Real Estate Investment Trusts (How to Invest in REITs)

When you’re just getting started investing — or even if you’ve been at it a little while — it can be hard to wrap your head around all the different kinds of investing tools that exist. The confusion can feel a little scary: will investing in this asset or fund mean I might lose all my money?

We’re here to break it down and make it a little less intimidating. In this post, we’ll cover REIT investing. That stands for Real Estate Investment Trusts, and they’re essentially a way for ordinary consumers to make money off real estate without having to own and manage (or buy and sell) property themselves.

We’ll walk you through what REITs are, how they work, the different kinds of REITs that exist, and how you can get started investing in them. If you’re new to investing and want a broad overview first, read through this  article on how to invest in stocks as well as the piece on green investing to get a quick crash course.

You can read through the post top-to-bottom for a thorough look into REITs; or, feel free to click one of the links below to jump straight to the section you’re most interested in.

What are REITs?

Let’s start with a simple REIT definition. A REIT is a real estate investment trust. A REIT is a fund that pools investor money toward a property or collection of properties. REITs can vary in size and portfolio makeup, but let’s consider a pretty straightforward example. A REIT may fund a few self-storage locations across a number of cities. The company then collects revenue from customers renting space in the self-storage facility, and that revenue is then distributed among investors, often in the form of dividends.

There are a couple of main types of REIT to be aware of, which we will explain here.

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Equity REITs

The most common variety of real estate investment trust is the equity REIT. Index REITs work basically in the way described above: the funds of all the shareholders are invested in property. That property is managed by a company who owns and operates it. A few examples of the kinds of property you might find in a REIT’s portfolio include:

  • Warehouses
  • Apartment complexes
  • Medical centers
  • Data centers
  • New construction
  • Hotels and hospitality

Essentially, anything that can be privately owned and operated can be part of a REIT’s holdings. That’s why REITs are such a massive portion of investment — they’re fairly easy to create. In fact, it’s estimated that American REITs contain about $3 trillion dollars collectively.

Note: REITs can also be structured as partnerships. The main difference here is how they are taxed when compared to index funds. REIT partnerships are taxed under Schedule K-1 which is a tax form used for small businesses, which can add some complexity when filing your annual tax return.

One other big difference in REITs is they can be bought as indexes (looks like this is mostly what you are talking about) but they can also be structured as partnerships – main thing to note is taxes – partnerships pay out with K1s which are a real pain if you buy a reit index it is taxed just like a stock and is much easier but they are very different in structure

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The Top 5 Stock Market Myths ::

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Mortgage REITs

Mortgage REITs are less common, but you might still find them when hunting for investments. A mortgage REIT works by investing funds into bundles of mortgage debt, then allocating funds based on the interest payments on that debt. They’re more complicated than equity REITs, and have different pros and cons that are dependent on the state of the mortgage market. For instance, if interest rates drop, dividends from mortgage REITs might also drop.

It’s smart to note that there are also many hybrid portfolios, which incorporate both equity-based REIT dividends and mortgage REIT dividends. If you’re not sure which you want to invest in, you’ll probably want to speak with a professional broker who can walk you through the wisest ways to invest for your financial situation. We’ll talk about that more in a later section.

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How to Organize Your Receipts and Tax Documents ::

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Something else you may want to be aware of is that REITs can either be publicly or privately held. That means there are some that are available to just about anyone with the capital to invest, and others that are entirely privately held by individual companies. If you’re not considering setting up your own REIT, it’s likely that you’ll only encounter the publicly traded options that are available on public exchanges.

How do REITs differ from other investment tools?

The feature of real estate investment trusts that most distinguishes them from other forms of investing is that they own or manage real estate or mortgages, as explained above. The world of investing is complicated, and it’s possible that other forms of investment also incorporate real estate to some degree; for instance, if you’re invested in Amazon, a portion of the returns you make from selling your shares might have been generated by the lucrative fulfillment center portion of their business.

However, the point of REITs is to focus entirely on real estate. That means that your investment will prosper or perish based on the fluctuations of the real estate market, rather than the fluctuations of a particular set of shares in equity, or individual company’s stock price. That brings us to the next thing you’ll probably want to know: the advantages and disadvantages of investing in REITs.

What are the pros and cons of investing in REITs?

As with any investment, the rewards of REITs can’t come without a bit of risk. Before you rush to ask your broker about REITs, let’s go over a few of the pros and cons that any investor should know about this investing tool.

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  • REITs are easily available on the stock exchange. Unlike other ways of investing in property, REITs are much more accessible. Real estate can be one of the most prohibitively expensive forms of investing, and is a difficult market to break into — especially for those without the upfront capital to put a downpayment on a home. On top of that, fixing up and managing your property can add up to a full time job. REITs let you benefit from the lucrative real estate industry without all the upfront cost and labor (albeit at a slower and smaller rate).
  • They can be a steady source of dividend income. If you’re looking for a place to get started with dividend investing, REITs can be a handy choice. Like any dividend investment, the company will pay you out monthly or quarterly, so you have an extra source of passive income to add to your portfolio.
  • There is the potential to outperform other markets. This one comes with a pretty big condition: if real estate is doing better than other markets. That can sometimes be the case (they’re not making more land, as the old saying goes), but it can also mean that sometimes other parts of the market do better than real informs that real estate investments are not always correlated with other parts of the market, so you may outperform them — or simply add them to keep a steadier, diversified investment portfolio.

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  • Real estate is subject to frequent fluctuation. Sometimes it’s a buyer’s market; sometimes, it’s a seller’s. Real estate can change with the winds, and it’s good to go into any investment with the knowledge that you could wind up losing money. While, in the long run, a solidly diversified portfolio may tend to grow, in the short-term you may have to weather a few storms.
  • Higher management fees. Depending on the REIT, you may face higher management fees. Recall that these are companies essentially doing the property buying and managing on their shareholders’ behalfs. They could charge a little extra for the work they have to put in.
  • Longer waits to access funds. Real estate sales can take a little while. If property managers and realtors are having a hard time renting or selling off properties, and you happen to be invested in those properties, you may not be able to access your funds as quickly as you may like. REITs are not a recommended place to store your emergency savings, for instance, for that reason. If you’re weighing the pros and cons of savings vs investing, REITs are much better suited as an investing tool.

Once you’ve got a clear picture of the advantages and disadvantages of REIT investing, you’ll probably be curious about how to get started. Let’s take a look.

How can I get started investing in REITs?

You can get started investing in REITs pretty much the same way you’d invest in any other fund or company’s stock. Here are the easiest ways that you can get started.

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  • Purchase publicly listed REIT stock. As noted earlier, many REIT stocks are publicly listed. That means you can buy shares directly from the stock exchange, using an app or a website that allows you to buy stocks. This can be intimidating for some beginner investors, as there’s no middle-man and no expert guidance on what companies are smartest to invest in.
  • Invest with a broker. Brokers are professionals who handle investment portfolios for consumers. They should know exactly how to tailor your portfolio to your specific goals, needs, and risk tolerance. If you think REITs are a good option for your portfolio, talk to your broker about it — or, if you don’t have one, find a broker in your area and say you want to get started investing and you think REITs could be a good option for you. Many robo-investors also allow you to invest in REITs, or simply do it automatically depending on the portfolio options you select when making your account.
  • Through your retirement account. If you have a retirement account like a target date fund, IRA, or 401k, there’s a chance that you’re already invested in REITs without knowing it! Because, as we noted earlier, a REIT’s performance isn’t always correlated with other sectors of the market, they make for a solid diversifying option to keep your portfolio balanced.

Getting started investing in any area can be challenging. However, being informed is the best first step you can take. Once you feel comfortable in your knowledge of real estate investment trusts and how they work, you can start seriously thinking about investing.

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How Do Interest Rates Affect the Stock Market?

How Do Interest Rates Affect the Stock Market? – SmartAsset

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Interest rates can have a significant impact on the economy as a whole and your personal financial life. When tracking changes to interest rates, the stock market is often a major focal point, as rates can affect investors directly and indirectly. The impact of interest rate changes can also be felt more immediately in the markets while it may take time for those impacts to trickle down to the broader economy. Understanding the relationship between interest rates and stock market movements matters for shaping your financial plan.

A financial advisor can offer valuable advice and insight into how a big interest rate change will affect your portfolio.

Interest Rates, Explained

Before digging into the correlation between changes in interest rates and the stock market, it’s helpful to know a little about how rates are set. The Federal Reserve uses interest rate policy to control inflation and pursue full employment. This is accomplished through, among other things, changes to the federal funds rate — that is, the interest rate commercial banks pay one another for overnight loans.

Whether interest rates rise or fall can depend on overall economic conditions. If the economy appears to be slowing down or even heading toward a recession, the Federal Reserve can lower interest rates. That’s important because banks follow suit by reducing interest rates for loans and lines of credit. This encourages borrowing and spending, which can help to stimulate the economy.

In 2020, for example, the Federal Reserve slashed rates to near zero in an effort to control negative economic impacts associated with the coronavirus pandemic. When rates drop, they can remain low for as long as the Fed believes it will take for the economy to begin recovering.

On the other, the Federal Reserve may raise rates if the economy is growing too rapidly. In that scenario, raising the federal funds rate makes it more expensive to borrow, since banks can also raise rates on loans. This strategy is often used to help curb or preempt inflation.

Interest Rates, the Stock Market and Investors

If you have money in the stock market, there are some tangible impacts interest rates can have on your portfolio. How you’re affected can depend on whether you’re invested in stocks or bonds and what’s happening with the economy as a whole. First, consider the relationship between interest rates and bonds. Bonds represent a debt obligation when issued by a corporation, government or another entity. As an investor, you supply money to the bond issuer who pays you interest in return. This interest is paid over a set maturity term.

Interest rates and bond prices move in opposite directions. The longer the maturity term of a bond, the more fluctuation you might see as interest rates change over time. In other words, short-duration bonds are less succeptible to interest rate changes than long-duration bonds.

With stocks and stock funds, interest rates don’t necessarily have as direct an impact. But interest rate changes can affect your stock portfolio, based on which way they’re moving. For example, say the Fed raises rates to counteract rising inflation. This makes business loans more expensive to obtain, which can result in companies shelving plans to expand or refinance debt.

If the company isn’t able to move ahead with its plans, that could shift how its financial stability is perceived by the market. As a result, fewer investors may choose to put their money into the company, which could trigger a decline in the stock’s share price. This could create a buying opportunity for investors but if this is repeated with multiple companies, it could result in a sharp drop in stock pricing across the market.

When stock prices go down on a broad scale, that can set off a bout of panic selling if investors are fearful about the market. In a worst-case scenario, investors could experience a correction, which could result in significant losses.

Interest Rates and Other Investments

Stocks and bonds aren’t the only investments that can be affected by interest rate changes. Increasing or declining rates can also affect things like:

  • Cash holdings
  • Real estate
  • Commodities

If you have some of your portfolio in cash, interest rate shifts could be a boon or a burden. Say you have a sizable amount of cash set aside in a 5-year CD, for instance. If rates rise while your money is locked into the CD, you’re missing out on potential growth unless you have the option to raise your rate during the CD term.

On the other hand, cash held in a high-yield savings account or money market account would be more accessible while benefiting from higher rates. The downside, of course, is that if rates fall then the annual percentage yield on your savings or money market account will also likely go down.

With real estate investments, interest rate impacts can depend on the type of investment and the overall real estate market. For example, say you want to buy a rental property. A low mortgage rate environment could make that easier to do and over time, you could generate more of a return from the rent you collect if you have a lower mortgage payment.

Low rates could also spur more people to spend, which could make it easier to keep your rental unit occupied and have income flowing in. On the other hand, rising rates could make it more difficult to rent out the property if you’ve adjusted rental prices upward to keep pace with a growing economy. Whether that bears out can depend on demand for rental property. The same would be true if you invest in rental units indirectly through a real estate investment trust (REIT).

With commodities, rising interest rates can trigger falling commodity prices and vice versa. Falling commodity prices could be a good thing if you want to buy into those investments but not so much if you’re ready to sell.

How to Manage Interest Rate Risk

If you’re worried about interest rates affecting your investments or overall financial health, diversification is one of the best ways to counter potential impacts. Constructing a portfolio that includes a mix of investments that are more or less sensitive to interest rate fluctuations can help you prepare for eventual rate shifts. For example, you may choose to include both bonds and bond funds on the conservative side of your portfolio. Bonds can allow you to lock in a consistent rate of return over a set maturity date while bond funds can give you the flexibility to buy and sell as market conditions change.

You may also consider a mix of investments that are less correlated to one another. For example, real estate and stocks generally don’t have a strong correlation. What affects the stock market may not always carry over to the real estate market. If you’re concerned about rising rates affecting stock prices, you may use real estate as a hedge against potential inflationary impacts.

The Bottom Line

Interest rates affect much of your daily financial life, from how much interest you earn on savings to what you pay for a mortgage or car loan. From an investment perspective, interest rates can also play a major part in your portfolio’s performance over time. Understanding the relationship between interest rates and stock market trends can help when deciding how to invest.

Tips for Investing

  • If you’re worried about interest rates and inflation specifically, you might consider investing in Treasury Inflation Protected Securities (TIPS). This is a type of Treasury bond that’s indexed to inflation. As inflation rises, the principal of a TIPS increases and vice versa with deflation.
  • Consider talking to a financial advisor about what interest rates might mean for your financial plan. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can connect you with local advisors in your area. It takes just a few minutes to get your personalized recommendations online. If you’re ready, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Peer to Peer Lending (How Does P2P Lending Work?)

Looking for a new investment avenue to boost your wealth? Or maybe you need to borrow money to open up your own business or afford a down payment on your first home? Whether you need a loan or want to capitalize on loans, peer-to-peer lending may be worth checking out.

In this post, we’ll break down what peer-to-peer lending is, how it works, and what pros and cons are associated with this lending option (for both investors and borrowers). Read all the way through for an in-depth look at peer-to-peer lending, or use the links below to skip throughout the article.

What is Peer-to-Peer Lending?

According to the Small Business Administration, peer-to-peer lending (aka P2P lending), is a way consumers and small businesses can access capital via the internet. Peer-to-peer lending is almost like taking a loan out from the bank, except that your bank is one of your peers. So instead of a credit union or big bank lending you money, it could be your neighbor, Seth, Claire, or any other individual or institutional investor.

P2P lending enables borrowers to access moderate capital to fund their business launch, consolidate their debt, or fix up their house, among other things, while individual investors can earn money through interest on the loans that they fund.

How Peer-to-Peer Lending Works

Now that you get the gist of peer-to-peer lending, let’s go over how P2P lending actually happens:

Whether you intend to lend or borrow money through a peer-to-peer lender, you’ll need to start with a lending platform, such as UpStart, Funding Circle, Prosper, or Lending Club. These platforms are where borrowers and lenders are partnered up so that they can create loan agreements.

If you’re an investor, you can choose which types of loans you want to invest in, like business or personal loans, for example. Additionally, investors can generally choose the amount of risk they’re willing to accept, as well as determine the timeline that they want to lend. Keep in mind, lending platforms each have their own qualifications for who can and can’t invest in loans through their marketplace, so you’ll have to be approved as an investor before you can start investing money in your peers.

If you’d like to open up a loan with a peer-to-peer lender, you’ll need to go through an application process provided by the lending platform of your choice. Each one works a little differently, but most include credit checks.

From there, you’ll either be approved or denied a loan. If you are approved, you’ll be presented with financing offers from different investors who may agree to fund your loan. Sometimes it can be a single investor, while other times, multiple investors will fund your loan, in which case, your loan payments and interest will be divided up among them.

Like any other loan type, peer-to-peer loans also have interest rates, which is how individual investors can turn a profit. Of course, the lending platform also wants in on the deal, so they’ll charge a small fee to the investors.

What can P2P loans be used for?

It depends on what type of loan you open and what loan types your lending platform offers. One of the most common uses for P2P loans is funding for small businesses. According to the House Committee on Small Business, the top peer lending platforms, Prosper and Lending Club, have helped investors finance $200 million in personal loans used for small business purposes.

Additionally, these platforms also offer the following loan types:

  • Lending Club offers personal loans, business loans, auto refinancing, and medical care financing.
  • Prosper offers several other loan types, including:
    • Debt Consolidation Loans
    • Home Improvement Loans
    • Short Term & Bridge Loans
    • Auto & Vehicle Loans
    • Small Business Loans
    • Baby & Adoption Loans
    • Engagement Ring Financing
    • Special Occasion Loans
    • Green Loans
    • Military Loans

Not seeing the loan type you’re looking for? There are several other lending platforms that offer P2P lending, more on that in a moment! Keep in mind that personal loans are known to be pretty versatile when it comes to what they can be used for. Debt consolidation, medical bills, and student debt are a few common applications for personal loan use.

Note: Like any other financial decision you make in your lifetime, it’s important to consider the various lending options you have available, whether that’s borrowing from a different P2P lender, or going with a different lending method altogether.

Benefits and Drawbacks of P2P Lending

Depending on which side of the loan agreement you’re on, peer-to-peer lending has different benefits and drawbacks, which can also vary depending on your financial situation and lifestyle. Here are a few of the pros and cons you may experience as a participant in the peer-to-peer lending sphere.

For borrowers

  • Pro: Borrowers can obtain loans in smaller amounts.
  • Pro: Smaller peer-to-peer loans can typically be paid off faster.
  • Pro: The peer-to-peer lending process can be faster than conventional loans.
  • Pro: P2P loans are typically unsecured, so borrowers don’t need to use their property or assets as collateral.
  • Con: Borrowers can keep their anonymity from investors and only communicate with the lending platform as necessary.
  • Con: Peer-to-peer loans may have higher interest rates than conventional loans. However, certain economists argue that P2P loans offer savvier options when compared to credit card lending.

Important Note: Like any other loan type, your loan rate can vary based on your credit history, credit score, and other factors that influence your lender’s approval and offer process. In general, those with high credit scores are more likely to be eligible for better loan terms, including lower interest rates in some cases.

For investors

  • Pro: Getting started is simple and so is managing investments.
  • Pro: You can tailor your budget, profile, and risk assessment to your needs.
  • Con: Peer-to-peer loans are not insured or backed by the government, which could present substantial financial risk if the borrower defaults on the loan. However, P2P lenders are now required to register with the SEC to mitigate risk.

Investing in P2P loans presents some level of risk to investors, no matter which loan types they choose to fund, that’s just the nature of investing! No matter what investment avenue you choose—stocks, bonds, penny stocks, etc.—keep investment best practices in mind. For additional guidance and general investment advice, check out this post on how to start investing.

Special considerations to make about P2P lending

Before taking out a P2P loan, the Consumer Financial Protection Bureau recommends taking the following precautions:

  1. Review your income and spending.
  2. Look at your budget to determine what you can afford to pay, and how much you need to borrow.
  3. Check your credit and look for any discrepancies—mistakes on your credit report can reduce your score.
  4. Learn about your options by shopping around.

Top P2P Lending Platforms

We’ve already mentioned Lending Club and Prosper as two of the most popular P2P lending platforms, but they’re not the only options out there! Here are a few of the other major P2P lending platforms to choose from:

When choosing a peer-to-peer lending platform to work with, consider using resources like the Better Business Bureau and the Consumer Financial Protection Bureau to help you find the platform that’s best for your financial interests and security.

Some platforms even focus on financing loans for certain groups like small businesses, female entrepreneurs, and veterans, so it’s worth looking into a variety of options before making your decision!

Key Takeaways

  • Peer-to-peer lending is a financing option that enables individual investors to offer loans to individuals seeking personal, business, auto, and other types of loans.
  • Peer-to-peer lending takes place on P2P lending platforms, which create a user-friendly space for both borrowers and lenders to make loan agreements for a fee.
  • Both borrowing and lending through P2P lending platforms come with several pros and cons to be aware of before moving forward.
  • There are several lending platforms to choose from—be sure to properly vet your options to find the solution that’s best for you!

Need support coming up with a budget to pay off loan debt? Or a budgeting strategy to position you to start investing? Mint enables you to create personalized budgeting solutions to help you reach your goals.


Small Business Administration | House Committee on Small Business | Experian | The Federal Reserve | LendingClub | | Consumer Financial Protection Bureau | The Balance | Better Business Bureau

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Investing Advice We Can Learn from 10 Successful Lady Bosses

When it comes to money, there’s nothing as empowering as having a good understanding of your finances and achieving financial freedom. However, women can often struggle to feel confident in their ability to invest or simply save altogether. On average, women invest 40 percent less than men and retire with two-thirds of the money — not sure about you, but in 2020, there’s absolutely no room for that kind of imbalance.

Again, part of the reason why women invest less than men can be due to a lack of confidence in financial knowledge. In a recent study, 68% of men said they’re confident in the way they manage their investments, compared to 52% of women. On the bright side, even with these insecurities, studies show that women investors actually outperform men. In fact, between three different studies from Fidelity, the Warwick Business School, and the University of California, Berkely, women have been found to surpass male investors by 0.4 to 1.8 percent annually. Although this may not seem like much, when you compound annually and add to the fact that women trade less frequently and therefore pay less trading fees, this small percentage can turn into significant returns.

And we know it can be frustrating to think about all the hurdles women have to jump compared to men. From the pink tax and the wage gap to good old fashioned discrimination, here’s yet another thing to add to the pile. But although the wage gap is important and we’re not suggesting you ignore it, the investment gap may end up costing you the most — over a million dollars in potential retirement money, in fact. So although a raise is great and being paid just as much as your male counterparts is even better, a bump in your salary isn’t likely to secure a comfortable retirement.

If you want to become an investor and make your money work for you, start by educating yourself on investment basics. It’s important to remember that investments come with risks and no one ever feels fully confident in their decisions (even men). Once you have a good understanding of how they work and the markets you’d like to invest in, it’s time to make your first money moves towards having successful personal finances.

To get you started on the right foot and hopefully encourage you to begin your journey towards a financially independent future, we collected inspiring advice from the top female leaders across several industries. From businesswomen and entrepreneurs to top financial advisors and Wall Street executives, this advice is a great stepping stone to start investing.

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Fidelity | University of California | WBS | Style Salute | Reuters | Merrill | Investopedia | Fast Company | Eventual Millionaire | Laura Adams | Bethenny Frankel | The Simple Dollar | Money | SoFiThe Balance Careers | Bank of America | Fidelity | CNBC | Pensions Institute

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Blooom Review for 2021

If you’re looking for a robo-advisor to automatically manage your employer-sponsored retirement plan, you probably already know that there are a ton of options out there. One of the top contenders is Blooom. They offer a flat monthly fee and focus specifically on defined contribution plans like 401(k)s.


We’ll walk you through Blooom’s process so you can discover if it’s the right fit for your investment goals.

Plan Overview

Blooom specifically manages defined contribution plans from employers. Employer-sponsored retirement plans include 401(k)s, 403(b)s, 457s, 401(a)s, and thrift savings plans (TSPs). So instead of making your own investment allocations with your workplace retirement account, you can have Blooom’s algorithms do it for you.

A great advantage of using Blooom is that there’s no account minimum. Even if you’re just starting to build your retirement funds, you can open an account, which is a huge bonus considering many robo-advisors require a minimum of $10,000 or more.

How much will you pay for Blooom to manage your account?

The management fee is a simple flat rate of $10 per month, no matter how large or small your account balance may be. This simplifies the process of having to figure out what you’ll be paying each month based on a percentage charged by most financial advisors.

If you have more than one 401(k) account, you get a slight discount for adding those on as well. You’ll only pay $7.50 per month for each additional retirement account.

Of course, that also means the lower your account balance, the higher percentage your fee may be. We’ll talk more about that soon to help you determine whether or not Blooom is worth it for your personal scenario.

Getting Started with Blooom

In order to check out Blooom’s services, they offer the first month free. Plus, you can create an account without actually signing up for their services. When you do that, you get a free analysis of an existing 401(k).

You’ll then receive suggestions on how to improve your current allocations. Since this is a free service, you’re not obligated to sign up for any additional services at this point and could certainly implement any of the suggested changes on your own.

The upside to using Blooom, though, is that you’ll keep getting this financial advice throughout the life of your 401(k), no matter what the balance may be. Plus, even as your balance grows, that $10 monthly fee stays the same so over time, you could potentially save money on your advisor costs.

Get a Free 401k Check-Up on Blooom’s secure website

Account Services

Blooom uses both automated technology and human advisors so you can get the best of both worlds. At least once every 90 days, your account will be reviewed to see if anything needs to be rebalanced.

This service generally isn’t provided by your employer that you have the retirement account with. You may not realize it, but in most cases, it’s up to you to pick how you want your money invested.

And over time as you age, those allocations should probably change.

Here’s how Blooom helps you with that. First, it looks at what investment options are available in your retirement plan from your employer and classifies them by asset type.

It looks at the lowest expense ratio in each category and selects one for your portfolio, which could potentially save you around $100 per year in investment fees.

Another service offered by Blooom is fraud monitoring. You’ll receive an alert if any suspicious activity occurs in your account.

We also appreciate that you don’t actually have to move your 401(k) to have Blooom manage it for you. You can simply link any account that has online access.

Customer Service and Support

Although Blooom is a roboadvisor, it also offers a human touch when you need it. You can get support over email or live chat at any time through the website. If you have more specific questions about your investment strategy, you also get access to financial advisors over the phone during traditional weekday office hours.

When you first start working with Blooom, you can typically expect them to fix your account within 10 days. Sometimes, however, it can take up to 30 days for them to finish the initial rebalancing.

Finally, if for some reason you decide that Blooom isn’t for you, you can cancel at any time.

Blooom’s Methodology

It’s important to know that Blooom has its own algorithms for allocating your 401(k) based on models and confirmed by financial advisors. Ultimately, though, you’re still in charge of your retirement accounts and can make adjustments as you see fit.

So how does Blooom manage your 401(k) portfolio?

After they choose investments to reduce hidden fees, they use an algorithm based on decades-long market data. They also make choices based on where you are in your career.

If you have at least 20 years left in the workforce, Bloom will more than likely place your entire 401(k) portfolio in the stock market.

The goal here is to maximize your returns because you have time to ride out any potential market ups and downs. If you don’t focus on stock funds, Blooom feels you’ll miss out on big opportunities to really grow your retirement savings.

So what’s Blooom’s approach if you’re getting close to retiring?

Whether you’re nearing retirement or already retired, Blooom switches gears with your 401(k). They’ll still place some of your investments into stocks in order to keep growing for your future years, but they also start switching more of your money to bonds.

Blooom creates a safe balance so that you’re not placing too much risk with aggressive investments, but you’re also still earning money. That way, if the market takes a hit, your retirement plans will ideally be affected at a minimum.

Get a Free 401k Check-Up on Blooom’s secure website

Making Your Own Changes

You still get to have the final say over your retirement account. Once Blooom makes its allocations in your 401(k), you can choose to make whatever changes you prefer. All you have to do is click a simple button called “Adjust Allocation” and you can tweak your account.

As your retirement plans change, you can also “Adjust Retirement.” Blooom uses your target retirement date as part of the algorithm. If you decide to retire early or stay in the workforce a few more years, be sure to update that information so your asset allocation is as targeted as possible.

Is Blooom Worth It?

It really depends on your asset amounts. When you compare the flat fee of $10 per month to how much you have invested in your 401(k), look at that number as a percentage.

If your balance is $10,000, your $120 in annual fees equals 1.2%. That’s a lot higher than most other robo-advisors and likely higher than even a human financial advisor.

But what happens when you bump that account number up to $100,000?

The total monthly fees for the year come to just 0.12% — which is incredibly low! So you really have to look at the numbers and weigh them against your other options to determine what works best for your account as it stands today.

Since there’s no charge to cancel, and you never transferred your funds so they stay exactly where they are, it’s easy to wait to use Blooom until your 401(k) has reached a threshold where the services make financial sense.

Don’t Forget About the Limitations

You also need to remember that Blooom has restrictions on the types of accounts it can manage on your behalf. You’re basically limited to employer-sponsored plans like a 401(k) or 403(b). If you have other accounts, such as IRAs, you’ll have to pick another service to manage them.

If you don’t mind working with multiple advisors and/or robo-advisors, then that can work out just fine. But if you want to streamline all of your investments into a single source, then Blooom probably isn’t right for you.

Bottom Line

The bottom line is that Blooom is easy to use, customer-centric, and extremely transparent. These are great qualities to look for in your robo-advisor.

If you’re looking for a way to maximize your workplace retirement planning, it’s definitely worth giving this niche-advisor a chance.

With that flat monthly fee, you really don’t have much to lose. Plus, you can even just sign up for a free analysis to see what kind of impact Blooom could have on your retirement savings.

Get a Free 401k Check-Up on Blooom’s secure website


How The Market Works: Tips for Beginner Investors

Knowing how the market works can make you an intelligent investor. If you want to build wealth, investing in the stock market is really one of the best ways to do it. Indeed, most of the world’s wealthiest individuals own some piece of a company.

But some of us don’t invest in the stock market either because we think we have very little money to invest, or because we don’t know how the market works.

Or, we think investing in the stock market is risky business.

Who could blame you!

After the 2008 financial crisis, investing in the stock market got scarier. But if you really want to grow wealth through stocks and don’t mind the risks that come with it, you must know how the stock market works.

Check Out:

Luckily for you, investing in the stock market is easy. It is also something that can be learned. No one is born knowing how to invest. The difference between those who know how the market works and those who don’t is is that those who do take the time and learn how it works.

I don’t want to scare you into quitting your job and become a full-time stock investor. If that’s what you want, yes, you have that option. But if you want to go on with your daily life, while at the same time building wealth, you can.

Investing intelligently can be done passively without taking a lot of your time. And you don’t need to have a fancy business degree or PHD in order to start investing.

But you do need to understand how the market works. Doing so can help you avoid many bumps and can help you tremendously.

Investing in the stock market, however, is not a guarantee of wealth. Just as you can make a lot of money, you can lose all of your money in a heartbeat.

So you must have the stomach to take the risk. Indeed, any investment vehicle with great potential to make you rich also comes with great risks. Your shares can be worth $1 Million today, but worth $500 within a matter of seconds.

So, don’t rush into investing if you’re not ready. Knowing how the stock market works is one thing, investing in products you understand is quite another.

So if you’re comfortable taking some risks, let’s see if we can learn how the market works.

See: How to Invest 100k to Build Real Wealth?

How the stock market works?

A better understanding of how the stock market works starts with knowing the basics. That means, what is the stock market? what are stocks? How do you buy and sell stocks them? Why companies issue stocks?

What is the stock market?

The stock market, simply stated, is a collection of markets or exchanges where people buy and sell stocks. Very simple.

The stock market works like an auction, really. It is a place where buyers and sellers come together to bid on something. It can be a car, a piece of art or some tangible goods.

The crazy thing about the stock market is that there is no tangible good. Unlike a piece of art, you cannot touch or see a stock. The stock market is where people trade shares electronically. But apart from that the market works in the same way like an auction.

You’ve probably heard of the New York Stock Exchange (NYSE)! Well, if you haven’t, it’s where people buy and sell stocks of a company. It’s indeed one of the two largest public exchanges in the world. It lists 2400 companies. The other largest one is the Nasdaq. It lists 3800 companies.

There are several other exchanges like the Tokyo Stock Exchange or Shanghai Stock Exchange. So individual stocks will trade on one of those exchanges.

Now that you have an idea of what the stock market is, you might be asking yourself this next question: what is a stock?

What is a stock?

A stock is a share of ownership in a company. For example, if you want to own a piece of a public company likeTesla (the company that makes those beautiful and shiny cars), you can! You simply buy a share or shares of Tesla through a brokerage firm.

And anytime someone buys a Tesla car, Tesla makes money. And you, in turn, makes money because you own a piece of the company.

Likewise, if you own shares of Apple, anytime someone buys an ipad, iphone, ipod, and so on, you make money.

So, by now, you may have an idea of what a stock or a share is and how the market works. Let’s take another example of how owning shares of a company can make you money.

Still not sure how the stock market works? Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

How do you make money in the stock market?

You can make money with stocks in two ways: through capital appreciation and income from dividends.

Appreciation. Suppose you own shares of Starbucks, which you bought at $90 a share. If the price of Starbucks rises to $135 the next year, you have made yourself a 50 percent profit on your original investment. That’s called capital appreciation. Your share value has appreciated. But that’s not the only you can make money in the stock market.

You can also make money in the stock market through dividends, which are payments companies make to their shareholders.

Dividends. Some companies also pay shareholders dividends. Let’ say the current dividend per share is 50 cents per quarter. So every 90 days you will make money. In other words, even if the share of Starbucks stays the same in price or decrease in value the next year, you will still make money via dividends. So as long as you hold Starbucks stocks, you get dividends.

You can get those dividends as a cash payment or you can reinvest them by buying more shares of the company.

However, not all companies pay dividends. And even those that do give out dividends have no obligation to do so. Think of dividends as a company bonus.

Why do companies sell or issue stocks?

Companies sell or issue stocks mainly to raise money to grow their business. Most people when they start a company, they usually start with getting a personal loan. Then the next step is that they go to a bank and ask for a business loan.

Once the company starts to grow, and they want to take the company to next level, then they need more money to expand. The best way to do that is by listing shares of the company’s stock through a process called Initial Public Offering (IPO). So investors like you an I can buy these shares.

How do you buy and sell stocks?

Part of knowing how the market works is knowing how to buy stocks. Buying stocks is easy. With a click of a button, you can buy and sell shares of companies. There are a few ways you can buy stocks.

You may buy stocks through a 401k plan. You may have already bought stocks already without knowing it. If you have a 401k account, then you have indirectly bought stocks through your employer’s 401k plan.

You may also pay a fee-only financial advisor who would buy stocks for you and manage them for a fee of 1 percent of assets. The advantages of using a financial advisor can be well worth any additional cost if you’re getting started or don’t have time to do your own research.

But buying and selling stocks on your own can be rewarding.

Buying stocks through a stockbroker

The most common and easiest ways to buy individual stocks is online through a brokerage firm. To buy stocks through a stock broker, you’ll need to open a brokerage account.

You will be required to provide certain personal information such as proof of identity and tax information.

The best brokerage firms out there are:

  • M1 Finance
  • TD Ameritrade
  • Fidelity
  • Charles Schwab
  • E-trade
  • Webull
  • Merrill Edge

Stockbroker’s costs

When you buy and sell stocks on the stock market, you pay a brokerage fee for each trade. Brokerage fees vary between stockbrokers depending on the services they offer. A brokerage fee can $20 for each trade.

For example, you’re buying 20 shares of Apple at one time (that is a trade), then you might be paying a $20 brokerage fee.

Once you buy stocks through the stockbroker, you will get an email stating that your order or trade takes place.

So if you’re just getting started and you don’t feel confident to buy your own stock, then the advice of a professional may be worth it. However, if you’re confident and know by now how the market works, you may go with a no advisor.

Buying stocks through mutual funds

Another way to buy stocks, is not to buy stocks individually, but through mutual funds. This is good option if you are a beginner investor with very little money to invest in the stock market.

A mutual fund is an investment company where you buy stocks and bonds. A professional manager will pool your money and that of other investors together and invest it.

Buying stocks through a robo-advisor

Another way to buy stocks and start investing in the stock market is through a robo-advisor like Acorns.

Acorns takes your spare change from your regular transaction and invest that change for you in a range of exchange-traded funds (ETFs). It rounds up all your transactions to the nearest dollar. And once the spare changes stack up to $5, Acorns will invest it for you.

That means if you spend $5.55 at the grocery store, 45 cents get dropped into your Acorns account. And Acorns invests it for you. The idea is that you will not miss this spare change and because the investment is automatic, it adds up fast.

While Acorns is not ideal if you want be rich, it’s a very good option for beginner investors while learning how the stock market works.

Plus, Acorns will give you a $5 bonus just for signing up

M1 Finance is another robo-advisor where you can buy your stocks.

In fact, it’s a great way to invest in ETFs and index funds without worrying about picking up your own individual stocks.

M1 Finance is perhaps the best robo-advisors out there, not only because the account minimum is pretty low ($100 minimum account), but also there is no maintenance fee. That is a big advantage, especially if you have very little money to invest.

Plus you get a $10 when you refer a friend or family member. They will then use that referral link and fund their account with that $100 account minimum.

To get your referral money from M1 Finance, visit its website.

Bottom line is the stock market works by having investors to buy and sell stocks. While sounds simple, investing in the stock market can be intimidating and confusing. So, if you want to build wealth in the stock market, you must have an understanding of how the market works.

Read More:

Still wondering how the market works? A financial advisor can help!

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.


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Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, and Entrepreneur.

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Investing Money Basics

What Are Actively Managed Funds?

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What Are Actively Managed Funds? – SmartAsset

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Mutual funds and exchange-traded funds (ETF) allow you to own a basket of securities, helping with portfolio diversification. When choosing which type of funds or ETFs to invest in, you may be wondering if active or passive management is better. Actively managed funds are overseen by a fund manager who’s responsible for deciding what the fund should own. These funds tend to carry higher expense ratios than passively managed funds but you get the benefit of the fund manager’s expertise. Here’s more on how actively managed funds work and their pros and cons.

Sometimes it’s wise to blend actively and passively managed funds in a portfolio, a strategy that a financial advisor can help you set up.

What Are Actively Managed Funds and How Do They Work?

Active management strategies rely on a single fund manager or group of fund managers making decisions about how to invest. For example, say an actively managed fund invests primarily in the tech sector. The fund manager or managers would choose which tech companies to buy or sell inside the fund. They may rely on market analysis and research, financial forecasting and their own years of experience to make those decisions.

The goal of actively managed funds is to deliver performance to investors that beats the market. This may mean outpacing the returns of a specific benchmark, such as the S&P 500 or the Nasdaq 100. As such, active fund managers are constantly tracking movements in the market to better navigate periods of volatility while generating the best returns possible.

Actively Managed Funds vs. Passively Managed Funds

Passive investing is the opposite of active management. With this type of strategy, the goal is not to meet the market but to match it. This is typically achieved by holding investments that track a specific stock market index. In terms of how actively managed funds compare to passively managed funds, there are some key differences, including:

  • Return potential. Actively managed funds may deliver higher returns than passive funds, depending on the fund manager’s skill and overall market conditions.
  • Cost. Passively managed funds may carry lower expense ratios than actively managed ones since the fund manager takes more of a hands-off approach.
  • Risk management. With actively managed funds, fund managers can more efficiently manage risk through the use of hedging strategies.

Are actively managed funds better than passively managed funds? There’s no definitive answer. Whether it’s better to invest in active vs. passive funds can depend on your risk tolerance, time frame for investing and investment goals. If you’re a long-term buy-and-hold investor, for instance, you may be fine with passively managed funds. But if you’re focused on performance, you may lean toward active management instead.

Pros of Actively Managed Funds

If you’re interested in actively managed funds or ETFs, it’s important to know what’s good (or bad) about them. On the pro side, there are several good reasons to consider an actively managed approach with mutual funds.

  • Outpace the market. Perhaps the most appealing reason to consider actively managed funds is their potential to beat the market. Depending on economic conditions and market trends, actively managed funds may be able to deliver returns that are well above the market average.
  • Professional expertise. Investing in the stock market can feel a little overwhelming if you’re just getting started. Actively managed funds can help with taking the guesswork out of deciding what to own in a portfolio since you’re relying on the fund manager’s experience, rather than your own.
  • Diversification. Investing in one or more actively managed funds can help with diversification. That’s important for managing risk and again, an active fund manager may be in a better position to hedge against potential volatility compared to funds that take a passive approach and simply track an index.

Cons of Actively Managed Funds

Like any other type of investment vehicle, active funds can have their downsides. Here are some of the most important things to watch out for with these funds.

  • Underperformance. While actively managed funds can outperform the market, that doesn’t guarantee that they will. An actively managed fund could underperform compared to the index it’s trying to beat, while a passive fund might hit its target return goals. In fact, many actively managed funds underperform their benchmark.
  • Turnover ratio. One thing to know about with mutual funds is how often assets turn over inside the fund. The more turnover occurs, the more capital gains tax you may have to pay each time a security is sold. Since actively managed funds tend to have higher turnover than passive funds, that could mean a bigger tax bite for you.
  • Management fees. As mentioned already, actively managed funds can come with higher expense ratios than passively managed funds. If you’re considering an actively managed fund with a high expense ratio, it’s important to weigh that against the fund’s historical performance to determine whether the cost is justified.

How to Invest in Actively Managed Funds

If you’re interested in adding actively managed funds to your portfolio, you can do so by opening an online brokerage account. When comparing brokerage accounts, be sure to pay attention to things like the minimum investment required, trading fees and the range of funds available. Some actively managed funds can have minimum investments of $5,000 or even $10,000, which may put them out of reach if you’re just getting started with investing.

In terms of how to choose which active funds to invest in, that takes a little more research. First, consider how much risk you’re comfortable taking on and what kind of returns you’re looking for. Next, think about what kind of diversification you’re hoping to add. For example, you may be looking for a fund that invests in healthcare or tech. And finally, think about what you’d prefer to pay for management fees.

As you look at individual funds, here’s a checklist of things to consider:

  • Fund makeup
  • Performance, including annual returns, compared to market returns
  • Fund manager’s background, experience and track record
  • Expense ratios and other fees
  • Fund turnover ratio

The fund’s prospectus should cover all of these things. You may also consider talking to your financial advisor as well about the potential tax implications of adding actively managed funds to your portfolio. Earning higher returns may lose some of its appeal if you’re handing back some of those earnings in taxes.

The Bottom Line

Active fund management can have its ups and downs and it may not be right for every investor. Understanding how an active strategy compares to passive investing can help you decide which one better aligns with your overall investment vision and goals.

Tips for Investing

  • Whether you’re considering getting started with investing or you’re already a seasoned investor, an investment calculator can help you figure out how to meet your goals. It can show you how your initial investment, frequency of contributions and risk tolerance can all affect how your money grows.
  • Consider talking to a financial advisor about active vs. passive investing to help decide which one is a better fit. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors online. You can get personalized recommendations for advisors in your local area in minutes. If you’re ready, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Money Basics

Penny Stocks: Guide to Penny Stock Trading & Investing

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A penny stock is a share of a small public company that initially trades at a very low price—usually under $5 per share. This is just one way you can start investing for under $100. They’re also referred to as micro-cap stocks, small cap stocks, or OTC stocks. Penny stocks are enticing for some investors because they can be bought cheap and can potentially yield enormous returns.

Penny stocks have been around for as long as the financial industry has existed, but they came into the collective consciousness with the Martin Scorsese film, The Wolf of Wall Street, which depicted the life of penny stock manipulator Jordan Belfort.

The film got a lot of people asking about how to invest on your own in penny stocks. Are they legal? Can you actually make lots of money by trading them? How do you even go about trading penny stocks?

Let’s answer those questions for you.

What are Penny Stocks?

Tip: If you’re not familiar with stock investing, you should first read our beginner’s guide on investing in stocks.

Penny stocks are priced much lower than other securities. But what else makes a penny stock different than a regular stock? Here are three unique characteristics of penny stocks:

  1. Shares are priced between $.01 and $10 (At, a penny stock is defined as being less than $5)
  2. Penny stocks are issued by small companies that are valued anywhere under $50 million
  3. Penny stocks have poor liquidity—this means that their price can fluctuate dramatically over a short period of time, unlike regular stocks.

On this CNBC market report, you’ll see the stock prices for a few well-established companies (these are not penny stocks).

These are companies that are featured on the NASDAQ-100—the 100 largest non-financial companies trading through NASDAQ. The lowest stock price on this snapshot is $28.51. The other stocks range from $42 to as high as $1,788.

If you scroll further down this list, you’d find a $7 share for Sirius XM Holdings Inc. Although that’s nearly a penny stock price, the company is still valued at over $700 million. You’ll also notice that the stock price has pretty good liquidity—the price has only changed by 0.43% on the trading day.

Penny stocks, on the other hand, can nearly double in value in a very short span of time. Let’s explain how that can be both a good and bad thing.

Penny Stock Trading

When it comes to securities, there’s a difference between “investing” and “trading.”

Penny stocks are more associated with trading than investing. Penny stock trading (also known as “pennystocking”) is primarily done for short-term profit: traders buy heaps of penny stocks and wait for the shares to rise dramatically in demand and value. When they do, the traders cash out their shares and reap an extremely high return on their investment.

For example, you might find a penny stock that’s worth $1 per share. You buy 100 shares for a grand total of $100. Suddenly, the stock price leaps up to $10 per share—a 900% increase. You sell all your shares to take a profit which gives you the option to reinvest $1000 or keep it. That’s a whopping 900% return on investment.

When you invest in penny stocks, you’re investing in a volatile market, which can yield great rewards but also present great risk.

Penny Stock Risks

Tip: Be sure to read our guide on investing mistakes so you’re aware of all risks associated with stock investment.

All investments are risky—there’s no such thing as a “no-risk” investment. However, a penny stock is considered a far riskier investment than other types of securities.

Fraudulent Trading

The main problem with penny stocks is that many of them aren’t listed on the major exchanges. Large exchanges, like the New York Stock Exchange (NYSE) and NASDAQ, require companies to submit financial data to confirm they’re a legitimate business with real value. These reporting requirements are designed to protect shareholders from investing in failing or fraudulent companies.

But a large number of penny stocks aren’t sold on the major exchanges. You’ll find lots of penny stocks on over-the-counter exchanges, or, OTC exchanges. Unlike large stock exchanges, OTC exchanges may not require companies to report financial information, so it’s more difficult to assess whether the company is legitimate.

Here’s a hypothetical example of what could happen with a seedy penny stock on an OTC exchange. A fraudster locates a company that’s new or that’s going bankrupt, or else they might form a fraudulent shell company that sells no real product or service. The fraudster convinces amateur investors to invest in the company—usually with false promises that the company is up-and-coming or has an incredibly innovative product that’s going to take over the market.

“This business is going to be huge!” says the fraudster, “Stock is only fifty cents per share! Buy as much as you can today.”

So, investors buy the stock in droves, which drives up the price to $30 per share. What the fraudster didn’t tell anyone was that he or she had already bought hundreds of shares in the company. Once the stock price hits $30, the fraudster sells his or her shares and makes a huge profit.

But the company’s not going to make profit because it’s failing or fraudulent—so, inevitably, the stock price is going to fall back down to $0.50. If you bought 10 shares at $30 each, then your $300 investment is going to be reduced to just $5.

Even if you bought stock at $0.50 per share, you won’t make money unless you sold your shares when they reached $30. But penny stocks drop very quickly in price, so it’s easy to miss that short profit window.

Since companies that issue penny stock don’t have to report financial data, it can be difficult to tell whether the company is legitimate or not. That’s how Jordan Belfort took advantage of unassuming investors—he convinced them to buy penny stocks for companies with no real earning potential. He didn’t care about helping them make money. He only wanted to create artificial demand so the stock price would increase, and he could cash out his shares.

Not every company that sells penny stocks is failing, bound-to-fail, or fraudulent. Some startup companies just don’t have the capital to pay the high listing fees required by the larger stock exchanges, or they don’t have the minimum valuation. Their only option is to fundraise with low-priced shares.

It’s up to the investor to thoroughly investigate a company and evaluate its future earning potential. But it’s hard to tell if a company is legitimate if it doesn’t have to report its financial information.

Market Timing

What makes it so difficult to invest in penny stocks is that you have to rely on a tactic called market timing. Here’s how market timing works:

  1. You buy stock when the price per share is at its lowest point
  2. You sell the stock when the price per share is at its highest point

The problem with market timing is that it’s near-impossible to predict when stocks will be at their lowest and highest prices. Since penny stocks rise and fall in value so quickly, it’s difficult to tell when it’s the right time to sell—and if you miss the window, you could lose your investment, and then some.

Small Drop, Huge Loss

We’ve assumed that every penny stock is bound to rise far above its original price. But that’s not always true—some penny stocks may only decline in price. Let’s say you bought a share for $3. The price falls by 10% to $2.70—now you’ve lost money. You’ve only lost 30 cents, but if you bought dozens or hundreds of these shares, then you’ll have lost a lot of money.

Higher-priced stocks are able to absorb these price falls much better than penny stocks. That’s because high-priced stocks yield quarterly dividends that are large enough to make up for those occasional price falls.

How to Buy Penny Stocks

Does all this mean that you can’t or shouldn’t invest in penny stocks? Not necessarily. We’re not going to advise you on what stocks you should invest in and which you shouldn’t, but there are things you can do to minimize risk with both regular stocks and penny stocks.

As mentioned earlier, no investment is safe, and there’s always a chance you could lose money. Just like in gambling, never invest more than you’re willing to lose.

Use a Major Stock Exchange

Penny stocks aren’t sold exclusively on OTC exchanges. You can find some penny stocks on major exchanges, too, like NASDAQ. NASDAQ is composed of three trading tiers. The third tier, NASDAQ Capital Market, has penny stock listings that range from $1 to $10.

Companies that list penny stock on NASDAQ Capital Market must report financial information to the exchange. That’s good news for you. When you buy from this exchange, there’s a greater chance you won’t be investing in a fraudulent company.

Don’t Buy Too Many Shares

The less shares you buy, the less money you’ll lose if an investment goes south (this is basically the same rule as “don’t invest more than you’re willing to lose”). When you’re just getting started investing in penny stocks, it may be best to buy a minimal number of shares—or a diverse set of shares—until you get a feel for the market. Unfortunately, you can’t necessarily make a high profit without buying a large number of shares, and that’s why penny stocks are so risky.

Use the Right Tools

How do you locate penny stocks that may be worth buying? Professional penny stock traders use market scanners, which basically just report on the stock prices throughout the day. These scanners enable you to set parameters on stock types, so you’re able to filter out stocks that are greater than $10. Popular market scanners include:

Invest in Companies You Care About

If you’re a new investor, it’s good to invest in companies that are in an industry you’re familiar with or passionate about—it’s a mantra made famous by Warren Buffett.

Think about a topic you’re interested in—maybe you love flying drones. You probably know all the ins and outs about drone-related stuff; you know the difference between a good drone and a bad drone, you know what the current technology is capable of, and you know where the technology is trending. You can use all this information to evaluate a new drone manufacturer and make an educated guess on whether or not they could be profitable.

Use your wisdom and passions to your advantage, and don’t merely buy a stock for its cheap price. You can even go as far as investing in the greater good by backing companies that align with your values.


A penny stock is a stock that’s listed at a very low asking price—usually between $0.01 and $10. Penny stocks are legal to buy, but they’re considered riskier than other types of stocks; companies issuing penny stock may not have to report their financial information on a major stock exchange, and so there’s a greater risk of fraudulent activity behind the stocks. Most investors try to profit from penny stock by timing the market or listening to investment tips, which is a risky investment strategy. The safest way to invest in penny stocks is to do ample research on the company that’s issuing them, and to only buy stocks that are listed on a major exchange. Read more on how to invest in stocks for beginners to build your investment knowledge or use this investment calculator to better understand your investment goals..

Sources | | CNBC | Forbes |NASDAQ | Investopedia

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Money Basics

What Are Dividends? Definitions, Insights, and How They Work

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A dividend is a payment from a company to a shareholder who has invested in shares of the company. Publicly traded companies that offer dividends usually pay them on a fixed schedule and the amount given out to shareholders is based on the company’s profit and performance.

So, why should you care about dividends? Not only are dividends a basic part of how the stock market works, they are also a great way to earn passive income. They are usually paid on a quarterly basis, so every three months you should expect to see dividend payments from dividend-paying companies you’ve invested in (as long as they’re in the green).

Dividends are also an accepted form of verified income that can help you get loans and achieve other financial goals. There are more caveats and complexities that we’ll go through below. Read on to see if investing in dividend-paying stocks is your next financial move.

How Do Dividends Work?

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In short, an investor invests in a dividend-paying company. At the end of each quarter, the company’s board of directors will decide whether or not to issue dividends based on financial performance. From there, eligible shareholders will receive their dividends in the form of cash (or occasionally additional company shares).

See an overview and explanation of the dividend process below:

1. An Investor Invests in a Dividend-Paying Company

Not all publicly traded companies pay out dividends to their shareholders, those who do are called “dividend-paying companies.”

2. Company Determines Dividend

At the end of each quarter, corporations review their financial performance. The Board of Directors may decide to issue dividends even if they didn’t hit profit goals but especially if they performed well. Sometimes companies will decide to issue stocks in the place of cash dividends.

3. Company Declares the Dividend

This is aptly known as the “declaration date.” Companies announce that they will be issuing dividends and how much that dividend will be per share. For example, a company might announce on June 29th (towards the end of the second quarter) that they will be issuing dividends of $0.10 per share. If you own 100 shares you should expect a dividend payment of $10.

4. Company Declares the Record Date (and Ex-Dividend Date)

Along with the dividend amount, companies will state their “record date,” or the date you need to be in the company’s records in order to receive a dividend. They also announce the ex-dividend date and payable date (date that they will be paid). For our example, the declared record date is Wednesday, July 15th.

The ex-dividend date goes hand-in-hand with the record date — it’s the cut-off date to buy shares and be eligible for a dividend. states, “The ex-dividend date for stocks is usually set one business day before the record date.” Per the example record date of Wednesday, July 15th, the ex-dividend date would be Tuesday, July 14th. You must buy shares before the ex-dividend date, otherwise you won’t be eligible for the dividend payment.

5. The Shareholders Receive Dividends: Payable Date

The shareholders receive their dividend payments on the payable date, usually in the form of a dividend check or, in some cases, as additional company shares. Dividend payments you receive can be used however you please — they can be used to help pay off debt and improve your debt-to-income-ratio.

When Are Dividends Paid?

Dividends are usually paid to shareholders quarterly after companies release their financial performance. After the dividend amount to be paid is announced, companies will determine which shareholders are eligible to receive dividends and how many eligible shares they own. Eligibility has everything to do with when the share was purchased.

Stock Dividend Dates

The dividend dates show the process of how companies determine who is eligible for a dividend payment. Company-specific dates can be found on their own platforms and on resources like Nasdaq. To recap our explanation above, these are the important dividend dates:

Are Dividends Guaranteed From a Dividend-Paying Company?

In short, no. Companies can roll back their dividends and forgo sending them out to common shareholders if they wish (or if they just can’t afford to). However, once a corporation declares the dividend, they are legally required to follow through.

An Exception: Preferred Investors

Companies are also required to pay scheduled dividends to “preferred investors,” who are high-level investors that give up their right to vote on company matters for the guarantee of steady dividend payouts. Even if companies don’t have the money to pay preferred investors when a scheduled dividend payment comes around, the company has to give the preferred investor an IOU and pay them back for it.

Why Do Companies Pay Dividends?

Why are companies just giving their money away? The main reasons that companies pay dividends are to entice and attract investors. The dividend payment amount correlates with your dividend payout, and the basic principle is the more stocks a person owns, the bigger their dividend payouts will be.

Offering impressive dividends can spark interest among serious investors and create more demand for the shares. Dividends are also a sign to investors that the company is doing well financially since they can afford to pay dividends. Some investors might use their dividends to invest back into the company and purchase more shares.

Why Do Some Companies Not Pay Dividends?

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There are many factors that play into these decisions at a corporate level. A big reason that some companies don’t offer dividends is because they want to reinvest maximum profits into the business, especially fast-growing companies that are keeping up with growing pains. Well-established companies will also forgo dividends and instead invest in secondary properties, innovations and other projects with the hope of increasing the share price.

Shareholders that own stocks in a company that doesn’t pay dividends still have the benefits of their voting rights (in certain cases) and increased stock value if a company is performing well — companies may also send bonus dividends with high profits.

Dividend Paying Companies

As mentioned above, dividend-paying companies are publicly traded and usually have a well-established track record of success. A huge portion of high-paying dividend stocks are utility-related, like electricity (ex: S&P) and oil (ex: Chevron). See some additional recognizable dividend-paying corporations below:

To find additional dividend-paying companies, check out resources like Kiplinger, Morningstar, and MarketWatch.

How to Calculate Annual Dividend Yield

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The dividend yield tells investors how much they can expect to make from their dividends. It’s very important to know the dividend yield in order to understand a dividend’s true value. If you decide to invest in the stock of a company because they promise great dividend payments, those dividends need to be compared to the price that you’re paying for the stock.

There is no “ideal yield” since there are other factors at play like the industry sector. Tech companies typically have lower yields (around 1.5 percent) while the utility sector hovers closer to 3.2 percent. That being said, 4–6 percent is quite good — it’s a fairly high yield but it’s also still a safe yield. The most high-paying dividend stocks usually don’t pay more than 10 percent per quarter. If the yield is so high that it seems too good to be true, it might be. Extremely high-paying dividends could mean that the company may not be able to afford to pay them in the future, especially if they take a financial hit.

To calculate your dividend yield, divide the annual dividend per share by the price per share. See two examples below:

Dividend yield: 6% = Dividend per share: $2 / Price per share: $30

Dividend yield: 2% = Dividend per share: $0.50 /  Price per share: $20

Dividend Pros and Cons: Dividend-Paying Stock Factors

Every type of investment has pros and cons and dividends are no exception. Below we’ve laid out some important pros and cons that can help you better understand the risk in reward by building a portfolio around dividend-paying stocks.



What Can I Do With My Dividend Payments?

You finally receive your highly anticipated dividend — now what? When you receive your dividend payout, you can do whatever you want with it. You can use it to pay bills, put it in your savings or reinvest it.

Will My Dividends Be Taxed?

Since dividends are a form of income, your dividend earnings will likely be taxed. The tax rate is dependent upon the type of dividend and how long you’ve owned the stock. If you meet the minimum reporting threshold, you should check with a tax professional to figure out how to best report dividends on your taxes.

Whether your financial resolutions involve saving for early retirement or a dream summer adventure, investing is a great way to help you get closer to achieving your financial goals or improving your credit score. Also remember that just because a company doesn’t offer steady dividends, that doesn’t mean they aren’t worth investing in. Always research a company before investing — because while dividends are a great perk, they don’t necessarily define a company that’s going to deliver a great return on your investment.

Sources: | Energy & Capital | Indiana Housing & Community Development Authority | SureDividend

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