What is a stop-limit order?

Photo showing the midsection of a woman showing a stop gesture to a businessman giving her an envelope on an office desk.
When setting up a stop-limit order, the stop price and limit price don’t have to be the same amount.

  • A stop-limit order is a type of trade that combines stop orders and limit orders into one.
  • Stop orders set a price to execute an order and limit orders specify how much should be bought or sold at that set price.
  • Not all stop-limit orders will execute and there are risks investors should be aware of.
  • Visit Insider’s Investing Reference library for more stories.

A stop-limit order is a way for investors to exert control over their trades while also managing levels of risk. There are two aspects of a stop-limit order: the stop price and the limit price. The stop price states that you’ll buy or sell at a specific price. The limit price sets a standard for buying or selling an amount of stocks when the price reaches the set price.

Here’s what to know about this conditional trade type and how it’s used.

What is a stop-limit order?

A stop-limit order is a financial tool that investors can use to maximize gains and minimize loss. The Securities and Exchange Commission (SEC) describes a stop-limit order as combining both stop orders and limit orders, which exist individually, into a single tool which investors can use as part of their risk-mitigation strategy.

Stop orders, sometimes referred to as a stop-loss order, is when you set a specific stop price on a stock. Once that stop price is reached, an order is executed to buy or sell a stock. That order then turns into a market order – actively trading on the market right away.

A limit order is a type of order where you buy or sell a stock at a certain price. So if you wanted to buy shares of a stock for $20, you could place a limit order of that amount and the order would take place only if and when the stock price was $20 or better.

Stop-limit orders merge two benefits from stop orders and limit orders into one financial tool. The stop order sets a price to execute an order and the limit order specifies how much should be bought or sold at that set price.

Stop orders alone turn into a market order trading immediately, whereas a stop-limit order turns into a limit order that will only be executed at a set price or even better.

“A stop-limit order is an order to buy or sell a stock at the market when it reaches a specified price, but then as soon as the stock has been bought or sold, the order becomes a limit order for an amount below the triggering price,” explains Jenna Lofton, a former Certified Financial Advisor with an MBA in Finance and founder of StockHitter. “This type of order gets one last chance to fulfill before it’s canceled without any execution. It helps protect against whipsaws and sudden spikes – especially on highly volatile stocks.”

Understanding how stop-limit orders work

Stop-limit orders combine the features of stop orders and limit orders to create a powerful strategy for investors to control costs. Investors need to set two price points:

  • The stop price
  • The limit price

The stop price and limit price don’t have to be the same amount. The stop price you set triggers execution of the order and is based on the price that the stock was last traded at. The limit price you set is the limit that sets price constraints on the trade and must be executed at that price or better.

“When trading, you can observe the market price and decide to buy or sell at any given moment, or you can condition the process so that it only activates once the price hits or exceeds the price point A (the stop) but does not break through the price point B (the limit). The latter option is called a stop-limit order,” explains Adam Garcia, founder of TheStockDork.com. “So you’re basically looking to buy the stock once it starts getting on an upward trajectory. On the other hand, there’s only so much that you can afford to pay, which is why you need to cap it.”

Let’s say you have a stop price of $50 on a sell stop limit order and your limit price is $45. If market conditions are appropriate and the price of a stock reaches $50 it would trigger a limit order that would only activate at the limit price of $45 or better.

An investor can execute a stop-limit order on their trades through their investment brokerage firm, though not all brokerages may offer this option. Additionally, brokerages may have different definitions for determining if a stop or limit price has been met.

Traders set a period of time when the stop-limit order is effective or can choose from good-til-canceled (GTC) option. Through these options, the stop-limit order is active until the price is triggered to buy or until the transaction expires. Stop-limit orders are executed during market hours.

You set a stop price which triggers the execution of an order. The limit price helps lower risk by stating that orders must be traded below or up to the limit price.

“You need to specify the timeframe in which this trade is going to be executed. But considering that this trade is conditioned, there’s no guarantee that it will actually happen. To make matters worse, this timeframe only includes regular trading hours. If a portion of your order gets executed today and the rest of it gets allocated across several days, your broker may charge several commissions instead of just one,” warns Garcia.

Pros and cons of stop-limit orders

Before deciding if a stop-limit order is a good strategy for you, consider the pros and cons.

Pros Cons
  • Offers more control and flexibility around costs
  • Can help lessen risk
  • You can use a buy stop limit or sell stop limit
  • Orders may not go through, depending on price
  • Can result in “partial fills” where not all of your orders actually execute

  • Brokerages may not offer this or have different standards

The financial takeaway

Using stop-limit orders as part of your investment strategy is one way to have greater control over how you invest and at what cost. You can set limits for both buying and selling and set parameters for executing orders on your terms.

While this strategy has its benefits, you should be aware that price fluctuations throughout the day can trigger an order and be “substantially inferior” to the closing price of the stock for that day, according to Investor.gov.

Be sure to check if this option is available at your brokerage firm and how they define prices so you know when your order would execute.

What is a broker? What to know about the intermediary that helps investors buy stocksA comprehensive guide to investing in stocks for beginnersWhat to know about swing trading and how to minimize risks of this speculative trading strategyWhat to know about speculation: When investors buy high-risk assets with the expectation of significant returns

Read the original article on Business Insider

China stock crackdown, plus experts share their favorite crypto apps

Hello everyone! Welcome to this weekly roundup of Investing stories from deputy editor Joe Ciolli. Please subscribe here to get this newsletter in your inbox every week.

China's flag with a downward trending arrow stemming from the second small star on a black gridded background

Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through the current market and investing landscape. Here’s what’s on the docket:

If you aren’t yet a subscriber to Insider Investing, you can sign up here.

Have thoughts on the newsletter? Just want to talk markets? Feel free to drop me a line at jciolli@insider.com or on Twitter @JoeCiolli.


A full-blown meltdown in Chinese stocks

china chinese stock market traders investors screen

US investors hold $2 trillion in Chinese stocks, but the entire market is effectively a financial house of cards. By skillfully exploiting regulatory loopholes in both Beijing and Washington, Chinese companies have evaded oversight, keeping investors in the dark about the true state of their finances. Read our full analysis here.

Read the full story here:

Chinese stocks are tanking. Here’s why their financial meltdown could get way, way worse.


10 crypto traders show us the apps they use

In this photo illustration, the Coinbase cryptocurrency exchange logo (C) is seen on the screen of an iPhone

Cryptocurrency trading can be incredibly challenging, with 24-hour markets and extreme volatility. Investors often use multiple apps and platforms to make sense of what’s happening in the market. We spoke to 10 crypto experts to understand what apps they use for trading, price monitoring, and news.

Read the full story here:

We asked 10 crypto traders to show us the apps they use on their phone to trade, track prices, and read news


Meet a real-estate investing power couple

This is a photo of Sean Pan on the left and Sharon Tseung on the right, sitting next to each other.

Between the two of them, real estate investors Sharon Tseung and Sean Pan own 21 rental units. In an interview with Insider, they explained their entire process, from how they decide which geographies to pursue, to how they normally finance their properties.

Read the full story here:

A couple in their 30s breaks down how they came to own 21 rental units in affordable, high-appreciating areas across the country – and share their approach for picking top cities, realtors, and financing strategies


Stock pick central

Seeking experts who are willing to name names? Look no further:

Read the original article on Business Insider

The 20 hedge-fund dealmakers who are beating VCs at their own game

Arielle Zuckerberg, Glen Kacher, John Curtius, and Alex Sacerdote on a blue background with money and investing icon imagery.
From left to right: Glen Kacher, Arielle Zuckerberg, John Curtius, and Alex Sacerdote.

  • For decades, hedge funds have dominated public markets.
  • Now funds like Tiger Global, D1, and Coatue are investing billions into top startups.
  • Insider lists those leading the charge into unicorn funding rounds.
  • See more stories on Insider’s business page.

It’s easy for investors to take big bets on companies like Google and Facebook. It’s much more challenging to find the fledgling startup that is set to become the next industry titan.

For decades, hedge funds have dominated public markets, through activists demanding major changes at blue-chip stocks or quants supercharging the speed of trading. Now managers are turning toward private markets, investing billions into top startups.

Managers like Tiger Global are pumping so much into private markets that traditional venture capitalists are grumbling that they can’t find any deals for their own clients, and more firms are expected to get in.

Insider compiled a list of the top 20 dealmakers at the most important shops.

Subscribe to see the full list here: 20 hedge-fund dealmakers who are beating VCs at their own game by pumping billions into the world’s hottest private companies

Read the original article on Business Insider

What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

What is a hedge fund and how does it work?

Smiling muslim woman in a business meeting shaking someone’s hand.
Despite being called “hedge” funds, these investment vehicles are quite risky.

  • Hedge funds are pooled investment funds that aim to maximize returns and protect against market losses by investing in a wider array of assets.
  • Hedge funds charge higher fees and have fewer regulations, which can make them riskier.
  • Individuals, large companies, and pension funds may invest in hedge funds as long as they meet asset requirements.
  • Visit Insider’s Investing Reference library for more stories.

A hedge fund is a type of investment that’s open to accredited investors. The goal is for participants to come out ahead no matter how the overall market is performing, which may help protect and grow your portfolio over time. But hedge funds come with some risks, which you’ll need to consider before diving in.

What is a hedge fund?

A hedge fund is a private investment that pools money from several high-net-worth investors and large companies with the goal of maximizing returns and reducing risk. To protect against market uncertainty, the fund might make two investments that respond in opposite ways. If one investment does well, then the other loses money – theoretically reducing the overall risk to investors. This is actually where the term “hedge” comes from, since using various market strategies can help offset risk, or “hedge” the fund against large market downturns.

Understanding how hedge funds work

Hedge funds have a lot of leeway in how they earn money. They can invest both domestically and around the world and use just about any investment strategy to make active returns. For instance, the fund may borrow money to grow returns – known as leveraging – make highly concentrated bets, or take aggressive short positions.

But that flexibility also makes these investment vehicles risky, despite being called “hedge” funds. “There’s no transparency in hedge funds, and most of the time, managers can do whatever they want inside of the fund,” says Meghan Railey, a certified financial planner and co-founder/chief financial officer of Optas Capital. “So they can make big bets on where the market’s going, and they could be very wrong.”

The elevated risk is why only accredited investors – those deemed sophisticated enough to handle potential risks – can invest in this type of fund. To be considered an accredited investor, you’ll need to earn at least $200,000 in each of the last two years ($300,000 for married couples) or have a net worth of more than $1 million.

Hedge funds vs. the S&P 500

It’s tough to compare hedge funds to the S&P 500 because there are so many different types of hedge funds, and the markets they invest in might be global-oriented, says Chris Berkel, investment adviser and founder of AXIS Financial. “However, we can say that a broad index of hedge funds underperformed the S&P 500 over the last 10 to 15 years,” Berkel says.

Berkel points to data compiled by the American Enterprise Institute (AEI) from both the S&P 500 and the average hedge fund from 2011 to 2020. The data shows that S&P 500 index outperformed a sample of hedge funds in each of the 10 years from 2011 to 2020:

Year Average hedge fund S&P 500 Index
2011 -5.48% 2.10%
2012 8.25% 15.89%
2013 11.12% 32.15%
2014 2.88% 13.52%
2015 0.04% 1.38%
2016 6.09% 11.77%
2017 10.79% 21.61%
2018 -5.09% -4.23%
2019 10.67% 31.49%
2020 10.29% 18.40%
Source: American Enterprise Institute

“The S&P 500 is a systematic risk, which cannot be diversified away,” Berkel says. A hedge fund may provide some safeguards to your portfolio, which you won’t get with the S&P 500.

Hedge funds pay structure

Investors earn money from the gains generated on hedge funds, but they pay higher fees compared to other investments such as mutual funds. “The management fee is charged every year, regardless of performance, and the incentive fee is charged if the manager performs in excess of a specific threshold, typically its high-water mark,” Berkel says.

The fee is typically structured as “2% and 20%.” So in this example, participants pay an annual fee of 2% of their investment in the fund and a 20% cut of any gains. But recently, many hedge funds have reduced their fees to “1.5% and 15%,” says Evan Katz, managing director of Crawford Ventures Inc.

Once you put money into the fund, you’ll also have to follow rules on when you can withdraw your money. “During market turmoil, most hedge funds reserve the right to ‘gate,’ or block, investors from redeeming their shares,” Berkel says. “The rationale is that it protects other investors and helps the fund manager maintain the integrity of their strategy.”

Outside of these lockup periods, you can usually withdraw money at certain intervals such as quarterly or annually.

Are hedge funds regulated?

Hedge funds are regulated, but to a lesser degree than other investments such as mutual funds. Most hedge funds aren’t required to register with the Securities and Exchange Commission (SEC), so they lack some of the rules and disclosure requirements that are designed to protect investors. This can make it difficult to research and verify a hedge fund before investing in this type of product. However, hedge fund investors are still protected against fraud, and fund managers still have a fiduciary duty to the funds they manage.

The financial takeaway

Investing in hedge funds could help your portfolio grow, but you wouldn’t want to concentrate your entire nest egg here. Hedge funds are illiquid, require higher minimum investments, are only open to accredited investors, and have fewer regulations than other types of investments, making them a risky endeavor.

“Start by consulting a financial professional who’s not incentivized to sell you a hedge fund,” Railey says. “Read the offering memorandum, ask some critical questions about past performance, and ask what their strategy is going forward.” Then, she suggests, allocate no more than 5% to 10% of your overall investable assets into a hedge fund.

If you’re not an accredited investor or you’d rather look at different investments, you still have options outside of your retirement accounts. For instance, you might decide to open an online brokerage account. Keeping your money in the market over time – instead of trying to buy and sell based on market conditions – can be a good strategy, Railey says. “Just start simple, stay simple, and add on complexity as time goes and you have more experience to be able to understand the difference.”

What is net worth? How it can be important indicator of your financial well-beingWhat are the safest investments? 7 low-risk places to put your money – and what makes them soHow to invest in the S&P 500 – a guide to the funds that mimic the influential index’s makeup and movesHow to diversify your portfolio to limit losses and guard against risk

Read the original article on Business Insider

3 Republican congressmen face ethics complaints for allegedly violating a federal stock disclosure law

Rep. Blake Moore, Sen. Tommy Tuberville, and Rep. Pat Fallon.
Rep. Blake Moore, Sen. Tommy Tuberville, and Rep. Pat Fallon.

  • Sen. Tommy Tuberville, and Reps. Pat Fallon and Blake Moore, are targeted by the complaints.
  • The Campaign Legal Center says the members broke transparency rules.
  • The complaints are in part based on reporting by Insider.
  • See more stories on Insider’s business page.

A watchdog organization is accusing three Republicans serving in Congress of violating a federal transparency law by failing to properly disclose millions of dollars worth of stock trades.

The separate complaints by the nonpartisan Campaign Legal Center were filed Thursday afternoon with the Office of Congressional Ethics and US Senate Select Committee on Ethics. They allege Sen. Tommy Tuberville of Alabama, as well as Reps. Pat Fallon of Texas and Blake Moore of Utah, illegally delayed by weeks or months their numerous stock trades.

“When members of Congress trade individual stocks and fail to disclose those trades, they break the law and diminish the public’s trust in government,” the three complaints each state. “The recent prevalence of STOCK Act violations in the House shows that merely the threat of a fine is not deterring members of Congress from breaking the law; real accountability is necessary.”

The Campaign Legal Center’s complaints are based in part on reporting by Insider, which in June and July revealed that Tuberville, Fallon, and Moore had violated the STOCK Act.

Read more: Republican Sen. Tommy Tuberville violated federal transparency law by failing to properly disclose stock transactions worth up to $3.56 million

The law, which Congress passed in 2012, is designed to defend against corruption and conflicts of interest, particularly for lawmakers who have personal financial interests in companies that vie for lucrative government contracts and spend millions of dollars each year lobbying the federal government. Among its provisions, the STOCK Act requires members of Congress to formally and publicly disclose any individual stock trade they make within 45 days of making it.

Members of Congress who violate the STOCK Act often must only pay a $200 late filing fine, regardless of the overall value of the trades they were tardy in disclosing. Congressional ethics committees may refer “knowing and willful” violations of the STOCK Act to the Department of Justice for criminal investigation, although this is rare.

Insider has reported that a growing number of federal lawmakers – Republicans and Democrats – have this year violated the law’s disclosure mandates.

Read more: Republican Rep. Blake Moore violated federal transparency law by failing to properly disclose stock transactions worth up to $1.1 million

“This is all triggered by a clear trend of members of Congress defeating the purpose of the STOCK Act,” said Kedric Payne, the Campaign Legal Center’s general counsel and senior director for ethics. “My hope is that the members will comply with the law that they created. But if complying with that law is too difficult for them, that supports the idea that’s been suggested that there should be restrictions on how they trade stocks.”

Reached Thursday afternoon, Tuberville spokeswoman Ryann DuRant said that “Sen. Tuberville has filed all required paperwork with the Ethics Committee. He was assessed a late filing penalty, and it has been paid.”

Representatives for Fallon and Moore could not immediately be reached for comment.

Previously, spokespeople for each lawmaker told Insider that their respective member of Congress will work to comply with the law in the future and that they do not personally make their own stock trades. Instead, they employ financial advisors to buy and sell stock on their behalf.

Read more: Republican Rep. Pat Fallon failed to properly disclose more than 90 stock transactions worth as much as $17.53 million in apparent violation of federal law

Payne said that each member of Congress is personally responsible for following the law.

Earlier this year, the Campaign Legal Center filed an ethics complaint against Rep. Tom Malinowski, a New Jersey Democrat, who Insider revealed has failed to disclose dozens of stock trades during 2020.

The Foundation of Accountability and Civic Trust, a conservative watchdog organization, also filed a complaint against Malinowski and also filed an unrelated STOCK Act ethics complaint against Rep. Sean Patrick Maloney, a Democrat from New York.

Read the original article on Business Insider

Nominations for Insider’s next class of Wall Street rising stars are open. Here’s how to apply.

We're looking for the next crop of rising stars on Wall Street.
We’re looking for the next crop of rising stars on Wall Street.

  • Insider is putting together a power list of the young talent on Wall Street.
  • We want to spotlight the standouts in investment banking, investing as well as sales and trading.
  • Please submit your ideas through this form by August 6th.

We’re seeking nominations for Insider’s list of rising stars on Wall Street, and we want to hear from you.

Submit your suggestions below or via this form.

We’re looking for the leaders of tomorrow, those making notable contributions or accomplishments and setting themselves apart from their class in investment banking, investing, and sales and trading.

In the past, we’ve had people with a variety of roles and experiences from companies including Apollo Global Management, Blackstone, Goldman Sachs, BlackRock, and the New York Stock Exchange.

Take a look at our 2020 list here.

Criteria and methodology

Our selection criteria: We ask that nominees be 35 or under as of September 30, 2021, based in the US, work front-office roles, and stand out from their peers. Editors make the final decisions.

Please make your submission below or through this form by August 6th to have your selection considered for the list. Please be as specific as possible in your submission.

Please email Michelle Abrego at mabrego@insider. com with any questions or issues submitting your nominations.

Read the original article on Business Insider

What is APR?

Business woman on a laptop making calculations with a cell phone and calculator.
Even a small difference in APR can really add up when you’re borrowing any sum of money.

When you use a credit card or take out a loan, your lender will charge you interest for the privilege of borrowing the money. They’ll typically present this cost as an annual percentage rate, or APR, which shows your total cost of borrowing – plus fees. Because they help you compare offers and find the best deal, it’s important to know how they work.

What is APR?

An APR is the cost of borrowing money expressed as a yearly rate. While the APR is usually applied to consumer debt, like credit cards and loans, it can also represent the return on an investment you make.

“In most cases, [it’s] the single most important factor to understand when both borrowing or saving money,” says Brian Stivers, an investment adviser and founder of Stivers Financial Services in Knoxville, Tennessee. That’s because it helps you “understand the true cost of borrowing money and not just the monthly payment.”

For instance, you can use APRs to compare the borrowing costs on a mortgage. Let’s say Lender A and Lender B both offer an interest rate of 2.75% and quote you a list of fees you’ll pay on the loan.

It can be tough to compare those fees because they may go by different names – plus, you’ll have to crunch the numbers. But the APR takes those fees, along with the interest rate, and translates the information into a unit you can quickly measure. In this example, let’s say Lender A charges an APR of 2.90%, while Lender B quotes an APR of 3.50%. At a quick glance, you can tell Lender B’s loan includes more costs outside of what you’re borrowing.

Lender A Lender B
Interest rate 2.75% 2.75%
APR 2.90% 3.50%

While the 0.60% difference may seem insignificant in this example, it can really add up if you’re borrowing a large sum of money – like a mortgage, for example.

APR 30-yr mortgage Monthly payment Total mortgage
Lender A 2.90% $300,000 $1,249 $449,528
Lender B 3.50% $300,000 $1,347 $484,968

In the example above, that 0.60% difference means you’d pay $35,440 more if you’d went with Lender B. This is the power of APR.

That being said, it’s always a good idea to calculate the interest you’ll pay over the life of a loan when the interest rates are different. You might end up paying less interest on a loan that has a higher APR, and you’ll have to figure out if the higher fees are worth it.

How does APR work?

On a loan, APR includes the interest rate plus any fees the lender charges, such as origination, legal, or underwriting fees. APR isn’t so complicated on a credit card – it’s just the interest rate stated as a yearly rate.

The APR was designed to give borrowers more information about what they’re really paying to borrow money. Thanks to the federal Truth in Lending Act (TILA), lenders are required to disclose the APR on every consumer loan agreement before the borrower signs the contract. The TILA disclosure also includes other important terms, including:

  • Finance charge, or the cost of credit expressed as a dollar amount.
  • Amount financed, which is typically the dollar amount you’re borrowing.
  • Payment information, such as the monthly payment, the total number of payments you’ll make, and the sum of all your payments combined (which includes principal plus financing costs).
  • Other information, such as late fees and prepayment penalties.

When you apply for the loan and receive the TILA disclosure, it might be written into the loan contract. It’s a good idea to review the whole contract and make sure you understand the terms before signing on the dotted line.

How is APR calculated?

The formula for calculating APR is as follows:

Formula graphic for how to calculate APR (Annual Percentage Rate)

Where n = number of days in the loan term.

Check out one example to see how it works. Let’s say you take out a $5,000 personal loan with a two-year loan term and a $400 origination fee. The total interest you pay over the life of the loan equals $980. Follow these steps to calculate the APR:

  1. Add up the fees and interest: $400 + $980 = $1,380
  2. Divide that number by the principal, or the amount you’re borrowing: $1,380/$5,000 = 0.276
  3. Divide by the number of days in the loan term: 0.276/730 = 0.00037808219
  4. Multiply what you’ve got by 365: 0.00037808219 x 365 = 0.138
  5. Now multiply by 100 to find the APR: 0.138 x 100 = 13.8%

What is a good APR?

A good APR is simply one that’s affordable to you, but there are some general rules you can follow when shopping around. For instance, the National Consumer Law Center says APRs over 36% are unaffordable.

But it also depends on the type of financial product and loan term. The APR on an auto loan might be higher than one on a mortgage, but the longer term on a mortgage means you’ll likely pay more interest over time.

APR varies with the type of financial product you’re taking out, but it also depends on the lender’s overhead costs. For example, an online lender often has lower expenses than a large bank with brick-and-mortar locations. “With lower expenses, they can generally charge less APR to achieve their profit margin,” Stivers says, “than a larger lending institution with many locations and more employees.”

APR vs. APY

Here’s what to know when comparing APR with APY:

APR APY
  • An interest rate, plus fees that are stated as a yearly rate
  • Usually applies to money you borrow
  • A lower APR helps you save money and is based off your credit
  • Different types of APRs depending on the financial product
  • A yearly interest rate that includes the compounding effect
  • Usually applies to money you earn on an investment
  • A higher APY helps you earn more money
  • Doesn’t include fees

APR vs. interest rate

Some people think the APR and the interest are one and the same, but they have different meanings when it comes to loans. “Interest rates only reflect the percentage of interest charged on the loan,” Stivers says. “The APR includes additional costs associated with the loan.”

Some of these additional costs include discount points, loan origination fees, and other underwriting fees.

Here’s a good way to think about it: You’ll use the interest rate to calculate your monthly payment, and use the APR to help gauge the entire cost of the loan and compare offers.

Types of APR

Several credit products, like mortgages and auto loans, only come with one APR. The APR may be fixed, which means it never changes, or variable, in which it may go up or down over time.

Other types of debt, like credit cards, may charge several APRs. That’s because “lenders, in general, have different APRs for different risk,” Stivers says. “For example, a balance transfer from one credit card to another generally has lower risk since there is a history of the consumer paying the payment to the original credit card company. So, the new credit card may discount their APR due to the perceived less risk than a brand-new purchase with no payment history.”

A credit card may charge a different APR based on the type of transaction you’re doing:

  • Purchase APR: applies to the purchases you make with the credit card. “Credit card companies will often use a lower APR, sometimes 0%, for a short period of time – six months to one year – to entice a consumer to use their credit,” Stivers says.
  • Balance transfer APR: applies to debts you transfer to your credit card. Some credit cards offer a low promotional APR on balance transfers.
  • Cash advance APR: applies when you borrow cash against the credit line. This APR is usually higher than the purchase APR.
  • Penalty APR: applies when you make a late payment or miss one entirely. The credit card issuer has to follow certain rules before applying a penalty APR to your account.
  • Introductory/promotional APR: a low APR that applies to certain transactions – like purchases or balance transfers – for a limited amount of time. The time frame varies with each card but is usually anywhere from 12 to 18 months.

Keep an eye on your credit card balance when it comes with a promotional APR, though. “The credit card companies realize few consumers will pay off the debt in the allotted time,” Stivers says, “and will then raise the APR to much higher rates at the end of the promotional period of time.”

The financial takeaway

Annual percentage rate is a helpful way to measure the total cost of borrowing. On a loan, it’s based on the lender’s interest rate plus fees they charge, while on a credit card it’s simply the rate expressed as a yearly rate. It’s important to know the APR before taking out a credit card or loan because you can use this number to compare offers – and finding the best deal can help you save money.

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13 must-see charts, plus an $875 mini bitcoin-mining rig

Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through the current market and investing landscape. Here’s what’s on the docket:

If you aren’t yet a subscriber to Insider Investing, you can sign up here.

Have thoughts on the newsletter? Just want to talk markets? Feel free to drop me a line at jciolli@insider.com or on Twitter @JoeCiolli.


13 must-see charts for the 2nd half of 2021

An employee views trading screens at the offices of Panmure Gordon and Co

The first half of 2021 in the stock market has been full of once-in-a-decade events. We asked 5 strategists from leading institutions to outline the most compelling charts informing their outlooks for the second half. Here are their top 13.

Read the full story here:

13 must-see charts for navigating markets in the second half of the year, according to strategists at 5 top investment banks and asset managers


Check out this $875 mini bitcoin-mining rig

This is a photo of Idan Abada, a crypto TikTok influencer and miner, holding a mini bitcoin mining rig. He's wearing a black t-shirt.

Idan Abada has gone viral on TikTok with an $875 mini bitcoin-mining rig. He explained to us how mini miners are generally used, what people usually hope to accomplish, and which limitations can impede success.

Read the full story here:

An $875 mini bitcoin-mining rig is viral on TikTok. The video’s creator told us 3 reasons why it’s an appealing alternative for crypto traders, and explained its limitations.


An interview with Grayscale’s CEO

Michael Sonnenshein

Grayscale Investments has launched a DeFi index fund in collaboration with CoinDesk Indexes. The market-cap-weighted index fund is Grayscale’s 15th product and tracked 10 tokens as of July 1. Grayscale CEO Michael Sonnenshein told Insider why they’re launching the DeFi fund now.

Read the full story here:

The world’s largest crypto asset manager is launching a decentralized finance index fund. Grayscale CEO Michael Sonnenshein told us why the firm is betting on DeFi amid surging demand from institutional investors.


Stock pick central

Seeking experts who are willing to name names? Look no further:

Read the original article on Business Insider

FINRA: The organization that regulates broker-dealers and protects investors

Finra logo inside oval shape, surrounded by financial icons on blue background
FINRA also provides educational resources and a space for investors to file complaints about brokers if needed.

  • The Financial Industry Regulatory Authority (FINRA) oversees US-based broker-dealer firms, registered brokers, and market dealings.
  • Brokers must be registered with FINRA in order to trade securities with the public.
  • FINRA plays a big role in market security by watching for manipulation or fraud.
  • Visit Insider’s Investing Reference library for more stories.

Financial Industry Regulatory Authority (FINRA) is a private organization authorized by the US government to enforce ethical investment practices among registered brokers. FINRA is largely known for regulation and registration of brokers and brokerage firms.

In reality, FINRA casts a much wider net of responsibility. The organization also monitors daily market functions, handles customer complaints, and maintains a library of educational materials for investors.

“Our whole mission is investor protection and market integrity,” says Gerri Walsh, senior vice president of Investor Education at FINRA.

Learn more about how FINRA protects everyday investors, maintains market integrity, and why its job is so important.

What is FINRA?

FINRA is a self-regulatory organization (SRO) that oversees broker-dealer firms, registered brokers, and market dealings in the US.

Empowered by the Securities and Exchange Commission (SEC), FINRA writes rules that brokers must abide by, evaluates firms’ compliance with those rules, and disciplines brokers that fail to adhere. In order to trade securities with the public, brokers must be registered with FINRA, which administers a rigorous application and examination process. FINRA’s online BrokerCheck tool shows whether a broker is registered with the organization.

FINRA also provides educational resources and a space for investors to file complaints about brokers.

Understanding FINRA

FINRA exists to help the SEC regulate aspects of the securities business, namely brokers and their relationships with consumers.

“Investing is an important part of people’s hard-earned money,” said Harris Kay, a managing partner with Murphy & McGonigle, a law firm specializing in securities law. “They deserve to be in a place that follows the rules.”

FINRA’s services can be divided into a few different, but connected, duties.

  1. Regulate and oversee brokers. Once registered with FINRA, brokers must complete ongoing education requirements over the years. Brokers are subject to periodic audits, which checks whether a firm and its employees are conducting competent and honest business. If a broker is found to be noncompliant, FINRA can bring disciplinary actions against the individual and/or the firm.
  2. Maintain its BrokerCheck database on brokers and firms. You can use FINRA’s BrokerCheck tool to check whether a broker is registered. BrokerCheck also provides background information on a broker or firm, including any history of disciplinary action.
  3. Receive and address customer complaints. When you have an issue with your broker or brokerage firm, you can turn to FINRA to file a complaint, which FINRA will then investigate.
  4. Provide dispute resolution services. When customer complaints evolve into legal action, FINRA provides a forum and lawyers for arbitration and mediation between customers and brokers as an alternative to going to court.
  5. Offer resources and tools for investors. FINRA has a wealth of personal finance and investing articles and calculators available to beginner and advanced investors alike. It even offers free online investing courses. You can give FINRA a toll-free call, to get help in understanding your investments whether you don’t understand something in your statements or you want to know more about a hard sell your broker is trying to make. There’s even a specialty helpline for senior citizens.
  6. Surveille equity markets. FINRA’s technology department plays a strong role in maintaining market integrity by monitoring market transactions and orders every day. Through algorithms and artificial intelligence, FINRA looks for any patterns or signs of market manipulation or fraud. If anything is found, it gets flagged to FINRA’s enforcement team, or sent to other relevant parties like the SEC or the securities exchange itself.

With such a wide responsibility, FINRA is split into 11 departments, including:

  • Board and External Relations includes Investor Education, Government Affairs, and Communications departments.
  • Enforcement takes care of FINRA’S disciplinary actions against brokers.
  • Legal oversees FINRA’s rulemaking and corporate legal functions, and includes Corporate Financing and Dispute Resolution departments.
  • Member Supervision watches over and examines member firms.
  • Market Regulation Transparency Services works with the SEC and exchanges to surveille markets and examine firms to identify any potential market manipulation or fraud. This department also checks that firms remain compliant to federal securities laws.
  • Office of Hearing Officers provides impartial adjudicators to preside over the disciplinary actions brought forward by the Enforcement Department.
  • Technology touches all aspects of technology at FINRA, including the algorithms that surveille markets.

FINRA vs. SEC

FINRA

SEC

Type

Private self-regulatory organization

Government agency

Main Focus

Regulation of brokerage firms and brokers

Regulate individual securities & markets

Other Duties

Administer examinations and registration to brokers and brokerage firms

Take legal action against violations of securities laws

Public Protection

Field and address customer complaints

Provide arbitration forum

Ensures accuracy of information regarding publicly available securities

Due to the magnitude of the securities trading industry, the SEC delegated the regulation of brokers to FINRA as a matter of efficiency. By outsourcing one side of the business, the SEC can maintain better oversight.

One way to see it is that FINRA primarily deals with the human aspect of investing, focusing on the way brokers do business with the public. It ensures that brokers are up to code with its registration process and audits, and assists the public by receiving complaints and offering an arbitration forum.

Meanwhile, the SEC focuses on the bigger picture. The SEC is able to regulate and keep an eye on securities. The SEC also verifies that companies are providing accurate and total information on their publicly available securities, whether on exchanges or over-the-counter. If someone is found in violation of securities laws, the SEC can bring action against them in federal court.

Still, FINRA and the SEC work together in examining broker practices, sharing market surveillance information, and teaming up on enforcement actions.

The financial takeaway

While it may seem like a background player compared to big name and trendy brokerage firms, FINRA should be investors main resource when it comes to securities and investment safety.

FINRA is a great and important resource for anyone who participates in securities markets. It provides a ton of resources, including BrokerCheck, to help investors make smart investment decisions. It also puts brokers and firms through a rigorous registration process to ensure only qualified entities are interacting with the public when it comes to securities.

FINRA can even serve as your personal secondary gut check with its toll-free helpline whenever you need help understanding the investment world.

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