment due dates seriously hurts your score. Being 31 days late is not as bad as being 120 days late, however, and being late is not as bad as failing to pay for so long that your creditor sends your account to collections, charges off your debt, or agrees to settle the debt for less than you owe.
How much you owe relative to how much credit you have available is another major factor, accounting for 30% of your score. Say you have three credit cards, each with a $5,000 credit limit, and you’ve maxed them all out. Your credit utilization ratio is 100%. The scoring formula looks most favorably on borrowers whose ratio is 20% or lower.
To keep their credit utilization ratio at a favorable 20%, someone with $15,000 in available credit should aim to keep their debt under $3,000.
The length of your credit history counts for 15% of your score. You don’t have much control over this component. Either your credit history stretches back several years or it doesn’t.
The number of new credit accounts you have counts for 10% of your score, which means that applying for new loans to move your debt around might hurt your score. On the other hand, if moving your debt lands you a lower interest rate and helps you get out of debt more easily, new credit could ultimately boost your score.
The types of credit you use count for the remaining 10% of your score. If you have an auto loan, a mortgage, and a credit card—three different types of credit—it can mean a better score than if you only have credit cards. Again, don’t worry too much about this one. Applying for different types of loans in an attempt to improve your score will have little impact and only get you further into debt—not what you want if you have less than stellar credit. Instead, focus on paying down your balances and making your payments on time.
Things That Won’t Directly Affect Your Score
You might be glad to know that the following factors have no direct impact on your credit score:
Your income. It doesn’t matter whether you earn $12,000 or $120,000 a year, as long as you’re making your payments on time. Having a low income doesn’t have to mean having bad credit. Where you live. Living in a bad neighborhood won’t give you a bad credit score, nor will living in a prestigious one gives you a good score. If you own a home, its value doesn’t influence your score, either. Participating in a credit counseling program. Signing up for help managing your bills neither hurts nor helps your score. It’s the specific steps you take under that program that will influence how you rate. Your race. Even if someone might guess your race based on your name, FICO doesn’t factor race into your credit score. Your marital status. Your credit report doesn’t state whether you’re married or divorced, nor does it factor that into your score. Marriage might indirectly lead to a good credit score if having two incomes makes it easier to pay bills you were struggling with—or it might leave you with bad credit if you marry someone who's financially irresponsible. Divorce can indirectly hurt your credit score if it damages your finances, but again, marital status won’t affect your score directly. The interest rate on any of your loans or credit cards. Whether you’re paying the default interest rate of 29.99% on a credit card or a promotional introductory rate of 0%, the scoring formula doesn’t care.
Does No Credit Mean Bad Credit?
Having no credit history and no credit score—as might be the case if you're just out of school or newly arrived in the U.S.—doesn't mean you have "bad" credit. Even so, it can make it harder to rent an apartment, open a credit card account, or obtain a loan. In many cases, you can get around your lack of a score by using alternative methods to prove your financial responsibility.
If you want a mortgage, for example, you can submit a history of timely rent and utility payments with your mortgage application. Or, if you aren't eligible for a conventional credit card, you can apply for a secured credit card, which, after a period of time, may qualify you for a conventional one.
3 Tips for Improving a Bad Credit Score
Here are some simple steps you can take that will almost certainly improve your score over time.
1. Make at least the minimum payment on time, every time, on every account. You may not have the cash to totally pay off your balances or even make a serious dent in them, but if you can at least make the minimum payment by the deadline each and every month, that will help your score.
2. Try to fix significant credit report errors. You can obtain your credit reports once a year, free of charge, from the three major credit reporting agencies (Equifax, Experian, and TransUnion) at the official website for that purpose, AnnualCreditReport.com. The three agencies' reports may differ somewhat, depending on what information they collect. If you find an error on any of them, you can file a "dispute," following the steps outlined on that agency's website. The agency is then required to investigate the matter and report back to you. For additional help spotting errors on your credit report, consider taking advantage of one of the best credit monitoring services.
3. Talk with your creditors. If you’re having trouble repaying your debts, see if you can work out a more favorable arrangement with your credit card companies or other lenders. Make sure you get any agreement in writing. Be aware that some arrangements can hurt your score, though. Asking to have your credit card payment due date changed to five days after you get your paycheck, for example, will not hurt your score, but getting your creditor to reduce your loan balance will.
The end game here is not just improving a three-digit number, but correcting the problems that might have gotten you into a difficult financial situation in the first place. In the long run, it’s not about having a 740 credit score, nice as that might be, but having your debts under control and being able to focus on your financial goals for the years ahead. If you need additional help removing negative marks from your credit report, the best credit repair companies can speak with the three major credit reporting agencies on your behalf.
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6f8c0c80f62d09ae64229911abebff49 | https://www.investopedia.com/articles/personal-finance/012315/how-expensive-new-york-city-really.asp | How Expensive Is New York City to Live In? | How Expensive Is New York City to Live In?
How Expensive Is it to Live in New York City?
Life really does cost more in New York. To be precise, the cost of living in Manhattan was 148% higher than the average cost for major U.S. cities in 2019. Manhattan takes the number one spot as the most expensive, according to a Kiplinger survey. Brooklyn, which was treated separately in the study, came in as the fourth most expensive city at 80% above the average cost.
Key Takeaways The cost of living in Manhattan was 148% higher than the average cost for major U.S. cities in 2019. The average rent in Manhattan was $3,475 according to zillow.com while the rents averaged $2,900 per month in the rest of the city. It costs an average of $1,376 per square foot to buy a home in Manhattan and $673 per square foot for the rest of the city. Consumer prices are 24% higher while restaurant prices are 28% higher in New York City than in other cities such as Chicago.
Understanding How Expensive is New York City
Before moving to any city, the cost of living is a critical financial metric to know, which can include rent, mortgage, food, and utilities. In some cities, residents need a car while in other cities like New York, public transportation is the norm. However, if you're contemplating moving to the Big Apple, it's likely going to be a more expensive city than your current one.
Childcare is nearly double the cost of other cities such as Chicago and as any New Yorker can tell you, the worst of the price discrepancies between New York and other cities is the cost to buy a home. Below is an outline of how much it costs to live in New York City.
Renting an Apartment
You can pay $20,000 a month for a family-size apartment on the Upper East Side of Manhattan. Or, you can rent a tiny apartment in Queens for about $2,000, assuming it's not in one of the borough's new luxury buildings. Of course, there are many options in between, but finding a place to live in New York City is grueling for all but the super-rich with vacancy rates under 4% in 2019.
The average rent in Manhattan was $3,475 in 2019, according to zillow.com. The rents are slightly lower with an average of $2,900 per month throughout the rest of the Big Apple. Neither price will get you a palace since the average size of an apartment is approximately 700 square feet.
However, some good news for renters is that approximately 40% of the rental apartments in the city are rent-stabilized. In other words, landlords can't increase rents at will since rent increases are set by the Rent Guidelines Board of New York City.
Buying a Home
The cost of real estate in Manhattan averaged $1,376 per square foot in 2019, according to zillow.com. That's more than double the price per square foot of $673 for the rest of the city. By comparison, San Francisco had a price per square foot of $1,108 while Boston came in at $758, and Miami Beach was $518.
The median price of homes listed in Manhattan for 2019 was $1,495,000, while the median price of homes that sold was $968,000. In other words, not all of the homes are selling for their listing price, which could possibly be a sign that the housing market is cooling off. New York City, as a whole, had an average listing price of $760,000 per home.
The outer boroughs are no longer safe havens from Manhattan prices. The average home in Brooklyn cost $730,000 according to Zillow. In Queens, the average was $579,000, Staten Island was $574,900, and the Bronx averaged $379,700.
Grocery Prices
Consumer prices are 24% higher in New York City than in Chicago, according to numbeo.com. Groceries such as milk, eggs, cheese, and chicken are all at least 30% more expensive in New York versus Chicago.
It should be noted that such comparative statistics are subject to huge variations. You can find specials on anything in New York, and grocery shopping options range from farmer's markets to supermarket chains and convenience stores.
Dining Out
Restaurant prices are 28% higher in New York versus Chicago. However, the average costs of dining out in New York City are likely to be inaccurate since there are so many options in the city. At the low price end, the choices are nearly endless, from street food, and cheap eateries to modest family-owned restaurants of every ethnicity and specialty. At the high end, the prices can be jaw-dropping.
The statistics say that a three-course meal for two in a mid-range restaurant will set you back $80 in NYC and only $60 in Chicago–a 33% higher cost in New York. Sadly, even McDonald’s costs more in New York than in Chicago, by about 12% for a McMeal.
Transportation
A single ticket fare for a New York subway or bus ride is $2.75, though regulars can buy a monthly pass for $116.50. Both are around 12% above Chicago’s fares.
Taxis start at $3.25 in Chicago versus only $2.50 in New York. Nevertheless, taxis tend to be an expensive option, at least during the weekdays when traffic is nearly always heavy.
One plus for New York City over many cities is that there's no need to own a car. Of course, considering that it averages $430 per month to rent a parking space in a garage, most people probably won't want a car. Public transportation or walking are likely the best ways to get around in the city, particularly considering the traffic.
Utilities
Basic utilities for a 900 square-foot apartment (including electricity, heating, water, and garbage) in New York is approximately $128 per month, which is comparable to Chicago. Adding access to the internet will set you back another $65 in Chicago and $63 in New York.
Elsewhere
Among American cities, only San Francisco comes close to New York in cost. However, a New Yorker has nearly 16% less purchasing power than someone living in San Francisco, which makes New York one of the top ten most expensive cities in the country.
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71b9a5d589ee2a812c9923623ee1d0d2 | https://www.investopedia.com/articles/personal-finance/012715/when-leasing-car-better-buying.asp | When Leasing a Car Is Better Than Buying | When Leasing a Car Is Better Than Buying
Choosing whether to lease a new vehicle instead of buying it largely comes down to priorities. For some drivers, leasing or buying is purely a matter of dollars and cents. For others, it’s more about forming an emotional connection to the car. Before choosing which road to go down, it’s important to understand the key distinctions.
The Basics of Leasing
When you lease a vehicle, you're basically renting it from the dealer for a certain length of time. That's usually 36 or 48 months. Once your lease period ends, you have the option of returning the vehicle to the dealer or purchasing it at a pre-determined amount, which is defined in the lease contract.
That's a lot different from buying a car. Buying it outright means you own it after the loan is paid off.
Key Takeaways The monthly payments for a lease are usually lower than for a loan.You're not building up any equity in the vehicle with those payments.You can buy the vehicle at the end of the lease for a pre-arranged price.
Lease Payments
Lease payments are generally lower than the monthly loan payments for a new vehicle.
Monthly car loan payments are calculated based on the sale price, the interest rate, and the number of months it will take to repay the loan.
Lease payments depend on factors including:
Sale Price: This is negotiated with the dealer, as with a vehicle purchase.Length of the lease: This is the number of months you agree to lease the car.Expected mileage: The lease sets a certain maximum number of miles you can drive the car each year. Most leases come with a 10,000-mile annual allotment. The monthly payment will increase slightly if you go for a higher yearly mileage. If you exceed the mileage limit in the contract, you'll owe the dealer cash for every extra mile at the end of the lease.Residual Value: This is the value of the vehicle at the end of the lease, with its depreciation figured in. If you decide to purchase the vehicle once the lease expires, this is the amount you will pay.Rent Charge. This fee is shown as a dollar figure rather than a percentage, but it is the equivalent of an interest charge.Taxes and Fees: These are added into the lease and affect the monthly cost.
Some dealers or the manufacturers they represent require a down payment for a lease. The more you put down, the lower your lease payment will be.
Keep in mind, it may not make sense to put too much cash down on a vehicle that you'll ultimately be handing back to the dealer. If you're quite sure you're going to buy it when the lease expires, it will reduce the cost then.
Advantages and Disadvantages of Leasing
The major drawback of leasing is that you don’t acquire any equity in the vehicle. It’s a bit like renting an apartment. You make monthly payments but have no ownership claim to the property once the lease expires.
In this case, it means you can't sell the car or trade it in to reduce the cost of your next vehicle.
However, there are advantages to leasing as well. They include:
Lower Monthly Payments
If you're concerned about the monthly costs, a lease eases the burden a bit. Generally, the monthly payment is considerably less than it would be for a car loan. Some people even opt for a more luxurious car than they otherwise could afford.
Make sure your insurance covers any charges that may still be due even if the car is totaled before the lease runs out.
A New Car Every Few Years
For many people, there’s nothing like the feeling of driving away in a brand new ride. If you’re one of them, leasing may be the way to go. When the lease is up in a few years, you can return it and get your next new car.
Worry-Free Maintenance
Many new cars offer a warranty that lasts at least three years. So when you take out a three-year lease, most of the repairs should be covered. Leasing arrangements largely eliminate the hazards of a significant unforeseen expense.
No Resale Worries
Are you the type of person who hates to haggle? If so, you probably hate the idea of selling your used car to a dealership or a private buyer. With a lease, you simply return the car. The only thing you have to worry about is paying any end-of-lease fees, including those for abnormal wear or additional mileage on the vehicle.
Maximizing Tax Deductions
If you use your car for business purposes, a lease will often afford you more tax write-offs than a loan. That’s because the IRS allows you to deduct both the depreciation and the financing costs that are part of each monthly payment. If you’re leasing a luxury automobile, the amount you can write off may be limited.
Longer-Term Considerations
If you’re thinking about the long-term financial impact, leases look less attractive. Because you don’t build equity and have to pay certain fees that don’t come with a loan, including an acquisition fee (also called a lease initiation fee), experts say it’s usually cheaper overall to buy a car and hold onto it for as long as possible.
Leases also provide less flexibility than buying. The contract discourages any customization. In fact, the finance company may require that you reverse any modifications prior to returning it, which can be both a pain and an extra expense.
Also, if the car is totaled in an accident before the end of your lease, you may be liable for some costs not covered by your car insurance unless the lease includes car gap insurance. This type of insurance covers any costs that might be required before the lease expires, even if the car is scrap.
If you decide that taking out a loan is preferable to leasing a vehicle, then it's worth using an auto loan calculator to determine what loan term and interest rate would best suit your needs.
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66bc4d1b20425a39a927942e14e17b4c | https://www.investopedia.com/articles/personal-finance/012815/banana-republic-credit-cards-benefits-rewards.asp | How Does the Banana Republic Store Credit Card Work: Benefits and Rewards | How Does the Banana Republic Store Credit Card Work: Benefits and Rewards
How the Banana Republic Store Credit Card Works
If you’re a frequent shopper at Banana Republic, you’ve probably been informed about the store's credit card at the checkout counter or seen advertisements for the credit card online, along with a promise of a discount on the day's purchases.
Banana Republic actually offers two credit cards: The Banana Republic Store Credit Card and the Banana Republic Visa Credit Card. All customers start with a Banana Republic Store or Visa Credit Card and can reach Banana Republic Luxe Credit Card-status by earning 5,000 points in a calendar year. Returned merchandise or points earned during a promotional campaign are not counted towards the 5,000 points for an upgrade. You can use your Banana Republic Store Credit Card at any Gap Inc. brands, including the Gap, Old Navy, and Athleta (in addition to Banana Republic). And new cardholders can take 20% off their first purchase when they open a Banana Republic store credit card.
Key Takeaways Banana Republic offers two credit cards: The Banana Republic Store Credit Card and the Banana Republic Visa Credit Card.You can use your Banana Republic Store Credit Card at any Gap Inc. brands, including the Gap, Old Navy, and Athleta (in addition to Banana Republic).Banana Republic partners with Synchrony Bank to offer revolving credit services for transactions made in-store and online at Gap Inc. brands.Customers who have the Banana Republic Store Credit Card earn five points for every $1 spent at Gap Inc. brands, a $5 reward for every 500 points earned, special cardmember-only offers and private sales, early access to special events, no receipts required for returns, and zero fraud liability.
Synchrony Bank, based in Stamford, Connecticut, is the issuer of Banana Republic credit cards. Banana Republic partners with Synchrony Bank to offer revolving credit services for transactions made in-store and online at Gap Inc. brands.
Store credit cards are also known as “private label” and “closed-loop” cards. They are distinct from general use credit cards that carry the logo of a major financial institution (i.e. Visa or Mastercard) and can be used at any merchant that accepts those network cards. Store credit cards, such as Shell's Fuel Rewards Card, are distinct from this type of card because they can only be used at certain retailers. In the case of Shell Fuel Rewards Cards, these credit cards can only be used at participating Shell locations.
Rewards and Benefits
Since Banana Republic is owned by Gap Inc., a Banana Republic store credit card can also be used to earn rewards at any Gap Inc. brand (Gap, Old Navy, Athleta, or Banana Republic). You can also redeem your rewards at any Gap Inc. brand.
Customers who have the Banana Republic Store Credit Card earn five points for every $1 spent at Gap Inc. brands, a $5 reward for every 500 points earned, special cardmember-only offers and private sales, early access to special events, a surprise birthday gift, no receipts required for return, and zero fraud liability.
Customers who have the Banana Republic Luxe Credit Card receive all the same rewards, plus some additional perks. With the code LUXE, all customers who have a Banana Republic Luxe Credit Card can receive free three to five day shipping on any Gap Inc. online order, in addition to 20% bonus points each quarter, free basic alterations on Banana Republic purchases, and can use the private toll-free priority line (866-450-2335). They can also participate in the Choose Your Own Sale Day.
Where Can Someone Get the Banana Republic Store Credit Card
Customers can apply for the Banana Republic Store Credit Card online.
What Kind of Credit is Required for the Banana Republic Store Credit Card
As with most store credit cards, the credit needed to qualify for the Banana Republic Store Credit Card is generally fair to good.
Where Can the Banana Republic Store Credit Card be Used?
The Banana Republic Store Credit Card can be used when you make a purchase using at all Gap Inc. brands (Banana Republic, Gap, Old Navy, and Athleta) in-store and online.
The Banana Republic Store Credit Card and the Banana Republic Luxe Credit Card are both private label credit cards. This means they only intended for use at Gap Inc retailers. The advantage of a private label credit card is that a company can offer more lenient and extended terms to its customers than they could otherwise.
Alternatives to the Banana Republic Store Credit Card
Gap Inc. offers both store cards that can only be used at Gap Inc. brands, in addition to a Gap Visa card, co-branded with Visa, that can be used anywhere that Visa cards are accepted.
There is also the Banana Republic Visa credit card which provides cardholders with one point for every $1 spent outside of Gap Inc. brands and offers Visa cardmember-only offers and promotions. Cardholders will also earn five points per $1 spent at Gap Inc. stores.
Terms and Conditions of the Banana Republic Store Credit Card
Financial institutions are required by law to obtain, verify, and record information that identifies each person who opens an account. Applicants will be asked to provide their name, address, date of birth, and other identifying information when they open an account. Applicants may also be required to show their driver's license or other identifying documents. Applicants will also be required to provide identification information for any authorized users they add to their account.
The annual percentage rate is 25.99%. Your due date is at least 23 days after the close of each billing cycle and you will not be charged any interest if you pay your entire balance by the due date each month. The late payment penalty fee is up to $40. There is no annual fee for the card. For cash advances, there is either a $10 transaction fee or 5% of the amount of each cash advance (whichever is greater). For foreign transactions, the fee is 3% of each transaction.
Annual Percentage Yield (APR): 25.99%Late fee: Up to $40Annual fee: $0Transaction fee for cash advances: $10 or 5% of the amount of each cash advance (whichever is greater)
Who Should Consider the Banana Republic Store Credit Card
A Banana Republic Store Credit Card can make sense if you frequently shop at Banana Republic or another Gap Inc. brand and you would like access to the special discounts that are involved with a store card.
However, if you have excellent credit, you might want to consider the Banana Republic Visa credit card. You can earn better rewards, access to a larger credit line, and have the greater flexibility of being able to use the card outside of Gap Inc. brands.
The Bottom Line
Like most store cards, the offer is enticing, and the Banana Republic Store Credit Card has the added benefit of applying to all the stores in the Gap group. All the same, measure it against what you would get from a regular cash back credit card.
First, crunch some numbers. Before you amass a $50 rewards certificate, you have to earn 5,000 points in Gap stores. Compare that to what you'd get from a cash back credit card.
If you do spend enough at Gap stores to take advantage of this card, avoid carrying a balance. With an 25.99% APR and a less-than-ideal rewards structure, any interest payments you make could wipe out any benefit from your rewards.
Frequently Asked Questions
How Do I Get a Banana Republic Luxe Card?
Cardholders who earn at least 5,000 points in a calendar year will be upgraded to a Banana Republic Luxe Credit Card account, which may entitle them to multiple additional benefits.
How Do I Pay My Banana Republic Store Credit Card?
You can call the number on the back of your credit card and follow the automated directions. Make sure to have your credit card nearby to verify your account information. You can mail a check or money order to pay your Banana Republic store credit card payment. Finally, you can set up an account on the credit card servicing website where you can make payments and manage your Banana Republic Store Credit Card online.
What Bank Is Banana Republic Store Credit Card?
Synchrony Bank issues the Banana Republic credit cards.
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8ba01334c2a1734df436a3f6209aa3e5 | https://www.investopedia.com/articles/personal-finance/012815/how-amazoncom-credit-card-works.asp | How the Amazon Prime Rewards Signature Visa Card Works: Benefits and Rewards | How the Amazon Prime Rewards Signature Visa Card Works: Benefits and Rewards
How the Amazon Prime Rewards Signature Visa Card Works
Amazon.com is the virtual store that has everything—and at low prices. Order it today; have it as soon as tomorrow. Not only does it offer a wide variety of goods, but the company also offers a co-branded visa card, especially for its Prime members.
The Prime Rewards Signature Visa is similar to its alternative co-branded card, named the Amazon Rewards Signature Visa credit card. Both credit cards can be used anywhere Visa is accepted and are backed by Chase Bank USA, N.A., a subsidiary of JPMorgan Chase & Co., which handles all revolving credit services and issues.
The card can be used anywhere that accepts Visa. The card offers 5% cashback on all items purchased on Amazon.com and Whole Foods markets. Newcomers are given the option of a $70 gift card to spend on Amazon.com or take advantage of a $100 statement credit after purchasing $100 worth of goods in a Whole Foods market before March 3, 2021. Cardholders may select a card design featuring either Amazon or Whole Foods, as well.
Key Takeaways The Amazon Prime Rewards Signature Visa Card is a co-branded credit card offering rewards like 5% cash back on purchases made on Amazon.com and in Whole Foods markets. Besides good credit, you must have a Prime membership to be eligible for a Prime Rewards Signature Visa. The Amazon Rewards Visa Signature Card is nearly identical to the card designed for Prime members. However, cardholders only receive a 3% rebate on purchases. You must have a good credit score—at least 670—to be considered for either of the co-branded Amazon Signature Visa cards. Amazon also offers two store cards, but these cards are not credit cards. The cards are used for purchases on Amazon.com but eligible for use in Whole Foods markets.
Rewards and Benefits
If you do a lot of shopping on Amazon and at Whole Foods, this card offers several perks. You earn a 5% rebate (or 3%, for non-Prime members, who are eligible for the Visa Rewards card) for all Amazon.com and Whole Foods Market purchases; 2% at gas stations, restaurants, and drugstores; and 1% on all other purchases. Your rewards come in the form of points. You'll get one point for each penny you earn in rebates.
When you open an Amazon Signature Visa credit card, you will receive 5% back everywhere you shop on up to $2,500 in purchases for the first three months of owning the card if you have a Prime account. If you tend to buy your groceries at Whole Foods and frequently shop online at Amazon as a Prime member, this card could provide substantial rewards and rebates.
Example of Points
Let’s say you bought an item on Amazon for $20. You would earn a 3% rebate (60 cents), which would become 60 points. Every 100 points are worth $1. Your points are available as soon as they are processed as a discount at checkout.
When you are approved for the card, Amazon will give you a $70 gift card. There is no annual fee, no foreign transaction fees, no earning cap, and your points never expire.
As of January until March 3, 2021, new cardholders can earn a $100 bonus if they use their Amazon Prime Rewards Visa Signature Card for in-store purchases at Whole Foods.
Where Can Someone Get the Amazon Prime Rewards Signature Visa Card?
Interested customers can apply for the card online at Amazon.com. However, the vetting process will go through Chase Bank, which authorizes and administers the financial logistics and the approval process.
According to Amazon.com, "if your application is instantly approved, you'll be taken to a page that includes the Cardmember Agreement, the terms of your Amazon Rewards Visa Signature account, and other important information."
Conversely, if your application isn't approved instantly, Chase Bank will inform you about your status after reviewing your credit history. This takes approximately two to four weeks. Amazon recommends waiting two weeks after submitting your application before contacting Chase Bank.
What Kind of Credit is Required for the Amazon Prime Rewards Signature Visa Card?
Unlike the Amazon store card, which only requires fair credit, the Amazon Rewards Signature Visa cards (Prime member or non-member) both require a higher credit score because they are Visa credit cards.
Amazon.com offers both a store credit card that can only be used on Amazon.com orders and several co-branded Visa card options such as the Amazon Rewards Visa Signature Card that can be used anywhere Visa is accepted.
Where Can the Amazon Prime Rewards Signature Visa Card Be Used?
You can expect to use your Amazon credit card anywhere that takes Visa, most likely anywhere in the U.S., and over 150 countries worldwide. Unlike store cards tied to use at a specific retailer, a visa card connected to Amazon.com is a regular credit card in many ways.
You will earn rewards if you use it to shop on Amazon.com or Whole Foods, but you can also benefit from rewards when used at participating gas stations, pharmacies, and other retailers.
Alternatives to the Amazon Prime Rewards Signature Visa Card
Amazon offers two store-only cards, similar to its credit cards, as the Amazon Prime store card offers its Prime member holders more perks. Synchrony Bank issues the Amazon.com Store Card and the Amazon Prime Store Card, and the cards are useful if you are a frequent shopper on Amazon.com.
Amazon.com and Amazon Prime Store Cards
If you don't want or don't qualify for either of the Amazon Rewards Signature Visa cards, the Amazon.com or Prime store cards may be a viable option for saving money on your Amazon purchases. Amazon store cards are not accepted at Whole Foods markets, unlike the Amazon Prime Rewards Signature Visa and the Amazon Rewards Signature Visa.
When you are approved for an Amazon.com store card, you receive a $60 gift card from Amazon.com, slightly less than the $70 gift card you receive for opening an Amazon Prime Visa card. The Amazon store card's reward program is not as robust as its Visa Rewards Signature Visa card, but it does offer introductory financing opportunities for new cardholders.
Amazon Rewards Signature Visa Credit Card
The Amazon Rewards Signature Visa card is another alternative if you don't have a Prime membership but want the convenience and the benefits of an Amazon Visa credit card. The Amazon Rewards Signature Visa is nearly identical in its perks and terms and conditions as the Prime Rewards Visa Signature Card, with one exception, if you are not a Prime member, you will only reap a 3% reward when you shop on Amazon.com and at Whole Foods.
Terms and Conditions of the Amazon Prime Rewards Signature Visa Card
The annual percentage rate on your card will depend on your credit history. There’s no introductory APR. Expect a rate between 14.24% and 22.24%, but it will vary based on the prime rate. Balance transfers have the same APR as purchases instead of the higher one many cards impose.
Cash advances on the Amazon Prime Rewards Signature Visa have an interest rate of 24.99%. You have 21 days after the end of the billing cycle to pay the balance in full to avoid any interest charges. The late payment fee is up to $39, depending on your card's balance. Customers will pay $5 or 5% of the balance transfer amount, whichever is greater. Cash advances cost $10 or 5%, whichever is greater.
The card does not have an annual fee attached, but if you want the Amazon Prime Rewards Signature Visa, you will have to pay to be an Amazon Prime member, which costs $119 per year. You must be age 18 or older to apply for the card, and credit limits are based on the applicant's credit.
Amazon Prime Rewards Signature Visa APR Late Fee Return Check Fee Grace Period Amazon Prime Rewards Signature Visa 14.24% and 22.24% $39 None 21 days after the end of the billing cycle
Who Should Consider the Amazon Prime Rewards Signature Visa Card?
If you frequently shop in Whole Food markets and on Amazon.com as a Prime member, this card might make sense given the rebates and rewards. A co-branded card like this provides not only access to rewards but a line of credit, and you have the flexibility of being able to use the card anywhere that takes Visa. If you don't want to take out a credit card, but you have brand loyalty to Amazon and shop frequently on its website, you might consider an Amazon.com or Amazon Prime Store card.
The Bottom Line
Although the card is only available to Prime members, the rewards structure of either Amazon Visa card might make it useful even for people who only shop at Amazon infrequently. The APR is still higher than most non-retail cards, but this card's terms are attractive in the retail space.
Rewards are most valuable to people who don’t carry a balance, as you can quickly pay more in interest charges than the benefits are worth if you don't pay it off. Second, it may be wise not to make purchases solely to earn rewards. Saving your money and investing it will always win out over spending.
If you are interested in owning a Visa card and an avid Amazon.com and Whole Foods shopper, you may want to investigate opening this card.
Frequently Asked Questions
What Kind of Credit Score Do I Need to Open an Amazon Prime Rewards Signature Visa Card?
Amazon.com doesn't state explicitly about the score. Still, numerous reviewers of the product report that the recommended credit score to be eligible for an Amazon Prime Signature Visa card needs to be at least 670.
Where Can I Use My Amazon Prime Rewards Signature Visa Credit Card?
You'll earn 5% back on all Amazon.com and Whole Foods markets purchases, but you can use the card anywhere Visa is accepted.
Does Amazon Prime Rewards Signature Visa Card Help You Build Credit?
Yes. Like any Visa credit card, if you manage your credit wisely, it can help you improve your credit over time.
Does the Amazon Prime Rewards Signature Visa Have an Annual Fee?
No, the card does not have an annual fee. However, you will be required to purchase an Amazon Prime membership ($119 a year) if you want to open an Amazon Prime Rewards Signature Visa credit card account.
What's the Difference Between the Amazon Prime Rewards Signature Visa Card and the Amazon Rewards Signature Visa Card?
Both cards are co-branded by Chase and offer the same terms and conditions but slightly different rewards. Prime members get a 5% back on all items purchased on Amazon.com, and at Whole Foods, non-prime cardholders receive a 3% rebate. Both cards come without an annual fee, but a Prime membership costs $119 a year.
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95c23e4b53a77f7467531e79b74033b8 | https://www.investopedia.com/articles/personal-finance/012815/how-steve-jobs-changed-world.asp | How Steve Jobs Changed the World | How Steve Jobs Changed the World
As an innovator and visionary, Steve Jobs' accomplishments can be held on a pedestal with the likes of Microsoft’s (MSFT) Bill Gates, Google’s (GOOG) Larry Page and Sergey Brin, and Facebook’s (FB) Mark Zuckerberg. The aforementioned names are all highly regarded within technology for transforming consumerism and the accessibility of information.
While best known as the chief executive officer (CEO) of Apple (AAPL), the late Jobs has had a profound effect on the world outside of technology. From purchasing Pixar in 1986 to supporting charities and environmental causes, Jobs’ achievements and innovations continue to affect industries and lifestyles worldwide.
1:59 Steve Jobs And The Apple Story
Key Takeaways Steve Jobs' impact on the world continues today through his accomplishments in technology, innovation, and product development.While at the helm of Apple, Jobs lead the company in the development of groundbreaking products, including the iPod, iPhone, and iPad.Jobs founded the NeXT computer company, which developed an operating system that Apple eventually acquired to help boost its own line of personal computers.Jobs successfully turned Pixar into a leader in animated featured films, eventually selling the company to Disney in 2006 for $7.4 billion.
NeXT
Most associate Jobs’ success with Apple. However, in the early days, Jobs' relationship with Apple proved to be a rocky one. After being fired from the company he founded in 1985, Jobs founded NeXT, a firm that created computers for business and educational needs. While NeXT wasn't particularly successful based on units sold, the company continues to be an integral part of computers today. Portions of Nextstep operating systems still live on within Mac OSX. Additionally, the famous “Wolfenstein” and “Doom” computer games were written on NeXTcube stations.
In 1990, British scientist Tim Berners-Lee created the World Wide Web using a NeXT computer.
Pixar
Jobs' $5 million acquisition of Lucasfilms' Computer Graphic Division in 1986 proved to be a wise investment. The potential he saw in the company—later renamed Pixar—paid off when he sold it to Disney (DIS) in 2006 for $7.4 billion. Prior to the mid-1990s, Disney was the gold standard of full-length animated feature films, and it wasn’t until the success of Toy Story in 1995 that Pixar landed on the map. With each subsequent film, Pixar gained steam and created a whole animation industry in Hollywood. The company’s movies grossed around $3.5 billion worldwide before its acquisition by Disney.
While Jobs lacked expertise in graphic design and video production, he believed Pixar’s computer technology and animation would one day match Disney’s work. Job’s biggest impact was on the strategic direction of the company, including leading and overseeing Pixar’s initial public offering (IPO) in 1995. The investment capital Pixar received from going public gave Jobs the freedom to rapidly expand the company. Many attest that Jobs' drive and vision for Pixar gave the company the support it needed to prosper and flourish. Today Pixar is recognized as one of the most influential film studios in the world.
Apple
Jobs’ development of new product lines while at the helm of Apple continues to impact countless individuals and has created enormous success for the company.
The iPod
Released in 2001, the iPod was widely recognized as the first user friendly and innovative means of accessing music on the go. Consumers had used portable radios, CD or tape players for remote audio purposes prior to widespread access of mp3 files. Syncing with Apple’s iTunes program, the iPod gave users the means to carry and purchase hundreds of songs on a single device.
The iPhone
Jobs’ next big product launch was the iPhone. Combining the features of an iPod with those of a phone and computer, the iPhone enabled users to make calls, listen to music, and browse the Internet on one touchscreen-capable device. Besides synchronization to iTunes, the iPhone featured an exclusive App Store that liberated users from purchasing content from wireless carriers. Before the App Store, wireless carriers controlled the distribution of content to phones.
On Nov. 1, 2018, Apple announced it would no longer report the number of iPhones sold. However, between its initial launch in June 2007 and Nov. 2018, cumulative worldwide sales for the iPhone had soared to approximately 1.5 billion.
The iPad
Taking their cue from the iPhone, Apple and Jobs then created the first touchscreen tablet without a keyboard. A cross between a laptop and an iPhone, the iPad spurred the development of a new industry that other technology companies have since entered. Jobs' influence on retail products has revolutionized consumer technology, forcing engineers and developers to create new and innovative products. Consumers have benefited most from increased competition, as products remain modestly priced but boast increased capabilities and features.
Charity
As seen at NeXT, Pixar, and Apple, Jobs had a visible role in the success of products and companies. However, behind the scenes, Jobs was known by a select few as a philanthropist. While his philanthropic efforts were rarely made public, many have attested to Jobs' charitable nature. Jobs donated over $50 million to Stanford hospitals through Apple, and contributed to various projects to fight AIDS. As a philanthropist, Jobs' goal wasn't to be recognized but to help those who needed it.
Environment
Not only are Apple products considered innovative, but they are also environmentally friendly. Jobs promoted an initiative for environmentally friendly products during his time as CEO. Apple utilizes eco-conscious materials such as recycled aluminum, plastics, and papers in its products to conserve global resources. Likewise, all Apple products are ENERGY STAR qualified, which means they follow the requirements set forth by the Environmental Protection Agency (EPA) for energy efficiency.
The Bottom Line
As the initial creator of upscale, user-friendly technology, Steve Jobs' accomplishments continue to have profound effects today. The competition created from the introduction of the iPod, iPhone, and iPad has revolutionized the technology industry. Consumers have benefited from developments in phones and computing, and have a wider array of choices when purchasing computers, phones, and tablets.
While Jobs’ influence on technology was obvious, his philanthropy has gone widely unrecognized. Jobs donated to a variety of charitable causes, and he also sought to lessen the long-lasting environmental impacts of Apple’s products by changing the company’s environmental policy.
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993ed5a3d5fc47c3ba47170c369b4746 | https://www.investopedia.com/articles/personal-finance/012915/how-use-linkedin-get-job.asp | How to Use LinkedIn to Get a Job | How to Use LinkedIn to Get a Job
LinkedIn wants to help you get a new job – it really, really does. But you’ve got to help it help you. It is a Microsoft subsidiary, and a very effective one. Even though LinkedIn has over 700 million users, only a tiny fraction of those people are relevant for your job-hunting purposes, so you need to find—and get found by—the right ones. Here are four ways to make that happen.
1. Make Your Profile Work Harder
Your first step to increasing your visibility is fairly easy: Add or change your photo to a better quality, more professional one. Research shows that adding a photo will increase your profile’s traffic by a factor of 11. Find or create an in-focus headshot of yourself dressed appropriately for what you do, smiling and making eye contact with the camera.
As far as what your profile should actually say, think of it as a reverse “Help Wanted” ad. As you scan job listings, note keywords you see repeatedly, things like “customer-centric” and “relationship building.” Headhunters search candidates’ LinkedIn profiles the same way, so you want to make sure your language reflects theirs.
Your Headline
Your first opportunity to work in important keywords is with the 120-character job title that appears under your name, aka, the headline. Don’t feel obligated to use your literal title, especially if your title doesn’t adequately describe what you do (e.g., not “community manager,” but “commercial real-estate management professional”). Most especially, don’t use “former” or any other word that indicates you aren’t currently employed.
Your Summary
The next opportunity to grab a potential employer’s attention is the “Summary” section—this is the make-or-break spot to sell yourself. Highlight your skills and be specific about accomplishments, awards and other recognition. Use employers’ hot-button terms (e.g., “fast-paced environment”), but don’t just stuff the summary full of keywords. Write in the first person—here’s one spot where you can let your personality shine through and add to your memorability (in a professional way, of course). Be strict about length: If you use the entire space allowed, you run the risk of appearing both boring and old, neither of which is going to win you a job.
Tip: It’s important to remember that LinkedIn will notify your contacts when you make changes to your profile, so while you are under construction, make sure you turn off the “Notify my network” function (found in the right-hand column on your Profile page). Otherwise, you run the risk of annoying your contacts with a continuous stream of insignificant updates. When you are happy with your new profile, though, turn it back on and let everyone know!
2. Stay Active (But Not Too Active)
To stay top of mind with your contacts, you want to maintain a visible presence on LinkedIn. It’s important, however, to be judicious about how active you are, especially if you are unemployed. You know that Facebook friend who seemingly posts every 15 minutes? Well, you don’t want to be that guy on LinkedIn, especially if you haven’t used it at all in a while.
Start Slow
First, download the LinkedIn app to your phone; this will encourage you to check out the site whenever you have downtime. (Think: less Facebook, more LinkedIn, until you have a new job.) Then, visit LinkedIn’s home page at least once a day and see what others are posting. Like and comment on those posts. After you have a feel for what’s appropriate, begin adding items yourself every day or so. The easiest way to do this is to find interesting, provocative stories, photos and videos that involve your profession and make intelligent comments as you share them, rather than trying to blog with high frequency yourself. If you are a blogger, however, be sure to include LinkedIn in your social media outreach.
Use Visuals
LinkedIn has made sharing photos directly from your phone easier, so if you find yourself at a professional seminar, conference or networking event, remember to post a photo and positive comment. Or post your work itself, especially if you are a visual or performing artist, culinary pro, or contractor. (Be mindful of client confidentiality and copyrights, of course.) Won an award or doing some volunteer work? Snap a photo and share that.
Don’t Add New Contacts in Big Batches
It makes you look indiscriminate and possibly desperate. But keep an eye on LinkedIn’s suggestions for additions to your network and invite people you know to link every few days or so. If the person accepts the link, send a friendly note updating them on what you’re up to. (You can also customize the copy that goes out with the invitation.)
Don’t be reluctant to ask for help in your job search if you think he or she can be of assistance—that’s what LinkedIn is for. Stay on top of your contacts’ new positions, birthdays, job anniversaries and other accomplishments via the Keep in Touch section in the Connections channel, and send congratulations. It’s important to reinforce your connections with LinkedIn contacts; a network of people you barely know is unlikely to do you much good.
3. Research, Research, Research
Even if there’s no job that matches the exact criteria you’ve entered in the Jobs channel, LinkedIn is good at suggesting companies that might have a suitable opening. Spend some time looking through the Discover Jobs in Your Network area. (This is another reason to build a large network of contacts.) And look at the site’s list of “People Also Viewed” jobs on job listing pages. It can lead you to some interesting postings you might not otherwise find.
Beyond the extensive job listings, LinkedIn has enormous amounts of background information available on companies. While this may not directly help you find a job, being well informed once you have the interview will help you get the job.
4. Consider Joining LinkedIn Premium
Starting at $29.99 a month, LinkedIn’s paid service is a little pricey, but a short-term subscription may be worth it. One of the Premium services takes a page from Google’s paid search: It moves your correspondence to the top of the mailbox of whoever posted the job you’re applying for. Sure, the potential employer knows that the reason you’re the “featured applicant” is because you paid to be, but that doesn’t necessarily negate your advantage of being first.
Via Premium, you can also see complete information about who viewed your profile. It can be a bit of a red herring to know that someone has looked at your profile since you still don’t know why they looked—it could simply be that you share a name with the person they were really seeking.
Probably the most valuable element of the paid service is InMail, which allows you to contact anyone on LinkedIn directly, even if he or she is not a current contact. However, you are only allowed three InMails a year (pricier plans allow more), so you have to be extremely prudent about how you use them—they are not a cold-calling tool. Reserve the privilege of making contact with a key decision-maker for your dream job or other critical communication.
The Bottom Line
LinkedIn is a valuable job search tool if you do it right. Fill out your complete profile, with a good professional photo, a headline and a compelling summary. Remember that LinkedIn is a search engine: Pay attention to the keywords that will get your profile noticed by the right people.
To stay visible, share links to interesting, provocative stories, photos and videos relevant to your profession, adding an intelligent comment. But don’t post so often you become annoying. And don’t forget that LinkedIn is a great place to research companies so that when you do get that callback, you’ll be ready to rock the interview.
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97e510b756a175c936a7610c9ede845d | https://www.investopedia.com/articles/personal-finance/013014/how-rent-your-home-so-you-can-pay-your-mortgage.asp | Temporarily Leasing Out Your Home | Temporarily Leasing Out Your Home
If you own your home, but temporarily can’t afford the payments, and can’t find a less expensive place to live, you’re likely worried about losing your home. The good news is that only about 5% of Americans were delinquent on their mortgage payments in 2013, compared to 30% in mid-2012. But that still represents millions of homeowners who can’t cover their mortgage obligation, and can’t refinance.
That leaves few options for behind-on-their payments homeowners. But you can flip the script by renting your home, and earn cash while you still retain the title to your home.
Is it doable? Sure. Is it easy? Like most “big-picture” financial housing decisions, not really. But if you know what you’re doing, plan ahead, and make the right decisions on who lives in your house—and for how much—a “rent your home” scenario can work out fine, for you and your tenant.
Key Takeaways Being a homeowner can be rewarding, but can also be a financial headache with property taxes, mortgage payments, utility bills, and unforeseen repairs.For those who find themselves falling behind, one option is to rent out your house on a temporary basis to help cover the costs before moving back in.Finding an ideal tenant can be the most difficult part, as many renters want more permanence.For shorter-term rentals, Airbnb and other home-sharing services can provide access for weekenders to help you cover your costs.
High Rental Property Demand
For starters, there’s likely more demand for renting your home than you might think. According to data from the MacArthur Foundation, 77% of Americans still believe the U.S. is in an economic crisis, and 61% say that renters can be just as happy as homeowners.
Another 57% of U.S. consumers say “buying has become less appealing,” and 54% say that “renting has become more appealing” than it was before.
Reasons to Lease Out Your Home
So how do you start your home landlord makeover? By deciding whether or not you need to rent your home in the first place, and if so, how to get the job done quickly and efficiently.
Do you really need to rent your home? The reasons for renting your home aren’t all that many, but they are important:
You need to sell your home, but for some reason, you can’t.You are moving away, but only temporarily (for a new job, for example) but plan on moving back to the area in a year or two.You’re an empty nester who wants to downsize, but want to save your family home for your children someday.
According to Christopher Villa, senior product manager for rental home insurance for United Services Automobile Association (USAA);
One in five of our members moves every year. In today's real estate market, we know it's more difficult for our members to sell their homes. When members can't sell and decide to rent their home out, it's vital that they take action to educate themselves on property management basics.
Villa’s not alone in that outlook – prospective home-renters really need to do their research.
“If you are in a situation where you are unable to make timely payments on your mortgage you may consider renting out your home for a period of time,” Samantha Reeves, a senior mortgage analyst for Veterans United Home Loans. “This may be a good option when two factors are present: Your home would rent for at or more than your mortgage payment and you were able to find an affordable place to stay.”
Reeves says that to determine the rental price of your property, consult directly with a real estate agent or property management company to take a look at comparable rentals in your area. “If you are only looking to rent out the property until you are able to sell it, you need to ensure the rental contract specifically covers this provision in detail, explaining notice to the renter and a reasonable time frame for moving,” she advises.
Alternatively, you could sell the property to an investor and the renter could stay in the home for the length of the rental agreement with an opportunity to contract with the investor at the end of the rental period,” Reeves adds.
Landing an Ideal Tenant
It’s likely that the most important step is to attract a great tenant to your home, one who pays rent on time, keeps the property clean, and doesn’t attract trouble to your home (i.e. parties, drugs, unruly pets, and overcrowding.)
Start spreading the net by asking friends, family, or co-workers for leads to a reliable tenant.
Run an Ad
Put an ad in your local paper(s) and Craigslist. Specify what you’re looking for (e.g., no pets, no smoker, no more than three tenants, for example.) Include your monthly rental fee, and list if you’re paying for services like utilities, water, and trash removal. Also, let the applicants know you’ll be running a credit check – that should save you the time of dealing with renters with bad credit histories.
Create a thorough rental application form - On the form, spell out exactly what you need to know, including:
NameEmployerSalaryHistory of landlords (along with phone or email contact information), reasons for leaving previous rental units, etc.ReferencesNames of proposed occupantsSocial Security number (for the credit check)Criminal record
Run a Credit Check
You can either hire a reputable rental agency to run a credit check for you (they’ll charge you the equivalent of one month’s rent for helping you rent your home) or you can run the credit check yourself.
If you use an agency, vet it first with the Better Business Bureau to see if there is a history of landlord complaints about the firm.
If you run the credit check yourself, go straight to one of the three major consumer credit rating companies: Experian, TransUnion, and Equifax. Or, you can turn to a tenant screening service such as TenantScreeningReport.com, which offers screening services starting at $24.95.
Make Sure to Check References
Don’t sign on the bottom line until you have talked to previous landlords and employers. Validate employment dates and confirm that the tenant has a history of steady, on-time payments.
Set Reasonable but Firm Lease Terms
Always work with a lease, and know that lease laws change from state to state. When creating your rental agreement, make sure to include the following items:
Lease term: A month-to-month lease works best if you want to eventually sell your property. If selling is not your goal, aim for a year-long lease.Security deposit: First and last month’s rent is advised.Rental due date: First of the month is advised to ensure you can make your mortgage payment.Repair responsibilities: Spell out who will pay for repairs, such as appliances, plumbing, light fixtures, etc.Landscaping: Determine who will pay for routine property maintenance, such as trash hauling or lawn care.List of tenants: The names of each tenant living in your home.“Good conduct” clause: A list of behavior requirements, including noise levels, neighborly conduct, and smoking.Pet policies: Maybe you’re OK with cats but don’t want barking dogs. Or maybe you want to keep all animals out of your home. The choice is yours, but be sure you’re clear so there’s no room for tenants to misinterpret your requirements.Eviction terms: List the reasons for which you’d evict the tenant, such as not paying the rent or damaging the property.
After You Lease the Home
While your home is occupied, you can build a savings program to catch up on your mortgage payments with the extra rental income you have coming in and start on an aggressive debt-reduction plan. If you're renting out your home because you need the cash, now is the time to stop using your credit card, create a tight budget, and take on part-time work, if needed.
Consider sharing a living space with a roommate or family member. Family-shared housing is one of the biggest trends coming out of the Great Recession. Alternatively, you could rent a small apartment or condo, depending on your budget. If you're retired or telecommute for your job (another big trend over the past half-decade), consider moving to a less-expensive city or town, or to a state like Florida or Texas that has no state taxes.
Airbnb
For even shorter leases, Airbnb is an online marketplace that connects people who want to rent out their homes with people who are looking for accommodations in that locale. It currently covers more than 81,000 cities and 191 countries worldwide. Airbnb hosts can choose to rent out their entire property, or just a bedroom or two and share the space with visitors.
For hosts, participating in Airbnb is a way to earn some income from their property, but with the risk that the guest might do damage to it. For guests, the advantage can be relatively inexpensive accommodations, but with the risk that the property won't be as appealing as the listing made it seem. The growing sharing economy offers ways to make extra income that weren’t available even a few years ago. Many of these opportunities require you to be comfortable navigating unclear local laws, sharing your most valuable possessions with strangers and taking on additional legal liability. Airbnb is no exception, but if you’re willing to take on the risks, you could make thousands of extra dollars a year.
The Bottom Line
Renting your own home can work out fine if you choose the right tenant. You’ll keep your home, have someone else pay for it (or at least most of the home), and you can leverage the lease to move back in when you like.
That’s a good deal, but only if you follow through on the tips listed above.
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0be05c46a7ce3a6101e9c76f5e5c3ecc | https://www.investopedia.com/articles/personal-finance/013014/tax-breaks-secondhome-owners.asp | Tax Breaks for Second-Home Owners | Tax Breaks for Second-Home Owners
If you’re thinking about buying a second home for vacations, rental income, or an eventual retirement residence, it makes financial sense to take advantage of all the available tax breaks. The cost of owning a second home can be significantly reduced through tax deductions on mortgage interest, property taxes, and rental expenses.
The Tax Cuts and Jobs Act (TCJA) changed how tax breaks work, such as lowering the mortgage interest deduction. Still, even with these changes, there are useful tax breaks that can help make owning a second home more affordable. Here’s a quick rundown.
Key Takeaways If you itemize deductions, the interest on your mortgage will likely be tax deductible up to a limit. Different rules apply to the mortgage deduction depending on whether a second home is a personal residence or rental property. You can deduct interest on home equity loans, but only if the funds are used for home improvements. You can deduct property taxes on your second home, but there are limits. The Tax Cuts and Jobs Act changed how many tax breaks work.
Mortgage Interest Deduction
The mortgage interest deduction has long been praised as a way to make owning a home more affordable. The TCJA, signed into law in December 2017, changed how much you can save via mortgage interest deductions for both a primary residence and a second home.
Single filers and those married filing jointly in most cases can deduct full interest on mortgages up to $750,000. This applies to any personal residence, be it your first or second. The previous limit was $1 million in mortgage debt, which still applies on home loans taken out before Dec. 16, 2017.
Different tax rules apply on the mortgage deduction depending on whether your second home is considered a personal residence or rental property. With rentals, the proportion of the year in which you rent the property—as opposed to living in it yourself—also comes into play.
1:36 Tax Breaks For Second-Home Owners
Interest Deduction on a Personal Residence
If your second property is a personal residence, you're eligible to deduct mortgage interest in the same way as you would on your primary home—up to $750,000 if you are single or married filing jointly. The limit is $375,000 if you’re married and filing separately.
To qualify for the deduction, the mortgage must be a secured debt on a qualified home you own, and you must itemize your deductions by filing Schedule A.
The $1 million mortgage interest limit will return in 2025, when the TCJA expires, unless lawmakers act to keep the law in place.
Interest Deduction on Homes Rented Out
The rules are complicated if you want to take tax deductions for rental property. What matters is whether you rent out the property for part or all of the year, and how often you use the property for personal use. Your use of the property will fall into one of three categories:
Property Rented Fewer Than 15 Days a Year
You can rent your home for fewer than 15 days during the tax year without having to report the income to the IRS. The house is considered a personal residence, which means you cannot take deductions for rental expenses. But you can deduct mortgage interest and property taxes as you would with any home.
This special rule applies even if you rent your home for $10,000 per night. Section 280A(g) of the Internal Revenue Code says the money doesn't need to be included in your gross income, provided the home was rented for fewer than 15 days per year.
Property Rented 14 or More Days a Year and You Seldom Use It
Your home is considered a rental property—and not a personal residence—if it is rented for 14 or more days per year, and if your own personal use of the property does not exceed 14 days per year, or 10% of the number of days the home was rented.
If you meet this requirement, then income from the property is reported as rental income. You can also deduct rental expenses, including mortgage interest, property taxes, insurance costs, fees paid to property managers, utilities, and depreciation of the property. However, you must apportion these costs between your personal use of the property and the time it was rented.
It’s worth noting that days spent fix upping the property do not count as personal use. It is possible to exceed the 14-day limit if you stayed at your property to perform maintenance. Plan to document your maintenance activities by retaining receipts to prove you weren't just vacationing on those days.
You Use Property More Than 14 Days and Seldom Rent It
If you stay at the property for more than 14 days per year, or more than 10% of the total days in which the property was rented, then the second home is considered a personal residence. This means you can deduct mortgage interest and property taxes as you would with any home, but you cannot claim rental losses. If a member of your family uses the property (including your spouse, siblings, parents, grandparents, children, and grandchildren), those days count as personal days unless you are collecting a fair rental price during those family stays.
Home Equity Loan Interest Deduction
In addition to the mortgage interest deduction, you may be able to write off interest on a home equity loan. However, the TCJA has changed these rules as well.
Previously, you could borrow against home equity and take a deduction on the interest regardless of whether the proceeds were used to pay off a credit card, take a vacation, or buy a second home. Now, you can deduct interest on home equity debt only if the funds were used “to buy, build, or substantially improve the taxpayer’s home that secures the loan.” In addition, as under the old rules, the loan must be secured by your primary or second home, and can’t exceed the cost of the home.
Under these provisions, if you want to deduct interest on a second home, you must have a mortgage on it. If you borrowed against equity on your first home to finance the purchase of your second home, this interest cannot be deducted. Like a mortgage, you can deduct interest on up to $750,000 in home equity debt if you are single or married filing jointly ($375,000 if married filing separately).
The limit applies to all your mortgage and home equity debt. If you already have $750,000 or more in mortgage debt, you wouldn't be able to claim an interest deduction on home equity loans exceeding that amount.
Property Tax Deduction
You can deduct property taxes on your second home and, for that matter, as many properties as you own. However, here too, the TCJA has brought changes that affect those deductions.
You can no longer deduct the entire amount of property taxes you paid on real estate you own. Now, the total of state and local taxes eligible for a deduction—including property and income taxes—is limited to $10,000 per tax return, or $5,000 if you're married and filing separately. Many people who buy a second home may already exceed that limit with their first home, and so will not see additional tax savings from their second home.
Selling Your Second Home
If you sell your primary residence, the law allows single taxpayers to exclude up to $250,000 in capital gains from your income. Couples who are married and filing jointly can exclude up to $500,000 in capital gains. However, this is for sales of primary residences only. When you sell your second home, you must pay a capital gains tax on your entire profit.
By making your second home your primary home, you could potentially lessen the capital gains hit. First, you would need to live in the second property for at least two years out of the five years prior to selling it. This would qualify the property as your primary residence. Also, to be eligible for the exclusion, you cannot have taken the capital gains exclusion on the sale of another home during the two-year period prior to the sale of this new primary residence.
1031 Exchanges
If your second property is held for business or investment, you might be able to defer capital gains taxes under a 1031 exchange. Known as a like-kind exchange, this involves selling the property and replacing it with a similar property. Once you have sold the initial property, you must identify its replacement property within 45 days and acquire it within 180 days. Capital gains are then deferred until the replacement property is sold (though it is possible to continually defer taxes with further like-kind exchanges).
Several conditions must be met to qualify for a like-kind exchange. The taxpayer must have owned the property for at least two years prior to selling. In each of the two 12-month periods prior to the sale, the taxpayer must have rented the property for at least 14 days. Furthermore, the taxpayer's personal use of the property cannot exceed 14 days per year, or 10% of the days the home was rented.
Finally, the replacement property must also meet these same conditions: it must be held for at least two years after the like-kind exchange; rented for at least 14 days per year; and cannot be used for personal enjoyment for more than 14 days per year, or 10% of the days the home was rented.
Since tax laws are complicated and change periodically, it’s advisable to consult with a qualified real estate tax specialist who can explain relevant tax implications and laws and help you determine the most favorable ownership strategy for your situation.
The Bottom Line
If it's financially feasible, owning a second home can be an excellent investment for vacation or rental purposes, and could also provide a suitable primary home during retirement. But because owning any home carries a significant financial burden, from mortgage and taxes to maintenance and repairs, it’s in your best interest to learn the tax implications for you of second-home ownership.
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821f38e985cd2bc4e8cce4266e0b5110 | https://www.investopedia.com/articles/personal-finance/013114/closer-look-accelerated-benefit-riders.asp | Accelerated Benefit Riders: How They Work | Accelerated Benefit Riders: How They Work
Life insurance policies that include accelerated benefit riders provide several types of coverage to policyholders while they are still alive. They pay benefits on top of the traditional death benefit and cash value to policyholders who have a chronic illness, critical illness, or need long-term care if certain conditions are met.
If you are considering accelerated benefit riders, here is what you need to know.
Key Takeaways Accelerated benefit riders pay death benefits to life insurance policyholders while they are alive. Benefits are paid to policyholders with a chronic illness, terminal illness, or who need long-term care and meet certain conditions. Some riders can be purchased as an add-on, while others are included directly in a policy.
How Accelerated Benefit Riders Work
Also referred to as living benefits or accelerated death benefits, accelerated benefit riders allow policyholders to access death benefits in their life insurance policy while they are alive, under certain conditions. Policyholders receive benefits to cover the costs of a chronic illness, critical illness, or long-term care, but are still entitled to any remaining cash value and death benefit in the policy. The payout ranges from 25% to 100% of the death benefit.
In some cases, policyholders have a choice as to how the benefits are paid—they can receive either a lump sum or periodic payments, depending on the type of claim and benefit. A policy may also limit the total amount of benefits paid or require a minimum payout.
Some riders can only be purchased at an additional cost, while others are built directly into the policy. Although the former type of rider will cost the policyholder an extra charge upfront in the form of a period fee, this type of benefit will pay out the full amount that is stated in the policy.
“No-cost” riders are simply riders that are paid at the time of claim, where the insurance carrier will discount the dollar amount of benefits that are paid to the policy owner according to a formula that takes interest and mortality rates into account, as well as the amount of cash value in the policy.
Like many other types of insurance, accelerated benefits can be paid either as reimbursements or on an indemnity basis, with the benefit going directly to the care providers or other parties requiring payment.
Accelerated Benefit Extensions
Some policies also offer an extension-of-benefits-rider that usually doubles the amount of accelerated coverage at an additional cost, but without the purchase of additional death benefit. This rider effectively allows cost-conscious consumers to purchase a smaller amount of death benefit and still maintain adequate living benefit protection. Riders known as “linked benefits” can also provide coverage for long-term care (LTC) expenses that equal at least two to three times the face amount of the policy.
Initially, accelerated benefit riders were only offered in cash value policies, such as whole life insurance or universal life insurance, but they are now available in term life insurance products as well. Most LTC riders are still only available with permanent policies.
Types of Accelerated Benefit Riders
Here is a closer look at critical illness, chronic illness, and long-term care riders:
Critical Illness Riders
Critical Illness riders pay out a large portion of the death benefit to policyholders when they diagnosed with a major condition or suffer significant injuries. This benefit is usually received as a lump-sum payment.
Chronic Illness Riders
These riders pay out a periodic benefit if the policyholder becomes incapacitated or disabled for an extended period of time. This type of rider typically triggers when the insured becomes unable to perform at least two out of the six activities of daily living, including eating, bathing, toileting, dressing, transferring, and continence.
Long-Term Care Riders
Long-term care riders commonly require separate full underwriting for the insured but provide more comprehensive coverage for long-term or nursing home expenses than chronic illness benefits. But this comes at a higher cost.
Benefits paid out from accelerated benefit riders while you are alive mean your beneficiaries will receive less when you die. Think of these riders as an advanced payment.
Chronic vs. Long-Term Care Coverage
Consumers can be understandably confused by the separation of chronic illness benefits from long-term care, as both seem to fall essentially into the same category. The life insurance industry, however, requires that these two types of benefits remain distinct.
Chronic illness riders are more restrictive by nature than long-term care riders, and one of the key differences between the two is that to qualify for the former, the insured must be permanently incapacitated. Chronic illness riders may also pay out in a lump sum or on an annual basis, while long-term care riders usually have a monthly payout. The cost of processing and managing claims for chronic illness benefits is also typically cheaper than for long-term care riders, which means the cost of chronic illness benefits is lower for consumers.
What to Consider Before You Buy Accelerated Benefits
Although living benefits can be a valuable addition to any life insurance policy, consumers need to consider several key factors before purchasing them. Some of the issues that policy owners must contend with include:
Impact on Estate
If accelerated benefits are paid out, the death benefit on the policy will be reduced for beneficiaries. Will the policy owner’s estate plan remain intact?
Separate Coverage Needed
Accelerated benefit riders do not completely substitute separate policies that are specifically designed to cover certain risks, such as a disability or health insurance.
Medicaid Eligibility
Payouts from accelerated benefits may impact Medicaid eligibility. The income paid out from accelerated riders is often counted as income for Medicaid, although applicants are not required by law to exhaust these benefits before they can be considered eligible.
Taxes
In most cases, benefits are not subject to federal taxes if a terminally or chronically ill person meets certain requirements. Under the federal tax code, for example, a terminally ill person is defined as having only 24 months to live.
Accelerated Benefit Riders vs. Viatical Settlements
Don't confuse accelerated benefit riders with viatical settlements. Accelerated benefit riders are essentially the modern equivalent of the viatical settlements that terminally ill policyholders use to raise cash to pay their medical bills. Under these arrangements, policyholders sell their policies to a third-party settlement company for a percentage of the face amount of the policy. The policyholder names the settlement company as the beneficiary of the policy, and the company collects the death benefit after the policyholder passes away.
Also called life settlements, viatical settlements generally net the seller more than the policy's surrender value, but less than its death benefit.
The Bottom Line
Accelerated benefit riders have effectively provided consumers with a greater level of control over their insurance protection, according to Jason Kestler, president, and CEO of Kestler Financial Group headquartered in Leesburg, Virginia. "Clients are now able to start or stop a stream of income from their policies when they have a qualifying need, and many riders now also provide a cost-of-living adjustment to keep up with inflation."
Market demographics, improved financial education, and the rising cost and need of healthcare have made multi-line protection in a policy more attractive. But those who need specific types of protection from these unique vehicles need to read the fine print and do their homework to understand whether they will receive what they are truly seeking and how much they will pay for it.
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af8a34164b582e880552c189acff4d83 | https://www.investopedia.com/articles/personal-finance/020215/indeed-vs-linkedin.asp | Indeed vs. LinkedIn: What's the Difference? | Indeed vs. LinkedIn: What's the Difference?
Indeed vs. LinkedIn: An Overview
More and more people take to the Internet to find jobs. There are many employment websites to choose from. However, some operate differently, adding complexities to the job search.
Two of the most popular resources for job seekers are LinkedIn (LNKD) and Indeed.com. These sites offer a variety of employment opportunities; however, LinkedIn and Indeed.com are very different. LinkedIn is built as an employment-related social network, while Indeed.com is a metasearch engine for job listings.
Key Takeaways Indeed.com is a job board that aggregates postings from many sources, allowing users to search for specific positions. Indeed earns money through the pay-per-click model and web advertising. LinkedIn is a social network for professionals and job seekers that offers a variety of services and makes money through premium subscriptions and enterprise solutions.
Indeed.com
Austin, Texas-based Indeed.com was founded in November 2004. It was created as a job listing board to compete with growing job boards, such as Monster.com and HotJobs. In 2010, Indeed.com became the most visited jobs website in the U.S. and, as of May 2019, boasts over 250 million unique visitors each month. It also lists jobs in over 60 countries and 28 languages.
A metasearch engine aggregates job postings from thousands of websites and employment firms, including company career web pages and recruiting firms. Prior to 2011, Indeed.com directed users to external job listings, but now the site allows job seekers to apply directly for jobs from within Indeed.com. Because of its ability to pull job listings from many diverse sources, the site offers a comprehensive listing of available job openings, which can be searched for by keyword, job title, industry, or level of experience.
Indeed.com has also added services like resume storage, salary comparisons, employment-related news and trends, and user forums.
Indeed.com earns a profit using a pay-per-click model. That means employers posting jobs pay a small fee each time a job seeker views a posting. Most clicks on Indeed.com cost between $0.25 - $1.50. The site also earns revenue through traditional website advertising.
(See also: 9 Different Ways to Find a New Job.)
LinkedIn
LinkedIn does have a job board as part of its suite of services, but it is first and foremost a professional- and business-related social networking site. It was founded in December 2002 and became a public company on May 11, 2011. In 2016, Microsoft acquired LinkedIn for $26.2 billion. The company serves over 610 million members in more than 200 countries and territories. Prior to its acquisition, it succeeded in growing through a series of acquisitions that bolstered and expanded its core business.
In addition to a job board, LinkedIn gives users the ability to find friends and colleagues and build a social network geared towards professional networking and information sharing. Users can search for professionals outside of their network and then ask to be introduced by a common connection. The main profile page for a user is designed to appear like a resume or CV with employment history, education, skills, and professional interests prominently displayed. Forums and groups are available for networking and discussing specific topics. In 2012, LinkedIn stopped allowing users to upload and store their resume.
LinkedIn generates revenue across four main product lines: Talent Solutions, Marketing Solutions, Sales Solutions and Learning Solutions, in addition to collecting Premium Subscriptions. All four product lines are sold through two channels: an offline field sales force, which engages with both large and small business customers, as well as an online, self-serve channel—where it generates revenue from both enterprise customers and individual members purchasing subscriptions.
Individual users may use the website and many of its services free of charge under a basic plan but can upgrade to a premium subscription for a monthly fee. There are four premium options to choose from depending on how the user wishes to take advantage of the site: one for job seekers; one for professional networking and business promotion; one for generating sales leads and finding potential new customers; and one for employers or recruiters to post jobs and find talent.
(For more, see: What Makes LinkedIn Different From Facebook and Twitter.)
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a666903cb4b589cd8ae5d7663693058a | https://www.investopedia.com/articles/personal-finance/020215/top-alternatives-cosigner.asp | Top Alternatives to a Co-signer | Top Alternatives to a Co-signer
At certain points in your life, especially if you're just starting out, you may need a co-signer for a loan or other financial transaction. But what if you don’t know anyone who is willing or able to co-sign? Or, you don’t want to strain your relationship with a friend or relative by asking them to do it? What are your alternatives?
Key Takeaways If you're having difficulty obtaining a loan or renting an apartment on your own, getting a friend or relative to co-sign isn't your only alternative.In the case of an apartment, see if you can sublet from, or room with, someone who already has a lease. You may also be able to hire a professional co-signer service to guarantee your rent. If you want to borrow money and conventional lenders have rejected you, peer-to-peer lending might be an option.
When Could You Need a Co-signer?
Suppose you want a car loan so you can drive to work. Public transportation where you live is poor; relying on it severely limits where you can work, compromises your safety, or takes up way too much of your free time. You're convinced you can make the loan payments, but you don't have quite enough income to qualify.
Perhaps you’ve just graduated from college and you’re trying to get your first apartment. You’re no longer eligible for student housing, but you don’t have a job yet and can’t convince any landlord to take a chance on you despite your solid grade point average.
Or maybe you’re trying to get back on your feet after unemployment or health problems depleted your savings and led to your defaulting on loans, damaging your credit history and making it impossible to get a new loan or a place to live.
Four Alternatives to Having a Co-signer
Fortunately, even if finding a co-signer would be difficult or impossible, you still have options. Here are four of them.
1. Become a Subtenant or Roommate
If it’s an apartment you’re after, you can try finding a situation where someone else is already fully obligated to pay the lease but is looking for help with the rent. You might be able to sublease from someone who is traveling or had to move unexpectedly and couldn’t get out of their rental agreement. You might also be able to rent a room from someone who will occupy the apartment with you but doesn’t need to add your name to the lease.
In these cases, since the landlord already has a signed agreement from someone who has passed a credit check, paid a security deposit, and promised to pay the rent for the full lease term, they may not check your credit or even care who occupies the place as long as they’re receiving rent checks on time each month from the original renter.
Ask the individual you want to sublet from or room with for a copy of the lease to make sure you won’t be violating it. The person on the lease should get written permission from the landlord before you move in, and you should sign a sublease or roommate agreement with the tenant. Be aware of the possibility that if you’re paying the person on the lease rather than the landlord, they could conceivably take your money and not remit it to the landlord.
2. Use a Co-signer Service
To secure an apartment, you could also hire a co-signer service. For a fee, they will guarantee to your landlord that they will pay your rent if you do not. You must apply for approval with a co-signer service, and there is often an application fee. If you’re approved, the service will give you a co-signing certificate to submit with your rental application. It’s up to the landlord whether to accept your co-signer.
If the landlord approves, you’ll have to pay the co-signing service a fee, calculated as a percentage of your rent, even if they never have to pay your rent for you. If the service does have to pay any rent on your behalf, you will be obligated to reimburse them.
One company that offers this service is Insurent. It charges a one-time, nonrefundable flat fee based on a percentage of your rent after your apartment application is approved.
Note that if you can’t find a landlord willing to accept a co-signer service’s guarantee, you might be able to secure an apartment by paying a larger security deposit or prepaying the rent.
3. Try a Peer-to-Peer Lender
If you want to borrow money and conventional lenders have rejected you, peer-to-peer lending might be an option. The two most prominent companies in this space are Prosper and Lending Club. Both companies will check your credit score when you apply, but they do not require borrowers to have perfect credit, and you can use the borrowed money for a variety of purposes. The worse your credit score, the higher your interest rate will be, and you might not get approved, but it could be worth applying to find out.
Prosper has a "recommended minimum credit score" of 640. Lending Club does not list a minimum credit score requirement on its website, but other sources have reported that the minimum is 660.
Important If you can’t get a loan or an apartment without a co-signer, this might be a signal that it's not a good time to borrow money or commit yourself to paying a lease.
4. Establish or Rebuild Your Credit History
Lenders require co-signers when a borrower has no credit or damaged credit. In either situation, you can create or re-establish a favorable credit profile by applying for a secured credit card that will report your activity to Equifax, Experian, and TransUnion, the three major credit bureaus. All you need to do is make one small purchase a month on the card and pay it off before the payment due date.
If your problem is that you have no credit, within about six months of beginning to use your secured credit card, borrowing only a little and paying it promptly, you’ll meet two of the most important criteria for having a strong credit score: a low credit utilization ratio and a history of paying on time. At this point, you might qualify for a loan or an apartment without a co-signer, assuming you earn enough income.
If you’re repairing damaged credit, you may have to wait longer, because negative items remain in your file for years. Lenders need to be convinced by your credit score that your new, positive repayment history isn’t just a short-term change.
Should You Wait to Borrow Instead?
If you can’t get a loan or an apartment without a co-signer, this might be a signal that it's not a good time to borrow money or obligate yourself to pay a lease. Lenders and landlords want someone else to guarantee payment because they aren't sure you’re good for the money. It's possible that their concerns are justified.
Having your loan or apartment application rejected can be a blessing in disguise when you can’t really afford it. Instead of adding more stress to your situation by taking on another financial obligation—and dragging someone else into your problems by asking them to co-sign, potentially damaging an important relationship—look for alternatives that you can afford on your own. They might be less than ideal, but when your situation improves, you can reapply for another loan or apartment.
The Bottom Line
It’s frustrating for sure to not be able to live where you want or buy something you think you need, and most of us have been in this situation at some point. But lenders and landlords make their decisions based on objective financial considerations, and you shouldn't take their rejection personally.
If you can’t get a co-signer or don’t want one, remember that you have options. They just require some patience and outside-the-box thinking.
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82f53789dc834026b4864b434af2e1ca | https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp | Visa vs. MasterCard: What's the Difference? | Visa vs. MasterCard: What's the Difference?
Visa vs. MasterCard: An Overview
The electronic payments industry is dominated by four companies. Visa, MasterCard, American Express, and Discover are responsible for handling the majority of the world’s card payments. Visa and MasterCard present unique offerings since neither company is involved with extending credit or issuing any cards. This means that all Visa and MasterCard payment cards are issued through some type of co-branded relationship. While the two companies don’t extend or issue any cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options.
Most Americans today have at least one debit and credit card. Many people have a number of them, seeking to take advantage of all the rewards, cash-back opportunities, and promotional benefits that issuers have to offer.
Credit cards often dominate the headlines, with approximately $1 trillion in outstanding revolving credit balances as of Q4 2019. Consumers are easily familiar with debit cards, which along with credit cards and other forms of non-cash payments generate around $174.2 billion in transaction volume—representing $97.04 trillion in value—annually. As the financial technology market evolves, more and more prepaid card offerings are also being brought to market, generating around $200 billion in annual volume.
Key Takeaways Visa and MasterCard are the two largest payment processing networks in the world. Visa and MasterCard do not issue cards directly to the public, as do Discover and American Express, but rather through member financial institutions. Member banks and credit unions issue Visa and Mastercard credit and debit cards directly to their customers and in many cases through co-brand credit card partnerships with airlines, hotels and national retailers.
Understanding Visa and MasterCard
Visa and MasterCard are the only network payment processors that are involved in all three areas of the payments market. Working exclusively as network processors, these two companies have a unique edge but operate differently.
Visa and MasterCard are both publicly traded. Visa (trading symbol V) commands a $365 billion market capitalization while MasterCard (trading symbol MA) follows closely behind at $293 billion (market caps as of March 3, 2020). Since neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings.
The business models of both companies are very similar. Visa and MasterCard do not issue cards directly to the public but rather through partner member financial institutions like banks and credit unions. The member financial institution then issue cards payment cards for individuals and businesses, either directly or in partnership with airline, hotel or retail brands.
Setting Terms and Conditions
The issuing financial institution sets the payment card’s terms and conditions, including fees, rewards, and other features. (Retailers usually work with a third-party financial institution.). For credit cards, the issuing bank is responsible for underwriting, interest rate structuring, and the full development of reward programs.
Card issuers can also offer other perks such as identity theft and fraud protection, car rental insurance, or business purchase discounts. While differences in interest rates, credit limits, rewards programs, and perks are controlled by the issuing financial institution, Visa and MasterCard compete for the co-branded relationship and also take part in the drafting of card terms.
Overall, the card payment industry is a complex one, involving merchants, merchant acquiring banks, issuer banking, network processing, and cardholders. Network processors, and specifically MasterCard and Visa, have the freedom to structure their fees in any way they like. This structuring and reporting is one of the biggest differences between the two largest network processors.
Visa
In 2019, Visa generated $23 billion in total revenue with payments volume of $8.8 trillion. Visa’s core products include: credit, debit, and prepaid cards as well as business solutions and global ATM services. The company’s reportable business segments include the following:
Service Data Processing International Transactions Other
Both Visa and MasterCard earn the majority of their revenue from service and data processing fees but the two companies characterize these fees differently and also have their own fee structures. Service fees are charged to the issuer and are based on card volume.
Data processing fees are generally also charged to the issuer who in turn retrieves these fees by charging merchants for each individual transaction. Data processing fees are typically very small, fixed fees, charged on a per-transaction basis that cover the costs of providing transactional information communicated on the network.
In general, Visa is known for offering three card levels: base, signature, and infinite. These categories come with standardized provisions for issuers.
Global Acceptance While Visa is larger in terms of transactions, purchase volume and cards in circulation, Visa and Mastercard have nearly identical global merchant acceptance footprints.
MasterCard
In 2019, MasterCard generated total revenue of $16.9 billion, with a payment volume of $6.5 trillion. MasterCard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business. MasterCard has one reportable business segment known as Payment Solutions which is broken out by geographies across U.S. and other.
Like Visa, MasterCard earns the majority of its revenue from service and data processing fees. However, it characterizes the fees differently. Service fees for MasterCard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as switching fees. Switching fees are a small, fixed cost per transaction, charged to the issuer.
MasterCard is known for offering three card levels: base, world, and world elite.
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a454e5f29af6b2e72de96b041b69e92b | https://www.investopedia.com/articles/personal-finance/020216/top-5-personal-finance-experts-follow-2016.asp | The Top 5 Personal Finance Experts to Follow | The Top 5 Personal Finance Experts to Follow
Trying to reach your financial goals might seem like an intimidating task. But the good news is that you don’t have to do it alone. There are many successful people out there who are kind enough to share the steps they took to become financially free. Here are five accomplished individuals who are experts when it comes to saving money, paying down debt, and creating sustainable wealth.
Key Takeaways Individuals often seek financial education and investment advice from so-called "gurus".These industry experts often write books or news columns, host radio shows or podcasts, and appear as guests on mass media outlets to help inform investors and take questions.Here, we take a look at just 5 of these popular figures in finance and describe their approach to personal finances and financial literacy.
Dave Ramsey
Dave Ramsey is an American multimillionaire entrepreneur and radio host who has built a strong reputation for eliminating debt. Having filed for personal bankruptcy protection just two years after becoming a millionaire at age 26, Ramsey learned the hard way that being in debt inhibits a person’s ability to create wealth. Since then, he has never borrowed money and often boasts about the fact that he has no credit score.
As the host of "The Dave Ramsey Show," the third-largest radio program in the United States for 2018, Ramsey teaches more than 13 million daily listeners how to get out of debt quickly. He is an Evangelical Christian and, as such, uses Bible-based principles to teach people how to succeed with money. In each episode of his show, Ramsey responds to a wide range of money-related questions that are asked by callers. These questions may include how to properly invest an unexpected inheritance and the best way to pay off several credit card balances. Ramsey has written a number of New York Times bestselling personal finance books over the years, including "The Total Money Makeover" and "Dave Ramsey’s Complete Guide to Money."
Chris Hogan
A sought-after speaker and financial advisor, Chris Hogan is known as America's trusted voice on retirement planning. As a "Ramsey Personality," Hogan works with Dave Ramsey’s money coaching team and can often be heard answering retirement-related questions from radio callers on "The Dave Ramsey Show."
In January 2016, Hogan made a debut as an author when he published Retire Inspired: It’s Not an Age, It’s a Financial Number. The book, which provides readers with strategies on how to save enough money for retirement, instantly became a hit as it reached number one on several bestselling lists, including The Wall Street Journal and Publishers Weekly.
Throughout the week, Hogan shares various tips and tricks on how to retirement planning on his Facebook and Twitter accounts. His website, ChrisHogan360.com, also has free articles and other resources for anyone looking to find out how to retire with dignity.
Grant Cardone
As a professional sales trainer with more than 25 years of experience, Grant Cardone and his company work with small business owners and Fortune 500 companies from around the world to help increase their annual revenue. Unlike the majority of personal finance experts, including Dave Ramsey and Chris Hogan, Cardone teaches his followers not to worry about spending a lot of money or getting into debt. In fact, he once said, ‘‘Your problem is never debt or [over] spending.’’ He believes that people should focus their time and energy on making more money instead of struggling to make ends meet with what little they currently have. According to Cardone, there is no limit on a person’s earning potential; however, at the end of the day, one can only reduce their living expenses by so much. This is why he tells people that the only way to thrive and not merely survive in this new economy is to get out of the middle class and become a high-income earner.
Cardone, who owns a Gulfstream G200 private jet, often advises his more than 1.3 million social media followers to create an extra income stream by investing in multifamily residential real estate. He owns $350 million worth of apartment complexes throughout the United States and was able to build that portfolio only using his own money and traditional bank financing. With the help of social media and his own web-based TV service, Cardone provides people with an inside look at how multimillionaires live and work. He often shares live video streams of himself with his family, his real estate negotiations, meetings with partners and other private activities in his life.
Peter Schiff
Peter Schiff is a contrarian investor who caught the attention of the financial world after correctly predicting the dotcom bubble of 2000 and the collapse of the U.S. housing market in 2008, long in advance. For many years, Schiff has served as the president and chief executive officer (CEO) of Euro Pacific Capital, an investment firm that focuses its asset allocation outside of the American market. Schiff records a daily two-hour show and follows it by recording audio podcasts that focus on analyzing and explaining recent headlines in financial news from around the world. "The Peter Schiff Show Podcast" is an informative resource for anyone looking to understand what is happening in the global economy. Schiff also provides his listeners with strategies on how to hedge their investments in international currencies and markets. Schiff has also been known as a prominent "gold bug", promulgating the long-term value of this precious metal as a key component of one's portfolio.
Schiff has also written two books: Crash Proof: How to Profit From the Coming Economic Collapse, which was published in 2007, and another the following year, titled The Little Book of Bull Moves in Bear Markets: How to Keep Your Portfolio Up When the Market Is Down.
Brandon Turner and Joshua Dorkin
Brandon Turner and Joshua Dorkin are the owners of one of the world’s most respected online communities for real estate investors, BiggerPockets.com. The website, which was created in 2004, provides useful resources for people who are interested in making money from flipping properties and owning rental properties.
In addition to running that website, Turner and Dorkin also produce the "BiggerPockets Podcast," a weekly audio series that shares interviews with professional real estate investors and their winning strategies, as well as quick tips that both Turner and Dorkin gleaned from their own property investing experience.
Turner is a co-author of the book The Book on Rental Property Investing, which lays out advice and plans for earning wealth and income through rental properties.
The Bottom Line
There are many personal finance experts to learn from. Dave Ramsey, for example, has had a lot of success helping people to live a debt-free life, while Chris Hogan provides great tips and tricks for retirement planning. If you are looking to significantly increase your monthly income, following Grant Cardone might be a smart decision. Whereas Peter Schiff’s podcast can be a helpful resource for those looking to have a better understanding of what’s happening in the economy. And Brandon Turner and Joshua Dorkin from BiggerPockets are wonderful teachers when it comes to learning how to invest in rental property.
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74ae599e0f95b204dcb88d381949cdee | https://www.investopedia.com/articles/personal-finance/020315/applying-grad-school-gpa-vs-work-experience.asp | GPA vs. Work Experience in Grad School Applications | GPA vs. Work Experience in Grad School Applications
A qualification from a top-tier graduate school can open a lot of professional doors, and savvy students do everything they can to get into the best program possible. The graduate school selection process is not always transparent, but a successful application often will include the following components:
Undergraduate transcripts including course gradesGrad school test results (usually GRE, but some fields have their own exams)A resume with work historyLetters of recommendationAn essay or statement of purpose An interview (either in-person or by phone)
Which of these components matters the most to universities? According to many education experts, most graduate admissions committees take a holistic approach to selecting candidates. They may have certain thresholds for GRE scores or undergrad GPAs, for example. But as a general rule, they consider all aspects of an application.
Key Takeaways Most graduate schools take a holistic approach to applicants.Focus on your strengths but don't neglect to address your weaknesses.Good work experience may offset a less-than-spectacular GPA.
Recognize Your Weaknesses and Use Your Strengths
The best approach when applying to grad school, according to education experts, is to work hard to address the weakest components of your application. You may have stellar test results, a high GPA and a rock-solid essay, but don't be complacent and submit a mediocre letter of recommendation.
It's a good idea to seek input from alumni about standards at your school of choice.
If, on the other hand, standardized tests are your Achilles heel, try to improve the numbers by taking an extra test preparation class. Schedule the exam far enough in advance that you have time to retake it if need be.
Does this mean that every factor in your application has the same weight? Not necessarily. Vijay Chidambaram, assistant professor at the University of Texas, Austin, ranked application components from most important to least important as follows:
GPARecommendation lettersGRE scoresResearch/published papersIndustry internshipsExperience as a teacher's assistant
Unfortunately, if your undergraduate GPA is weak, there's not much you can do about it now. But you can emphasize your strengths to compensate.
Keep in mind that some fields will have a different set of criteria than others. While GPA is important, some schools may place great emphasis on a student's work experience, which might trump a mediocre GPA.
1:45 Applying To Graduate School: What’s Important?
Application Killers
Avoid common pitfalls when completing your application. According to College Choice, a leading authority on college rankings and resources, the most common mistakes include the following:
Waiting until the last minute: If you miss a deadline for an application, you might miss out on a scholarship or early approval status.Not proofreading: Don't rush to press “submit.” Proofread your application and have someone else read it too.Writing a generic essay: If you want to stand out, make your essay count.Lying about grades or extracurricular activities: Your high school transcripts will be examined, so don't even think about it.
Get An Edge
The key to a strong application is knowing what the school is looking for and adjusting your application to fit that mold.
Talk to alumni to obtain their insights and ask them what they recommend.
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45c07c687c4b7c270269843e4f5f5333 | https://www.investopedia.com/articles/personal-finance/020615/xoom-vs-western-union-which-should-you-choose.asp | Xoom vs. Western Union: What's the Difference? | Xoom vs. Western Union: What's the Difference?
Xoom vs. Western Union: An Overview
For those needing to send funds to faraway places fast, Xoom (XOOM) and Western Union (WU) both offer viable money transfer options. Founded exactly 150 years apart, the two companies offer similar services, but with significant differences in the way funds can be sent, the destinations they can be sent to, and the recipients eligible to receive them.
Western Union
Founded in 1851, Western Union (WU) has been in the money transfer business for more than 150 years, originally operating by the then-novel telegraph (the internet of its day). As of 2020, the Colorado-headquartered company's network includes some 550,000 agent locations and over 200 countries and territories across the globe.
Customers can arrange for transfers by phone, online, in-person, or from more than 100,000 ATMs worldwide. Recipients can have funds deposited into a bank account, or pick up cash at a WU location.
Western Union also offers money orders for purchase and bill-paying services.
Both Western Union and Xoom make money from the transfer fees they charge on transactions and from currency exchange rates (when your funds are converted into a different currency).
Xoom
Xoom (XOOM) came on the scene in 2001. PayPal acquired the San Francisco-based company in 2015. Its international money transfer service is available in 160 countries, as of 2020.
Customers can only send money online using their mobile phone, tablet, or computer. Recipients generally have funds deposited into a bank account, though cash pickup is available in many nations where Xoom has partners, as is door-to-door delivery.
Xoom also offers bill-paying and mobile phone-reloading services.
Key Takeaways Western Union transfers to more countries than Xoom. Xoom offers lower fees than Western Union. Western Union allows for transfers made in cash and in person at its own agencies, while Xoom is exclusively digital. Western Union services both business and consumer transfers. In some countries, Xoom offers door-to-door cash deliveries.
Key Differences
Along with the number of countries they serve and the methods for sending funds, Western Union and Xoom are distinguished by several other factors.
Fees and Exchange Rates
For the most part, Xoom offers lower prices on international money transfers than Western Union. Xoom can charge lower fees because it does not have the overhead of maintaining physical centers like Western Union.
Keep in mind that both Xoom's and Western Union’s fees vary depending on your country, the country to which you are transferring money, your funding source, the payout currency, and the overall transfer amount. The majority of Xoom’s transactions are sent to Mexico and the Philippines, funded from a bank account and disbursed in local currency. For those transactions, the customer pays a flat fee of $5.99 to $15.99 (if using a credit or debit card) to send any amount up to $2,999. Customers transferring money to Mexico or the Philippines from Western Union can expect to pay higher fees using the same funding methods, up to $19.99 per transaction.
However, Western Union may offer better exchange rates. In July 2020, for example, a $600 transfer to Mexico would net the recipient 13,598 pesos via WU, and only 13,400 pesos via Xoom.
Eligible Recipients
If you need to transfer money to a business, you’ll have to go with Western Union. Xoom only allows consumers to transfer to other consumers (family and friends), whereas Western Union offers both consumer-to-consumer transfers as well as business transfers and bill-payment services.
Cash Transfers
With Xoom, customers can only transfer money from a bank account, debit or credit card, or a PayPal account. Because Western Union has physical locations staffed with agents worldwide, it accepts cash for money transfers. If you or your recipient doesn’t have a bank account, Western Union is probably the better bet.
Speed
Although Xoom promises instant transfer in certain countries, the company often has very little control over the actual delivery to the recipient’s account. That’s because processing times depend on each individual bank. On the other hand, Western Union can ensure quick delivery because it has its own agents across the globe.
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60d4cef2cb2da33cdedaca6932307374 | https://www.investopedia.com/articles/personal-finance/020916/universal-life-how-much-cash-value-retirement.asp | The Value of Universal Life by Retirement | The Value of Universal Life by Retirement
When it comes to life insurance, there are two basic categories: term life and permanent life. A term life policy is meant to protect a wage earner's family, usually while they are working. If the wage earner passes away, the policy pays a lump sum, a death benefit, to those the policyholder has designated the beneficiaries. Term life policies run for a designated time, though they can be renewed.
Permanent life insurance, also known as cash-value life insurance, isn’t designed to expire within a normal lifespan. Some do routinely terminate when the insured turns 100 years old. Unlike term, permanent life insurance offers both a death and a savings benefit, the latter essentially funded by a policyholder's premiums. Permanent life policies are more expensive than term life because of this cash value portion. There are two types of permanent life insurance—whole and universal life. Of the two, universal offers more investment opportunities that could become a source of savings income, especially after retirement.
If you’re going to view an insurance policy as an income vehicle during retirement, you need to consider the value of that policy when it comes time for it to begin paying you.
Understanding the Two Types of Permanent Life
Whole life insurance offers a consistent premium and a guaranteed cash value accumulation. In return, the premiums are likely to be much higher than they are for term insurance, But the payout is assured. The only risks: that you end up paying more in fees than your return is worth or that the company goes bankrupt.
Universal life offers more flexibility in premium costs, death benefits, and savings because the policies allow policyholders to take advantage of a strong stock market. Universal life policies were very popular as a retirement income vehicle when they were first introduced in the 1980s and 1990s. But a long decline in interest rates pushed monthly insurance premiums much higher, greatly devaluing the cash value of the universal policies bought during that time.
The Reality of Universal Life Investment Earnings
When universal life insurance policies were first introduced, the policies were written assuming rates of return from 11% to 15%. Those policies didn't take into account that as the 20th century ended, interest rates would drop into the single digits, undermining the growth of a policy's cash value. Policyholders found themselves forced to pay premiums entirely out of pocket. If they couldn't afford to pay, their policies became worthless. Once that happened, they faced a large tax bill on any sums they'd withdrawn over the years—undermining a key selling point for these policies.
But what makes universal life so appealing as an alternative to whole life is its flexibility in allowing a policy owner to shift funds between the policy's insurance and savings components. Some policies also allow you to choose how the funds in the savings component will be allocated—similar to how you might choose among different mutual funds for your 401(k) plan.
Loans and Withdrawals
As the cash value of universal life insurance plans accumulates, policyholders can borrow against it. In fact, borrowing is the most tax-advantaged way to use these funds. “Life insurance cash values can be accessed during the policy owner’s lifetime through two ways—loans and withdrawals," says Jason Silverberg, an author and certified financial planner at Financial Advantage Associates in Rockville, Maryland. "You can access your basis (what you contributed to the policy), without any tax implications." That is, the funds that are withdrawn from the account usually aren't subject to income tax—unlike traditional IRA and 401(k) plan distributions.
"The gains, however, are taxed at ordinary income rates, unless you take them out as a loan," Silverberg cautions. In other words, you technically don't withdraw funds from the insurance policy; you borrow against it. This is not unlike taking out a home-equity loan against the accrued value of your house. These life insurance policy loans are not subject to income tax. While you do pay interest on them, you can use the cash-value account funds to cover the interest payments, too.
What Happens When You Retire
Another key benefit, in addition to the life insurance component, is that you can tap into your universal life policy for income after you've retired. The cash-value account within an insurance policy accumulates tax-free. “Some people use the cash value in their life insurance policy to bridge the gap from [the year of their] retirement to age 70 when they can receive the highest Social Security benefit," says David Wilken, former president of Individual Life Sales for Voya Financial. Others allow their policy to mature and cash out later to receive the maximum benefit.
"In general, the more time you allow your cash-value life insurance policy to grow, the better," adds Wilken. "A good rule of thumb is to plan to wait at least 15 years [after you purchase a policy] before you begin taking distributions.”
The Risk of Lapsed Insurance
To take distributions, of course, your insurance policy has to have a cash value. That's never a problem with whole life, but universal life policies are designed differently. Earnings on the cash value are an important component in maintaining the policy—not just the premiums you pay. Often, with universal life policies, the size of the premium varies based on how the investment portion of the policy is performing. In other words, the cash value of the policy isn't just your cash cow; it's there to help pay for the insurance, supplementing or even covering your premiums outright.
Earnings on cash value are especially important during periods when the policyholder takes out a loan against the policy's cash value. “If you take out too much money and the cost of the policy exceeds the cash value," Wilken says, "it's similar to being underwater on your home." If your insurance policy lapses, not only would you lose your death benefit; all the funds you borrowed or withdrew from the policy would be considered taxable income.
Deciding What’s Safe to Withdraw
How do you know how much you can safely withdraw before or after retirement? When you buy one of these policies, the terms will be laid out in what the insurance industry calls an illustration. This is a document that highlights the assumptions made to compute your expected cash value, monthly interest rate, and other key components of your policy.
Unrealistically optimistic illustrations were what left so many early holders of universal life policies underwater, often just when they were counting on their holdings to help them in retirement.
In an attempt to ensure more realistic illustrations, the National Association of Insurance Commissioners adopted a new actuarial guideline—AG 49—in 2015 to provide insurance carriers a more uniform method for calculating maximum illustrated rates on equity-indexed universal life insurance (IUL) products. That said, as of 2019, insurance regulators are questioning how accurate and effective those guidelines are.
The Bottom Line
There are pros and cons to every life insurance plan. The best way to determine which is best for you is by defining your goals. If your primary goal is to make sure your loved ones are taken care of after you're gone, term life might be the most cost-effective option. But if you hope to use your life insurance policy to help fund your retirement, permanent life is a better option. Whether you should get whole life or universal life depends in large part on your financial situation and your risk tolerance. In any event, if your life insurance policy was written years ago and you haven’t had a comprehensive review of it lately, it might be time to visit your insurance agent.
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320673a4593e9407086383f543d2feae | https://www.investopedia.com/articles/personal-finance/021015/how-land-wall-street-job-out-college.asp | How to Land a Wall Street Job Out of College | How to Land a Wall Street Job Out of College
If you ask a recruiter how to land a great job on Wall Street straight out of college, they'll probably say the best way is through connections and a degree from an Ivy League school, or one of a handful of other elite universities known as target schools. However, your gender and racial background could still be an issue. CNBC reported in March 2018 that at Goldman Sachs, for instance, only 5.3% of the total workforce of around 35,000 was African American and 37.6% was female. Despite reported efforts to increase diversity, Wall Street workers are still predominantly white and male.
But not fitting the stereotype isn't a reason to be deterred. While a well-placed family friend and a degree from Harvard may open doors, people without these advantages have succeeded on Wall Street. Plenty of Wall Street CEOs had humble beginnings, went to public schools, beat the odds, and worked their way up the ladder. Here is a look at what it takes for an outsider to make it to Wall Street.
Key Takeaways College majors often matter when seeking out positions on Wall Street. Internships are an important way to get your foot in the door, especially if you're an undergraduate student. Identify the kind of work you want to do, along with a list of potential employers. Make calls, send out resumes, and apply for a variety of open positions. Network constantly by joining groups related to your job search on LinkedIn and other local organizations of professionals.
Wall Street Jobs Have Changed
First, it's important to understand how these jobs have changed over time. In the past, a college grad vying for a Wall Street job would seek an entry-level analyst position at one of the big banks like Goldman Sachs or JPMorgan located at or around a financial district. But the proliferation of boutique sell-side firms and buy-side asset management companies, including hedge funds, has altered the definition of Wall Street. For review, buy-side firms might buy and invest in securities for fund managers and pension funds while sell-side firms might include advisory firms and investment banks.
So let's take a look at how to get an entry-level job at one of these Wall Street-like firms, including different types of investment firms—most of which are on the buy-side. Just to note, big banks and boutiques tend to be the only ones on the sell-side.
What Was Your Your Major?
College majors like finance, business administration and management, economics, accounting, and mathematics are natural fits for Wall Street. However, firms do hire from any major if the candidate understands markets and business. Legendary hedge fund manager George Soros, for example, has both a bachelor’s and a Master of Science degree in philosophy.
From a salary-by-position perspective, analysts who made the most money majored in management and strategy, according to Business Insider. The highest-earning associates majored in math and statistics, while vice presidents and directors at the top of the salary scale studied engineering. Interestingly, the outlet found that, on average, across all finance workers in New York City, computer science majors were paid the highest.
If you're still an undergrad, try to get an internship at a Wall Street firm or similar institution the summer after your junior year of college. Many firms hire from their intern pool, and even if you end up working somewhere else after college, a successful internship will give you an edge in the hiring process, along with a better understanding of the world you're hoping to enter.
Identify a Suitable Position
Determine which type of Wall Street job is best suited for you based on your personality and skills. Rather than limit yourself to a specific niche in the market, make sure your net is wide—the larger your job search scope, the better your chances of getting your foot in the door. There are numerous jobs at investment firms, and each has its own characteristics and requires specific skills and traits. These can be broken down into three main categories:
Investment Team
Jobs in this category include research analysts, portfolio managers, and traders. At many firms, analysts and portfolio managers are one and the same, with portfolio managers often coming up through the ranks of the research arm of the organization.
Skills and traits you need for these jobs include a mathematical and analytical mindset, knowledge of accounting and economics, and the ability to focus and see the trees among a dense forest. Hours are often long but not overwhelming.
Investment teams typically begin the day before the market opens and end it after its closing. Members of the team incorporate the most current economic, financial, and company-specific news into an investment thesis and decide which securities to hold, buy, or sell. This group is the hardest to break into at an entry-level unless the organization has a multilayered structure that hires new graduates.
Operations
Positions in operations include client relationship, marketing, risk, legal, back-office functions, and other systems. These positions are varied and can provide an entry point to an investment organization.
Many of these jobs require some degree of an analytical mind and a self-starter personality. Client teams additionally require strong interpersonal and communication skills along with a distinct understanding of the portfolio and markets. These jobs are fast-paced, demanding, and often the least heralded.
Sales
This is a broad category. In sell-side firms, investment bankers are successful when they build and maintain strong relationships that translate into revenue for the firm.
Necessary traits here bear a strong resemblance to the sales organization that sells the firm’s products—research in the case of the sell-side or portfolios in the case of the buy-side. Strong relationship building and interpersonal and communication skills are necessary to be successful. While a financial mind is extremely useful here, it is not the most important trait.
These jobs also provide entry points—either as sales assistants or entry-level analysts. The hours are often long, demand intense customer interactions, and require a significant amount of travel. The focus is on building relationships.
Make a List of Potential Employers
Generate a list of potential employers that fit your skillset and personality. For instance, if you have a passion for investment banking, make sure you include mergers and acquisition (M&A) firms such as private equity firms or hedge funds. If you excel in sales, include both the sell- and buy-side firms in your search. This list of employers should consider:
Skills: College major, skills acquired during internships, and/or work experience Personality traits: Strengths, areas of weakness, likes, dislikes, and overall strength of your work ethic Goals: What you want to achieve and when you want to achieve it Lifestyle: How much you want to work and whether you like to travel Types and location of firms: Small versus large, willingness to move abroad or to other areas in the U.S.
When generating a list of potential employers, don’t forget companies that may participate in investing in the markets but that aren't overtly known as asset managers. Such employers may help you get a foot in the finance door and eventually launch you into a more conventional Wall Street position. Examples include insurance companies, a local government treasurer’s office, or small accounting firms that offer investment advice and products. Large companies, such as General Electric or Ford, have asset management arms that manage internal pension plans. Even your college or university may have an endowment fund that offers internships and entry-level positions.
And don't go blind—do your research. Make sure you know the most important details about each company in which you're interested. Nothing shows your dedication more than being prepared.
Doing your research on companies that you're interested in shows how dedicated you are to your career.
Apply for a Position
Start your job search. Call companies and send out resumes. Take advantage of resume and job search tools such as LinkedIn. If you are still in college, apply for Wall Street or general finance internships. If you've graduated and cannot secure a front office, entry-level Wall Street job, consider applying for a support position. Former president and CEO of HSBC USA Irene Dorner got her start as an in-house lawyer for a bank. There are numerous examples of people who started out in operations and moved into other parts of an organization.
Risk is an area that has garnered a great deal of attention since the global financial crisis in 2008. This area has transitioned from operations into the investment team in many organizations. Client relationship managers have skills that parallel sales, and often these two functions share mobility. There have also been examples of administrative assistants moving into marketing roles. While the investment team often gets the glory, every other part of the organization is necessary to make a firm a success. The key is to have the required skills and education to be able to propel yourself to the next level. Be assertive and persistent, and cast a wide net.
Network Constantly
Even when you are not actively applying for a position, continue to network. This is where social media can be extremely useful. Use your business or social network to find someone who knows someone who can make a useful introduction or serve as a mentor. You can join groups related to your job search on LinkedIn as a start. But you can also search for social groups with financial industry experts on Facebook.
Often overlooked, Meetup groups are another way to help expand your base of network contacts. Depending on where you live, you may find regular events in your area for like-minded individuals who you can meet with in person in a social setting. This is a great way to get your face and name out there to people who may be able to help you out in your job search.
Another helpful activity is to join the local trade association. If you live in New York, for example, and have your sights set on becoming a security analyst, join the New York Society of Security Analysts. If you are not in New York, find your local chapter. These types of associations can lead to invaluable networking opportunities.
The Bottom Line
Landing a glamorous investment banking analyst position at a large bank on Wall Street right out of college may not be realistic. But Wall Street success stories follow many trajectories. Consider working for a boutique firm or a large corporation or pursue any opportunity that promises to provide experience in finance and eventual connections to Wall Street.
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dbf10907618140e8b5212b8704382b87 | https://www.investopedia.com/articles/personal-finance/021015/how-much-are-taxes-ira-withdrawal.asp | How Much Are Taxes on an IRA Withdrawal? | How Much Are Taxes on an IRA Withdrawal?
How much you will pay in taxes when you withdraw money from an individual retirement account (IRA) depends on the type of IRA, your age, and even the purpose of the withdrawal. Sometimes the answer is zero—you owe no taxes. In other cases, you owe income tax on the money you withdraw. You can even owe an additional penalty if you withdraw funds before age 59½. On the other hand, after a certain age, you may be required to withdraw some money every year and pay taxes on it.
There are multiple IRA options and many places to open these accounts, but the Roth IRA and the traditional IRA are by far the most widely held types. The withdrawal rules for other types of IRAs are similar to the traditional IRA, with some minor unique differences. These include the SEP IRA, Simple IRA, and SARSEP IRA. Each has different rules about who can open one. But before getting into the details, you should know that the Internal Revenue Service (IRS) refers to a withdrawal from an IRA as a "distribution."
Key Takeaways Only Roth IRAs offer tax-free withdrawals. The income tax was paid when the money was deposited. If you withdraw money before age 59½, you will have to pay income tax and even a 10% penalty unless you qualify for an exception or are withdrawing Roth contributions (but not Roth earnings). At age 72, you are required to withdraw money from every type of IRA but a Roth—whether you need it or not—and pay income taxes on it.
Tax-Free Withdrawals: Roth IRAs Only
When you invest in a Roth IRA, you deposit your money after it has already been taxed. When you withdraw the money, presumably after retiring, you pay no tax on the money you withdraw or on any of the gains your investments earned. That's a significant benefit.
To take advantage of this tax-free withdrawal, the money must have been deposited in the IRA and held for at least five years and you must be at least 59½ years old.
If you need the money before that time, you can take out your contributions with no tax penalty. It's your money and you already paid the tax on it.
However, you can't touch any of the investment gains. Keep a careful log of any money withdrawn prior to age 59½ and tell the trustee to tap into only your contributions if you're withdrawing funds early. If you do not do this, you could be charged the same early withdrawal penalties charged for taking money out of a traditional IRA.
If you accidentally withdraw investment earnings rather than just your contributions from a Roth IRA before you are 59½, you can also owe a 10% penalty. It is crucial to keep careful records.
"For a retired investor who has a 401(k), a little-known technique can allow for a no-strings-attached withdrawal of a Roth IRA at age 55 without the 10% penalty," says James B. Twining, founder and CEO of Financial Plan Inc. in Bellingham, Wash. "The Roth IRA is 'reverse rolled' into the 401(k) and then withdrawn under the age 55 exception."
Knowing you can withdraw money penalty-free might give you the confidence to invest more in a Roth than you'd otherwise feel comfortable doing. If you really want to have enough for retirement, it is, of course, better to avoid withdrawing money early so that it can continue to grow in your account tax-free.
Taxes on Traditional IRA Withdrawals
Money deposited in a traditional IRA is taxed differently from money in a Roth. You contribute pretax income. Each dollar you deposit reduces your taxable income by that amount in that year. When you withdraw the money, both the initial investment and the gains it earned are taxed at your income tax rate in the year you withdraw it.
However, if you withdraw money before you reach age 59½, you will be assessed a 10% penalty in addition to the regular income tax based on your tax bracket. There are some exceptions to this penalty (see below).
Avoiding the Early Withdrawal Penalty
There are some hardship exceptions to penalty charges for withdrawing money from a traditional IRA or the investment-earnings portion of a Roth IRA before you reach age 59½. Common exceptions for you or your heirs include:
Qualified education expenses Qualified first-time home purchase Disability of the IRA owner Death of the IRA owner An Internal Revenue Service levy on the plan Unreimbursed medical expenses A call to duty of a military reservist
IRS exceptions are a little different for IRAs and 401(k) plans; they even vary a little for different types of IRAs.
You also escape the tax penalty if you make an IRA deposit and change your mind by the extended due date of that year's tax return. You can withdraw the money without owing the penalty. Of course, that cash will then be added to the year's taxable income.
The other time you risk a tax penalty for early withdrawal is when you roll over the money from one IRA into another qualified IRA. The safest way to accomplish this is to work with your IRA trustee to arrange a trustee-to-trustee transfer, also called a direct transfer. If you make a mistake trying to roll over the money without the help of a trustee, you could end up owing taxes.
"Most plans allow you to put the name, address, and account number of the receiving institution on their rollover forms. That way, you never have to touch the money or run the risk of paying taxes on an accidental early distribution," says Kristi Sullivan, certified financial planner of Sullivan Financial Planning LLC in Denver, Colo.
"In terms of IRA rollovers, you can only do one per year where you physically remove money from an IRA, receive the proceeds, and then within 60 days place the money into another IRA. If you do a second, it is fully taxable," says Morris Armstrong, a registered investment advisor with Armstrong Financial Strategies in Cheshire, Conn.
You should not mix Roth IRA funds with the other types of IRAs. If you do, the Roth IRA funds will become taxable.
Some states also levy early withdrawal penalties.
When You Owe Income Tax on a Withdrawal
Once you reach age 59½, you can withdraw money without a 10% penalty from any type of IRA.
If it is a Roth IRA and you've had a Roth for five years or more, you won't owe any income tax on the withdrawal. If it's not, you will.
Money deposited in a traditional IRA is treated differently from money in a Roth.
If it's a traditional IRA, SEP IRA, Simple IRA, or SARSEP IRA, you will owe taxes at your current tax rate on the amount you withdraw. For example, if you are in the 22% tax bracket, your withdrawal will be taxed at 22%.
You won't owe any income tax as long as you leave your money in a traditional IRA until you reach another key age milestone. Once you reach age 72, you will be required to take a distribution from a traditional IRA. (The age was set at 70½ until the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019).
The IRS has specific rules about how much you must withdraw each year, the required minimum distribution (RMD). If you fail to withdraw the required amount, you could be charged a hefty 50% tax on the amount not distributed as required.
There are no RMD requirements for your Roth IRA, but if money remains after your death, your beneficiaries may have to pay taxes. There are several different ways your beneficiaries can withdraw the funds, and they should seek advice from a financial advisor or the Roth trustee.
The Bottom Line
The money you deposit in an IRA should be money you plan to set aside for retirement, but sometimes unexpected circumstances get in the way. If you are considering withdrawing money prior to retirement, learn the rules regarding a penalty and try to avoid that extra 10% payment to the IRS.
If you think you may need emergency funds before retirement, consider putting at least some of your money in a Roth IRA so that it will be accessible without penalty if needed.
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a7b7433444e9b3d53a773430626b0be3 | https://www.investopedia.com/articles/personal-finance/021015/uber-versus-yellow-cabs-new-york-city.asp | The Difference Between Uber vs. Yellow Cabs in New York City | The Difference Between Uber vs. Yellow Cabs in New York City
Uber vs. Yellow Cabs in New York City: An Overview
If you live in a mid-to-large-sized city and take taxis, you have probably already tried Uber. What you may not know is that the transportation app has different rates in each city. New York City is arguably the taxi capital of America and home of the classic yellow taxicab.
They do have some similarities—both conventional taxis and Uber charge fares based on a combination of time and distance. Both also charge passengers for any bridge or road tolls in addition to the fare. However, there are also significant differences between Uber and taxis in New York City. Which is the quickest and most economical ride in New York City, and what are the differences between Uber and Yellow Cab?
Uber
Uber does not differentiate between cruising and stop-and-go traffic, while taxis do charge different rates based on speed. In addition, Uber has price hikes during times of high demand, while taxis have extra rush hour fees. Uber does provide fare estimates within the Uber app, but it does not guarantee the final fare because road conditions can change during the ride.
Uber offers five classes of service in New York City, each with a different price structure, as the table below shows.
Type Description Base Fare $/Minute + $/Mile Minimum Fare uberX regular people or professional drivers; regular cars $2.55 $0.35 per minute + $1.75 per mile $7.00 uberXL regular people or professional drivers; regular SUVs $3.85 $0.50 per minute + $2.85 per mile $10.50 UberBLACK professional drivers; upscale cars $7.00 $0.65 per minute + $3.75 per mile $15.00 UberSUV professional drivers; upscale SUVs $14.00 $0.80 per minute + $4.50 per mile $25.00 uberT yellow taxicab requested through Uber app $2.50 $0.50 per 1/5 mile or $0.50 per 60 seconds in slow traffic or when the vehicle is stopped $2.50
It can be difficult to understand how these pricing structures work in real life, so here is an example:
For a 5-mile, 10-minute trip going 25 miles per hour the entire way, uberX would cost the $2.55 base fare plus $3.50 for the 10 minutes plus $10.75 for the mileage, for a total of $16.80. You can now add a tip on Uber if you choose.
Uber has something called surge pricing, which refers to the higher fares it imposes during times of high rider demand. Surge pricing can take effect during rush hour, during a natural disaster, or during a random spike of requests on a Saturday afternoon. Uber claims these price increases are meant to encourage more Uber drivers to get out on the road, and that prices revert to normal when supply and demand even out—capitalism at its finest. The Uber app notifies users of surge pricing when they request a ride.
Airport Fares
Uber used to offer a $60 flat rate between Manhattan and JFK but dropped that option. Rates are now calculated based on time and distance.
Payments and Tipping
Before you can call an Uber, you must download the app onto your smartphone and register a credit card or PayPal account to your Uber account. Uber automatically charges your account at the end of the ride. When you take a cab, you can pay with cash, credit card, or a payment app on your phone, like Apple Pay.
Tipping is different with each service, too. Uber allows riders to tip their driver through the app after they have rated their ride, once complete. You have 30 days to add a tip once your ride is complete.
Vehicle Types
Uber’s vehicles range from standard consumer cars like Honda Accords in the uberX class to upscale vehicles like all-black Cadillac Escalades under UberSUV. Uber policy is that all cars must be no more than 15 years old and must be easy to enter and exit and a four-door (so no pickup trucks or compact cars).
Getting a Ride
Uber is only accessible through an up-to-date smartphone. If you do not own a smartphone, your smartphone is not up to date, or you forgot your phone, you will not be able to use Uber. New York City regulations prohibit street hails for private ride services (also called livery services).
Customer Service
Since passengers request all Uber rides through the app, there is no waiting on the street and getting drenched trying to hail a ride in bad weather. Nor will you find yourself standing alone on an empty street late at night trying to catch a cab. The app lets users know when the driver has arrived, so passengers can wait indoors.
Uber actively seeks and reviews passenger feedback on drivers. After each ride, Uber asks the passenger to rate the driver through the app and add comments. Uber will stop using a driver who gets too many low ratings. Uber drivers also rate passengers, and passengers have to contact Uber or ask a driver to find out their scores. Some drivers avoid passengers with low scores. Uber may temporarily ban passengers for inappropriate or unsafe behavior and permanently refuse service to riders who have been aggressive, violent, or disrespectful.
Yellow Cab
The same 5-mile, 10-minute trip going 25 miles per hour the entire way in a taxi would cost the base fare of $2.50 plus 25 units at $0.50 each, or $12.50, for a total of $15.00. It is customary to tip the driver 10 percent to 20 percent. This adds $3 to the cab fare, for a total of $18.
In this example, the cost of each ride is close. Which option is cheaper in other scenarios depends on traffic. When Sara Silverstein did the math for Business Insider, she found that taxis are cheaper in New York City when traffic is flowing at under 20 MPH. Uber is cheaper in other cases unless it is charging high-demand fares.
Taxis do not have surge pricing, but riders might have to wait longer when demand exceeds supply. Taxis do, however, add a $0.50 surcharge in the evening (8:00 p.m. to 6:00 a.m.) and a $1 surcharge during rush hour (4:00 p.m. to 8:00 p.m.), Monday through Friday. If Uber’s surge pricing is in effect, you will probably pay a lot less by taking a cab, if you can get one. Surge pricing will at least double your usual fare, and Uber has reported charging customers as much as $39 per mile. A New York City councilman introduced a bill in January 2015 proposing to limit surge pricing to twice the usual rate.
Getting into a taxi in an unfamiliar city can be nerve-wracking. You have no idea how much the trip should cost or if the driver is taking the most direct route. In New York City, taxi riders cannot get an advance estimate for taxi fares. The NYC Taxi and Limousine Commission’s official stance is that “it is impossible to pre-calculate a fare, because the meter rate depends on traffic, construction, weather, and route to the destination.”
Airport Fares
Yellow cabs have regulated fares to and from the Newark International and John F. Kennedy International airports. For trips between Newark International Airport and New York City, the price is the regular metered fare, plus a $17.50 surcharge, plus tolls. For trips between John F. Kennedy International Airport and Manhattan, it is a flat fare of $52 plus tolls. The regular metered fare applies to all trips to and from LaGuardia International Airport.
Payments and Tipping
NYC cab drivers are required to accept MasterCard, Visa, Discover, and American Express credit cards and MasterCard and Visa debit cards with no minimum fare requirement. Passengers pay for rides by swiping their card through a card reader and can see the transaction details on a monitor in the back seat. Passengers must sign for card transactions over $25. Uber's receipts are emailed to the passenger and available through the app.
Tipping is customary for cab rides. You can add the tip to your credit card or pay it in cash. Most riders who pay by credit card tip 20 percent, which might have something to do with the automatic tip options offered by the credit card machine: 20 percent, 25 percent, and 30 percent. You can always calculate your own tip or decline to tip altogether for bad service.
Vehicle Types
Taxicabs hold either four or five passengers, depending on the vehicle model. The most common vehicle model for older taxis is the Ford Crown Victoria. There is an approved vehicle list for taxicabs. All taxis are painted yellow, except for taxis in boroughs other than Manhattan, which are green. If you want a fancier ride, you will need to call a traditional private car service or use Uber.
Getting a Ride
Yellow cabs accept street hails anywhere in New York City. Green Boro Taxis, which operate in the outer boroughs and parts of Manhattan north of certain streets, can either be prearranged or hailed on the street.
Customer Service
What if you have a bad experience during your ride? The NYC Taxi and Limousine Commission posts a passenger bill of rights inside the cab that drivers and cab owners must adhere to. If you want to make a complaint, the NYC TLC directs passengers to call 311 or make the complaint online through this form.
To file a complaint about a bad taxi ride, the passenger should first get a receipt from the driver that shows the taxi’s unique four-character medallion number. You can also get the medallion number from the taxi’s license plate, roof, or inside the car on the back of the partition. You can then file a complaint online through the NYC Taxi and Limousine Commission website. If the driver pleads guilty, they will pay a fine and the case will be closed. If the driver pleads not guilty, there will be a hearing, which requires you to give testimony by phone or in person.
What if you leave something in a cab? Again, you need the medallion number to report to the NYC Taxi and Limousine Commission for help tracking down your belongings. If you leave something in an Uber, you can open the Uber app and click on a link to your electronic receipt for the ride to find and contact the driver.
Key Takeaways Both conventional taxis and Uber charge fares based on a combination of time and distance. Taxis do not have surge pricing, but riders might have to wait longer when demand exceeds supply.Uber does not differentiate between cruising and stop-and-go traffic, while taxis do charge different rates based on speed.
Editor’s note: This article was previously published with inaccurate and out of date information. In addition, it made false and insensitive characterizations of both taxi and Uber drivers that Investopedia does not stand by. We regret that we missed these issues when this article was recently updated, but we have since corrected it and we apologize for the remarks and the oversight.
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d502bd7f6b2dd7a66b25754119014223 | https://www.investopedia.com/articles/personal-finance/021016/5-alternatives-traditional-health-insurance.asp | 5 Alternatives to Traditional Health Insurance | 5 Alternatives to Traditional Health Insurance
As the cost of traditional health insurance rises, some Americans are seeking alternatives that provide some sort of protection without busting their monthly budgets. Here are five viable options worth considering.
Key Takeaways Traditional health insurance policies are the go-to plan for medical coverage, but consumers have other options.Alternatives include primary care membership plans, medical cost-sharing programs, health savings accounts (HSAs), medical services discount cards, and high-deductible policies.Primary care membership plans allow participants to receive care from a primary care physician for a flat fee, usually paid monthly.Medical cost sharing programs allow participants to pool money to cover each other's medical expenses.
1. Primary Care Memberships
Some medical practices and independent primary care physicians offer services for a flat monthly fee, rather like a gym membership. This is often referred to as a concierge medical service.
An individual or family can get the usual services provided by a primary care physician, including virtually unlimited doctor visits, blood tests, and pediatric care, all with no copay. Of course, such an arrangement does not cover surgery, hospitalization, major injury treatment, or specialist care.
Most who choose this option supplement the primary care membership with a high-deductible, low-premium health insurance policy that covers catastrophic illnesses or injuries.
2. Medical Cost Sharing Programs
Participants in programs such as Medi-Share pay monthly fees similar to insurance premiums. By pooling their resources, they share each others' medical costs as they arise. Each member who needs medical services pays an "incident fee," similar to a copay. The remainder of the medical costs is covered by the pooled fees.
These programs often negotiate discounts with primary care physicians and hospitals to keep costs down. The monthly fee is typically less than traditional health insurance while offering similar levels of reimbursement.
Many cost sharing programs are from faith-based organizations that exclude some services, such as birth control and substance abuse treatment. Otherwise, the programs function much like a regular insurance policy at a lower overall cost.
Still, if you're thinking about a medical cost sharing program, be sure to read the fine print—very carefully. Some of these programs don't guarantee you'll be reimbursed at all for any bills (it might be "voluntary"), and many have very limited per-incident and lifetime caps.
3. Health Savings Accounts
A health savings account (HSA) can help cover medical expenses while offering tax advantages. A health savings account must be combined with a high-deductible health plan (HDHP) to cover catastrophic illnesses or injuries.
HSAs are available through many employers, but may also be set up by individuals. Payments made into an HSA are pre-tax deductions, and there is no tax penalty for spending or withdrawing money as long as it is used to pay medical expenses.
The IRS limits maximum contributions to an HSA account. For 2020, you can contribute $3,550 for individual coverage (up from $3,500 in 2019). For family coverage, the 2020 limit is $7,100 (up from $7,000 in 2019). If you're age 55 or older, you can stash away an extra $1,000 per year.
4. Medical Services Discount Cards
For those who prefer to operate on a cash-only basis for medical costs, a variety of medical discount cards are available. Some discount cards can be used for physician and hospital services, prescriptions, or a combination of these. The discounts can be substantial, up to 80% or more.
Some cards come with a one-time membership fee, while others may have a small monthly fee. Keep in mind that these are discounted fee-for-service programs—not health insurance plans. And the services you need may not be covered, so be sure to read the fine print.
There are typically restrictions on where the discount cards can be used, similar to those for a healthcare plan that requires using doctors within a specified network.
One notable advantage is that the cards can often be used for major dental services. The dental coverage in traditional health insurance policies is usually severely limited, expensive, or both.
Discount cards can also be used in combination with high-deductible catastrophic illness or injury insurance coverage.
5. High-Deductible Policies
Younger adults in generally good health who do not expect to incur much in the way of medical costs during the year can often make do with a low-premium, high-deductible policy that covers only unexpected major injury or illness. A catastrophic health insurance policy ensures coverage in the event of such unforeseen medical expenses while keeping insurance costs to a minimum.
If you have a high-deductible health plan, it makes sense to open (and fund) a health savings account. This allows you to set pre-tax money aside to pay for medical expenses, which effectively gives you an automatic "discount" (equal to your tax bracket) on every bill you pay.
The Bottom Line
Healthcare is expensive, and costs are expected to keep climbing. Even if you're in perfect health today, you can't count on staying healthy or avoiding injuries. If you can't afford a traditional health insurance policy, these options can help. Still, keep in mind that these are not perfect solutions, and that benefits vary. It's essential that you read the fine print so you understand exactly what type of coverage you'll have.
Also, many providers offer a discount if you pay for services on the same day you receive them, but you have to ask for it. And, many health systems offer financial assistance—either interest-free payment plans or discounts, typically based on your household income. If you're facing a large bill, always ask about discounts and financial assistance.
Finally, remember that one of the best ways to control healthcare costs is to prevent illness and injury to begin with. Eat well, be active, and focus on a healthy lifestyle.
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544b0a09b553f3b6a03f823cd48a040f | https://www.investopedia.com/articles/personal-finance/021115/become-venture-capital-associate.asp | How to Become a Venture Capital Associate | How to Become a Venture Capital Associate
Venture capital (VC) firms search the startup world and look for the next Facebook or YouTube. They provide risky capital infusions to early-stage or small companies that have limited access to more conventional sources of capital like bank loans.
In exchange, the venture capitalists receive ownership in the company and significant managerial oversight. In a VC firm, the venture capital associate is the most junior member. Nevertheless, these positions are competitive, involve a lot of responsibility and independent thinking, and command strong salaries.
Key Takeaways Venture capital firms provide funding to startup companies and small businesses—namely, those with fewer options for raising money. Venture capital associates are responsible for sourcing new deals for their firm and for supporting those that are already in the works. VC associates can expect an annual salary of $80,000 to $150,000, though with bonuses this number can become significantly higher.
VC Associate Job Description
VC associates have two main job functions: sourcing new deals and supporting existing deals.
Sourcing New Deals
VC associates are on the front lines of finding and screening deals. They are expected to bring an ambitious, sales-like mentality to this task, oftentimes sourcing potential deals by cold calling companies and entrepreneurs in order to set up meetings. The associate then presents prospective deals to the firm partners.
Supporting Existing Deals
VC associates, similar to other financial analysts, support all aspects of a deal, from due diligence to modeling and execution. With due diligence, they produce the initial analytics that lead a firm to pursue or reject a deal.
Similar to private equity, when a deal moves onto later stages, associates continue to work side-by-side with the partner. Work intensity and hours fluctuate based on how close the team is to closing deals. Like other finance analysts, VC associates can work extremely long hours near deal closings. Because of the high demands and pressure, VC associates are often rewarded with generous compensation.
The type of VC firm distinguishes some of the functions of the associates. VC firms that concentrate on early-stage financing do much more sourcing and very limited due diligence and modeling. Firms that concentrate on late-stage financing do more of the traditional diligence, modeling, and execution, similar to a private equity firm.
VC Associate Salary
Annual salary and bonuses differ broadly in this field depending on the size of the VC firm and its specialization. In general, VC analysts can expect an annual salary of $80,000 to $150,000, according to Wall Street Oasis. With a bonus, which is typically a percentage of salary, this can be much higher.
In addition, firms will compensate associates for sourcing or finding deals. At higher levels in a venture capital firm, bonuses involve multiples of salary tied to the portfolio and carry from investments.
Fast Fact In 2019, venture capital deployed in the U.S. reached $136.5 billion, surpassing the $130 billion mark for the second consecutive year.
How VC Associates Advance
The advancement track is also a bit different at VC firms when compared to private equity. As in private equity, most VC pre-MBA associates come in with some type of experience. This can range from a stint as an investment banking analyst to some kind of industry‑specific training.
Firms expect pre-MBA associates to stay for two to three years and then exit to business school or another employer. In fact, many firms give a two-year contract at this level.
The post-MBA VC associate is on the partner track. If a partnership is the end goal—and it usually is for post-MBA associates—then the way to get there is to establish a strong track record of sourcing companies, closing deals, positively impacting the portfolio company, and exiting the investment to generate solid returns for the firm.
Education and Training
Venture capital pre-MBA associates may get bachelor's degrees in mathematics, statistics, finance, economics, or accounting. VC firms tend to focus investments on a specific sector and will sometimes pursue candidates in the industry who have no prior finance or venture capital experience. For example, a venture capital firm focused on healthcare may hire a biochemist that successfully started a pharmaceutical company.
Post-MBA associates, in general, get considered for a VC firm based on the school they attended. And depending on the type of VC firm (early versus late stage) the characteristics sought can differ widely. Early-stage VC firms look for candidates who understand markets and industries and can perform analysis to determine market size and opportunity. Late-stage VC firms look for the more traditional skills of financial modeling and deal execution.
Venture Capital vs. Private Equity
Venture capital firms are quite similar to private equity in terms of the deals they make and the sources of financing. They differ, however, in the types of companies they pursue.
In general, private equity firms tend to gravitate to established companies, whether small or large, whereas venture capital firms seek to finance startups and smaller companies that do not have access to the capital markets. This distinction is important because it frames the roles of the associates at venture capital firms.
Characteristics of a VC Associate
Venture capital associates operate in a unique area of finance. Unlike investment banking and other financial analysts who focus on modeling and deal execution, VC associates have less structure.
Even at the entry-level, VC associates are tasked with finding deals, meeting entrepreneurs, and evaluating business ideas. This can appeal to a candidate who is interested in being involved and partnering with businesses.
"To get a job in VC, it's all about hustle," said Angela Lee, a Professor of Professional Practice at Columbia Business School. "You have to be out there networking and be top of mind when one of those highly coveted roles opens up. Once there is an opening, you need to demonstrate your ability to source, select, and support startups."
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99a34aa482ede2a88c1c2abe00c1ec54 | https://www.investopedia.com/articles/personal-finance/021115/job-description-and-salary-mergers-and-acquisitions-analyst.asp | Mergers and Acquisitions Analysts - Career Profile | Mergers and Acquisitions Analysts - Career Profile
Within finance, working in the field of mergers and acquisitions (M&A) carries an extra patina of glamour. These corporate strategists study industries and buy, sell, divide, restructure, and combine companies with the aim of achieving greater growth and efficiency. Mergers and acquisitions analysts support these complex deals by evaluating financial reports, studying company operations, and deciding how a company will fit within another business or as part of a larger portfolio.
Job Description
Mergers and acquisitions analysts do most of the preliminary legwork for potential deals. They analyze industry prospects by gathering information about growth, competitors, and market share possibilities. They also review company fundamentals and financial statements. The analyst will then build a mosaic to help upper-level managers make decisions on a deal. This work is done over many months, but during certain periods analysts can work very long hours—up to 18 hour days. It is an extremely stressful and high-pressured job.
Entry-level analysts can join mergers and acquisitions teams at small, mid-sized, and large banks or investment firms. At smaller firms, the analyst works hand-in-hand with senior executives and can find being involved in more aspects of a deal to be rewarding. The downside to a small firm is the analyst will be responsible for more of the research and due diligence in a deal. At a large bank, analysts may have a slightly lighter workload as there will be more people specializing in each task. The analyst will likely also specialize in a task and see less variation in duties. A large bank will have more resources for gathering data and information.
Education and Training
An entry-level M&A analyst likely has some prior experience as an investment banking analyst, very strong analytical skills, and a bachelor’s degree in accounting, economics, finance, or mathematics. Successful analysts should also have global market knowledge, good business understanding, problem-solving skills, and business intuition. Most analysts hope to advance to associate and then to director or principal. The top job in the field is managing director or partner. Beginning at the director level, duties shift from analyzing and executing deals to bringing in deals that make money for the firm. Analysts who hope to advance to the director level should have excellent sales skills as well as strong interpersonal, relationship building, and communication skills.
Salary
Typically firms have a hierarchy of analyst positions, from the entry-level college graduate to second and third-year analysts. After three years, analysts can be promoted to associates.
In general, the median salary for an entry-level mergers and acquisitions analyst is $71,138-$97,294. However, depending on location, employer, and bonuses, an entry-level analyst can earn between $57,958 and $107,928. As with other investment banking analysts, bonuses can comprise a signification portion of annual compensation (although at the entry level it is much lower than at the higher levels). For the entry-level analyst, the median bonus may be around 7 percent. The experienced analyst may see a 14 percent bonus.
The Bottom Line
Mergers and acquisitions analysts are well compensated but the job can be demanding and require very long hours. Analysts must have strong financial and modeling skills to enter the field, and advancing to the director level requires strong interpersonal and sales abilities.
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2369516a7d9dae361addf65767f4fe82 | https://www.investopedia.com/articles/personal-finance/021314/how-file-tax-extension.asp | How to File a Tax Extension | How to File a Tax Extension
Tax deadlines have a way of creeping up on you, so filing for a tax extension might be something you need to do. The filing deadline for your 2020 individual income tax return is Thursday, April 15, 2021. You have until that date to file and pay your federal taxes without any penalty.
Filing an extension for your tax filing deadline does not also extend your payment deadline; taxes are due on the April 15 tax due date.
If you need more time to prepare your return—whether you are busy with school, travel, a family emergency, or are simply disorganized—you can request a six-month filing extension by submitting the proper form to the U.S. Internal Revenue Service (IRS).
Due to the winter storms that hit Texas in February 2021, the IRS has shifted the deadline for individual and business tax filings for residents of the state—including tax payments—from April 15, 2021, to June 15, 2021.
Of course, there’s also a deadline for that, but the good news is that getting an extension is easier than you might think. Here’s what you need to know, from dates and forms to special rules.
Key Takeaways Filing for a tax extension can be done either electronically or by using a paper form. Tax extensions are generally six months in length, meaning for the 2020 tax year, you should have until Friday, Oct. 15, 2021. Any overage you pay will be refunded to you once you file your tax return.
Filing for a Tax Extension: Form 4868
If you need an extension of time to file your 2020 individual income tax return in 2021, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Normally, the deadline would be April 15 for most taxpayers, as it is required to be filed by the original due date of the return. (Please note: In 2020, the 2019 tax return filing deadline was extended to July 15 due to the coronavirus pandemic. )
Requesting an extension is free and relatively simple, and it can be done either electronically or on paper. Either way, you will fill out identification information (your name, address, Social Security number, and your spouse’s Social Security number) and your individual income tax information (estimate of total tax liability for the year in question, total payments you’ve already made, the balance due, and the amount you are paying). There are also check boxes to indicate if you either are a U.S. citizen or resident who is out of the country or if you file Form 1040NR or 1040NR-EZ.
Like other tax forms, Form 4868 is available on the IRS website. Visit the Forms, Instructions & Publications section for a list of frequently downloaded forms and publications, including Form 4868.
Filing electronically
IRS e-file is the IRS’s electronic filing program, which allows you to send tax forms, including Form 4868, directly to IRS computers. You can get an automatic extension to file your tax return by filing Form 4868 electronically through IRS e-file on your own (from your personal computer, using free or commercial tax software) or with the help of a tax professional who uses e-file. You will receive an electronic acknowledgment you can keep with your tax records.
If your adjusted gross income (AGI) for 2020 was $72,000 or less, you can use brand-name software at no cost from Free File—a free service that provides taxpayers with federal tax preparation and e-file options. This is a partnership between the IRS and commercial tax-software companies. If your income is above the $72,000 threshold, you can use the IRS’s own Fillable Forms tool. There are also some tax-software companies that offer free filing under certain conditions.
$72,000 The highest amount of adjusted gross income that qualifies you to use Free File to file your taxes electronically at no cost to you.
Filing by mail
As an alternative to filing electronically, you can file a paper Form 4868. You can download the form from the IRS website or request to have a paper form mailed to you (for free) by filling out an order form on the IRS website. Alternatively, you can call the IRS at (800) 829-3676 to order a form.
Note: If you are a fiscal year (not calendar year) taxpayer, you’ll have to file a paper Form 4868.
More Time to File, Not More Time to Pay (Usually)
It’s important to remember that the Form 4868 extension gives you more time to file, not more time to pay. You will still have to pay your taxes by the original due date of the return, even if the IRS grants an extension to file later than that.
If you think you may owe tax when it comes time to file your return, you should estimate how much you will owe and subtract any taxes that you have already paid (for example, through tax withholding on your paycheck). If your estimate is on the high side and you end up overpaying, you will be able to get a refund when you eventually file your return. That will also avoid the potential for penalties and interest to accumulate if you underestimate your taxes due.
You can pay part or all of your estimated income tax online using a debit or credit card or through an electronic funds transfer using Direct Pay, the Electronic Federal Tax Payment System. Even if you file electronically, you can mail a check or money order to make your tax payment. Make the check or money order payable to “United States Treasury” and include a completed Form 4868 to use as a voucher. You do not need to file a paper Form 4868 if you submitted one electronically and are not mailing a payment.
An extension on your federal tax return does not apply to your state tax return; you must apply to your state separately for that, and the rules vary among the states.
State Extensions
Each state has its own requirements for tax extensions. While some states offer automatic six-month extensions to all taxpayers (Alabama, California, and Wisconsin, for example), others require you to fill out a specific form on or before your return’s original due date. Some states do not impose a state income tax, so you would file neither a return nor an extension request in those states.
You can use commercial tax preparation software (see below) to generate the correct, state-specific form, or you can find the form on your state tax authority’s website. As with your federal tax return, the state extension serves only to give you more time to file your return, not to pay your taxes. If you can, calculate what you might owe and submit a payment to avoid penalties and interest.
Special Rules
The IRS has two special circumstances under which you can extend the tax payment deadline.
Out of the country
You will be allowed an automatic two-month extension to file your return and pay any federal income tax due—without requesting an extension—if you are a U.S. citizen or resident alien and on the regular due date of your return you are:
Living outside the U.S. and Puerto Rico and your main place of business or post of duty is outside the U.S. and Puerto Rico, or On duty outside the U.S. and Puerto Rico for military or naval service.
For your 2020 return, that means you may have until June 15, 2021, to file your tax return. You must attach a statement to your return that explains the situation that qualified you for the extension. Additionally, interest will accumulate on any taxes not paid by the original due date, if you owe at the time of filing.
Combat zone
The deadline for filing tax returns and paying taxes is automatically extended if:
You serve in the Armed Forces in a combat zone or have qualifying service outside of a combat zone, or You serve in the Armed Forces on deployment outside the U.S. away from your permanent duty station while participating in a contingency operation.
The extension is 180 days past the later of:
The last day you are in a combat zone or serving in a contingency operation, or The last day of any continuous qualified hospitalization for a service injury from a combat zone or contingency operation.
The Bottom Line
Having extra time to gather, review, prepare, and submit your tax return can ease stress and allow you to be more thorough on your return. Requesting an extension is fairly simple, and you do not need to explain to the IRS why you want one. As most requests are automatically granted, the IRS will contact you only if your request is denied. You can file your tax return any time before the extension expires and you do not need to attach a copy of Form 4868 to the return. Just remember to pay any federal tax you owe by April 15, 2021, and check with your state about its regulations for state income tax returns.
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c529f050ec5a048a18dafed09798553c | https://www.investopedia.com/articles/personal-finance/021315/how-overdraft-fees-work-and-how-avoid-them.asp | How Overdraft Fees Work and How to Avoid Them | How Overdraft Fees Work and How to Avoid Them
Overdraft fees can seem inescapable. Top banks charge as much as $30 whenever you spend more money than is available in your checking account, unless you've opted into overdraft protection with a linked account or line of credit. Because banks generate substantial revenue from overdraft and non-sufficient fund (NSF) fees, it isn't a surprise they haven’t worked too hard to eliminate them.
Banks use a questionable process known as "reordering transactions" to maximize overdraft fees, processing the largest checks, ATM withdrawals and debit card transactions first, rather than in the order in which they are received. This triggers negative balances and overdraft fees more frequently. Here's how reordering can hurt you:
Say you have $100 in your account, with incoming charges of $25, $35 and $85 hitting the same day and in that order. You might expect the bank to process the charges in the order in which they arrive. The $100 would cover the $25 and $35 payments, but the remaining $40 balance would be insufficient to process the $85 transaction, which then incurs a single overdraft fee. But if the bank reorders the transactions to process the $85 payment first, that leaves an insufficient balance of $15 with two smaller transactions remaining. Now the bank can levy two overdraft fees instead of one. Seem fair?
While it can be a challenge to avoid overdraft charges, there are strategies for keeping your hard-earned money where it belongs: in your pocket.
1. Opt Out of Overdraft Coverage
When a bank offers overdraft coverage, it means you can buy things with your debit card or withdraw from an ATM even if there are insufficient funds in your account. That can save embarrassment at the lunch counter but you'll incur a hefty overdraft fee—or run up interest if your bank offers an overdraft line of credit to cover charges until you pay them back.
A 2010 Federal Reserve rule prohibits banks from automatically enrolling customers in overdraft protection. Now, you must opt in to have your debit card purchases or ATM withdrawals covered by your bank. If you prefer a rejected debit card transaction over a hefty one-time fee, contact your bank and forego overdraft coverage. But be warned: even when you opt out, most banks will charge NSF fees that can equal overdraft fees.
2. Choose a Checking Account with No Overdraft Fees
Some banks pride themselves on offering checking accounts that eliminate overdraft fees altogether. In most cases, the bank will decline to cover the attempted charge or ATM withdrawal and will not charge an NSF fee either. There are tradeoffs. Most no-fee checking accounts don't accrue interest and the bank might have few, if any, brick-and-mortar branches. However, these drawbacks are outweighed by the elimination of onerous overdraft and NSF fees.
3. Keep Money in a Linked Account
Many banks allow you to link a checking account with another account so payments are covered with your own funds in the event you overdraw. In lieu of the bigger overdraft fee, you'll be hit with a smaller transfer fee ($10 to $15 is common). Some banks will let you link a credit card to your checking account to serve as a cushion for overdrafts. If you go that route, it will likely be treated as a cash advance, incurring an immediate interest charge on top of the transfer fee.
4. Set Up Daily Account Balance Alerts
Knowledge is power when it comes to your bank account. If you know ahead of time that your balance is dangerously low, you can transfer funds into your account or skip that impulsive purchase until your next paycheck. Most banks with online or mobile banking capabilities allow you to set up an email or text alert when your balance drops below a pre-defined threshold, say $200, for example. You can also set alerts for whenever a deposit or withdrawal posts to your account, so you know when your balance is in trouble.
Even better, sign up for a daily email that reports your current balance. It won't protect the account against reordering, but you'll have a clearer picture of your spending habits.
The Bottom Line
Overdraft fees can be an unnecessary strain on your pocketbook. Banks make billions of dollars per year from customers overdrawing their accounts, with those who can least afford the fees often getting hit the hardest. But with a little extra vigilance and the right checking account, you can be fee-free and make the most of your money. For more, see Pros and Cons of Overdraft Protection.
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b540ca092280b3d360f4afba6104cd2b | https://www.investopedia.com/articles/personal-finance/021315/it-worth-paying-broker-fee-new-york-city.asp | Is It Worth Paying A Broker Fee In New York City? | Is It Worth Paying A Broker Fee In New York City?
The scenario: You are getting ready to move to New York City and are going to look for a rental apartment there. New York is a great city—vibrant, rich in culture and diversity—but you need to understand from the outset that it also has one of the most difficult-to-navigate real estate markets in the world. Finding an apartment that you like and what you can afford, particularly in Manhattan or Brooklyn, can be an experience best described as one filled with “shock and awe.”
But, you don’t have to go it alone. There are 27,000 real estate agents, salespeople, and brokers waiting to help you in all five boroughs, with more than half of them in Manhattan. (For the purposes of this article, no need to worry about the difference in the titles; we’ll refer to all of them as brokers to make things easier.)
Is using a broker absolutely necessary? No. Is it expensive? Yes. Will it save you time and aggravation? It may if your broker is good at the job. And will it save you money? Possibly.
Why does New York have a broker system when so many other cities don’t? According to Gary Malin, current COO of Corcoran and former president of Citi Habitats, a Manhattan-based firm that was founded in 1994 and that merged with Corcoran in 2020, “It’s because of the sheer density – everything from walk-ups to super-luxury high-rise buildings. Most property owners just don’t have the staff or the wherewithal to handle rentals by themselves.”
Key Takeaways New York City's vast rental market, spread out across five boroughs, can be overwhelming and hard to understand.While there are apartments you can scrounge up yourself, through various apps and websites, or word-of-mouth, there are other apartments that only brokers have access to.Brokers can help you prioritize your requirements for an apartment, such as location, amenities, etc., as well as navigate the complicated paperwork often needed to get a lease.Brokers schedule appointments with you, go with you to see apartments, and help you deal with landlords and building owners.Broker's fees are often 15% of the total rent for the year. If the broker finds you a really good deal on rent, this might enable you to come out ahead versus what you would pay finding an apartment on your own.
New York City Rental Market
The real estate market in New York moves at the speed of light and has its own language, its own rules. First, the speed. Malin tells us that in order to get the place you want, you have to come to every apartment you see ready, he says, “to act on the spot – any delay will mean you’ll lose it.” New York property owners require a staggering amount of paperwork. That paperwork needs to be ready to go before your hunt begins. (More on that later.)
And as for NYC real-estate speak: You’re going to see listings that refer to “junior 4s” – a one-bedroom apartment that has a (usually tiny, often doorless and windowless) extra space that can be used as a home office, for storage, or other uses. And buildings described as pre-war means they were built before World War II and are generally considered to have more charm than some more recent vintages.
Another peculiarity of the NYC market is that you really can’t start looking for an apartment any earlier than 30 to 45 days before your anticipated move-in date. Available apartments are rarely listed sooner.
What Do Brokers Charge?
Brokers’ fees vary from firm to firm but are most often 15% of the annual rent. It is possible to find some lower rates (in a special deal for readers of real estate website BrickUnderground.com, for instance, you can sign up with a broker who charges a lower fee than the standard 15%.) Other brokers may also charge less than the standard or, since some may receive their fee directly from the property owner, there will be no fee at all.
What does this 15% mean in real terms? A $2,000/month apartment will require a $3,600 fee that must be paid when the lease is signed. At the same time you will be required to pay the property owner one month’s rent, or sometimes three—when the first month, last month, and security deposit are all requested. You must have all of those funds ready at signing, and everything needs to be paid with a certified check (no personal checks accepted).
“For anyone new to New York, brokers’ fees come as quite a shock,” says Teri Rogers, founder of BrickUnderground. That’s one reason so many newcomers avoid using a broker. “They start off in New York renting a sublet they find through a friend or online, or rent a room in someone else's apartment.”
While it is possible to find an apartment without a broker, there are advantages to having a professional work with you.
Why Use a Broker?
You are paying your broker for his or her experience, knowledge, and access – all extremely valuable. Malin explains that some brokers will find you an apartment that has a rent lower than what you might find if you do a no-fee search, and if you compare the broker’s fee to the rent money saved, you may come out ahead.
A broker may have listings that you won’t find in a DIY search on the internet. A good broker will ask the right questions from the start and determine just what your priorities are – what is your realistic budget for rent (most New Yorkers figure on spending at least 30% of their net income on rent); do you want something close to where you work; do you want to be in a neighborhood with lots of restaurants and bars or in one that is more serene; are you going to share with a roommate; do you have a dog and if so, how big is Fido?
A savvy broker will also guide you through the required paperwork – all the financial information you’ll need, such as an employer letter, pay stubs, income tax returns, and more. If you do not have an income that is 40 times as much as your rent, most landlords won’t even consider granting you a lease so you will need a guarantor, or co-signer, who will have to submit a staggering amount of paperwork as well. The broker will help you with this often thorny situation (guarantors unfamiliar with the New York market may balk when they see that they have to submit more information than they did when they bought their own home).
Your broker will schedule appointments, go with you to look at apartments, and help you to submit the applications required by the property owner. He or she will be right alongside you at lease signing. Your broker will be your advocate every step of the process and even once you’ve found an apartment, a broker can be a great resource for information on moving, on local transportation, on any questions that a newbie might have.
Finding a Good Broker
Probably the best path to a broker you can trust is via recommendations from friends, relatives, and friends of friends. Use social network tools to find people who have had good experiences with their New York City search. Make sure that the company the broker represents is a member of the Real Estate Board of New York; be suspicious of any deal that looks too good to be true – because it will be.
If you already know what neighborhood you want to live in, search out a broker who has had experience there, or, even better, one who both lives and works there.
Be wary of brokers who want you to meet them in the street and seem a bit shady about information about their office. And never fall for the “bring cash” request.
The Bottom Line
Unless you are among the chosen few who will be able to find an apartment without shedding either sweat nor tears (e.g. your sister is moving out of her affordable apartment and has arranged with the property owner for you to take over the lease), you may want to consider using a broker who will navigate the system for you.
For more on choosing an apartment, see 5 Tips For Finding A Good Landlord. Found a place? Read Insurance 101 For Renters.
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7fe04b89da0550676ca91907e541d21d | https://www.investopedia.com/articles/personal-finance/021715/square-vs-stripe.asp | Square vs. Stripe | Square vs. Stripe
Square (SQ) and Stripe have emerged as two popular payment processing services for small and growing businesses. As the services have become widely used, their simple fixed-rate payment processing fees have drawn in big-name supporters, such as Starbucks (SBUX), to use and promote their systems. For investors and business owners, it’s important to understand how these companies operate to make smart financial decisions in the rapidly shifting payment processing industry.
How Square Works
Co-founded by Jack Dorsey, a founder of Twitter (TWTR), in 2009, Square began as a mobile payment processor for small businesses that operate on the go. The company initially targeted service-based businesses such as plumbers, food trucks, and pedicabs, offering its service as a way to safely, quickly, and inexpensively accept credit and debit cards. Square became popular thanks to its free and convenient adapters that operate through a phone’s headphone jack, a flat-rate 2.6% plus .10 cents processing fee, and no monthly recurring service fee.
Key Takeaways Stripe and Square are payment processing companies for small and growing businesses. The companies are disruptors in the space, which has long been dominated by large banks. Founded in 2009, Square is known for its adapters that plug into mobile-device phone jacks. Stripe is predominantly used for online debit and credit card transactions. While Square raised money through an initial public offering in 2015, Stripe says it has no IPO plans.
Square has been widely adopted by mobile and brick-and-mortar businesses alike. To further extend its reach among the latter, Square released a physical Square Stand in May 2013 that transforms iPads into traditional cash registers. The company has also built out its software suite to better handle diverse product sales from a predefined menu or inventory. Later product additions include inventory management, appointment management, analytics, invoicing, online ordering, gift cards, and capital management tools.
In Oct. 2013, Square launched Square Cash (now Cash App) as a person-to-person payment platform. The company had an initial public offering in 2015 and raised $243 million, with shares trading on the New York Stock Exchange under the ticker symbol SQ. That same year, the firm launched Square Payroll, a tool for small businesses to process payrolls. In 2019, Square began offering an application programming interfaces (API) to allow merchants to customize the Square platform.
How Stripe Works
What Square is to mobile payment processing, Stripe is to Internet payment processing. Stripe, which was founded in 2010 by two Irish entrepreneurs, charges 2.9% plus .30 cents per transaction with discounts available for high volume clients. Like Square, Stripe doesn’t have any monthly service fees and only charges business owners when a payment is processed.
Stripe, which was designed with online developers in mind, makes it easy to integrate a variety of online payment processing tools and plugins through its API. Sites on common platforms like Wordpress, Drupal, and Joomla can use Stripe for invoice payments, ticket sales, and physical goods sales, among other applications.
Stripe wasn't intended for in-person payments and focused on online transactions. These payments have a higher probability of fraud than in-person methods, which explains Stripe’s higher cost per transaction. However, in 2018, the firm launched a point of sale solution called Terminal, which provides credit and debit card readers that work with Stripe.
In 2019, Stripe raised $100 million from investment firm Tiger Global Management, increasing the company's valuation to $22.5 billion. In contrast to Square, Stripe says it has no intention of going public.
Similarities and Differences
Another major difference between the two payment processors is how the payment information is acquired. Square is primarily used for in-person payments where the card is present and can be physically swiped through a card reader. In 2015 the company began offering an EMV chip reader. Prior the the launch of Terminal in 2018, Stripe was used primarily for Internet transactions where the card isn’t physically present.
Both companies target similarly sized businesses that do not want to pay monthly transaction fees and do not want to be burdened with expensive payment processing equipment or complex contracts. Both companies offer similar, automated direct deposits within a few days of processing each transaction, so clients will have fast access to cash after each payment takes place.
The Bottom Line
Square and Stripe are major disruptors in traditional payment processing, a space long dominated by large banks. Overturning the traditional monthly merchant account fees and transaction fees allows many more businesses to access credit and debit customers, further shifting the competitive landscape from traditional businesses to startups and growing small to medium-sized companies.
As these companies continue to innovate, consumers and business owners can expect further changes that will make payment processing easier and more accessible. As cash becomes less prevalent and consumers continue to shift towards plastic en masse, these electronic payment processing companies can be expected to grow and more competitors are likely to enter the space.
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e496c2670290a7cced5e48400ce7b4ca | https://www.investopedia.com/articles/personal-finance/021815/how-make-money-airbnb-risks-rewards.asp | The Risks and Rewards of Making Money With Airbnb | The Risks and Rewards of Making Money With Airbnb
The peer-to-peer short-term rental services like Airbnb are becoming an alternative to many travelers. Some travelers are looking for the feel of home away from home. Others are looking for accommodations that will cover large groups in one place. Many also look to short-term peer-to-peer rentals as a less costly option than the standard hotel room. If you are thinking about getting in on the trend and renting out a room—or an entire home—here’s what you need to know first.
How to List With Airbnb
You decide when to make your space available and at what price. Listing is free, and you can individually approve potential guests. In setting your price, you’ll want to consider the going rate in your area by looking at competing listings. You’ll want to consider the costs of hosting – including cleaning, higher utility bills, taxes, and Airbnb’s host fee, which is 3% for payment processing. Your guests pay Airbnb’s 6% to 12% booking fees. Make sure you understand Airbnb’s hosting standards for listing accuracy, communication with guests, keeping your reservation commitments, cleaning your place for each guest, and providing basic amenities such as soap and toilet paper.
You’ll want to clean and declutter your space before you photograph it to present it in the best possible light. In most cities, Airbnb will even send a professional photographer to capture your space for free if you’re an active host. When describing your place, think about what makes it unique, and try to consider it from an out-of-town visitor’s perspective. Is your place within walking distance of public transit? Is it located near great restaurants, nightlife, or cultural activities? What amenities can you offer: wireless Internet, a fully stocked kitchen, cable television, an outdoor patio? Your listing will be displayed on Airbnb’s website, and you can also cross-promote it through social media or your own website.
Legalities and Taxes
Before listing your place on Airbnb, you might need to get permission. If your property is controlled by a homeowners’ association or co-op, check its rules to make sure you’re allowed to host. If you rent, you’ll want to get your landlord’s blessing. Airbnb suggests adding a rider to your contract with any of these entities to specifically address hosting through Airbnb.
In addition, your locality might require a business license, and you might owe local taxes on any income you earn. For example, you might have to pay a transient occupancy tax, the same tax that applies to hotels. Hotels usually pass this tax onto their guests: You might recall the extra 12% that was added to your bill the last time you stayed somewhere. You can look up Airbnb's information on many cities’ regulations.
You’ll also owe federal taxes on Airbnb income, which will be reported to you and to the IRS on form 1099. However, you may be able to reduce your taxable Airbnb income by deducting business expenses, such as cleaning fees and insurance.
Personal Safety
If you’re renting out your home when you won’t be there, you’re probably not at risk of physical violence. However, you’ll want to find a safe place to store anything of high sentimental or financial value. Your wedding dress, Grandpa’s gold watch, photo albums, your emergency cash, and your tax returns are all examples of things you’ll want to secure. Don’t give guests the opportunity to steal your possessions or your identity.
Things get trickier if you’re renting out part of your home while continuing to live there. You can keep a closer eye on your stuff (though you’d still be wise to safeguard it), but you’re physically vulnerable if your guest turns out to be dangerous. It’s not realistic to run criminal background checks on guests before they book or before they check-in; you can do some basic Internet sleuthing, but it’s not a failsafe process.
Reviews from previous hosts can offer reassurance, and you can always decline a reservation or even cancel a booking, though in some cases, Airbnb will impose penalties. You can also limit the reservations you accept to guests who have completed Airbnb’s Verified ID process. Both hosts and guests can have Airbnb verify their identity by uploading a valid government-issued ID and connecting a Facebook, Google+, or LinkedIn account to an Airbnb account.
Airbnb Home Safety
Airbnb also provides guidelines for hosts to make their homes safer. If basic human decency doesn’t give you enough incentive to make your place safe for guests, minimizing safety risks to guests minimizes your risk of being sued by a guest who is injured on your property. Guests also might give you lower ratings if you haven’t taken basic precautions to protect them, such as installing smoke and carbon monoxide detectors and eliminating or pointing out any trip or fall hazards. If you’re particularly negligent, Airbnb could refuse to let you continue to host.
Insurance and Liability
Speaking of liability, let’s talk about insurance. Airbnb’s host guarantee provides up to $1 million in insurance coverage for property damage in 29 countries, including the United States, United Kingdom, and Canada. Airbnb’s insurance is not a substitute for homeowner’s or renter’s insurance, and it doesn’t protect against theft or personal liability. Talk to your homeowner’s or renter’s insurance company to make sure your policy will cover your property, your possessions, and your liability while renting out your place through Airbnb. If you need extra coverage, an umbrella policy might be the ticket.
Airbnb offers liability insurance for U.S. hosts. It offers up to $1 million per occurrence and is secondary to any other insurance, such as your homeowner’s policy or your landlord’s insurance, that might cover the incident. Like any insurance policy, Airbnb’s liability insurance has conditions and limitations, so if you want to know exactly what’s covered and what’s not, read the fine print thoroughly.
Airbnb’s host guarantee doesn’t protect against wear and tear to your place, but you can charge a security deposit to cover possible damage. It’s important to inspect your property after each guest checks out because otherwise, you’ll have no way of knowing which guest caused the damage, and you won’t be eligible to file a claim. You’ll want to document any damage with photos and substantiate the “before” value of the damaged property. Airbnb asks that hosts first try to resolve any problems directly with guests before filing a claim. To file a claim with Airbnb for more than $300, you’ll need first to file a police report. Hosts have a limited window to file a claim: 14 days or before the next guest checks in, whichever is sooner.
“Airbnb provides an option to procure a refundable security deposit, which is what I do for each guest,” says Deb Glassman, who has been renting out her Venice, California, home on Airbnb for the last four years. “In one or two situations where I have had to collect the security deposit for minor issues, Airbnb has always backed me 100% with the guest.” She adds that staying in the studio in the back of her house while renting it out seems to be an automatic deterrent to potential guests who might want to party.
Payment Guarantees
Is it possible for a guest to crash and dash – that is, to stay overnight in your place without paying you?
Guests actually pay you through Airbnb. As long as there are no problems, Airbnb will release your payment within 24 hours of your guest’s arrival, and you’ll receive it within one business day, if you choose to get paid via PayPal or via Payoneer prepaid debit card, within a few days for a bank transfer, or within 15 business days for a mailed check.
Guests must notify Airbnb within 24 hours of check-in if there’s a problem that warrants a refund. If you don’t respond to guests who try to contact you about a problem, they might be allowed to complete their reservation and receive a partial refund.
Airbnb could require you to refund a guest’s payment if you cancel a reservation at the last minute, forget to leave the key, misrepresent your listing, don’t clean your home, or otherwise fail to meet Airbnb’s hospitality standards. Airbnb suggests making sure you’re available within 24 hours of guests’ scheduled check-in to address any concerns they might have since many problems are easily resolved. In your listing, make sure you describe your room type, number of bedrooms and bathrooms, and amenities accurately. If you choose to provide linens and towels, make sure they’re clean. Also, note whether there will be any animals on the property.
You could also get burned if you arrange payment with a guest outside of the Airbnb website. A guest might try to do this to avoid paying Airbnb’s guest fee or might be planning to rip you off. As a host, you only stand to save 3% by not going through Airbnb’s payment system, plus Airbnb could refuse to do further business with you if you get caught. So don’t try to circumvent the system.
The Bottom Line
The growing sharing economy offers ways to make extra income that wasn’t available even a few years ago. Many of these opportunities require you to be comfortable navigating unclear local laws, sharing your most valuable possessions with strangers, and taking on additional legal liability. Airbnb is no exception, but if you’re willing to take on the risks, you could make thousands of extra dollars a year.
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da95b3337d90ed3a7ea78ed66db81639 | https://www.investopedia.com/articles/personal-finance/022014/your-employerprovided-life-insurance-coverage-enough.asp | Is Your Employer-Provided Life Insurance Coverage Enough? | Is Your Employer-Provided Life Insurance Coverage Enough?
As part of your employee benefits package, you employer may provide some group term life insurance. While that's a nice perk, especially if you have no other life insurance in place, it's important to consider whether it's sufficient to meet your financial needs. What's more, relying entirely on your employer's insurance plan to cover you can pose other problems.
Key Takeaways Many employers offer a certain amount of group term life insurance as part of their employee benefits package.If you have this benefit, your employer may pay for some or all of the premium costs.You may also be able to buy additional coverage at your own expense.But getting all of your life insurance where you work can put your family at risk if something happens to you.
Problem 1: Your Employer May Not Offer Enough Life Insurance
While basic employer-provided life insurance is usually low-cost or free, and you may be able to buy additional coverage at low rates, your policy’s face value still may not be high enough. If you have dependents who rely on your income, you probably need coverage worth at least six times your annual salary. Some experts even recommend getting coverage worth 10 to 12 times your salary.
“Most people are able to buy an additional four to six times their salary in supplemental coverage over and above what’s provided by their employer," says Brian Frederick, a certified financial planner (CFP) with Stillwater Financial Partners in Scottsdale, Arizona. “While this amount is sufficient for some people, it isn’t enough for employees that have non-working spouses, a sizable mortgage, large families, or special-needs dependents.”
What's more, simply multiplying your salary may not be enough to replace your actual income. “Death benefits that replace salary do not take into account bonuses, commissions, second incomes, and the value of additional benefits such as medical insurance and retirement contributions,” notes Mitchell Barber, a financial services professional at the Center for Wealth Preservation, a Syosset, New York-based agency of MassMutual Financial Group.
On the other hand, your employer’s group life insurance might be sufficient if you’re single or if you have a spouse who isn’t dependent on your income to cover household expenses and the two of you don’t have children. If you’re in that situation, you may not need life insurance at all unless you want to cover your funeral expenses or have debts, such as cosigned student loans, that you don't want to leave behind for someone else.
Problem 2: You Can Lose Your Coverage if Your Job Situation Changes
As with health insurance, you don’t want gaps in your life insurance coverage because you never know when you might need it. If you change jobs, are laid off, or are reduced to part-time status, you could lose your employer-provided life insurance.
Lack of portability can be a problem if you aren’t going directly to another job with similar coverage and aren’t healthy enough to qualify for an individual policy. Some policies do allow you to convert your group policy to an individual one, but it will likely become much more expensive. And if you’re losing your coverage because you were laid off, the premiums might be unaffordable.
“Since the products that are available for conversion from an employer-provided plan are typically limited to just one insurance carrier’s offerings, a client can generally find a more cost-efficient insurance policy outside of the employer’s plan,” says Thaddeus J. Dziuba III, a life insurance specialist for PRW Wealth Management in Quincy, Massachusetts.
“This presupposes that the client can obtain favorable underwriting, however. As a rule of thumb, if a client can no longer get medically underwritten for new insurance coverage but still has a financial need for the death benefit provided by his or her company’s plan, then we often advise conversion regardless of price, since it will be unlikely that they can obtain coverage elsewhere,” he adds.
Even if you don't leave your job, there's also the risk that your employer could stop offering life insurance as a benefit to save the company money, leaving you without coverage.
Problem 3: Coverage Gets Tricky if Your Health Declines
Another problem arises if you’re leaving your job because of a health problem. “If you rely solely or heavily upon group insurance, and then suffer a medical condition that forces you to leave your job, you may be losing your life insurance coverage just when your family is going to need it the most,” says Jim Saulnier, a CFP with Jim Saulnier & Associates in Fort Collins, Colorado. At that point, it may be too late to purchase your own policy at an affordable rate, if you can get one at all, he says.
Even if your health problems aren’t significant enough to stop you from working, they might limit your employment options if you only have life insurance through work. “You could end up handcuffed to your job to keep the life insurance if you experienced a serious enough health issue,” says David Rae, a CFP and vice president of client services for Trilogy Financial Services in Los Angeles.
Problem 4: Your Plan Doesn’t Provide Enough Coverage for Your Spouse
While your employer’s benefits package probably offers health insurance for your spouse, it won’t always provide life insurance for them. If it does, the coverage may be minimal—$100,000 is a common amount, and that doesn’t go far when you lose your husband or wife unexpectedly.
Couples often assume the family will only suffer economic hardship if the primary breadwinner dies, says Saulnier, and as a result, many workers fail to adequately insure their spouses. But the death of a non-working or lower-earning spouse can put great demands on the family's income. “I often say rhetorically to a client, if your [partner] dies on Saturday are you going back to work Monday morning? Do you have ample PTO [paid time off] on the books to cover an extended leave?”
What’s more, says Barber, “When one parent is absent, the other must take up the slack with daycare or chauffeuring. Hours are cut back. There is never time to properly grieve and, as survivors are often depressed, productivity often falls.”
If your current employer-sponsored coverage doesn't offer a sufficient death benefit for your spouse, you may need to purchase a separate policy for them. But if they're also employed, they can first check to see what kind of life insurance benefits their workplace offers.
Problem 5: Employer-Provided Life Insurance May Not Be Your Cheapest Option
Even if you can get all the life insurance you need for both yourself and your spouse through your employers, it’s a good idea to shop around to see if your employer’s insurance really offers the best value for the money. The younger and healthier you are, the more likely you will be to find a better rate elsewhere. Also, unlike the guaranteed level-premium term life insurance you can purchase individually, which costs you the same amount every year for as long as you have the policy, the coverage provided by your employer tends to get more expensive as you age.
“Employer coverage starts out being very cheap prior to age 35 and then rapidly increases in price,” says Frederick. “Most policies increase every five years and become incredibly expensive once the employee turns 50. If you are healthy and a nonsmoker, buying a stand-alone policy might be cheaper than taking coverage through your employer.”
“Employees who are too unhealthy to qualify for life insurance on their own tend to overload the group insurance because there is no underwriting, and life insurance companies make up for it by charging higher premiums,” Saulnier explains. As a result, the healthy people in group policies may pay more than they would if they purchased private policies.
Important When shopping for individual life insurance, consider whether it makes sense to include any riders, such as an accelerated death benefits rider, a guaranteed insurability rider, or a long-term care rider, to broaden your policy's coverage.
The Solution: Supplement Employer-Sponsored Life Insurance With a Policy of Your Own
While there’s no reason not to take advantage of any free or inexpensive life insurance your employer offers, it probably shouldn’t be your only insurance. Nor should most people rely entirely on the additional life insurance they can buy through work.
The solution to each of the problems described above is to purchase some of your life insurance directly in the form of an individual term life policy. Term life insurance is designed to cover you for a set period of time—such as 10, 20, or 30 years—and it's generally much more affordable than permanent life insurance.
You might need to purchase as much as 80% of your life insurance on your own to have enough and to make sure you’re covered at all times and under all circumstances.
Barber believes that, on the whole, the most affordable solution is to buy the most insurance you can afford at the youngest age, since, as you get older, the chance of acquiring an illness goes up, and with illness comes more expensive premiums, if you can qualify for a policy at all.
How Much Supplemental Life Insurance Do I Need?
As mentioned above, there are a number of rules of thumb for how much life insurance you need in total, such as multiplying your current salary by six, eight, 10, or more. While those guidelines can be better than nothing, they may also be way off the mark, depending on your circumstances.
If you'd like to come up with a more precise, individualized estimate, first consider how much annual income your dependents rely on from you and how many years they are likely to need it. If, for example, you have very young children, you will need to replace more years of income than if your kids are teenagers or older.
So, for instance, if your family would need $100,000 a year for 10 years to cover their living expenses if you were to die tomorrow, you should ideally have at least $1 million in life insurance.
Also consider any large expenditures beyond their everyday needs that your survivors are likely to face. For example, if you expect that your kids will be going to college one day, figure those costs into the equation, too.
If you have other assets that your family will inherit, such as investments or money in retirement accounts, you may need less life insurance than otherwise. But, if you can afford to, it's better to err on the high side when estimating your needs, in part because inflation could erode the value of your policy over time.
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149e18246d39a6cdf46d2cc43e40a7fa | https://www.investopedia.com/articles/personal-finance/022017/7-jobs-cant-be-automated.asp | 7 Jobs That (Probably) Won’t Be Automated | 7 Jobs That (Probably) Won’t Be Automated
Today automation is making it possible to perform tasks more efficiently and precisely than any human could ever hope to do. While that’s great for companies, it’s a not-so-comforting thought for workers who could one day lose their jobs because of it. A report released by the consulting firm McKinsey & Company represents a wake-up call for today’s workforce: “Almost every occupation has partial automation potential, as a proportion of its activities could be automated,” the authors concluded.
The group estimates that as many as half the activities performed by workers across the globe could be replaced by automation by using “currently demonstrated technologies.” The seeds have already been sown for the mechanization of millions of jobs—it’s just a matter of how quickly organizations are able to successfully implement them (though, on a positive note, the authors acknowledge that innovation creates entirely new jobs as well).
7 Jobs That Can’t Be Automated
Certainly, not every sector of the economy will undergo the same level of change. Highly physically demanding jobs, especially done in “predictable environments,” are the ones that are most susceptible to replacement by software or machinery. However, there are numerous jobs that will probably never become obsolete, due to the need for a level of adaptability and creativity that only humans can provide. Here is a list of seven that qualify.
Key Takeaways Although artificial intelligence has taken many jobs away from human workers, there are certain things that are hard to recreate.Such positions require a human touch. This can be in art, education, or healthcare fields.Computers are advanced and can recreate many human characteristics, but one thing that computers seem unable to mimic is emotional understanding.
Healthcare Workers
While automation is playing a bigger role in the treatment of patients, it’s hard to imagine it ever overtaking the need for human providers – and that’s good news for doctors, nurses and other healthcare employees everywhere. A separate McKinsey report, for instance, found that fewer than 30% of a nurse’s tasks could be replaced by automation, so it looks like the professionals in scrubs are on solid ground.
Teachers
Education is another area in which technology is making a huge impact, as the rise in online classes reveals. Nevertheless, experts say that there will likely always be a need for someone to provide instruction and answer questions – not to mention grade written assignments. As Michael Chui, a partner at the McKinsey Global Institute, pointed out, “The essence of teaching is deep expertise and complex interactions with other people.” And those are the sorts of activities that are least prone to mechanization.
Creatives
Jobs that rely heavily on the right side of the brain—from writers to graphic designers—appear safe for the foreseeable future. Computers excel at analyzing structured data but haven’t yet proved as useful in more imaginative pursuits such as writing literature or developing logos. Now might be the time to take that artistic hobby and turn it into a profession.
Social Workers and Counselors
People undergoing difficult times, whether it’s relationship troubles or substance abuse issues, need professionals who can listen and provide support and detailed advice. Despite remarkable advances in software, that’s not something computers can offer. That’s why jobs that rely heavily on interpersonal communication, such as social workers and counselors, look safe.
Lawyers
Imagine being arrested and entrusting a software program to mount your defense. It’s hard to posit a scenario such as that taking place anytime soon; legal proceedings are simply too nuanced. Lawyer jokes aside, the legal system still needs people who can make sense of complex laws and argue on behalf of their client.
Supervisors
Certain mechanical and manufacturing jobs are being replaced by robotics, but there remains a need for people who can watch over those machines. First-line supervisors, even those in a factory setting, will likely remain in demand down the road. That’s why PC Magazine has called this position one of the most secure jobs in the age of automation.
Computer Systems Analysts
It may seem ironic to suggest that computer-related jobs are among those least threatened by computers. In reality, the more our economy relies on automation, the more we’ll need people who can implement and manage those systems. The Bureau of Labor Statistics estimates that there will be a 9% increase in the number of analysts by 2028, a rate higher than for most occupations.
The Bottom Line
Without a doubt, the workforce two or three decades from now will look very different from the one we know today. Still, for certain jobs, the impact of automation will be relatively limited. If you’re in a job that requires creativity and a depth of knowledge (or significant hands-on, personal contact), you’re in a much safer spot for the foreseeable future.
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54b66fd47a53d397216bc9b798d9c7d9 | https://www.investopedia.com/articles/personal-finance/022216/i-make-50k-year-how-much-should-i-invest.asp | I Make $50K a Year: How Much Should I Invest? | I Make $50K a Year: How Much Should I Invest?
No matter how much money you earn, the amount you invest each year should be based on your goals. Your investment goals not only provide you with a target at which to aim, but they also provide the motivation to stick with your investing plan.
Your investment goals should also be based on how much you can afford to invest. With an income of $50,000, the constraints of living expenses may prevent you from investing as much as you would like initially, but if you stay focused on your goals, you should be able to increase the number of your investments as your income increases.
By following four key financial planning steps, you can determine how much to invest in the beginning and have a plan for achieving your goals through gradual increases in the amount you invest. For purposes of illustration, this particular case involves a 30-year-old person earning $50,000 per year with an expected increase in income of 4% per year.
Key Takeaways Investing a portion of your wealth can be a smart way to grow your wealth in order to pay for future needs and wants. What to invest in and how much will be dependent on your income, age, risk tolerance, and investment goals. For a 30-year old making $50,000 a year and a $1 million retirement savings goal, putting away $500 a month should get you to your goal assuming a 6.5% average annual return.
Set Your Goals
At age 30, you may have several goals you want to achieve, which could include starting a family, having children, providing those children with a college education and retiring on time.
This is a lot to accomplish on a $50,000 income. However, it is safe to assume your income will increase over the years, so you should not let your current income constrain your goals. You just have to prioritize, and as you set up your investment plan, target each goal separately. For this example, assume the goal you want to target is to retire at age 65.
After inputting some assumptions into a retirement calculator, this indicates a need for $1 million in capital. This is your target. Using a savings calculator, and assuming an average annual return of 6.5%, you need to save $500 per month starting at age 30. This is your savings goal. Your next step is to create a spending plan that allows you to meet this goal.
Create a Spending Plan
The mistake many people make when creating a personal spending plan is they determine their savings amounts around their monthly expenses, which means they save what they have leftover after expenses.
This invariably results in a sporadic investing plan, which could mean no money is available for investing when expenses run high in a particular month. People who are intent on achieving their goals reverse the process and determine their monthly expenses around their savings goals. If your savings goal is $500, this amount becomes your first expenditure.
It is especially easy to do if you set up an automatic deduction from your paycheck for a qualified retirement plan. This forces you to manage your expenses on $500 less each month.
Lock in a Percentage of Your Income
Most financial planners advise saving between 10% and 15% of your annual income. A savings goal of $500 amount a month amounts to 12% of your income, which is considered an appropriate amount for your income level.
Assuming your income increases by an average of 4% per year, this automatically increases your savings amount by 4%. In 10 years, your annual savings amount, which started out as $6,000 per year, will increase to $8,540 per year. By the time you are 55, your annual savings will increase to $16,000 per year. This is how you reach your goal of $1 million at age 65 starting out on a $50,000 per-year income.
Invest According to Your Risk Profile
This investment plan assumes an average annual rate of return of 6.5%, which is achievable based on the historical return of the stock market over the last 100 years. It assumes a moderate investment profile, investing in large-cap stocks.
If you are adverse to risk or prefer to include investments that are less volatile than stocks, you will have to lower your assumed rate of return, which will require you to increase the amount you invest.
At a younger age, you have a longer time horizon, which may allow you to assume a little more risk for the potential of higher returns. Then, as you get closer to your retirement target, you will probably want to reduce the volatility in your portfolio by adding more fixed-income investments. By staying focused on your benchmark of a 6.5% average annual rate of return, you should be able to construct a portfolio allocation that suits your evolving risk profile over time, which will allow you to maintain a constant monthly investment amount.
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a30913a8d70b11cf10a079c6550577e6 | https://www.investopedia.com/articles/personal-finance/022315/best-credit-cards-travel-china.asp | Best Credit Cards for Travel in China | Best Credit Cards for Travel in China
Credit card usage and acceptance in China have greatly increased over the past decade, particularly in large metropolitan areas such as Beijing, Hong Kong, and Shanghai. That’s good news for many tourists who prefer the convenience and safety of carrying credit cards over large amounts of cash.
But not all credit cards are equal in China. It's helpful to know which cards are widely accepted, and which ones don’t charge a foreign transaction fee.
Discover: The Card of Choice in China
An agreement between Discover Financial Services (DFS) and China UnionPay, currently China’s only national bankcard payment network, makes Discover the credit card of choice when traveling to China. Under the agreement, Discover cards are accepted at all UnionPay locations, which basically is everywhere in China that a credit card is accepted.
Discover’s website states that if a decal displaying the Discover or UnionPay acceptance mark isn’t visible, you can still hand over your card for payment if the merchant accepts credit cards, noting that some merchants (especially hotels) don’t always display the acceptance decals.
Discover also notes that, while its cards have been used in China since 2006, some merchants may still be unfamiliar with the Discover brand. To help, you can download from Discover’s website a wallet-sized instruction card (written in both English and Chinese) that can be presented to merchants to facilitate transactions.
Added perks with Discover cards:
You can use your card at any UnionPay ATM machine for a cash advance.Discover charges no foreign transaction fees on purchases.
Note that Discover specifies that you can use the card in "Mainland China." Some online forums report that Discover cards may not always be accepted in Hong Kong; check ahead with your hotel if you're headed there.
key takeaways Discover is the credit card of choice for China, as it's accepted at all China UnionPay locations, which basically is everywhere in the country that takes a credit card.Other credit cards are widely accepted at major retailers, restaurants, and hotels, but make sure you use one without foreign transaction fees.Surcharges are common on credit card transactions in China.Try to have a transaction done in RMB, the local currency.
Other Credit Cards for China
Many hotels, chain stores, and tourist attractions accept other international credit cards, including Visa, MasterCard, Diners Club, and American Express. A number of these cards don’t charge foreign transaction fees and may offer other incentives that benefit frequent travelers. The Bank of America Travel Rewards credit card, for example, has no annual fee, charges no foreign transaction fees, and offers 1.5 points for every dollar you spend. The points can be redeemed as a statement credit for any travel-related purchase, including airfare, baggage fees, and hotels.
Like Discover, CapitalOne bank doesn't charge foreign transaction fees on any of its cards, either. In other cases, you'll have to check with your bank or issuer about your particular card. Among those that are fee-free: Chase Sapphire Preferred, American Express Platinum, the American Express Gold Delta SkyMiles card, and the Barclaycard Arrival Plus World Elite Master Card.
Of note, the Bank of America Travel Rewards card and Chase Sapphire Preferred card are among the best rewards credit cards available, making them especially beneficial while traveling abroad.
Definitely inform your credit card company of your upcoming trip to China, to ensure transactions don't get flagged as fraudulent and a block gets put on your card.
Tips for Using Credit Cards in China
It’s not uncommon for businesses in China to add a surcharge to the total cost of your purchase if you use a credit card instead of cash. In some cases, surcharges are a result of how the processing bank handles the transaction. When using some credit cards, the bank that processes the transaction converts the transaction into your home currency at an unfavorable exchange rate, essentially adding 4% to 6% to your bill.
If possible, make sure the transaction is done in the local currency (RMB) with the Chinese bank charging your bank the RMB amount. Your bank will then convert this to your home currency at a fair exchange rate. When in doubt, ask about a surcharge before you hand over your credit card so you can decide if it makes more sense to pay in cash.
Getting Cash with Credit Cards in China
Even though more local businesses now accept credit cards, China is still a cash-based country. You'll definitely still need the coin of the realm to pay for goods and services at smaller businesses in major cities and whenever you’re in a rural area.
ATM machines in larger cities typically accept foreign bank cards (look for signs that show which cards are accepted). Be aware that you might pay hefty ATM fees for any amount you withdraw, so limit the number of withdrawals you make. You’ll receive RMB (renminbi, Chinese currency notes, the basic unit being the yuan). It’s a good idea to hang on to your receipt; you might have to show it if you want to exchange your RMB back to your home currency before you leave the country.
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53bf9441d82f6ef1f92060c053ab01eb | https://www.investopedia.com/articles/personal-finance/022315/best-fortune-500-mentorship-programs.asp | The Best Fortune 500 Mentorship Programs | The Best Fortune 500 Mentorship Programs
Whether you are a college student, have just landed your first job, or have more extensive experience in the workforce, a mentor can help guide you down the path toward a successful career. Choosing the perfect mentor is an important decision. It requires finding someone that has the experience that closely correlates with your future goals.
Most companies have amazing perks for their employees, and one of the most overlooked of these is a corporate mentorship program, in which more experienced and more knowledgeable employees provide advice and guidance to less experienced and less knowledgeable employees.
71% The percentage of Fortune 500 companies that have a corporate mentorship program, according to an American Society for Training and Development study.
The study also found that 75% of executives credit their mentors with helping them reach their current positions.
Below are a few of the top Fortune 500 companies offering mentorship programs.
General Electric
New graduates who are hired into one of General Electric’s (GE) nine business units are placed into their Experienced Commercial Leadership Program. All program participants will complete eight-month rotations within the sales or marketing areas of their particular business.
The training is designed to help participants advance and further develop their knowledge of different sales and marketing skills. They also work to enhance their leadership abilities.
Those who excel within the Experienced Commercial Leadership Program are well-positioned for growth in their businesses within General Electric.
Key Takeaways An amazing benefit available to employees of many companies is a corporate mentorship program, in which mentors provide guidance and advice to participants. Recent graduates employed by General Electric business units are enrolled in the company's eight-month rotational mentorship program, the Experienced Commercial Leadership Program. Microchip giant Intel offers a mentorship program whereby mentees are paired with mentors who possess desired skills and competencies. Tech leader Google hosts a summer-long global program, donned the Summer of Code, in which future leaders write codes for projects and earn stipends.
Intel
One of the world’s largest chipmakers takes a different stance on mentorship programs. Instead of matching up fresh talent with seasoned veterans, Intel (INTC) has reinvented the process a bit by matching people based on the skills that are in demand at any given time.
Intel searches far and wide for matches in their mentorship program. They run the program through the intranet and email allowing mentorship pairs to be located across state lines.
Each person that enters the mentorship program fills out a questionnaire, which helps eliminate guesswork. Participants are then paired based on the specific skills they possess.
One of the greatest things about the mentorship program at Intel is that they are not concerned about moving a few select people up the chain of command. Instead, they are interested in passing information and talent from one generation to another. Overall, company growth is a priority.
Caterpillar
One of the world’s leaders in mining and construction equipment, Caterpillar (CAT) aims to mold their recent college graduates into the future of the company. Their professional development program lasts two or three years, depending on the department.
During the rotation program, participants create the basic building blocks for technical competence, develop, and refine their leadership skills, gain exposure to senior management, and develop long-lasting relationships with all of the program mentors.
Google
Google (GOOG) is one of the world's leading technology companies; therefore, attracting some of the brightest talent is crucial to the company's continued growth. Each year, Google hosts Summer of Code, a global program offering student developers stipends to write code for various open-source software projects. Since its inception in 2005 to 2019, Google has had over 14,000 successful student participants from more than 109 countries. There have also been over 24,000 mentors.
Throughout the summer, the students are paired with different mentors giving them real-world software development experience, along with the chance to earn employment within their areas of interest.
Time Warner Cable
At Time Warner Cable (TWC), the goal for the mentorship program is to build employees' skill sets, increase their knowledge of the industry, and achieve their development goals. The program is beneficial to everyone because it also helps the mentor further strengthen their skills as a leader.
Time Warner Cable feels that a mentorship program helps enhance loyalty and retention by improving employee satisfaction. The program gives top talent a stage on which to shine and enables them to move throughout the company.
The Bottom Line
Mentorship programs are one of the best ways to groom recent college graduates to be successful during their careers. By teaching a newly-graduated employee about the successes and failures that they have experienced, mentors can play a vital role in the making of future leaders.
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3e4032aa89c988bcd40739eabe652a0d | https://www.investopedia.com/articles/personal-finance/022415/filling-out-form-4562-stepbystep.asp | Form 4562: Depreciation and Amortization Definition | Form 4562: Depreciation and Amortization Definition
What Is Form 4562: Depreciation and Amortization?
If you purchased for business or investment purposes any equipment or machinery, bought a building or other property, or used a vehicle for business this year, you need to complete Form 4562, Depreciation and Amortization. This two-page form has six parts, but if you take it step-by-step, you’ll be able to complete the sections that your situation requires.
If you don’t own a business, breathe a sigh of relief. You won’t ever have to fill in depreciation and amortization tax forms. If, however, a vintage clothing shop owner purchases new racks and displays for her store or a baker acquires a second-hand (new to him) delivery truck or perhaps a new iPad-based checkout system for his market stall, the IRS won’t allow them to automatically deduct the full cost of purchases like these in the first year. That’s where Form 4562 comes in.
If you didn’t acquire any assets during the year and are merely depreciating the cost of assets purchased in prior years, you may not need to complete this form (it depends on your business’ entity type and other factors). Not sure about this, or whether you’re up to the task of handling this form? Review the IRS instructions to Form 4562 or consult a tax professional.
Key Takeaways • Business owners must file Form 4562 if they are claiming depreciation for property that was placed into service during the current tax year or a previous tax year (section 179 deductions). The form is also used to claim depreciation on vehicles and other "listed" property.• In general, businesses can depreciate tangible property, such as machinery, buildings, vehicles and equipment, as well as intangible property like patents, copyrights, and software.• For tax years beginning in 2020, the maximum section 179 expense deduction is $1,040,000, or $1,075,000 for qualified enterprise zone property. That cap is reduced, however, if the cost of section 179 property exceeds $2,590,000.
How to Complete Form 4562: Depreciation and Amortization
Depreciation and amortization are write-offs for the cost of acquiring various assets or incurring certain expenses used in business or for investment purposes (such as a landlord with a rental building). Sounds simple enough, but there are many conditions and requirements, special elections, special terminology (not all of which can be defined here), and other rules that complicate the topic. The following is a step-by-step approach to completing the form under the most common circumstances.
Form 4562 Part I
This part of the form is used to elect to expense tangible property, off-the-shelf software, and certain types of real estate (e.g., a greenhouse) placed in service throughout the calendar year (called the Section 179 deduction). For tax years 2020 and after, the maximum section 179 expense deduction is $1,040,000 ($1,045,000 for qualified enterprise zone property). This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,590,000.
Regardless of the deduction amount, you must apply the limitation that restricts the Section 179 deduction to the extent of your business profits (called “taxable income” without regard to certain deductions) for the year. The limitation–your net earnings from self-employment for sole proprietors or net profit for other business entities–is entered on line 11. If you had any Section 179 deduction disallowed last year because of this business income limitation, the carryover is entered on line 10; if any part of this year’s deduction cannot be used because of the limitation (and is carried over to the next tax year), enter it on line 13.
Note: You don’t have to use the Section 179 deduction; you can instead depreciate the property over the number of years applicable to the type of property involved (an option that makes sense if you think future depreciation will save you more taxes). You can choose to use the Section 179 deduction for a part of the cost of the property by entering the “elected cost” on line 6(c).
Form 4562 is available on the IRS website.
Form 4562 Part II
This part of the form is used for a special depreciation allowance (also called “bonus depreciation”), which is a 50% allowance claimed in the year that eligible property is placed in service. Certain property acquired after Sept. 27, 2017, and used before January 1, 2021, is eligible for a 100% deduction, though you don't have to take it.
Do not complete this part for:
Property that is not “eligible property.” only new property, and not pre-owned property, are eligible.“Listed property,” which is defined later (in Part V).
Bonus depreciation applies automatically to a qualified property unless you decide not to take it. The election out of bonus depreciation is made by attaching a statement to the return indicating property for which you do not want to apply this special depreciation. Note: This election cannot be revoked without IRS consent, so be sure you want to opt out.
Bonus depreciation can be combined with the Section 179 deduction. As with the order of Form 4562, the Section 179 deduction is taken first, then bonus depreciation. If there is still any cost that has not been fully deducted, regular depreciation (in Part III) can also be claimed.
Form 4562 Part III
This section is for basic depreciation (other than depreciation for listed property, which is entered in Part V) under the Modified Accelerated Cost Recovery System (MACRS) that was created in 1986 and continues to apply today. A single entry on line 17 is used to report deductions for assets placed in service during a previous tax year (refer to your prior tax returns or any worksheets you may have retained to determine the amount to enter here).
Details about assets placed in service during the current tax year are entered on Section B (lines 19a through 19i). For example, say your design firm bought and started using a $3,000 3-D printer so you could make your own prototypes of the housewares you were designing (and you did not expense the cost in Part I or use bonus depreciation in Part II). The tax law says the printer is five-year property.
Enter:
The date (month and year) it was placed in service on line 19b, column (b) The cost or another basis on which depreciation is figured in column (c) The recovery period is different from the basic recovery period (a time frame set by law for each type of property) in column (d) The appropriate convention (a tax rule that impacts the depreciation computation) in column (e)The depreciation method (e.g., an even deduction over the recovery period, called the straight-line method, or one that skews write-offs to early years, called accelerated depreciation method) in column (f)The amount of the depreciation deduction in column (g)
Residential rental property and nonresidential real property (e.g., office building, factory) automatically has a fixed recovery period, uses the mid-month convention (that assumes the property was placed into service in the middle of a month), and the method of straight-line.
Businesses should list assets that were placed into service during the current tax year (excluding automobiles or other listed property) and subject to the Alternative Depreciation System (ADS) in Section C (lines 20a through 20d) instead of Section B. Certain assets, including tangible property used mostly outside the United States and tax-exempt use property must be expensed using ADS. A complete list is included in the IRS Instructions for Form 4562.
Business owners should file a separate Form 4562 for each business or activity that requires the form. Should you need more space than that which is provided, you may attach additional sheets of paper.
Form 4562 Part IV
This part of the form is a summary from Parts I, II, and III, as well as listed property in Part V. Line 22 is the key entry; it is the amount of depreciation that is deductible. The amount on line 22 is reported on the appropriate line of your tax return.
Businesses that are subject to the uniform capitalization rules of section 263A should enter the increase on line 23.
Form 4562 Part V
This section is for claiming write-offs for listed property: cars weighing 6,000 pounds or less, pickup trucks, computers, and peripheral equipment, video recording equipment, and other property specifically called “listed property.”
Section A is for the depreciation allowance for listed property, including the Section 179 deduction and bonus depreciation. You need to enter a lot of information about each item of property in this section:
Type of property in column (a) Date it was placed in service in column (b) The portion of the business and/or investment usage in column (c)The cost or another basis in column (d) The basis for depreciation [which reflects the amount in column (d) multiplied by the percentage in column (c)] in column (e) The recovery period in column (f) The method or convention for depreciation in column (g) The depreciation deduction in column (h)Any election Section 179 deduction in column (i)Line 24a in Section A asks two key yes-no questions: (1) Do you have evidence to support the business and/or investment use of the listed property and (2) is this evidence written? This means if you use your personal car for business, you need to be able to answer "yes" to both questions (e.g., you’ve kept a log on paper, on a computer, or via an app).
For property that is subject to a special depreciation allowance, the depreciation deduction and elected section 179 costs must be entered on line 25. Otherwise, property used more than 50% for a qualified business use is recorded on line 26, and that which is used less than 50% for business is entered on line 27.
Section B is used to provide information about vehicles used by sole proprietors, partners or other “more than 5% owners”, or people related to these business owners. There’s space for up to six vehicles; use an attachment for reporting any additional vehicles (which is generated automatically for electronic returns).
The form will ask how many business and commuting miles each vehicle was driven during the year, whether the vehicle was available for personal use during "off-duty" hours and whether it was used primarily by a 5% owner or related person.
Section C is used by an employer to report certain information on employee use of company vehicles. There are five yes-no questions to answer here. If you don’t have any employees, skip this section.
Form 4562 Part VI
This part is for any amortization you claim. With amortization, costs are deducted evenly over a set number of years fixed by law or over the expected life of the property. Amortizable costs include start-up costs that were not fully deductible in the first year of business and costs for certain intangibles (such as goodwill, patents, and copyrights). Amortization costs that begin during the current tax year are entered on line 42 (along with a description of the costs and other information); amortization for costs that began in a prior year is entered on line 43.
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ac1ca41f5b5b44d8df8e9b816603f812 | https://www.investopedia.com/articles/personal-finance/022415/how-pinterest-makes-money.asp | How Pinterest Makes Money | How Pinterest Makes Money
Social media platform Pinterest went public earlier this year. In short, the company makes money from advertising. Shares started trading on the New York Stock Exchange on April 18 under the symbol “PINS.”
Pinterest's initial public offering (IPO) price was at $19 per share and it raised $1.4 billion, giving it a valuation of roughly $12.7 billion including restricted stock and options. As of Oct. 17, 2019, the company had a market capitalization of $14 billion. Roughly 300 million users, or "pinners," use the bulletin board-like platform every month to browse and share images and other content in the form of "pins."
Key Takeaways Pinterest makes its money via advertising, specifically, promoted pins. These promoted pins are ads that look similar to user-generated pins (posts). The company generated $756 million last year in revenue but posted a net loss of $63 million.Opportunities for increasing revenue that Pinterest plans to pursue include greater international expansion, focusing on video and increasing ad capabilities, as well as pursuing its own e-commerce efforts.
Pinterest History
The company, founded in 2010, previously received $1.5 billion in funding from 37 firms including Rakuten, Goldman Sachs (GS) and Andreessen Horowitz. It was valued at $12.3 billion during its last round of funding in 2017. The company has a dual-class structure.
When it was founded, Pinterest seemed to follow the model of social network sites like Facebook Inc. (FB), meaning that it aimed to develop a massive network of users first and then to install means of generating revenue later on. It generated $756 million in revenue in 2018, a jump of 60% from the previous year. The company generated $261 million in revenue during the second quarter of 2019, a 62% year-over-year increase.
“Our advertising products help businesses reach Pinners across their decision-making journey," said the company, which cited a Talk Shoppe survey that said 68% of weekly active users discovered a new brand or product on Pinterest.
"We address various advertiser objectives through our Promoted Pin ad format, which contains either a single image, a carousel of images or video. Our ability to develop new and improve existing advertising products will be an important driver of our future growth."
So just how has Pinterest come to be one of the most-hyped social media companies among investors and what is a promoted pin?
Monetizing Pins
Before looking at more traditional means of generating revenue, it’s worth looking at how Pinterest has utilized its unique pin system to create opportunities for monetization. The company has integrated a “buy it” button which permits users to buy pinned products directly from Pinterest, rather than visiting a separate merchant site.
Merchants participating in BigCommerce, Shopify, or Salesforce Commerce Cloud are allowed the opportunity to partner with Pinterest; it’s unclear whether Pinterest charges any commissions from these partners.
Promoted Pins
Pinterest’s primary source of revenue is what it calls “promoted pins.” These special pins are effectively advertisements, paid for by identified sponsors. Like in Facebook’s timeline feature and other social media platforms, promoted pins look very similar to (but not exactly the same as) standard pins. Pinterest utilizes user data to target advertisements based on user interests and searches, as well as other demographics. Given that users pin items that they are interested in already, this process is relatively straightforward for the company.
Pinterest's revenue is driven by interest and use of its platform, which is increasingly popular among fashion and beauty brands. Given that the users of Pinterest are overwhelmingly female and have above average incomes, using its platform as an e-commerce gateway is more than ideal.
Next Steps
Pinterest's user base has grown over the years, where it’s carved out a niche that allows it to not directly compete with the likes of Facebook. Pinterest’s leadership has adopted a much less aggressive approach to growth than its competitors. Revenue has grown since the company has gone public, but so has its net loss, as the company has ramped up spending on sales and marketing and research and development.
One big future opportunity is being able to tap the international markets, where Pinterest currently has little reach. Beyond that, Pinterest is interested in building out its e-commerce efforts (what exactly that looks like remains to be seen), as well as continuing to develop advertising tools, including video capabilities, for advertisers.
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63d792a265838f4af6acf9b68d05b7f1 | https://www.investopedia.com/articles/personal-finance/022415/mba-vs-executive-mba-which-better.asp | MBA vs. Executive MBA: What's the Difference? | MBA vs. Executive MBA: What's the Difference?
MBA vs. Executive MBA: An Overview
For many people, the deciding factor between picking a standard, full-time MBA vs. a part-time executive MBA (EMBA) comes down to how best to juggle classes with the responsibility of a day job. In addition, many mid-career professionals will choose the executive MBA because they don't want to or can't stop working, and the program is better geared towards their life stage.
Beyond the difference in full and part-time programming, the main trade-off between the two types of programs is the less-immersive experience of pursuing an executive MBA. While that doesn't mean that EMBA candidates still won't learn a lot and make connections, there is something to be said about the full-time immersion of a traditional MBA program. So, if both the MBA and EMBA are accredited, which is more impressive and which is the better choice? Read on to find out the main differences between the two and, more importantly, which is likely to matter more to you in your career.
It's important to note that neither an MBA nor an EMBA guarantees job security. However, both should equip a student with important skill sets, a valuable business network, and some prestige that comes with a higher degree; the preference ultimately comes down to the student's flexibility in timing and money.
1:31 MBA Vs Executive MBA: Which Is Better?
Key Takeaways The main cited difference between an MBA and an Executive MBA is the level of immersion in the graduate school experience and the customization of classes towards a more experienced group of individuals. Full-time MBA students have full-day, intensive schedules, making it tough to maintain a job outside the program. Executive MBA students keep their full-time jobs and typically attend classes on Fridays and the weekends, though this can lead to less interaction on campus.
MBA
A traditional MBA program is generally a two-year program, stretched out to three or four years if students choose to go part-time. Essentially a general management degree, an MBA doesn't require applicants to have professional work experience, but prospective students are usually required to take the Graduate Management Admission Test (GMAT) as part of the admissions process.
Full-time MBA students have full-time, intensive schedules, making it tough to maintain a job outside the program. In addition to core business basics classes, MBAs can specialize in such areas as finance, marketing, and entrepreneurship, and they can usually choose when to take a class.
Executive MBA
An EMBA, or an Executive Master of Business Administration, is also a two-year program, but it's aimed at business executives with five years or more of managerial experience. The average age of students is 38 years old. However business rock stars—prodigies, fast-climbers, valuable executives that the company wants to hang onto, and maybe a real-life rock star or two—may not have to put in that much time. EMBA students keep their full-time jobs and typically attend classes on Fridays and on weekends.
EMBA students face faster-paced classes, but they cover the same material. Programs offer fewer electives, and they're designed so that students take most classes, if not all, with the same classmates. This is great for networking but not so great if you can’t stand working with the others you're grouped with.
Key Differences: EMBA vs. MBA
With an MBA, tuition's on you, though it usually costs a bit less than the EMBA. In the top ten business schools, expect the total cost to be more than $150,000.
For an EMBA, an employer usually pays most, if not all, tuition costs. After all, they’re benefiting from the new skills their managers are learning! However, along with someone else covering your tuition, EMBA candidates also receive a full salary.
Companies that cover MBA tuition costs tend to require a few years' commitment after you finish the degree, so you must be willing to make that time commitment and stick to the company for a bit.
In terms of location, with an MBA you can attend classes at whichever school you get into and choose. For an EMBA, if you're working at your job, you're limited to local schools in the area.
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7b54d32cab359e925ae55cec8795086e | https://www.investopedia.com/articles/personal-finance/022415/top-10-countries-save-most.asp | 10 Countries With the Highest Savings Rates | 10 Countries With the Highest Savings Rates
When we talk about the top savers among countries, we are really talking about which countries have the highest savings rates. These are not necessarily the nations with the highest incomes. For example, a country where the average person makes $10,000 and saves $2,000 would have a 20% savings rate. Another country where people save $20,000 per year out of $100,000 in income would also have a 20% savings rate.
Furthermore, there are also different ways to save. People can save directly, businesses might save, and government agencies may also save. The national savings rate incorporates all of these different types of savings. As a practical matter, this article uses World Bank data on gross domestic savings rates and average incomes from 2018 and 2019.
A wide variety of countries have high savings rates, and their reasons for saving are as diverse as the countries themselves. The list of top savers also changes considerably over time.
Key Takeaways The top ten countries by savings rate were Macao, the Republic of the Congo, Qatar, Ireland, Brunei, Singapore, Luxembourg, Gabon, the UAE, and China.There is a connection between economic growth, incomes, and savings rates.Oil wealth is also associated with higher savings rates.Relatively low taxes seem to be another factor in high gross domestic savings rates.
The Top Ten Savers
1. Macao (64.3%)
Macao is a former Portuguese colony located near Hong Kong. Like Hong Kong, Macao benefited from Special Administrative Region (SAR) status within China. With an average income of slightly more than $129,000 per person in purchasing power parity terms, the people of Macao can afford a high gross domestic savings rate of 64.3%.
2. Republic of the Congo (61.4%)
The Republic of the Congo is a relatively small African country with its capital at Brazzaville. It should not be confused with its much larger neighbor, the Democratic Republic of the Congo (DRC). The average GDP per capita (adjusted for purchasing power parity) in the Republic of the Congo is about $3,400 compared to $1,100 in the DRC. The Republic of the Congo has substantial oil exports, which helps explain both its higher income and its higher savings rate than the DRC.
3. Qatar (58.1%)
Qatar owes its high savings rate of 58.1% to both its high average income of about $96,000 in purchasing power parity terms and its oil exports. Furthermore, the Qatari Riyal has a fixed exchange rate with the U.S. dollar, which is common among Middle Eastern countries.
4. Ireland (57.6%)
Ireland's gross domestic savings of 57.6% of GDP is impressive, even given the country's high GDP per capita of about $88,000 (adjusting for purchasing power parity). Ireland's high savings rate is also partially a response to the European sovereign debt crisis.
5. Brunei (54.5%)
Brunei is a small oil-rich country located near Indonesia and Malaysia. Brunei has an average income of around $65,000 in purchasing power parity terms, which supports a high savings rate of 54.5%. Some of this saving is accomplished by the Brunei Investment Agency, which is responsible for managing the nation's sovereign wealth fund (SWF).
6. Singapore (53.8%)
Singapore has a gross domestic savings rate of 53.8% that comes out of average incomes of around $101,000 (adjusting for purchasing power parity). Much of the credit goes to the country’s rapid industrialization in the 1960s. Manufacturing drove growth, and Singapore—along with the other tiger economies of Hong Kong, South Korea, and Taiwan—achieved full employment.
7. Luxembourg (53.4%)
Luxembourg's high savings rate of 53.4% comes out of a GDP per capita of about $121,000 in purchasing power parity terms. Luxembourg is a fairly small country, but its status as a tax haven within the Eurozone supports high savings and high incomes.
8. Gabon (52.2%)
Gabon is an African country with significant oil exports. Gabon's oil plays a large role in both the country's gross domestic savings rate of 52.2% of GDP and average income of around $15,000 in purchasing power parity terms, which is much higher than its neighbors.
9. UAE (47.8%)
The United Arab Emirates (UAE) is a Middle Eastern country with a GDP per capita of about $70,000 (adjusting for purchasing power parity) and substantial oil exports. The UAE also has a notable financial industry, with the Emirates Interbank Offered Rate (EIBOR) playing a major role in Islamic finance.
10. China (44.9%)
The Chinese savings rate of 44.9% remains high by global standards, and it was a significant factor in China's economic growth. In purchasing power parity terms, China's average income came close to $17,000 per year in 2019.
Economic Growth, Incomes, and Savings
There is a connection between economic growth, incomes, and savings rates in the above examples. However, the exact nature of this relationship is less clear. The idea that higher savings lead to more economic growth and higher incomes is intuitively appealing.
On the other hand, personal savings can contribute to recessions, according to the paradox of thrift associated with economist John Maynard Keynes.
There is a long-running debate among economists on the role of savings in economic growth.
Another possible explanation is that as incomes grow, people have more money left to save. While many countries with high savings rates also have high incomes, some of them do not. High economic growth, rather than high incomes, might be a better explanation for high savings rates in some countries.
Suppose you made 10% more each year and saved 70% of that increase. Your savings rate would gradually converge toward 70%, even as you spent 3% more on consumption each year. In this way, higher growth supports higher consumption and higher savings rates.
Oil and Savings
Oil wealth is also associated with higher savings rates. Profits from oil exports might support a wealthy elite who are far better able to save. Governments also sometimes set up sovereign wealth funds to preserve capital for their countries after their oil reserves are exhausted.
Finally, a government might sign a long-term development deal with one of the big oil companies. When such a deal goes through, there could be a one-time flood of cash into the local economy. In such a situation, it would be logical to expect the savings rate to increase temporarily.
Taxes and Savings
Relatively low taxes seem to be another factor in high gross domestic savings rates. In theory, lower taxes should lead to higher returns for savers, which would increase the savings rate. In practice, some of the top savers are actual tax havens, while others offer lower taxes than neighboring countries. However, people with naturally higher savings rates moving to tax havens might play a more important role than increased savings among other residents.
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5e3d4d64d7d9936f785e664c8a3f5ed8 | https://www.investopedia.com/articles/personal-finance/022516/be-smart-naming-beneficiaries-your-401k.asp | Be Smart in Naming Beneficiaries of Your 401(k) | Be Smart in Naming Beneficiaries of Your 401(k)
It's common when a person works in the same company for a long time for the dusty 401(k) paperwork to sit in a file drawer safe and sound—and out of date.
Imagine the shock when the death of a happily married executive, the proud parent of several children with a second wife, reveals that the primary, 100% beneficiary of his 401(k) is his first wife. Wife number two will have to sue and hope that the courts will correct this mistake, but her chances of getting more than 50% are poor at best.
In the flurry of decisions that come with a new job, it's easy to give short shrift to choosing beneficiaries on various financial accounts. For one thing, this task makes people think, at least briefly, about their own death. Think instead about the bequests as gifts to the people who should receive them.
These designations are important to get right. Otherwise, a legacy may become a nightmare.
Key Takeaways You must name a primary beneficiary and at least one contingent beneficiary (to whom assets will pass if the primary beneficiary has already died). Beneficiary designations for 401(k)s override the contents of a will. Children who are still minors cannot inherit as direct beneficiaries.
Beneficiary Designation and Allocation
When you set up a company 401(k), you're faced with a beneficiary form that asks for both the primary and the contingent beneficiary or beneficiaries. If you should die with that 401(k) still undesignated, it will end up in probate court—no place to leave grieving loved ones.
You must name a primary beneficiary and at least one contingent beneficiary (to whom assets will pass if the primary beneficiary has already died). Once the assets have become the property of the primary beneficiary, the backup beneficiary loses all claims.
This assumes that one-hundred percent of the assets go to the primary beneficiary. You may choose instead to name several primary beneficiaries, allocating percentages of the assets to them. If, for instance, a spouse will already be well provided for, the asset owner might decide to allocate only 50% of the 401(k) to them and divide the rest between the couple's two children as 25% primary beneficiaries each.
For any account governed by the Employee Retirement Income Security Act (ERISA), putting a spouse down for less than 50% triggers the need for a spousal waiver. This provision is in the state's interest so that the widow or widower will not be left indigent while all assets go directly to the children—or someone else. It can head off litigation, too.
Again, multiple contingent beneficiaries, like multiple primaries, may be allocated percentages. One might designate 100% for the spouse as the primary beneficiary and then in the backup allocation (contingency), divide equally among one's children.
Think of these decisions as part of an overall estate plan. Just proclaiming that "all my assets to be divided equally between" or some such language in a will doesn't automatically take care of everything. Beneficiary designations for 401(k)s override the contents of a will, and any conflicting naming of heirs opens the door to litigation that wastes money and may create a legacy of antagonism in the family.
How Old Are the Kids?
Children who are still minors cannot inherit as direct beneficiaries; a guardian must be provided to oversee the use of the funds (or the court will appoint one). If possible, avoid the involvement of the surrogate court, which hears cases involving the affairs of decedents, including the probate of wills and the administration of estates and trusts.
Setting up a trust in the children's names with a trustee of choice is often a solution. Doing this (with the help of an attorney or similarly qualified expert) also allows for specifying how old the children have to be to come into their inheritance.
With an attorney, one may want to explore establishing a testamentary trust that can be named as a beneficiary. In a testamentary trust, the trustee manages the assets until the trust expires and the beneficiary receives control of them.
The expiration date of a testamentary trust is usually tied to a specific event, such as the beneficiary reaching a certain age.
With individual retirement accounts, there are enough tax complexities according to the type of account and the life situation of heirs for professional tax planning or legal expertise to be brought in. This helps avoid unnecessary taxes, and it allows the beneficiaries future flexibility in how they withdraw the funds.
These concerns also hold for other funds that might pass to children. As with 401(k)s, life insurance payouts cannot go directly to young children, who must be 18 or older to receive the funds directly. The Uniform Transfers to Minors Act (UTMA) governs in most states. A designated custodian will manage the assets until the children are old enough to take over.
Review and Update
Review beneficiary decisions at least annually and whenever life changes in a major way: marriage, divorce, the death of a parent, the birth of a child, or the sale or acquisition of major assets.
The deceased's estate should never be the beneficiary of a 401(k). To do that, either on purpose or simply by failing to name a beneficiary, means the 401(k) money will be disposed of by probate court, which may also delay the distribution of assets to heirs for months.
The Bottom Line
Who inherits an asset like a 401(k) is a momentous decision—and a critical detail often handled once and then forgotten. Realize the importance of those names on the dotted line and remember to inspect them at least once a year. To learn how various beneficiaries and their life situations may affect designation decisions, consult an estate-planning specialist or tax expert.
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152563dbc1a31b3e08eb94bb50bc8967 | https://www.investopedia.com/articles/personal-finance/022516/what-will-social-security-look-when-you-retire.asp | What Will Social Security Look Like When You Retire? | What Will Social Security Look Like When You Retire?
What will Social Security look like when you retire? Many Americans have lost hope that there will be anything to see. According to a 2019 Gallup poll, 41% of individuals surveyed said they worry a great deal about the Social Security system. The same survey also revealed that 33% of individuals said they believe Social Security is going to be a major source of their income in retirement.
So what will Social Security realistically look like in the future? Should workers be concerned?
Key Takeaways Social Security does not now—and is unlikely in the future to—provide enough income for a comfortable retirement.If Social Security is reworked by Congress to extend its life, younger workers and high-income earners will likely be the ones to pay for it.You should start saving for your retirement as early as possible by contributing to retirement accounts such as an IRA or 401(k).
The Future of Social Security
Social Security may look drastically different in the next few decades, especially since the Social Security Administration's 2019 Trustees Report estimates the funds will be depleted in 2035 based on the current way it operates. That means that it will have no cash reserves and will only be able to pay out what it takes in on an annual basis. The 2035 date is one year later than previous estimates, but some financial analysts predict the reserves could run out even sooner.
Social Security is a pay-as-you-go program. Earlier generations relied on decades of contributions from the huge baby boomer generation, which provided year after year of surpluses to the Social Security trust funds. Now, as the boomers retire, younger generations make up a smaller percentage of the workforce than in the past, creating a shortfall in funding.
Social Security depleting its cash reserves by 2035 means that, if you're in your forties or fifties today, you could conceivably not receive full benefits during retirement—even though you're paying into the system now.
Changes must be made. Many have speculated on what those changes will be. The most likely course of action is that benefits will be reduced and/or the full retirement age (at which a taxpayer's entitled to full benefits) will be raised. The latter is already happening. Depending on when you were born, 66 and 67 are already replacing 65 as the proverbial retirement age.
Who Will Be Affected the Most?
Younger workers and individuals who earn more may be hit the hardest. These two groups contribute the most to the fund and could end up reaping the fewest benefits. However, even if the funds were to be “depleted,” the Social Security Administration report noted, “At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80% of scheduled benefits.” Later, it adds that “by 2093, continuing income equals about 75% of the program cost.”
That said, if you are planning to retire in the upcoming decade, it is important to use the time you have left wisely. Boost your retirement savings as much as possible while also paying down debt and keeping expenditures low. Social Security payments alone will not cover an average mortgage or living expenses when you are saddled with debt.
Social Security Is Not Enough for Retirement
Even if Social Security gets a huge makeover from Congress, workers should not consider the program as a sufficient retirement plan. Even now, Social Security barely covers living expenses for retired individuals.
According to the Social Security Administration, it estimates that it will pay 64 million Americans around $1 trillion in combined benefits for 2019. This might seem like a lot, but break down those numbers, and in 2019, retired individuals are earning $1,461 per month, on average, and disabled individuals are earning $1,234 per month. Individuals who exist on Social Security benefits alone don't live far above the poverty line, which is roughly $1,041 a month for a single person in 2019.
With the typical 401(k) plan, your contribution is automatically deducted "off the top" of your gross earnings in each paycheck, thus reducing your taxable income for the year.
The Anti-Social Security Retirement Plan
So what can an individual do when retirement is 20, 30, or even 40 years away? The best plan is to start saving now. Take advantage of the time you have and save as much as you can in your 401(k) and/or individual retirement accounts (IRAs), traditional or Roth.
Be sure to contribute enough to get your employer’s full match, even if it is a small percentage. Otherwise, you’re throwing away free money. If your company does not currently offer matching, you should still think hard about using the 401(k) plan, anyway. You get a tax break on the contribution, your contributions will grow tax-free, and you'll be able to deposit much more annually than you can in an IRA.
IRA Contribution Limits
The maximum amount that you can contribute each year to a traditional IRA and Roth IRA is $6,000 in 2020 and 2021. For those who are aged 50 and over, you can contribute an additional $1,000 in the form of a catch-up contribution. Conversely, the maximum amount that you can contribute to a 401(k) is $19,500 per year for both 2020 and 2021. If you are 50 or older, you can contribute an additional $6,500.
Roth IRA Income Limits
Contributions to Roth IRAs are limited and can be phased out, depending on how much income you earn and your tax filing status.
For the 2020 tax year, if you're single and earn more than $139,000, you can't contribute to a Roth. The income phase-out range for singles is $124,000 to $139,000, meaning the contributions get reduced within the phase-out range. For 2021 contributions, the income phase-out range for singles is slightly higher: $125,000 to $140,000.
For married couples who file jointly, the income phase-out range for 2020 is $196,000 to $206,000, and for 2021, it's $198,000 to $208,000. So, if a married couple earns more than $206,000 in 2020 or $208,000 in 2021, they can't contribute to a Roth.
Start Early
As early as your 20s, you should make every effort to start saving for retirement—even if you feel you cannot afford it or you’re not in your dream job. If possible, have retirement savings taken out automatically before you receive your paycheck. This way, you won’t miss the money. Another option is to learn to live off of 98% of your paycheck and invest the other 2%, then gradually increase the percentage each month while cutting back on spending.
The Bottom Line
Many people worry whether Social Security will be available when they retire. Although it's unlikely that Congress will let the system go bankrupt, it's likely that belt-tightening changes will occur, including a longer waiting time until you qualify for full benefits and smaller benefits when you do. It is best for individuals to secure other retirement savings and not plan to rely on Social Security benefits as the chief source of their nest egg. That's not a good idea now and won't get any better in the future.
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