What is OTC? A beginner’s guide to over-the-counter markets

otc
OTC or over-the-counter trading offers opportunities, like buying a young company of great potential for a low price. But it’s also subject to major risks, like lack of regulations and difficulty of getting information.

  • OTC (over-the-counter) refers to buying and selling securities outside of an official stock exchange.
  • OTC investments can include penny stocks, bonds, derivatives, ADRs, and currencies.
  • OTC markets are electronic networks that allow two parties to trade with each other using a dealer-broker as an intermediary.
  • Visit Business Insider’s Investing Reference library for more stories.

OTC (over the counter) is the stock market version of “for sale by owner.”

It’s a process by which stocks, bonds, and other financial instruments are traded directly between two parties instead of on a public stock market, such as the New York Stock Exchange (NYSE) or Nasdaq.

Investing in OTC securities has advantages, such as getting in on the ground floor of a winning stock. “With OTC, you have access to high-growth emerging companies, including startups,” says Michael Bertov, author of The Evergreen Startup.

And you get more bang for the investment buck too since prices are typically lower for OTC investments than for their public exchange counterparts.

Still, there are a lot things to consider when trading OTC securities. Let’s look at the ins and outs of investing OTC.

What does OTC mean?

OTC markets are electronic networks that allow two parties to trade with each other using a dealer-broker as a middleman. They are known as dealer networks or markets. In contrast, stock exchanges are auction markets. A price for a stock is posted (the “ask”), and then investors make offers for it, bidding against each other.

Companies that trade OTC are considered public but unlisted. This means their stock can be openly bought and sold, but that the stock is not listed on a major exchange such as the NYSE or Nasdaq. So these equities are subject to the rules and requirements that these exchanges impose on their listed companies. No governing institution is watching them, in other words.

That said, there are still federal regulatory hoops to jump through. Many OTC stocks are subject to at least some oversight by the SEC. In fact, SEC regulations were updated in September 2020 to enhance disclosure and investor protections by ensuring that broker-dealers do not publish price quotes for a security when current information about that security is not publicly available.

Also, OTC trading is usually done through a licensed broker-dealer. Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA).

What kinds of investments trade OTC?

Many OTC securities include stocks issued by small companies that don’t qualify to be listed on major exchanges because they don’t trade enough shares or their shares don’t sell above a minimum price. Often referred to as penny stocks, they trade for less than $5 per share.

Other OTC companies are larger, but can’t afford (or don’t want to pay) the listing fees the major exchanges charge. NASDAQ, for example, charges companies up to $163,000 to be listed, assuming they qualify.

Most bonds trade OTC after their initial offering. OTC markets are a better fit for bonds than stock exchanges because of the large size of trades, number of bonds traded, and the infrequent trading of bonds.

Besides stocks and bonds, investments that trade OTC often include:

  • Derivatives, private contracts between two parties, typically arranged by a broker. These can be options, forwards, futures, or other agreements whose value is based on that of an underlying asset, like a stock.
  • American Depositary Receipts (ADRs), sometimes called ADSs, or bank certificates that represent a specified number of shares of a foreign stock.
  • Foreign currencies. About $5 trillion worth in different nations’ money trades on what’s called the Forex, an over-the-counter currency exchange.
  • Cryptocurrencies, like bitcoin and ethereum.

What are the major OTC markets?

One primary over-the-counter (OTC) network is OTC Markets Group. As an investor, you’ll have access to this market depending on your broker. There’s also the Grey Market, which we’ll cover below.

OTC Markets Group

The majority of OTC trades take place on the OTC Markets Group, a publicly traded company. OTC Markets lists over-the-counter equities at three tiers, depending on their size, share price, and the amount of financial reporting and disclosure they do.

OTCQX® Best Market is the highest tier – these are firms with audited financials that could trade on regular exchanges. The next, OTCQB® Venture Market, is for early-stage or growth companies; they must have a minimum bid price of $0.01.

The lowest tier is the Pink® Open Market, which is the default market for broker-dealers who want to trade OTC securities. This tier includes foreign companies, penny stocks, shell companies, and other firms that choose not to disclose financial information.

Grey Market

Only broker-dealers can trade on the OTC Markets Group. The Grey Market, sometimes called Other OTC, is a catch-all category for any security that is considered over-the-counter but not quoted by broker-dealers due to a lack of investor interest, lack of financial information, or lack of regulatory compliance.

Is it safe to buy OTC stocks?

OTC trading has had a shady reputation. Partly that’s because of the basic way it operates. In contrast to the total transparency of the stock exchanges, where prices are displayed for all to see, OTC is a buyer and seller secretly negotiating a price. The seller might offer the stock to one buyer for one price and to another buyer for another.

Small wonder that OTC markets have been the site of scams and criminal activities. Dealing in penny stocks opens the door to illegal pump and dump schemes in which someone promotes (pumps) a stock, then sells (dumps) the stock after you and other investors buy, raising the price of the stock.

Bonus scams are also a major risk according to OTC Forex trader Frano Grgić, who notes the presence of unscrupulous “brokerages that want to lure beginners into trading by offering them large bonuses on their deposit.” Unfortunately, Grgić says, “when it comes time to withdraw funds, the money is gone.”

For regular investors, the only safe way to buy (or sell) OTC stocks is through a reputable broker-dealer using a major online platforms like OTC Markets. They actually operate like “discount” stock exchanges, imposing some rules and oversight and, in OTC Markets’ case, classifying stocks into tiers.

Even then, consider the tier you plan to use and, of course, the reputation of the broker-dealer who will negotiate your trades.

Risks of OTC trading

Fraudulent activities aside, there are other risks associated with OTC trading.

  • Lack of price transparency. As noted above, theoretically a seller could be charging a buyer one amount for a security, and naming another price to another.
  • Low liquidity. Many OTC stocks are thinly traded, meaning there isn’t much demand. That can make them hard to sell when you want to.
  • Volatility. Since OTC securities experience lower trading volume, it may lead to sharp price swings.
  • Lack of oversight. OTC trading may have less regulation than major exchanges, depending on the market or OTC network you choose to trade through.

Benefits of OTC trading

Despite the drawbacks, OTC trading has its upsides too.

  • The stars of tomorrow. Many big-name stocks started small, trading OTC. “Imagine buying shares of Twitter or Facebook in 2007,says Michael Bertov.
  • Low transaction costs. Fees are lower on the OTC market compared to major exchanges, says Jon Ovadia, OTC trader and founder of the OVEX cryptocurrency exchange platform.
  • Lower share prices mean your money goes farther and buys more of an OTC investment than an exchange-listed one.
  • “Private and personalized service,” as Ovadia puts it – you’re dealing not in a huge, anonymous market space, but in a more intimate one, with an individual broker-dealer and the seller.

The financial takeaway

OTC trading is not for everyone. In fact, the SEC does issue this dire warning: “Academic studies find that OTC stocks tend to be highly illiquid; are frequent targets of alleged market manipulation; generate negative and volatile investment returns on average, and rarely grow into a large company or transition to listing on a stock exchange.”

If your investment strategy is ultra-conservative or if you are a relative novice, most experts suggest you stay away or at the very least, confine your trading to the OTCQX® Best Market tier on OTC Markets Group.

On the other hand, “If you are able to be patient and disciplined, and are open to learning something new,” you may want to try OTC, says Grgić. He cautions, however, “If you do not have money to invest which you can lose,” don’t try it.

Impact investing finances companies that aim to do good in the world – here’s how it works and how to get involvedAlternative investments are exotic assets that can diversify your portfolioTrading and investing are two approaches to playing the stock market that bring their own benefits and risksMargin trading means buying stocks with borrowed funds – it’s riskier than paying cash, but the returns can be greater

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An annuity is an insurance product that can provide a secure income stream for the rest of your life

annuities
Annuities have long been a go-to for seniors seeking a steady return on a lump-sum investment, but they can benefit younger investors too.

  • An annuity is an insurance investment that provides a steady source of income during retirement.
  • An annuity charges a premium upfront with other management fees often rolled into the cost.
  • Fixed, variable, and indexed annuities offer different investment options with varying risk profiles.
  • Visit Business Insider’s Investing Reference library for more stories.

When you’re saving for retirement, it can be difficult to know whether you’re saving enough. Even if you think you’ve got it covered, there’s little accounting for how much you’ll actually spend in retirement or how long your retirement will be.

That’s where annuities come in. These unique combinations of insurance and investment features help investors save for retirement and offer assurance they won’t outlive their hard-earned assets.

Learn more about annuities below and what you’ll want to take into consideration before you add them to your portfolio.

What is an annuity?

An annuity is an investment you buy in exchange for periodic payouts, typically during retirement. You can make a single premium payment or a series of payments, and choose whether your annuity payouts are made in a lump sum or over time.

How do annuities work?

A modern-day annuity is a contract between you and an insurance company. In order to get an annuity, you’ll need to pay a premium – usually a large lump sum – and then the insurer invests it. Afterward, the insurer provides you with a stream of payouts for a predetermined number of years or even the remainder of your lifetime.

An annuity has two phases: the accumulation phase and the annuitization phase. The accumulation phase of an annuity is the period of time when you’re making payments. Those funds may be split among various investment options.

The annuitization phase is the period of time when you receive payouts from the annuity, much like a regular paycheck. This can last for a set amount of years or for the rest of your life. The payouts include the principal amount along with any investment gains.

Annuities provide a stable investment option for savers who worry about market volatility or outliving their retirement savings. Annuities are known for three main benefits.

  • Reliable income for a set amount of time. Once you’ve made your payments, you’re guaranteed to receive payouts for the rest of your life or someone else’s life, like your spouse.
  • Death benefits. You may also designate a beneficiary on your annuity. This beneficiary will receive the payouts if you die beforehand.
  • Tax-deferred savings. Before you start receiving payouts, annuity income and investment gains grow tax free. “Annuities complement other retirement plans in that they provide opportunities to grow without heavy taxation,” says Rob Williams, managing director of financial planning, retirement income, and wealth management at Charles Schwab. You pay taxes on annuity income when you receive its payouts.

What are the different types of annuities?

Different types of annuities vary in how your money is invested.

  • Fixed annuities place your money in a general account of the insurance provider which promises a minimum rate of interest and fixed amount of periodic payouts. Check with your state insurance commission to confirm your insurance broker is registered to sell fixed annuities.
  • Variable annuities place your money in various investments, like mutual funds, much like a 401(k). The payouts from variable annuities will vary depending on how much money you pay, the rate of return on your investments, and any expenses of those investments as well as the annuity. Variable annuities are regulated by the Securities and Exchange Commission (SEC).
  • Indexed annuities provide the positive investment potential that variable annuities offer. The return of an index annuity is based on a stock market index, like the S&P 500. Like fixed annuities, these are regulated by state insurance commissioners.

Pros and cons of annuities

At their core, annuities are full of advantages:

  • Regular payments. They provide a guaranteed source of income throughout your retirement.
  • Low-risk returns. Annuities are generally a more stable investment, unless you have a variable annuity.
  • Tax-deferred growth. Earnings in your annuity are untaxed as they grow over time.

Unfortunately, there are major drawbacks to consider as well:

  • Big fees. Annuities typically have high fees and commissions which can really cut back on the long-term earning potential. Because of this, annuities aren’t a great place to grow money, but fixed immediate annuities take a smaller fee hit while generating a lifetime income stream.
  • Illiquidity. Variable annuities don’t offer access to your money until after several years, typically six to eight years but sometimes longer. If you do withdraw funds or cancel your annuity contract before that surrender period ends, you incur a surrender fee that can initially reach as high as 10% of your contributed funds, decreasing by one percentage point each consecutive year. Once your payouts start, it’s next to impossible to change them or access more of your principal.
  • Taxable income and tax penalties. Annuities aren’t totally tax free. As a source of income, annuity payouts are subject to income tax as you receive them. If you withdraw from your annuity before you’re 59 ½, you’ll face a 10% penalty on top of your ordinary income tax as well.
Pros Cons
  • Guaranteed retirement income
  • Payouts last through your lifetime
  • Tax-deferred growth
  • Typically high fees
  • No short-term access to variable annuity funds
  • Tax penalties on early withdrawal

The financial takeaway

Annuities are a great addition to your retirement savings plan if you’re always maxing out your 401(k) contributions and if you can afford the fees. They provide steady income throughout your retirement, they grow tax-free, and your beneficiaries can benefit from the payouts, too.

Since annuities aren’t free, however, be sure to weigh their costs against their promised benefits to determine whether it’s the right choice for you.

A variable annuity can provide you with more retirement income, since its payouts rise with the stock marketBackdoor Roth IRA: Understanding the loophole that gives high-income earners the tax benefits of a Roth IRATraditional IRA vs. Roth IRA: What’s the difference?Interest income from your investments is taxable – here’s how to calculate what you owe and ways to lower it

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The federal funds rate is the benchmark interest rate that affects borrowing costs across the US economy

fed funds
While it technically applies only to banks, the federal funds rate impacts interest rates on a variety of loans and investments.

  • Set by the Federal Reserve, the federal funds rate is the interest banks charge each other to borrow money overnight.
  • Changes in the federal funds rate impact the interest rates on consumer loans, credit cards, and bank accounts.
  • The federal funds rate is the key tool the Federal Reserve uses to stimulate or slow down the economy.
  • Visit Business Insider’s Investing Reference library for more stories.

The major mandate of the Federal Reserve – the central bank of the US – is to keep the nation’s financial system solvent and manage its money supply (the amount of cash and readily available funds in circulation). It does this through a balancing act involving interest rates – specifically one called the federal funds rate.

The federal funds rate (“fed funds rate,” for short) is only used between banks; it’s not an interest rate an individual can apply for or a financial account will earn.

But it’s a key benchmark.

After the Fed sets it, the federal funds rate becomes the basis for interest charged on loans and credit card purchases, and the return offered by fixed-income investments, like bonds and annuities. The level of interest rates – how cheap or expensive it is to borrow money – affects business and consumer spending. So, through the federal funds rate, the Fed tries to keep the entire economy on course.

Here’s how it works, and the ways it can affect you.

What is the federal funds rate?

The federal funds rate, also known as the overnight rate, is the interest commercial banks charge when they lend money to one another for extremely short-term periods – literally, overnight.

The Fed mandates this activity between banks to ensure they meet their reserve requirements. That is, it requires that each bank must maintain enough cash on hand, plus a reserve balance with the central bank, to cover a certain percentage of its deposits and other liabilities on every business day.

These regulations are to make sure that a bank’s account-holders always have ready access to their money. If banks are short on funds to maintain their reserve requirement, they borrow from another – at (or very close to) the fed funds rate.

There are two types of federal funds rates:

  • The federal funds effective rate is the weighted average of all the interest rates banks pay when they borrow from other banks in the country.
  • The federal funds target rate is the rate set by the Federal Open Market Committee (FOMC), the monetary policy-making body of the Federal Reserve, to serve as the guidepost by which banks charge each other. Made up of the Fed’s Board of Governors and five regional Federal Reserve Bank presidents, the FOMC meets at least eight times a year to decide the federal funds rate based on prevailing economic conditions.

When people refer to the Fed “slashing the interest rate” or “raising interest rates,” they usual mean the federal funds target rate.

What is the current federal funds rate?

On September 22, 2021, the Federal Reserve maintained the federal funds rate at a range of 0% to 0.25%. This remains unchanged from the first time the Fed lowered the benchmark rate to almost 0% on March 15, 2020 in response to the COVID-19 pandemic. The fed funds rate averaged 5.59% from 1971 until 2020.

How does the federal funds rate affect the economy?

During its eight meetings a year, the FOMC can raise, lower, or keep the fed funds rate the same. But what motivates the committee to periodically change it? How does the Fed use it as an economy-adjusting tool?

When it needs to stimulate economic growth – production, spending, expansion – the Fed lowers the fed funds rate. This move makes it cheaper for banks to borrow money and maintain their reserves. So these banks can then lend out their extra funds at lower financing costs, encouraging companies and individuals to take out loans to expand, invest, and buy things. It increases the money supply in the system, in technical terms.

In contrast, when the Fed needs to slow down the economy – say, because prices are climbing too fast, causing rampant inflation – it raises the fed funds rate. To prevent their required reserve balance from going into the red, member banks have to pay more interest. They then raise their interest rates to clients, which tends to slow down any form of borrowing activity. When banks don’t finance as much, the money supply contracts, and economic growth goes back to more sustainable levels.

How does the federal funds rate affect you?

The federal funds rate is an interbank interest rate. But it has a ripple effect throughout people’s financial lives, the interest they pay, and the money they earn. Among its effects:

  • Prime rate: How the fed funds rate moves influences the movement of a number of interest rates, one of the most significant being the prime rate. The prime rate is the rate a bank can offer its best corporate or high-net-worth individual clients.
  • Consumer loans and accounts: A shift in the prime rate influences consumer interest rates as well. When the prime rate rises or drops, you can expect a corresponding adjustment on the monthly charges of your personal loans, credit cards, and adjustable-rate mortgages. If they pay fluctuating interest, your bank accounts and CDs also earn more or less.
  • US Treasuries and other bonds: Changes in the fed funds rate can be paralleled in the interest rates paid by newly issued Treasury notes and bonds. These in turn serve as a benchmark for corporate bond rates.
  • Stocks: A decrease in the feds fund rate can send markets soaring, while an increase can push the markets to decline.
  • Employment: When interest rates go down, it encourages consumers to buy more goods and services. In turn, this propels businesses to meet the demand by expanding production, hiring more workers, and raising wages.

The financial takeaway

The federal funds rate is an important tool – the tool, some would say – the Federal Reserve uses to stimulate or slow down the economy. Not to mention, maintain the solvency and reliability of the nation’s banks.

Financial institutions, corporations, and individuals are all affected by the federal funds rate one way or another. There’s not much you can do to alter the Fed’s moves or even anticipate them, but it’s good to understand how it can influence your daily life and finances.

The Federal Reserve is the central bank of the US – here’s why it’s so powerful and how it affects your financial lifeWhy the Federal Reserve uses contractionary monetary policy to curb the inflation that accompanies an overheating economyWhat is a bond? How to earn a steady stream of income by loaning money to a business or governmentWhat is inflation? Why the cost of goods rise over time and what it means for the value of your money

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How to say no and handle to tough clients professionally without getting pushed around

financial planner and client
You’re allowed to walk away from any client or project that isn’t a good fit.

  • Angie Colee is a coach who helps creative entrepreneurs grow their businesses.
  • As a freelancer, she says she’s learned to master the art of politely saying no to client requests.
  • Presume good intentions before going into the conversation, and frame your words carefully and firmly.
  • See more stories on Insider’s business page.

If you’ve been in business as a freelancer and dealing with clients for a while, odds are you’ve encountered the kind of tough client that makes you question whether you’re cut out to run your own business.

I freelance as the head of a writing team for an email marketing agency, and part of my role is saying “no” to clients without wrecking the relationship. Here’s my go-to strategy.

A time to type versus talk

Sending an email can backfire when there are strong feelings involved. You might be great at writing emails, but upset people are even better at finding ways to misinterpret something you thought was 1000% clear.

As soon as you notice resentment or frustration, reach out. Set up a phone or Zoom call, and bring a few talking points and a positive, problem-solving attitude. Ten minutes on the phone will often clear up what was a genuine misunderstanding.

If you’re worried you won’t do well on a call, send a voicemail or video instead. You’ll be able to script out what you want to say, practice a few times, and still send something personal, all without having to react on the fly.

Set the scene for your chat

Don’t go into this looking for a fight. Since this is a client you’ve already started working with, assume positive intent, and that there might be some missing detail that helps make sense of the frustration. Pretend like the client is paying you because they like you, because they are. People like working with people they like!

If you start out upset, that irritation will leak into your mannerisms no matter how carefully you frame your words. If you look for ways to work together, you’re more likely to solve the problem in a way that makes everyone happy.

Side note: If mean clients and misunderstandings are a consistent problem in your business, then something is broken in your lead generation system or your screening process. Fix that and you’ll find working with clients is a lot easier.

Have a productive conversation

You need to find the answer to two simple questions. The first is, “Is this problem fixable?” The second is, “Am I the person to fix it?”

Sometimes the problem can’t actually be fixed, like when there are circumstances beyond your control or the client has unrealistic expectations. I like to ask, “If you could wave a magic wand, what would solve this and make you happy?” If they haven’t thought about what a good outcome looks like, this forces them to.

Once you have a potential fix, determine if it’s feasible – you can’t always fix a client’s problems. I once had a wonderful client disappear after he unexpectedly lost a key member of his team. He couldn’t keep up with all the demands on his plate, including our project. In that situation, I couldn’t find him a new teammate, but I could (and did) let him know I’m still here when things settle.

You’re allowed to walk away

You can walk away from any project or client that’s making you miserable. Sometimes it’s just not a good fit, and you can’t always know that until the work begins. Refund their money or finish the work you agreed to, because professionals honor their commitments, and then part on polite terms.

It’s hard to walk away from someone waving cash at you, but be strong and do it anyway, because bad-fit clients will suck up all your time and energy until you can’t even see other opportunities. You’ve got to make space for bigger projects and better clients. Nature abhors a vacuum and will rush to fill the space you create.

And don’t take abuse

Name calling, lying, and insults are unacceptable – it doesn’t matter how much money they’re offering. Stress is not an excuse for bad behavior. With almost 8 billion people on the planet, there’s bound to be someone else you can work with, and work with well.

Angie Colee helps creative entrepreneurs grow their businesses. She’s coached and run creative teams for companies like Lowes, Product Launch Formula, Copy Chief, and Orzy Media. She also hosts the Permission to Kick Ass podcast.

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I’m a freelancer living feast or famine to survive on US healthcare – and I’m scared of what comes next

woman on laptop
  • Years ago, people predicted the US would become a free-agent nation full of contract gigs.
  • But as a freelance writer trying to make it on US healthcare, I struggle to see the sustainability.
  • Unless something changes, our ability to achieve the American dream is significantly limited.
  • See more stories on Insider’s business page.

I never thought much about health insurance until I was T-boned at 50 mph.

The wreck totaled my car. It deployed all of the airbags, burst all of the windows on the left side, and displaced the entire engine from the nose of my Honda CR-V. If the driver of the other car had hit me just a few inches lower, I likely wouldn’t have been so lucky.

There had been mild pain in my back for about two months, but the crash increased it threefold. It was after this that I took my first real visit to a chiropractor and physical therapy clinic, but I only paid for two visits before I dropped out.

The reason? I’m a freelance writer.

US healthcare affects the freelance economy in a major way. A study in 2018 showed that more than 40% of all freelancers saw healthcare as their biggest concern for the upcoming midterm elections. In that same study, more than 41% of respondents claimed that healthcare benefits were the reason they chose to pair “side hustles” with their full-time jobs rather than go fully freelance.

There are roughly 56.7 million American freelancers today, many of whom are responsible for their personal healthcare costs and insurances. Without employer premiums, which offer discounted rates and bonuses, we’re entirely and totally on our own.

Even with Medicare and government marketplace programs, less than one in four freelancers reported buying insurance in 2019 – and 35% of freelancers choose to neglect healthcare due to high costs and steep premiums, which averages a whopping $484 a month for a single person. For families and married couples, that number rises to $1,230.

There are credit systems that help freelancers pay for insurance, as well as a few marketplace programs that try to make a difference. But writers operate on a feast-or-famine lifestyle, which is unable to accommodate exorbitant healthcare costs. Even published authors are unable to qualify for benefitted plans outside of the insurance marketplace.

Suppose my writing takes off one year, and I’m able to live comfortably. This means my insurance credits dry up, and I am liable for the entire sum tacked onto my taxes. Insurance credits, like taxes, flex with your income bracket. Their purpose is to help pay down insurance premiums.

For example, you might only pay for half the premium if your income falls below a certain threshold. But insurance credits aren’t the perfect solution you might be dreaming of. If you happen to make more or less than your declared income (which will never be exact for freelancers), you might be in for a nasty surprise. And if you happen to only have one good month in a 12-month year, your resources for healthcare are still shot.

Bear in mind that freelancer taxes are already impressively steep; the cost includes your income tax plus 15.3% charged for being your own boss. This means less money can be saved for healthcare purposes – plus deductibles, plus vital care that isn’t covered by the policy.

If I make less money another year, insurance credits kick in. I might pay less per month, but I’m still liable for enormous deductibles and higher premiums just to access the care I need. And if I happen to make great money only in the last month of the year? My credits are gone again, and I have the devil to pay come spring.

You might think that neglecting health insurance is an option. I did, for a time. But the pain between my shoulder blades reminds me that passing on quality healthcare is no longer doable.

According to statistics, healthcare averaged $11,000 per person in 2018. By 2028, costs are projected to rise to $18,000. Where I live, the cost of an ambulance is $500, plus $12 per mile until you reach the hospital. Insurance protects us in the event of cataclysm, but it won’t protect us from the costs that matter.

Writers aren’t employees. We don’t have set hours, we don’t report to anyone, and we certainly don’t have PTO. I can’t decide to leave work early on a Friday for a dentist appointment, or take vacation time for surgeries. If I can’t make the time, and if I can’t access doctors that require certain types of insurance, I go without.

I’m a freelance writer who chose to invest in healthcare for the long-term. Because of my field, and because I live alone, I simply can’t afford to be sick. I don’t have access to a spouse’s insurance.

Whether it’s due to scheduled deadlines or just paying the bills, downtime is a cost I can’t afford. But shelling out hundreds of dollars per month and having to pay thousands more in the event of an accident doesn’t seem like much of an alternative.

And if COVID-19 puts me in the hospital, my career is borderline finished.

Since the start of 2020, I’ve submitted more proposals and pitch requests than I can count. I spend two or more hours a day just trying to find gigs. It doesn’t take a rocket scientist to realize things are drying up. During a pandemic, it’s harder than ever to take the leap of faith into freelancing. As of 2020, 28% of freelancers stopped working due to contract cuts, failing job opportunities, and limited growth.

As less and less money gets saved, I get more and more worried about the future of my health in a world that operates with an employer-employee relationship.

A few decades ago, people were predicting that the US would become a free-agent nation, composed of freelancers and contract gigs. But self employment is not a growing trend. We are a small portion of the workforce that gets overlooked and underrepresented. There aren’t a lot of us saying anything about our healthcare woes, and as COVID-10 variants continue to circle, insurance worries will continue to grow.

Unless something changes with the way writers like me source and access insurance, our ability to achieve the American dream is significantly limited.

I don’t need much to be happy. Dollar signs and restful nights are a bonus, but not the end-all, be-all. In the end, the American dream is the pursuit of fulfillment, or what we were meant to do. All I need is my writing, my wits, and my health.

And if healthcare isn’t there for the latter, where will freelancers be in a post-COVID-19 world?

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MAKING BIG MONEY: The ultimate guides to breaking into careers with 6-figure salaries

Caroline Stokes
Caroline Stokes is the CEO of talent agency and executive search firm FORWARD, and an expert on growing your career in management consulting.

  • You want to increase your salary but don’t know how to get that promotion or land that job.
  • These guides will point you in the right direction by shifting to freelance or learning new skills.
  • Insider regularly interviews experts about making more money. You can read them all by subscribing to Insider.

Looking for a career move that can boost cash flow? These professions and positions help add the good kind of zeros to your salary. Read these articles to help you combine a career you love with a paycheck you want – and for advice on how to get there.

Full-time gigs

IT professional: 3 IT professionals who didn’t get a college degree and are now making 6 figures reveal how to succeed in their field

Management consultant: How to get onto the partner track at McKinsey and make millions, according to 3 management-consulting headhunters and a former McKinsey HR manager

Engineer: The best way to teach yourself to code and land a six-figure job, from 5 people who’ve done it

Marketing consultant: The ultimate guide to breaking into marketing consulting and making 6 figures, from people who did it

VC: How to break into venture capital and land a job at a top firm, according to recruiters, managing partners, and executive coaches in the VC space

Crisis manager: Crisis managers are taking center stage during the pandemic – and can make a lucrative living. Here’s how to break into the in-demand role, according to 5 veterans in the industry.

Software engineer: 3 software engineers reveal the steps they took to move up in their careers to make 6-figure salaries

Executive in gaming or esports: The non-engineer’s guide to landing a 6-figure job in online gaming or esports, according to senior executives and CEOs in the space

Freelance or independent gigs

General freelancer: The ultimate guide to going freelance – and making more than you did at a full-time gig

Software engineer: Freelance software engineers making over $100,000 a year reveal how they got started, find clients, and set their rates

Ghostwriter: How to become a freelance ghostwriter, according to someone who left her $50,000-a-year banking job and now makes $80,000 a year on her own time

Graphic designer: The best way to build a client base and make 6 figures as a freelance graphic designer, according to 6 people who are currently doing it

Web designer: How to find clients and market your business as an independent web designer, according to 6-figure freelancers who did it

Presentation designer: The exact email one freelance presentation designer uses to increase her rates – and how she plans to make $400,000 this year

Independent consultant: How 5 executives who left their jobs to become independent consultants now make 6 figures on their own time – and how you could do the same

Real estate agent: How to make 6 figures as an independent real estate agent, according to someone who did it

Dietitian: How to earn a 6-figure salary as a dietitian or nutritionist, according to 4 renowned entrepreneurs in the industry

Personal trainer: How to earn a 6-figure salary as a personal trainer, according to 3 people who are doing it

Online tutor: How to become a highly successful online tutor and make a lucrative living as virtual learning becomes the norm

Poshmark seller: The ultimate guide to earning 6 figures on Poshmark, according to star sellers who’ve done it and gained boatloads of customers

Ecommerce seller: The ultimate guides to using popular platforms like Amazon, Depop, and eBay to start your own online business, sell to a massive audience, and make big money

Massage therapist and birth coach: A New-York-based doula and massage therapist reveals the exact formula that’s helped her build an almost 6-figure business solely by word-of-mouth referrals

Upwork freelancer: Self-employed professionals who’ve made over $100,000 on Upwork reveal how they built lucrative businesses in just a few years on the freelancing platform

Freelancer.com freelancer: How to land gigs and build a 6-figure career on Freelancer.com, according to the CEO and freelancers who’ve done it

Fiverr freelancer: 6-figure sellers on the freelancing platform Fiverr share how they landed clients and built successful businesses online

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Most executives say they want more contract and temp workers. A majority of those workers say that’s not good enough.

Prop 22 protest
Jorge Vargas joins other rideshare drivers in a demonstration in November 2020 urging voters to vote reject Proposition 22, a ballot measure that exempted companies like Uber and DoorDash from California’s AB-5 law.

  • Contract workers “overwhelmingly” want to be permanent employees, according to a new McKinsey-Ipsos survey.
  • But executives say they plan to rely more heavily on contract labor, McKinsey previously found.
  • The findings reveal a huge divide between workers’ wants and those of their bosses.
  • See more stories on Insider’s business page.

Around a quarter of Americans say they work mostly in the gig economy, and 62% of those workers say that they’d rather not, according to a survey published Wednesday by McKinsey and Ipsos.

“Gig workers would overwhelmingly prefer permanent employment,” the survey found.

That preference is even stronger among immigrants and workers of color, who disproportionately make up the gig workforce.

Among those groups, 72% of Hispanic and Latino gig workers, 71% of Asian American gig workers, and 68% of Black gig workers said they’d rather be permanent or non-contract employees, as did 76% and 73% of first- and second-generation immigrants, respectively.

McKinsey and Ipsos surveyed 25,000 Americans over the spring of 2021, and 27% percent of those surveyed said their primary job at the time was as a contract, freelance, or temporary work.

But their resounding preference for the security, benefits, and legal protections that come with employee status could encounter some tough resistance: their bosses.

Globally, 70% of executives – mostly from large US firms – said they plan to ramp up their reliance on contract and temporary workers, according to a McKinsey study from September.

Corporate America has aggressively opposed efforts to reclassify contractors as employees, in many cases arguing that workers prefer the flexibility that gig work claim to offer. But McKinsey’s latest findings suggest that executives – often citing surveys that their own companies funded – may not be as in touch with workers’ needs and wants.

While companies like Uber, Lyft, DoorDash, Grubhub, Amazon, Facebook, and Google have played leading roles in familiarizing American consumers with the gig-based business model, they’re far from the only ones who have leveraged contractors to skirt labor laws and minimize their costs. (Insider has contacted the above companies for comment, and will update this story if they respond.)

Executives in the lodging, food service, healthcare, and social assistance sectors, are especially keen on relying more heavily on contractors, according to McKinsey.

As Insider previously reported, the COVID-19 pandemic exposed how the tech industry’s push to build their empires on the backs of contractors has failed American workers, who abruptly found themselves without healthcare, sick pay, workers’ compensation, and other benefits guaranteed to employees.

Read more: Biden could be the most pro-labor president in decades. These 81 government power players will take a major role in shaping policy during his administration.

That model also hit taxpayers hard, as they subsidized unemployment benefits for contractors laid off by multibillion-dollar corporations that, despite record profits, hadn’t contributed a dime to those funds on behalf of their workers. Taxpayers coughed up $80 million in pandemic assistance for around 27,000 Uber and Lyft drivers who lost their incomes.

State and federal lawmakers are increasingly considering ways to secure better pay, working conditions, and legal protections for contractors, from California’s AB-5 to recent talks between unions and app companies in New York, though experts say more wide-reaching labor law reforms are needed.

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What is inflation? Why the cost of goods rise over time and what it means for the value of your money

inflation2
Inflation, an increase in the costs of goods and services, means that your money has effectively gone down in value.

  • Inflation is the increase in the prices of goods and services in an economy over time.
  • It could also be thought of as a decrease in the value of your money and purchasing power.
  • While a low, steady inflation rate of 2% indicates a healthy economy, high or rapidly changing inflation can become dangerous.
  • Visit Insider’s Investing Reference library for more stories.

Does it feel like a dollar buys less than it used to? You’re not imagining things. “It’s inflation,” people sigh.

You probably have a rough idea of what inflation means. The cost of things is going up.

But what is inflation really, what causes it, and how does it affect your finances? Here’s everything you need to know about this everyday economic term.

What is inflation?

Inflation is an increase in the prices of goods and services in an economy over a period of time.

That means you lose buying power – the same dollar (or whatever currency you use) buys less, and is thus worth less. In other words: When high inflation happens, your money doesn’t go as far as it used to.

Remember that modern money really has no intrinsic value – it’s just paper and ink, or, increasingly, digits on a computer screen. Its value is measured in what or how much it can buy.

While it’s easier to understand inflation by calculating goods and services, it’s typically a broad measure that can be applied across sectors or industries, impacting the entire economy. In fact, one of the primary jobs of the Federal Reserve is to control inflation to an optimum level to encourage spending and investing instead of saving, thereby encouraging economic growth.

How is inflation measured?

Inflation is measured by the inflation rate, which is the percent change in prices from one year to another. The inflation rate can be measured a few different ways:

  • The US Bureau of Labor Statistics measures the inflation rate using the Consumer Price Index (CPI). The CPI measures the total cost of goods and services consumers have purchased over a certain period using a representative basket of goods, based on household surveys. Increases in the cost of that basket indicate inflation, and using a basket accounts for how prices for different goods change at different rates by illustrating more general price changes.
  • In contrast with the CPI, the Producer Price Index (PPI) measures inflation from the producer’s perspective. The PPI is a measure of the average prices producer’s receive for goods and services produced domestically. It’s calculated by dividing the current prices sellers receive for a representative basket of goods by their prices in a specific base year, then multiplying the result by 100.
  • The Bureau of Economic Analysis measures the inflation rate using a third common index, the Personal Consumption Expenditures (PCE). The PCE measures price changes for household goods and services based on GDP data from producers. It’s less specific than the CPI because it bases price estimates on those used in the CPI, but includes estimates from other sources, too. As with both other indices, an increase in the index from one year to another indicates inflation.

The PPI is useful in its ability to forecast consumer spending and demand, but the CPI is the most common measure and tends to have a significant influence on inflation-sensitive price forecasts.

The PCE is less well-known than the CPI, using different calculations to measure consumer spending. It’s based on data from the GDP report and businesses and is generally less volatile than the CPI, because its formula accounts for potential price swings in less stable industries.

Real versus nominal prices

To make meaningful historical cost comparisons – to compare apples to apples, so to speak – economists adjust prices for inflation.

When you hear a price from the past talked about in “real” dollars, that means the price has been adjusted for inflation. When you hear prices from the past talked about in “nominal” dollars, that means it hasn’t been adjusted.

Is inflation good or bad?

Inflation is certainly a problem when it comes to ready cash that isn’t invested or earning anything. Over time, it’ll erode the value of your cash and bank account. It’s also the enemy of anything that pays a fixed rate of interest or return.

But individuals with assets that can appreciate in price, like a home or stocks, may benefit from inflation and sell those assets at a higher price.

In general, economists like inflation to occur at a low, steady rate. It indicates a healthy economy: that goods and services are being produced at a growing rate, and that consumers are buying them in increasing amounts, too. In the US, the Federal Reserve targets an average 2% inflation rate over time.

When inflation starts mounting higher than that or changes quickly, it can become a real problem. It’s a problem because it interferes with how the economy works as currency loses its value quickly and the cost of goods skyrockets. Wages can’t keep up, so people stop buying. Production then stops or slows, and an economy can tumble into recession.

What causes inflation?

There’s a massive economic literature on the causes of inflation and it’s fairly complex. Basically, though, it comes down to supply and demand. Keynesian economists emphasize that it’s demand pressures that are most responsible for inflation in the short term.

  • Demand-pull inflation happens when prices rise from an increase in demand throughout an economy.
  • Cost-push inflation happens when prices rise because of higher production costs or a drop in supply (such as from a natural disaster).

Other analysts cite another cause of inflation: An increase in the money supply – how much cash, or readily available money, there is in circulation. Whenever there’s a plentiful amount of something, that thing tends to be less valuable – cheaper. Indeed, many economists of the monetary school believe this is one of the most important factors in long-term inflation: Too much money sloshing around the supply devalues the currency, and it costs more to buy things.

Types of extreme inflation

Hyperinflation refers to a period of extremely high inflation rates, sometimes as much as price rises over 50% per month for several months. Hyperinflation is usually caused by government deficits and the over-printing of money. For example, hyperinflation occurred during the US Civil War when both the Union and the Confederate states printed money to finance their war efforts.

In a modern case, Venezuela is experiencing hyperinflation, reaching an inflation rate over 800,000% in October 2020.

Stagflation is a rare event in which rising costs and prices are happening at the same time as a stagnant economy – one suffering from high unemployment and weak production. The US experienced stagflation in 1973-4, the result of a rapid increase in oil prices in the midst of low GDP.

How inflation is controlled

Governments can control inflation through their monetary policy. They have three primary levers.

  • Interest rates: Increasing interest rates makes it more expensive to borrow money. So people spend less, reducing demand. As demand drops, so do prices.
  • Bank reserve requirements: Increasing reserve requirements means banks must hold more money in reserve. That gives them less to lend, reducing spending and leading (hopefully) to deflation, a drop in prices.
  • Supply of money: Reducing the money supply reduces inflation. There are several ways governments do this; one example is increasing interest paid on bonds, so more people buy them, giving more money to the government and taking it out of circulation.

How to beat inflation with investments

Investing for inflation means ensuring that your rate of return outpaces the inflation rate. Certain types of assets may beat inflation better than others.

  • Stocks: There are no guarantees with the stock market, but overall and over time, share prices appreciate at a rate that typically exceeds the inflation rate. Most index funds also post returns better than inflation.
  • Inflation-indexed bonds: Most US Treasuries pay the same fixed amount of interest – whose value erodes if inflation is rampant. However, with one type of bond, called Treasury Inflation-Protected Security (TIPS), interest payments rise with inflation (and fall with deflation).
  • Physical assets and commodities: Alternative investments – often, tangible assets like gold, commodities, fine art, or collectibles – do well in inflationary environments. So does real property: Zach Ashburn, president of Reach Strategic Wealth, notes, “returns on investments in real estate have kept up with, or surpassed, rates of inflation for many periods in the past.” That’s because these physical assets, unlike paper ones, have intrinsic value, and are sold and priced in markets outside the conventional financial ones.

More generally, Asher Rogovy, chief investment officer at Magnifina, suggests that it’s best to avoid nominal assets in favor of real assets when inflation’s on the upswing. Real assets, like stocks and real estate, have prices that fluctuate or vary freely. Nominal assets, like CDs and traditional bonds, are priced based on the fixed interest they pay and will lose value in inflationary times.

The financial takeaway

Inflation means costs and prices are rising. When they do, it means that paper money buys less. Low, steady inflation is good for the economy but bad for your savings. Ashburn says, “While having cash available is important for financial security, cash will see its value slowly eaten away by inflation over time.”

To beat inflation, don’t leave your cash under your mattress – or in any place where it’s stagnant. It has to keep earning.

Instead, aim to structure your portfolio so that it provides a rate of return – one that’s hopefully better than, or at least keeps pace with, that of inflation, which is almost always happening. If you do, it means that your investment gains really are making you richer – in real terms.

What are commodities? Tangible, everyday goods you can invest in, to hedge against inflation or sinking stock pricesWhat is real GDP? Understanding the tool economists and governments use to manage the economyWhy the Federal Reserve uses contractionary monetary policy to curb the inflation that accompanies an overheating economyAmericans are the most worried about inflation they’ve been in 7 years

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Florida’s Democratic Party is having an identity crisis: 2020 losses were the culmination of strategic missteps, cultural blindness, and internal divides

Florida ballots
An employee works with ballot tabulating machines as counting is underway for the general election at the Broward County Voting Equipment Center, Wednesday, Oct. 28, 2020, in Lauderhill, Fla.

  • After Florida Democrats lost almost every critical race, many thought the state’s Democratic Party had hit rock bottom.
  • Florida’s Democratic operatives are struggling to understand how they got here and how they can fix the party.
  • See more stories on Insider’s business page.

After Florida Democrats lost almost every critical race, many Floridians thought the state’s party had hit rock bottom. Then came the news that the party had more than $860,000 in outstanding debt at the end of 2020, and a scandal over lapsed payment for staffers’ health insurance following the November election.

Now, four months after the election, the state’s Democratic operatives are struggling to understand how they got here and how they can fix the party.

Donald Trump won Florida in November by record margins, beating out Joe Biden by 3.3 points – a stark win in the perennial swing state. The down-ballot races were even worse. Democrats lost a majority of the state House races, as well as every battleground race for the state Senate.

But while 2020 was by far the worst year in recent history for the state’s Democrats, it was far from an isolated occurrence. Business Insider spoke with several political operatives and elected politicians, all of whom said the same thing: last year’s losses were the culmination of several cycles of strategic missteps, cultural blindness, and internal divides over the direction of the Party.

For more than two decades, Florida hovered in a strange political position. At the national level, it was a highly contested swing state with a huge population, leading many presidential campaigns to see the state as crucial to their success. But when it came to local and state elections, Florida remained overwhelmingly Republican.

Starting in the 1990s, Republicans began to organize on a grassroots level to flip state Senate seats, according to Kartik Krishnaiyer, a political analyst who runs The Florida Squeeze, a local political news site. By the time Bill Clinton swept the state in 1996 by the largest margin in modern history, Republicans already controlled the state legislature. Two years later, in 1998, Republicans would also win the governor’s seat. Since then, Democrats have not won a gubernatorial race in Florida, nor have they held a majority in the legislature.

Part of this is due to the Democratic Party’s insistence on viewing minority groups as a homogenous body, rather than a diverse electorate.

In the most recent election, Republicans took out Spanish-language ads on Telemundo and Latin radio stations, often using them as an opportunity to spread disinformation. Republicans also focused on hot-button issues like immigration, intentionally provoking divides within the Hispanic community. Still, Democratic strategists in the state held fast to their belief that they had “the Hispanic vote” locked down, and failed to counter Republican messaging. The results were devastating: in 2016, Hillary Clinton swept Miami-Dade county, which is overwhelmingly Hispanic, by more than 30 points. In November, Biden won by just seven points.

Democratic field organizers alerted party leadership to their messaging failures during the campaign, but their warnings often fell on deaf ears, according to one senior operative. As early as 2018, organizers in South Florida informed party officials that Republicans were framing Democratic policies as socialist in order to sway Cuban and Venezuelan voters away from the Democratic party. However, the party failed to take meaningful action to combat this messaging.

latinos for trump
Supporters of US President Donald Trump rally outside the “Latinos for Trump Roundtable” event at Trump National Doral Miami golf resort in Doral, Florida, on September 25, 2020.

“Until Democrats do a better job of understanding those distinctions, and not treating the electorate as monolithic, we’re going to continue to falter in Florida,” says Juan Peñalosa, who was the Executive Director of the Florida Democratic Party during the 2020 election.

Independent consultants were behind many of these messaging failures, according to several operatives.

These consultants, many of whom double-dip as lobbyists during off years, are hired by campaigns to craft strategy and lead field organizing efforts. But consultants are not affiliated with the party. Therefore, they have little incentive to build anything beyond that specific election, according to Stephanie Porta, the Director of Florida Rising, a progressive political action group.

These consultants have become a flashpoint between the Party’s progressive wing and the centrists who make up the bulk of it, and who often rely on consultants to run their campaigns. For progressives, consultants embody the hands-off, myopic approach that has led the Party to consistently fail at growing its base. “You can’t just show up in people’s neighborhood when there’s a campaign, you have to show up all the time,” says Anna Eskamani, a progressive state representative from Orlando.

When it comes to showing up, Eskamani says that many centrists are unwilling to match their words to their actions. She points to the fact that many Democrats wavered on a $15 minimum wage law, for which a majority of Floridians voted in November. By failing to identify the Party with concrete, actionable policies, Democrats have kept away large swaths of the electorate.

There are signs that the Florida Democratic Party is starting to change, however.

In January, the party elected Manny Diaz, the former mayor of Miami, as its new chairman. Diaz, who is known for his fundraising prowess, came into the position promising to restructure the party and assuage donors’ concerns about investing in the state. For many donors, the losses the party suffered in the last election were “almost the last straw,” Diaz said in an interview with Business Insider. “I’ve gotten the sense from many donors that they were getting tired of investing in Florida and not seeing results,” he added.

manny diaz
Then-Vice President Joe Biden (L) talks with Miami-Dade Mayor Carlos Alvarez (C) as Miami Mayor Manny Diaz speaks in Miami, Florida, on March 5, 2009.

Diaz seems to have been successful, at least in reversing the party’s nearly million-dollar deficit. The Florida Democratic Party raised around $2 million over the last three months and its latest federal report shows that it has almost $200,000 in cash on hand. When accounting for its state accounts, which aren’t listed on the FEC filing, the Party says it has around $750,000 in cash available.

The 2022 election will be a watershed for the party. With both Gov. Ron DeSantis and Sen. Marco Rubio up for reelection in 2022, Democrats have a chance to restructure the party and gain a modicum of control over the state. The roster of potential names runs the gambit, from centrists like Nikki Fried and Charlie Crist to progressives like Eskamani.

To win, the party will have to define itself, both internally and to voters. For many, “it’s not a re-education, but something they will hear for the first time,” says Peñalosa. “What does the Florida Democratic Party stand for? Who are we? And why should you vote for us?”

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What is a unit investment trust? An easy way to build diversification while earning steady income

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UITs can offer you access to a wide range of asset classes and investment strategies through a single purchase.

  • A unit investment trust (UIT) is a type of investment fund that offers a fixed portfolio of stocks, bonds, and other assets for a set period of time.
  • UIT portfolios are typically fixed and not actively managed or traded.
  • UITs are particularly popular as diversification tools for hands-off investors and the retirement community, where stability is prized.
  • Visit Insider’s Investing Reference library for more stories.

If you’ve avoided mutual funds because of high management fees or how frequently they can be traded, you might benefit from a closer look at the unit investment trust, or UIT.

Like mutual funds, UITs pool investor funds to purchase a series of assets, which are then bundled and offered up as a single unit – making them great for portfolio diversification.

Unlike mutual funds, UITs are designed to be bought and held until a specific maturity date, with extremely limited trading in the meantime. Because of this, the funds tend to be particularly popular with buy-and-hold investors where stability is more highly valued.

As of December 2020, the Investment Company Institute (ICI) reported that there were 4,310 outstanding UITs, representing $77.85 billion invested, so a booming industry awaits the interested investor.

What is a UIT?

A UIT is one of three basic types of investment companies. The other two types of investment companies are open-end funds and closed-end funds, which we’ll cover later.

UITs offer investors a fixed portfolio that can include stocks, bonds, or other securities in the form of redeemable units. They’re public investments that are bought and sold directly through the company issuing them, or through a broker working as an intermediary. Investors can redeem UITs after a set period of time passed, known as the maturity date.

How does a UIT work?

The goal of a UIT is that the passively held assets it contains will provide capital appreciation or dividend income throughout the life of the trust. And while that outcome isn’t guaranteed, UITs are regulated through the Securities and Exchange Commission (SEC), so concerned investors can breathe easier. Every UIT must register through the commission, which then enforces requirements about everything from where the fund can invest to under what circumstances trades can be made.

The average UIT is typically made up of mostly stocks and bonds, but can also contain assets like mortgages, real estate investment trusts (REITs), master limited partnerships (MLPs), hybrid instruments like preferred shares, and beyond. These assets are often fixed around a broad theme, like American stocks offering historically high dividends, or corporate bonds from companies in a specific sector.

Money managers select assets for inclusion at the creation of the trust, aiming for securities they think will offer the most capital appreciation over time. They also set the maturity date for the fund, which can be anywhere between 15 months and 30 years. After that, the fund remains largely undisturbed until its maturity date.

A prosperous UIT will earn its investors income in two different ways: in the form of quarterly or monthly dividends throughout the life of a fund, and as capital appreciation when the fund matures. Once your UIT expires, you have the option of taking delivery of the underlying assets into your own brokerage account, reupping into a similar or identical trust, or liquidating your holdings, which would give you the current cash value.

UITs vs. mutual funds

Mutual funds and UITs are similar in that they’re pooled funds overseen by a professional money manager, and are subject to SEC regulation. Here’s how the two assets diverge:

  • Mutual funds are actively managed and UITs are not: The ability to buy and sell assets within a mutual fund increases the potential for capital gains – and, of course, losses. Since UITs don’t actively trade, fees are lower, and as fixed income investments, their underlying securities do not change except in rare cases like bankruptcy or merger.
  • Mutual funds and UITs structure dividends differently: While mutual funds are designed to reinvest your dividends, UIT investors can miss out during market upswings, as the latter doesn’t allow for the purchase of additional shares.
  • UITs have a maturity date, while mutual funds do not: Much like bonds or CDs, UITs have defined lifespans and set metrics to hit before their expiration. This makes UITs, by their nature, a more long-term investment than mutual funds.
  • Mutual funds and UITs offer different ways to invest: If you have the cash to invest in a mutual fund, you can purchase shares on demand, as their quantity is limitless. But since UITs have a set limit or shares released upon its initial public offering (IPO), you have to invest within that window or be subject to the whims of the secondary market.

Each investment type has its own limits. But by and large, the reason you’d see a portfolio organized as a UIT instead of a mutual fund is to minimize both short-term and long-term expenses.

UITs come with much lower expense ratios and also come with favorable tax terms. Because of the way capital gains taxes are structured, it’s possible to lose money on a mutual fund and pay taxes on gains you never actually appreciated. For example, if the shares were sold right before you got your hands on them, you could find yourself with a shared tax liability for someone else’s capital gains.

But that won’t happen with a UIT. Because the securities are bundled when you place the order and not before, the original value – or cost basis, as it’s termed – is specific to you and can’t burn you down the road.

Who should buy UITs?

UITs have benefits to offer every investor, but they’re particularly compelling for those who aren’t interested in building a portfolio security by security, or who don’t want to pay the high expense ratios on actively managed mutual funds. Plus, the lower buy-ins on UITs make them more accessible for newer investors or those with less capital.

UITs are also quite popular with those at or close to retirement age because they tend to be more stable investment vehicles. While UITs might not have the growth potential of a different asset class, their buy-and-hold strategy is lighter on risk as well. From the very start, you’ll know exactly where you’re invested, how long that investment will last, and roughly how much income you can expect from your investment, all without having to wait to pore over a prospectus.

If you’re looking to join the ranks of UIT investors, these funds can be purchased directly from the issuer, or bought and sold on the stock exchange. Talk to your financial adviser about which UIT might be a match for you and your situation.

The financial takeaway

As an investment, UITs are a different option from mutual funds or closed-end funds that offer a winning combination of low costs, reliability, tax protection, and fairly predictable gains.

There are certain pitfalls, of course, like a lack of flexibility and a potential cap on earnings, since dividends can’t be reinvested. But if you’re nearing retirement or simply trying to stretch a dollar, UITs can prove to be a plum choice for the (semi) conservative investor looking to diversify their portfolio.

How to invest in mutual funds and grow your money for retirement, a bucket-list trip, or any other long-term goalDividends are payments made by a company to its shareholders – here’s how they workPassive investing is a long-term wealth-building strategy all investors should know – here’s how it worksREITs are a way to own real estate without becoming a landlord – here’s how they work and ways to invest

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