investment

Where Does Bill Gates Keep His Money?

Where does Bill Gates, one of the world’s richest individuals, stash his money?The bulk of it is in a portfolio held by Cascade Investments LLC. His well-managed holdings are diverse, including large stakes in a waste-management company, a national car dealership, a hotel, and others. He recently founded a think tank that’s dedicated to scientific and technological services. And he’s involved with Research Gate, a social networking site for scientists.Some of his wealth is in real estate. He owns a 66,000 square foot lodge on Lake Washington that has six kitchens, six fireplaces, and 24 bathrooms. He owns a mansion in Wellington, Florida; and is rumored to own Grand Bogue Caye, a 314-acre island off the coast of Belize.Gates owns a private jet, which cost around $45 million, and a 1999 Porsche 911 Carrera convertible, a 930 Turbo, and a rare 1988 959 Coupe, of which only 337 were made.His collectibles include a da Vinci manuscript he bought at auction for $30.8 million. It documents many of da Vinci’s scientific discoveries and observations. Also in his art collection is “Lost on The Grand Banks,” a Winslow Homer painting that went for $36 million at auction.And Gates gives billions to worthy causes. The Bill & Melinda Gates Foundation is the largest charitable foundation in the world.

Reviewed by JeFreda R. BrownFact checked by Vikki VelasquezReviewed by JeFreda R. BrownFact checked by Vikki Velasquez

What do you do with your money when you’re one of the richest people on the planet? Bill Gates is worth roughly $159 billion as of August 20, 2024. He earned the bulk of his fortune as CEO, chair, and chief software architect of Microsoft (MSFT). Gates stepped down from the board in 2020, owning about 1.3% of the company he co-founded. As of 2024, he still owns about 1.3%.

Here is where this billionaire stashes some of his money.

Key Takeaways

• Bill Gates still owns more than 1% of Microsoft’s shares, worth more than $40 billion dollars, as of August 2024.
• Gates has a lot of his financial investments held by a family office known as Cascade Investments.
• He also has substantial real estate holdings and an extensive collection of collectibles.
• The Bill & Melinda Gates Foundation is one of the world’s largest philanthropic organizations, donating billions of dollars each year to worthy causes.

Investments in Corporations

Gates waived his wages and stock compensation when he ended his board service effective on March 13, 2020. The majority of his financial assets are held by Cascade Investment LLC, an entity controlled by Gates to manage his investments. Although Cascade is not a public company, some of its investment activity must be disclosed to the Securities and Exchange Commission (SEC).

The company’s portfolio is well-diversified. Cascade at one time held 9.8% of Strategic Hotels and Resorts. Cascade also has purchased Four Seasons hotels in Mexico, Atlanta, and Houston.

Gates holds equity in Branded Entertainment Network, a brand integration and advertising company. He is chair of TerraPower, a nuclear reactor design company. He has backed ResearchGate, a social networking site for researchers and scientists. Through Gates Ventures, his private office, he funds initiatives in clean energy, education, healthcare, and poverty alleviation.

Gates also owns a large amount of Microsoft (MSFT) shares, the software company that he co-founded and ran for many years. He still holds 1.3% of the company’s outstanding shares, worth roughly over $40 billion.

$128 billion

Cascade Investment’s portfolio was worth about $128 billion as of July 16, 2024.

Real Estate

His investment portfolio is certainly significant, but Bill Gates also puts his money to use buying real assets, including a sprawling estate and a private island.

Gates’ Seattle-area home, Xanadu 2.0, is an ocean-side lodge boasting over 66,000 square feet with approximately 500 feet of private waterfront on Lake Washington. The estate features top-of-the-line technology and gadgets befitting its six kitchens, 24 bathrooms, and six fireplaces. Nearly every amenity is computer-controlled, including automatic lights and music that follow you from room to room. In 2019, the property was assessed $1.04 million in taxes, implying an assessed value of $131.24 million at a 0.793% property tax rate.

In 2013, Gates began amassing property in Wellington, Florida, considered to be the winter equestrian capital of the world. He started by snapping up a four-bedroom mansion and horse ranch for $8.7 million. In 2016, he bought the adjoining parcels, bringing five properties together for a total of $35.87 million. He spent another $21 million on a horse farm in 2019, bringing his combined purchases to $59 million for a 30-acre assemblage. His daughter, Jennifer Gates, is an award-winning equestrian.

Gates is also rumored to own Grand Bogue Caye, a 314-acre island off the coast of Belize in Central America—the largest island in that country. Grand Bogue Caye is home to pristine beaches, abundant marine life, and excellent diving. It is reported that Gates purchased the island for upwards of $25 million.

Planes and Automobiles

As of 2023, he appeared to own not one, but two Gulfstream G650ERs, registered in Washington State to Mente, LLC. He also owns two Bombardier Challenger 350s through Net Jets. (Michael Larson, who runs Cascade Investment, is listed as an officer at Challenger).

He also likes a fancy set of wheels and has been a long-time fan of Porsche automobiles. Gates bought a Porsche 911 in 1979 and later added a Porsche 930 Turbo and a rare Porsche 959. His most recent purchase is the fully electric Porsche Taycan, an acquisition that set off an X (formerly Twitter) spat with Tesla CEO Elon Musk.

The Porsche 959 is very rare, and they were plagued with problems, and only 337 or so were ever made. Gates is also said to own a Jaguar XJ6 and a Ferrari 348. His first Porsche was sold at auction for $80,000. At the time, he told reporters: “I drive myself around town in a normal Mercedes.” He also tooled around town in a “nice” minivan with the family.

Collectibles

While it’s certainly an achievement to own one-of-a-kind real estate and rare cars, it is another to own precious, irreplaceable collectibles—and Bill Gates certainly has accumulated quite the collection.

In 1994, he purchased a celebrated Leonardo Da Vinci manuscript at auction for $30.8 million. Known as the Codex Leicester, this work documents many of Da Vinci’s scientific discoveries and observations. Gates once remarked in a speech at the British Library on his purchase:

“Yeah, I feel very lucky that I own a notebook. In fact, I remember going home one night and telling Melinda that I was going to buy a notebook; she didn’t think that was a very big deal. I said, no, this is a pretty special notebook; this is the Codex Leicester, one of the Notebooks of Leonardo da Vinci.”

He also acquired Andrew Wyeth’s “Distant Thunder” for $7 million in 1996; Winslow Homer’s “Lost on The Grand Banks” for $36 million in 1998; George Bellow’s “Polo Crowd” for $28 million in 1999; William Merritt Chase’s “The Nursery” for $10 million; and Frederick Childe Hassam’s work “Room of Flowers” for $20 million.

Philanthropic Endeavors

Funding worthy causes are atop Bill Gates’ list of achievements. The Bill & Melinda Gates Foundation is the largest charitable foundation in the U.S. The foundation held $75.2 billion in assets in 2023 (the most recent figures) and the total grant payments since the foundation’s inception are $77.6 billion.

Since the beginning, Gates gave more than $59.5 billion to the foundation. In 2023 alone, Gates gave $7.7 billion, and he has also encouraged fellow billionaires to donate large sums to charitable causes through The Giving Pledge.

How Much Is Bill Gates Worth?

As of August 2024, Bill Gates is worth an estimated $159 billion, making him the fifth-richest person in the world at that time.

Who Is Richer than Bill Gates?

As of August 2024, Elon Musk ranks first as the wealthiest person in the world, followed by Jeff Bezos, Bernard Arnault, and Mark Zuckerberg. Gates comes in at number five.

What Does the Bill and Melinda Gates Foundation Invest In?

The Bill & Melinda Gates Foundation’s portfolio has Berkshire Hathaway as its top holding with 24.6 million shares valued at over $10 billion.

The Bottom Line

For Bill Gates, savvy investing in a diversified portfolio of financial assets, real estate, and collectibles help ensure that his wealth will continue to grow. But beyond that, his philanthropic mission to donate much of his wealth to causes to help better the world may be his most significant investment and certainly a lasting legacy.

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You can’t have both, so choose wisely

Medigap vs. Medicare Advantage: What’s the Difference

In this video, you’ll learn about the difference between Medicare Advantage and Medigap. You’ll learn more about Medicare coverage and when to sign up for Medicare. See how you can choose between a traditional Medicare Plus and Medigap plan. Watch as we show you all the small differences between the different options so you can make an educated decision. This video explainer guide will explain the differences between Medicare Advantage and Medigap.

Reviewed by Marguerita ChengFact checked by Suzanne KvilhaugReviewed by Marguerita ChengFact checked by Suzanne Kvilhaug

Anyone who’s ready to sign up for Medicare has a lot of decisions to make. But one decision is especially important: Should you choose Medicare Advantage or a Medigap plan to supplement your original Medicare plan?

If you choose a Medigap supplemental plan, you’ll keep original Medicare (Parts A and B), and purchase a supplement plan from a private insurer to fill coverage gaps. You’ll also need to purchase prescription drug coverage (Part D).

Conversely, Medicare Advantage plans are an all-in-one solution. They replace original Medicare as well as cover gaps in its coverage. Almost all of them offer prescription drug coverage, too. Additionally, many Medicare Advantage plans offer extra coverage, such as vision and dental.

Read on to learn more about the differences between these two options and how they cover gaps in original Medicare.

Key Takeaways

• Original Medicare provides good basic healthcare coverage, but Part B only pays 80% of approved costs in most cases, and some items are not covered, such as prescription drugs.
• Medigap supplemental insurance plans are designed to fill original Medicare coverage gaps.
• Medicare Advantage plans, which are offered by private, Medicare-approved insurers, are an alternative to original Medicare (Parts A and B) and Medigap plans, and feature additional coverage to fill gaps.
• To avoid penalties and gaps in coverage, most people should sign up for Medicare Part A and Part B within the seven-month window that starts three months before their 65th birthday.
• Although Medicare Part D prescription drug coverage is optional, if you don’t have qualifying drug coverage, there may be financial penalties if you need to buy a policy later on.

Medicare Coverage and Its Gaps

Budgeting for healthcare costs in retirement is tough since there’s often no way of knowing whether your expenses each year will be minimal or huge.

While original Medicare (Part A and Part B) provides basic coverage, Parts A and B have yearly deductibles and Part B normally only pays 80% of costs, with the insured typically owing 20% coinsurance.

Unlike coverage under the Affordable Care Act (ACA), original Medicare has no cap on the amount a person might have to pay in one year.

For example, let’s say that you need heart bypass surgery. The cost could average $151,271, and you would be responsible for a copay. In fact, the cost could be much more, depending on the hospital, if there are complications, or if something else goes wrong.

In addition, some health needs, such as prescription drugs, hearing aids, eyeglasses, and dental care, are not covered at all by original Medicare (Parts A and B).

There are two basic ways for recipients to fill most of these coverage gaps and reduce the risk of tremendous bills in a bad health year: 

1. Medicare plus a Medigap supplemental insurance policy
2. Medicare Advantage plans

Medicare Plus Medigap Supplemental Insurance Policies

About 46% of roughly 61 million Medicare beneficiaries choose original Medicare, which covers hospitals, doctors, and medical procedures. The other 54%, about 32.8 million people, are enrolled in Medicare Advantage plans.

Over 80% of original Medicare beneficiaries supplement their insurance with a Medigap plan, Medicaid, or employer-sponsored insurance. In 2023, more than 50 million people were enrolled in a standalone Medicare Part D prescription drug program.

While supplementing Medicare with a Medigap policy may be the more expensive option, it has some distinct advantages:

• Both Medicare and Medigap insurance plans cover your choice of any hospital or doctor in the U.S. that accepts Medicare, and the great majority do.
• In addition, there is no need for prior authorization for a procedure or a referral from a primary care doctor.
• Coverage includes the entire U.S., which may be important for anyone who travels frequently or spends part of the year in a different locale.

Important

Medicare Supplement Insurance, otherwise known as Medigap plans, are offered by private insurance companies and are standardized and labeled by the federal government. They must follow federal and state laws.

Medicare Advantage Plans

Available from private, Medicare-approved insurance companies, Medicare Advantage policies (also known as Medicare Part C) are marketed to consumers by companies like Aetna, Humana, and Kaiser Permanente.

Medicare Advantage plans may have no premium, or a lower one compared to the premiums for Medigap. As an all-in-one option, Medicare Advantage plans cover hospitals and doctors and often include prescription drug coverage and some services not covered by Medicare.

Most Medicare Advantage plans operate as a health maintenance organization (HMO) or a preferred provider organization (PPO).

In addition to no or lower premiums, these plans differ from original Medicare and Medigap plans in specific ways:

• HMOs require members to use the doctors and hospitals in their networks.
• PPOs generally let members get care outside the plan’s network, but members may have to pay more for such care.
• Some plans require prior authorization for specialist care or procedures, or a referral from a primary care doctor.
• Plans might not cover care given outside of the network’s geographical area.
• However, Medicare Advantage plans often offer additional benefits not covered by original Medicare, such as eyeglasses, routine dental care, and gym memberships.

The average Medicare beneficiary had access to 43 Medicare Advantage plans in 2023. With so many choices, it’s important to take the time to find the best plan for your unique circumstances.

When to Sign Up for Medicare

As you approach age 65, it’s important to know which enrollment deadlines apply to your circumstances. Begin by checking your eligibility.

To avoid costly penalties for not enrolling in time and gaps in coverage, most people should sign up for Medicare Part A (hospitals) and Part B (doctors) in the seven-month window that starts three months before you turn 65.

If you currently receive Social Security benefits, you will be automatically enrolled. If not, you need to sign up either online or at your Social Security office.

Note

Failing to enroll in Part B when you become eligible results in a permanent 10% penalty increase in your Part B premium for each full 12-month period that you’re not enrolled. However, having coverage through your employer when you become eligible provides you with a special enrollment period and prevents the penalty from accruing.

Delaying Medicare Part B

If you are working at age 65, and you have employer insurance through a company with more than 20 employees, you have the right to stay on your employer insurance and delay signing up for Medicare Part B until your employer coverage ends.

If you work for an employer with fewer than 20 employees, it is very important to ask the employer whether you are required to sign up for Medicare and get that decision in writing.

Medicare Part D

Once you’ve enrolled in Medicare, a key decision point is choosing coverage for Part D prescription drug insurance. If you don’t enroll in Part D insurance when you start Medicare and want to buy drug coverage later on, you may be permanently penalized for signing up late.

You can avoid the penalty, however, if you have what’s known as creditable prescription drug coverage. That is prescription drug coverage (from an employer or union, for example) that’s expected to pay, on average, at least as much as Medicare’s standard prescription drug coverage. 

Generally, you can keep this kind of drug coverage when you become eligible for Medicare. You won’t have to pay a penalty if you later decide to enroll in a Medicare prescription drug plan and you haven’t gone for longer than 63 continuous days without creditable coverage.

Important

Many Medicare Advantage plans include Part D drug insurance, but a stand-alone policy can also be purchased for those who choose either regular Medicare (Part A and Part B) or a Medicare Advantage plan that doesn’t include Part D.

Choosing Original Medicare Plus a Medigap Plan

As noted above, original Medicare comprises Part A (hospital insurance) and Part B (medical insurance). You can supplement this coverage with a stand-alone Medicare Part D prescription drug plan and a Medigap supplemental insurance plan.

While signing up for Medicare gets you Parts A and B, you have to take action on your own to buy these supplemental policies.

Selecting Part D, Drug Insurance

To get started, look for the plans available in your zip code at Medicare.gov. When you create a Medicare account at that site, you can enter the names of your drugs and use a convenient tool that allows you to compare plan premiums, deductibles, and Medicare star ratings.

If you don’t take many (or any) prescription drugs, look for a plan with a low monthly premium. All plans must still cover most drugs used by people with Medicare.

If, on the other hand, you have high prescription drug costs, check into plans that cover your drugs in the donut hole, the coverage gap period that kicks in after you and the plan have spent a certain amount on covered drugs for the year. That amount is $5,030 in 2024, up from $4,660 in 2023.

Selecting a Medigap Supplemental Plan

Medigap policies are private plans that are available from insurance companies or through brokers, but not on Medicare’s site. The plans are labeled A, B, C, D, F, G, K, L, M, and N, and each has a different standardized coverage.

Plans F and G also offer high-deductible versions in some states. Some plans include emergency medical benefits during foreign travel.

Since coverage is standard between different insurance companies, consumers can confidently compare insurers’ prices for each lettered plan and simply choose the better deal. There are no ratings of Medigap policies.

Before 2020, Plan F was the most popular Medicare supplement, with over half of all supplement policyholders choosing it in 2016. The plan offered the most comprehensive coverage, including paying the annual Medicare Part B deductible ($240 in 2024, up from $226 in 2023).

However, in an effort to limit Medicare costs, Congress suspended Plans C, F, and High Deductible F for people who become Medicare-eligible in 2020 and beyond.

Plan D and Plan G have similar benefits to Plan C and Plan F, except that they don’t cover the Part B deductible. People who signed up or became eligible for Medicare before 2020 can purchase or continue Plans C or F, though prices may rise and it may be a better deal to switch to a plan that doesn’t cover the deductible.

Important

As of Jan. 1, 2020, Medigap plans sold to new Medicare beneficiaries aren’t allowed to cover the annual Part B deductible.

Choosing a Medicare Advantage Plan

Medicare Advantage plans are offered by private companies that contract with Medicare. Most services, such as office visits, lab work, surgery, and many others, are covered after a small co-pay.

To recap, plans might offer an HMO or PPO network, and all plans have the same mandatory limit on members’ annual out-of-pocket expenses. Each plan has different benefits and rules. Most provide prescription drug coverage. Some require a referral to see a specialist, while others do not.

Some may pay a portion of out-of-network care, while others will cover only doctors and facilities that are in the HMO or PPO network.

Plan Your Selection With Care

There are a variety of types of Medicare Advantage plans. Selecting a plan with a low or no annual premium can be important. But it’s also essential to check on co-pay and coinsurance costs, especially for expensive hospital stays and procedures, to estimate your annual expenses accurately.

Since care is often limited to in-network physicians and hospitals, the quality and size of a particular plan’s network also should be an important factor in your choice. 

Head to Explore Your Medicare Coverage Options at Medicare.gov to start your search. The compare feature of the selection tool allows you to look at plans side by side.

The National Committee for Quality Assurance (NCQA), an insurance rating organization, also tracks what consumers think of Medicare Advantage plans’ services and physicians, and whether the plans meet certain quality standards. 

No Medicare Advantage plans earned a 5-star rating in 2023, 24 earned 4.5 stars, and 127 earned a 4-star rating. Be sure to check the ratings for plans available in your state.

Key Differences: What to Consider in Making Your Choice

Your lifestyle, health, and finances all may influence what you determine is best for you: original Medicare plus Medigap or Medicare Advantage. Here are some other things to consider.

Costs

Medicare Advantage plans might save you money on premiums, but be sure to check whether prescription drug benefits are included. If not, you’ll need to buy a separate Part D plan if you want that coverage.

Also check the cost of any premiums, copays, and other out-of-pocket expenses, and whether there are any limits to the coverage. If extra benefits are included, such as help with hearing aids and dental bills, be sure to find out what and how much will actually be covered. 

Compare these costs to those of purchasing Medigap and stand-alone Medicare Part D prescription drug policies. Calculate the premiums, as well as the amount of any out-of-pocket expenses (deductibles, copays, coinsurance) the policies may require.

Yes, these can be time-consuming and perhaps complex calculations, but an insurance broker can help by doing the math for you and making cost-saving recommendations.

Choice of Doctors 

Original Medicare allows you to use any U.S. doctor or hospital that accepts Medicare. Most Medicare Advantage plans restrict you to using physicians in their network and may cover less, or none, of the expenses of using out-of-network providers.

Under Medicare Advantage HMO plans, your care is coordinated and your primary care doctor will be in the loop about the findings of specialists. However, if your plan is a PPO, getting referrals from a primary care doctor won’t be required.

Original Medicare doesn’t require a referral to see a specialist or a prior authorization for procedures. But you’ll need to make sure care is coordinated and your doctors are in communication with one another.

Once you develop a trusting relationship with a primary care physician, you can always request referrals to specialists from them. However, it’s your choice and not required.

Local Conditions and Convenience

In some areas where physicians and hospitals are scarce, it’s important to check out both the networks of available Medicare Advantage plans and the locations of providers who accept original Medicare.

Are the doctors accepting new patients? Will you have to travel far to see a provider or be treated in an emergency room? Advice from local professionals, neighbors, and licensed insurance brokers can help you find Medicare Advantage plans that do business in your area. Compare plans to find one that suits your needs.

Lifestyle Factors 

Frequent travel, dual residences, and the desire to keep seeing your current physician are some of the factors that may make original Medicare a good choice.

For people who travel, choosing regular Medicare plus a Medigap insurance policy that covers emergency care in foreign countries may be a good fit. Similarly, people who spend part of the year in a different geographical area may find it difficult to stay in-network for medical care and might be better off with regular Medicare and a Medigap insurance policy.

If you’re not yet on Medicare and like your current physicians, ask them if they participate in any Medicare Advantage plans or accept regular Medicare.

Your Health

People with chronic diseases and those who develop a serious health condition should look deeper into the choices available. A Medicare Advantage plan may be a better choice if it has an out-of-pocket maximum that protects you from huge bills.

Original Medicare plus a Medigap insurance plan generally allows you more choice in where you receive your care and may cover more.

Check whether any expensive drugs or equipment (such as supplies for people with diabetes) will be covered by your Medicare prescription drug plan, whether it’s a standalone or part of a Medicare Advantage plan.

More Benefits

Medicare Advantage plans are evolving as the government allows insurers to add coverage for additional benefits not included in regular Medicare.

As a result, it pays to reconsider your choice of regular Medicare vs. Medicare Advantage each year during open enrollment to make sure you’re getting the benefits you need most, whether it’s home care or transportation to doctors.

The CARES Act of 2020 relaxed rules on home care by allowing Medicare certification of home care given by physician assistants, nurse practitioners, and certified nurse specialists. The act also expanded telehealth access by making coverage more flexible.

Can You Switch? Yes, But There’s a Catch

It’s logical to consider enjoying the cost savings of a Medicare Advantage plan while you’re relatively healthy, and then switching back to regular Medicare if you develop a condition you want treated at an out-of-town facility.

In fact, switching between the two forms of Medicare (or between Medicare Advantage plans) is an option for everyone during the open enrollment period. This annual election period runs from Oct. 15 to Dec. 7 each year.

Switching Back to Original Medicare

Here’s the catch. If you switch from a Medicare Advantage plan back to regular Medicare (Part A and Part B), you may not be able to sign up for a Medigap insurance policy.

When you first sign up for Medicare Part A and Part B, Medigap insurance companies are generally obligated to sell you a policy, regardless of your medical condition.

You’re also allowed to buy a Medigap policy without medical underwriting restrictions if you enroll in a Medicare Advantage plan when first eligible for Medicare but switch to original Medicare within a year. Or if you later switch back to a Medicare Advantage plan but return to original Medicare coverage within a year.

Otherwise, Medigap insurers may charge you extra due to your age and preexisting conditions, or not sell you a policy at all if you have serious medical problems.

Some states have enacted laws to address this. In Connecticut, for example, Medigap insurance plans are guaranteed-issue year-round, meaning the insurers must provide coverage without medical underwriting to all who seek it.

In Massachusetts, guaranteed-issue Medigap enrollment is available in February and March each year, while Medigap insurers in Maine must offer Plan A on a guaranteed-issue basis for one month each year.

If you live in a state that doesn’t offer this protection, planning to switch between original Medicare and a Medicare Advantage plan according to the state of your health is a risky business.

Warning

Do not pay a Medicare broker directly for their assistance. They are paid by the insurance company to sell their insurance. If you suspect Medicare Advantage fraud, please call Medicare at 1-800-633-4227 or the Medicare Drug Integrity Contractor at 1-877-772-3379.

Why Do I Need Medigap If I Already Have Medicare?

Since Medicare Part B only covers about 80% of medical costs, signing up for a Medigap plan can cover the other 20% and save you out-of-pocket costs. Medigap is a private insurance option that is designed to supplement original Medicare (Part A and Part B), paying costs that would otherwise be your responsibility.

How Do I Choose Between Medicare Advantage and Medigap?

Consider the differences in the plans along with your priorities, like budget, travel, and health conditions. While Medicare Advantage can be more affordable for people with long-term health issues, Medigap gives you flexibility and choice with fewer restrictions and by expanding your network.

What Are the Benefits of Medicare Advantage?

Medicare Advantage plans (Part C) may offer more additional coverage than original Medicare (Part A and Part B), allowing patients more options and flexibility. For instance, many Medicare Advantage plans cover hearing aids, vision care, and dental care. In addition, Medicare Advantage plans can have no or lower premiums than Medigap plans.

The Bottom Line

Take your time choosing between Medicare Advantage and original Medicare with a supplement plan. There are distinct differences between them and what’s right for you may come down to a number of personal factors.

Would you prefer to have access to any doctors you choose, no requirement to get referrals in order to see someone, and no need for prior authorization for a procedure? If so, original Medicare plus a Medigap plan may be right for you.

However, if you’d like lower plan premiums, yearly out-of-pocket maximums, and coverage for dental, vision, and hearing aids, then certain Medicare Advantage plans may be your best option.

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Fact checked by Vikki VelasquezReviewed by Khadija KhartitFact checked by Vikki VelasquezReviewed by Khadija Khartit

Master of One

Pick a company that’s doing well and you can probably name 2 to 20 different products or divisions that it is responsible for creating. That’s because, as a business grows in revenue and stability, there is always the temptation to expand into new product markets.

However, some brands have done well to stick to what they do best, leaving the desire to bring on new product lines to the other guys. These six companies take repetition to a whole new level, offering reliability and quality via a single product concept.

Crocs

These kinda-ugly, but super-comfy, foam clogs have been a huge hit since they were first released to the public. An estimated 150 million Crocs shoes are sold every year and the footwear giant shows no signs of stopping. With a wide variation of the basic clog from which to choose (toddlers, women, men, athletic, dress, and beach-inspired, to name a few), the sky really is the limit for this business.

Spanx

In the never-ending battle of the bulge, women have relied heavily on high-quality wear to help make them look their best. Born from the bright idea that by cutting the feet from a pair of panty-hose a woman really can look good under her trousers, Spanx by Sara Blakely is no doubt one of the most respected names in this niche, offering just the bare essentials to women (and men) around the world. While the company has gotten smart in the offering of bras, panties, maternity, and men’s solutions, its sole purpose is still the same: what goes on under your clothing is entirely Spanx’s business.

Michelin

In a day and age where most companies have almost too much going on, Michelin has remained faithful to the cause of strictly manufacturing quality tires. Planes, cars, bikes, and more have benefited from over 130 years of tire-making success, giving the creator of the first radial tire a customer base that spans the globe. While this company has dabbled in the fine art of creating rocket fuel components and designing road maps, the famous tire division is what keeps this company moving forward.

Roku

Almost a baby to the consumer market, Roku is an up-and-comer with an innovative solution for the need to connect to the world at the click of our TV remote. Its Roku player is a small electronic box that, when linked to your television and an Internet connection, offers access to Amazon, Netflix, Hulu, Pandora, and many other entertainment accounts. There’s a strong possibility that it may create new and different product lines, as Roku has expanded to include more hi-tech versions of its original Roku player. In the meantime, the company knows what it’s doing: adding more features to the existing product is what keeps Roku’s customers happy.

Gorilla Glue

If it’s broken, why not fix it? Gorilla Glue is a handyman’s dream, offering a strong bond for almost any surface and a drying time that gives it a top spot in the tool kit. To keep it at the top of the market, Gorilla’s DIY guides give customers inspiration for creating the projects of their dreams—with the help of Gorilla Glue, of course. While Gorilla’s family-owned company does get into the tape and epoxy game, its famous glue is what keeps it in business.

Sleep Number Corporation (formerly known as Select Comfort)

The commercials speak for themselves: Sleep Number is all about a good night’s sleep, and this company hasn’t attempted to do anything but beds and pillows in their over 20 years of business. Best-known for the adjustable Sleep Number mattress, the company rebranded from Select Comfort to the Sleep Number Corporation in 2017. Sleep Number has been consistently ranked a top option for bedding and offers its wares in-store, online, and via its convincing infomercials. Even with an expanding accessory line that includes pillows and sheets, it’s the bed that gives this company its thunder.

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Reviewed by Robert C. KellyFact checked by Jared EckerReviewed by Robert C. KellyFact checked by Jared Ecker

Because America has the world’s largest economy, every economic move that the United States makes has immediate effects on the global markets. At a basic level, raising interest rates goes hand-in-hand with appreciating currencies.

In many parts of the world, the U.S. dollar is used as a benchmark of current and future economic growth. In developed countries, a strong dollar is seen in a positive light. However, circumstances are different in emerging economies. 

Key Takeaways

• Rising interest rates correspond with appreciating currencies.
• When the U.S. raises interest rates, there are concerns about its global effects.
• The value of Treasury Bonds correlates to changes in U.S. interest rates.
• U.S. dollar-denominated liabilities at global banks have been steadily increasing.
• A strong dollar that accompanies a rate increase often boosts U.S. demand for products around the world.

The Appreciating Dollar

In the aftermath of the 2008 Financial Crisis, the Federal Reserve implemented years of quantitative easing to stimulate economic recovery, slashing rates to near-zero, where they remained for the next six years.

The idea was to spur investments and consumer spending and drag the American economy out of recession. In the years that followed, the economy did begin to recover.

Following the COVID-19 pandemic and the significant increase in inflation, the Federal Reserve began to raise interest rates; a process that continued into 2023.

Historically, rising interest rates have gone hand-in-hand with an appreciating U.S. dollar. This, in turn, affects economic facets domestically and around the world; particularly the credit market, commodities, stocks, and investment opportunities.

Treasury Bonds

The value of U.S. Treasury Bonds is directly connected to changes in U.S. interest rates, and in the United States, the Treasury yield curve is quick to reflect changes in domestic interest rates. As the yield curve moves up or down, global rates are set, accordingly.

Since Treasury bonds are considered a risk-free asset, any other security must offer a higher yield to remain attractive, and with interest rates expected to increase, causing global investors to park their money in the U.S., emerging markets will feel a great deal of pressure to remain attractive. 

Ultimately, this could hinder employment levels in developing nations, along with exchange rates and exports.

Dollar Denominated Debt

Emerging markets are commonly affected by increasing interest rates in the United States and dollar appreciation.

Countries such as Turkey, Brazil, and South Africa, which perpetually run trade deficits, finance their account deficits by building up dollar-denominated debt.

In situations where U.S. interest rates increase while the dollar appreciates, the exchange rate between developing nations and the United States tends to widen. As a result, dollar-denominated debt owed by developing nations increases and becomes unmanageable.

5.33%

The effective fed funds rate as of June 2024.

The Credit Market

The fear of rising interest rates can be rooted in their contractionary effects on credit and money supply. Basic economic theory attests that higher interest rates lead to a decrease in the money supply and appreciation of the dollar.

At the same time, lending and credit markets contract. Global credit markets follow the movements of Treasury Bonds. And, as interest rates increase, the cost of credit does, too.

From bank loans to mortgages, it becomes more expensive to borrow. Hence, an increase in the cost of capital can hinder consumption, manufacturing, and production.

The most profound consequences of interest rate hikes in America are likely to come at the expense of Asian economies, accelerating capital outflows from China and creating instability.

Historically, China has borrowed from foreign banks to stimulate growth. This borrowing was fueled by lower interest rates. However, with tighter credit conditions, foreign lending to heavily indebted countries drops off.

The Commodities Market

Oil, gold, cotton, and other global commodities are priced in U.S. dollars, and a strong currency following a rate increase would increase the price of commodities for non-dollar holders.

Economies that rely primarily on commodity production and an abundance of natural resources will be worse off. As the products of their principal industrial decline in value, their available credit streams will shrink.

Foreign Trade

Despite how U.S. interest rates negatively impact the global economy, rising interest rates do benefit foreign trade.

The stronger dollar that will accompany the rate increase should boost demand for products around the world, increasing corporate profits for domestic and foreign companies alike.

Because fluctuations in the stock market reflect beliefs about whether industries grow or contract, the resulting profit spikes will lead to the stock market will rallies.

What Are the Foreign Effects of High U.S. Interest Rates?

High U.S. interest rates similarly impact foreign economies as they do the domestic economy, reducing the GDP in foreign economies. It is estimated that the rise in U.S. rates reduces the GDP of advanced economies by 0.5% and emerging economies by 0.8% after three years. This increase in rates impacts countries that have de facto pegs to the U.S. dollar or large trade volumes with the U.S.

What Happens When Interest Rates Increase?

When interest rates increase, the cost of borrowing money becomes more expensive. When goods and services become more expensive, people stop spending. This starts to slow down the economy and businesses react by slowing production, which results in even more of a slowdown, and increased unemployment. Increased unemployment means people continue to spend less because now they don’t have jobs, continuing the contractionary cycle.

How Do U.S. Interest Rates Affect China?

Increasing U.S. interest rates would strengthen the dollar, resulting in Chinese exports being more expensive. This would make Chinese exports less competitive and hurt the Chinese economy. Decreasing U.S. rates would have the opposite effect.

The Bottom Line

Interest rates are fundamental indicators of an economy’s growth. In the United States, the Federal Reserve’s move to increase interest rates is expected to spur growth and exuberance on the part of investors, while tempering the economy itself.

Higher interest rates can help an economy avoid overproduction traps and asset bubbles fueled by cheap debt. While the Fed’s primary concern is the U.S. economy, it will also be paying close attention to the effect its rate increase will have on foreign trade, and the world’s credit and commodities markets.         

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Reviewed by Charlene RhinehartFact checked by Pete RathburnReviewed by Charlene RhinehartFact checked by Pete Rathburn

Anyone who flies is familiar with the hassles of spending time in a domestic airport. The flight delays, endless lines, hard chairs, greasy fast food, and lack of personal space and charging plugs for your phone and tablet can make for a grim experience. However, access to an airline lounge can offer a calm escape from airport hassles if you know which ones to head for.

Key Takeaways

• Frequent flyers know that airline lounges can make any airport visit more comfortable and less stressful.
• In the U.S., there are currently just six major and regional airlines that offer member lounges at American airports.
• When judging the value or overall quality of an airport lounge, look to the number and convenience of locations, amenities offered, and cost of membership.
• Opening a travel rewards credit card could make sense if membership perks include airport lounge access.

Airline Lounges

Consolidation has shrunk the U.S. airline industry over the years leading to fewer branded lounges in domestic airports than there were even a decade ago. Three majors are offering these oases, along with three smaller carriers:

•  Alaska Board Room, Alaska Airlines (ALK)
•  Admirals Club, American Airlines (AAL)
•  Delta Sky Club, Delta Air Lines (DAL)
•  Premier Club, Hawaiian Airlines (HA)
•  United Club/United Polaris, United Airlines (UAL)
•  Virgin America Clubhouse, Virgin America (VA)

Unlocking the doors to these lounges can be done in several ways, but the two primary methods are traveling in business or first class or earning elite status in the carrier’s frequent flyer program. Earning elite status can be achieved by booking the requisite number of eligible fares or flying a specific number of miles each year.

If you don’t fit any of these categories, you can always buy a membership. Which ones are worth it? We’ve examined the locations, amenities, pricing policies, and day passes for the six airlines. Here’s how they compare, with our take on which lounges have the edge in each category. 

Tip

Opening an airline rewards credit card to earn miles or points on flights could help you fast-track your way to elite status in that airline’s frequent flyer program.

Location, Location, Location

Airlines operate their own facilities, primarily in the United States, but they can also offer access to clubs operated by partner airlines in countries worldwide. In this way, the Big Three (American, Delta, and United) have a clear advantage over the smaller carriers. However, access can be restricted in many cases and for many reasons. Here’s how the top airlines compare for lounge access in terms of locations and availability:

• Alaska Airlines: Located in six major U.S. cities, with nearly 90 global partner lounges
• American Airlines: Located in 32 global hubs, along with access to 50 partner lounges 
• Delta Airlines: More than 50 SkyClub locations, with partners located worldwide
• Hawaiian Airlines: Five Premier Club locations in Hawaii, with partners located worldwide
• United Airlines: Located in 32 cities in the U.S. and abroad
• Virgin America: five global locations, with 20+ partners worldwide

Verdict: American and Delta provide the broadest range of lounge options and share the title of the best airport lounge in this category.

Important

On Nov. 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act. The $1.2 trillion infrastructure bill authorizes $25 billion in spending on airports to address repair and maintenance backlogs, and reduce congestion and emissions.
There’s also $110 billion of new spending on roads and bridges and $39 billion to modernize the transit system. The legislation should help the airline industry and the surrounding airport infrastructure.

Amenities

These days, complimentary television, Wi-Fi, and periodicals are standard in nearly all U.S. airline lounges. And there’s always something to nibble on. In domestic facilities (unlike those operated by many foreign carriers), the fare usually runs to complimentary snacks and cookies, with meals sometimes available for purchase. Alcohol is free in most lounges, but top-shelf drinks and foreign beers often cost extra.

• Alaska: Wi-Fi; office work stations; snacks; alcoholic beverages 
• American: Wi-Fi; office work stations; snacks; cash menu for meals (some locations); some alcoholic beverages; cash bar; showers (some locations); children’s play areas (some locations)
• Delta: Wi-Fi; office work stations; snacks/soups/salads; some alcoholic beverages; cash bar; showers (some locations) 
• Hawaiian: Wi-Fi; snacks; nonalcoholic beverages
• United: Wi-Fi; office work stations; snacks; most alcoholic beverages; cash bar for premium alcoholic beverages
• Virgin America: Wi-Fi; cash menu for snacks/meals; free beer/wine; cash bar for cocktails; showers (some locations)

Verdict: Although most of these airport lounge amenities are similar across the board, the one lounge that stands out is American, which provides the broadest range of amenities.

Annual Costs

Discounts may apply when an annual membership is purchased with certain charge cards. Some airlines allow you to pay with frequent-flyer miles rather than cash.

Note that prices given here are for the first year of membership; renewal rates may be lower in some cases. For example, American charges $850 for the first year and $800 to renew.

• Alaska: $450
• American AAdvantage® member: $850 individual; $1,650 household
• Delta: $695 for individual membership; $1,495 for executive membership
• Hawaiian: $299*
• United: $650
• Virgin America: Open to all passengers flying with an Upper-Class boarding pass and Flying Club Gold members

*Membership includes other benefits, including express check-in, two free checked bags, pre-boarding, etc.

Verdict: Hawaiian wins on price tag alone, but Delta scores on value given the number of venues and their perks.

Note

Keep in mind that membership rates for airport lounge access may only cover you and a limited number of guests. Additional guest passes may be available for an extra fee.

Day Tripping

For those who don’t fly very frequently on a given carrier, a one-day pass may make a lot of sense. As with annual memberships, free access and discounts may apply for elite frequent flyer program members or those traveling in premium cabins. However, there are caveats. For example, Delta’s pass does not grant access to partner lounges, which would make it useless if flying overseas. In other words, please be sure a pass is good for the venues you’re traveling from.

• Alaska: $60
• American: $79
• Delta: Discontinued in 2018
• Hawaiian: $40 for Plumeria Lounge
• United: $59
• Virgin America: Open to all passengers flying with an Upper-Class boarding pass and Flying Club Gold members

Verdict: If you’re a Virgin Flying Club member or you’ve paid extra for an Upper-Class boarding pass you can access Clubhouse lounges free of charge.

The Fine Print

Some exclusions may prohibit access to certain lounges, particularly among the international partner airlines. Delta states: “Delta Sky Club cannot guarantee entry at partner lounge locations.” And American even offers this caveat: “Some lounges may restrict access due to capacity at busy times.”

What’s more, as with most clubs, there are rules. For example, Delta mentions “dignified” attire and “disruptive” behavior. There may also be limits on the number of guests you can bring and restrictions on underage travelers, so be sure to read through the details when booking flights.

The Bottom Line

The value of spending time in an airport lounge—especially while waiting out a lengthy flight delay—becomes apparent to anyone who has experienced it. But not everyone can afford to fly in premium classes or has earned enough miles to gain access. Depending on your travel plans, buying a membership can be well worth the expense, as long as you consider the various caveats and regulations.

Another option to consider is Priority Pass, which is an independent company and not an airline. Priority Pass provides access to more than 1,600+ airport lounges worldwide. The annual fee for a standard membership is $99 and $35 per visit. A $329 annual fee buys 10 visits (with no extra charge), then $35 for each additional visit, but a $469 annual fee allows you to enjoy unlimited visits. Take time to compare the best travel rewards credit cards, as some may offer Priority Pass access as a card benefit.

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Reviewed by Andy SmithFact checked by Yarilet PerezReviewed by Andy SmithFact checked by Yarilet Perez

In Australia, trust funds or trusts are among the nation’s most popular investment structures. Although many people mistakenly believe trusts are strictly enjoyed by the super-rich, in reality, even moderately well-to-do individuals can use trusts to protect their personal, family, and business assets. But setting up a trust fund can be a complicated effort.

For this reason, it’s vital to proceed with caution and purpose. In this article, we review the different types of trusts that Australia recognizes along with what you need to do to establish one.

Key Takeaways

• In Australia, the trust fund is a key structure to make sure individuals safely pass on their assets to their chosen beneficiaries.
• A trust is a great tool for separating a person’s assets from their estate or portfolio, effectively shielding those assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits.
• The assets in a trust may contain stocks, bonds, cash, real estate, antiques, and fine art.

What Is a Trust Fund?

The word trust is an umbrella term used to signify a variety of structures—each with its own specific procedures, regulations, and tax considerations. But fundamentally speaking, a trust is a private legal arrangement in which the ownership of one’s assets—such as stocks, bonds, cash, real estate, antiques, and fine art—are parked in an account that’s managed by an individual, or group of individuals, for the benefit of another person or persons.

The individuals who originally provide the assets are generally referred to as settlors. Those charged with managing trusts and distributing their assigned assets are known as trustees.

Finally, those who ultimately receive the assets contained within the trusts are known as beneficiaries.

Why Create a Trust?

Trusts are mainly created to separate a person’s assets from their personal estate. Once a settlor assigns those assets to a trust, they no longer own them, effectively shielding the assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits.

Other reasons for creating a trust include:

• Controlling the assets of individuals who are too young or incapacitated to handle their own financial affairs
• Protecting spendthrifts from squandering their fortunes
• Managing and distributing pension/retirement funds during an individual’s employment years

Types of Australian Trusts

Australia recognizes the following different types of trusts:

1. Family or Discretionary Trusts

A family trust (also known as a discretionary trust), one of Australia’s most common small business structures, is ideal for families with private businesses and other income-generating operations. Such trusts give trustees the discretion to decide who receives distributions and how often payouts occur. Accepted in every Australian state, family trusts are relatively easy to establish and operate.

2. Unit or Fixed Trusts

A unit trust (also known as a fixed trust) differs from a family trust in that the trustee generally does not hold discretion over the distribution of assets to beneficiaries. These structures divide the trust property into units, similar to shares of stock. Each beneficiary (known as a “unit holder”) owns a given number of those units, and at the end of each year, each unitholder receives a distribution from the trust, based on the number of units held. Ideal when multiple families are involved, unit trusts operate somewhat like a company.

Another type of fixed unit trust is a public unit trust. In this type of trust, units are offered to the public or listed on a stock exchange or held by 50 or more persons.

3. Hybrid Trusts

A hybrid trust bears characteristics of both discretionary and unit trusts. The trustee is empowered to distribute trust income and capital among nominated beneficiaries—as with discretionary trusts. However, the income and capital are proportionally distributed—as with unit trusts—based on the number of units each beneficiary holds. Hybrid trusts are often the favored structures when there are significant investment assets involved, due to their income tax and capital gains tax benefits.

4. Special Disability Trusts

Established in Sept. 20, 2006, the special disability trust allows immediate family members and carers to set up a trust to benefit another family member. Before the trust can be set up, the prospective beneficiary must be assessed as severely disabled per the requirements of the trust’s legislation.

Family members will then be allowed to make private financial contributions for the current and future care of the beneficiary. The trust beneficiary can use the money from the trust to help pay for a variety of expenses, including medical and accommodation expenses.

Establishing a Trust

Setting up a family trust can be a straightforward process that you might be able to accomplish using a do-it-yourself online service for a fee of about $150. Additionally, you’ll pay the stamp duty—a state-based tax. Slightly more complicated structures that require the active management of a corporate trustee can start at around $1,200.

In establishing trusts, settlors must take the following steps:

Step 1: Decide Upon Original Trust Assets

List all the holdings, along with their current value, to be placed in the trust. 

Step 2: Appoint Trustee(s)

Designate an individual or financial institution to serve as trustee. Choose wisely, as this person or entity will wield significant legal authority and control over your trust assets.

Important

Since trustees of discretionary trusts have wide powers, it is essential to choose a responsible and impartial individual for this position. For this reason, it may be best to appoint an independent trustee, who has no allegiance to any of the beneficiaries listed in the trust deed document.

Step 3: Determine Beneficiaries

Compile a list of people or entities entitled to receive benefits. Include the percentage breakdown of assets intended for each recipient.

Step 4: Draft a Trust Deed

A trust deed is a legal document prescribing the rules that govern your fund and the powers of the appointed trustee. It includes the fund’s objectives, specifies original trust assets, identifies the beneficiaries, delineates how benefits are to be paid (either via lump sum or an income stream), details how the trust may be terminated, and establishes rules for operating the trust bank account.

Trust deeds must be signed and dated by all trustees, executed according to state or territory laws, and regularly reviewed and updated as required. Deeds should be crafted by professionals with specialized legal and financial knowledge of trusts.

Step 5: Stamping

Stamp duty is a state-based tax that may be payable on the trust deed, depending on the state or territory. Stamping can be arranged directly through the relevant revenue authority or via a lawyer or accountant in your given state or territory. 

Step 6: Register as a Business

As with other Australian business structures, you will need an ABN (Australian business number), TFN (tax file number), and a business name for the trust. Depending on the trust type and complexity, you may be required to register it as a company.

Step 7: Open a Bank Account

Once the trust has been established, a trust bank account should be opened in the trustee’s name. The bank may require personal details about the trustee(s) and other parties involved before it will open the account.

Step 8: Commence Trust Activity

Once the bank account has been established, the trust becomes operational and can accept contributions or make investments, subject to terms outlined in the trust deed.

What Is the Difference Between a Trust Fund and a Trust?

“Trust fund” and “trust” both refer to a private legal arrangement in which the owner of specific assets—such as stocks, bonds, cash, real estate, antiques, and fine art—places them into an account that’s managed by an individual, or group of individuals, for the benefit of another person or persons.

What Are the Advantages of Putting Assets Into a Trust?

One advantage of creating a trust is that you can effectively protect trust assets from creditors in bankruptcy proceedings or plaintiffs in lawsuits. In addition, you can control the assets of individuals who are too young or incapacitated to handle their own financial affairs and prevent someone who is inexperienced with handling money from squandering their fortune.

What Is Stamping?

Stamping involves paying a state-based tax, or stamp duty, on a trust deed. Whether or not it is required depends on the state or territory.

The Bottom Line

Trusts have become a common way of structuring financial affairs, and a logical, tax-efficient means of distributing earnings that protect wealth for future generations. It’s critically important to crystallize legal relationships and obligations associated with any trust because they are typically irrevocable, which means they cannot be modified, amended, or terminated without the permission of the beneficiary or by the order of a court.

While online platforms can offer some guidance, seeking professional advice from a lawyer, accountant, or tax advisor is highly recommended.

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When company files Chapter 7 or Chapter 11, investors often lose out

Reviewed by JeFreda R. BrownFact checked by Timothy LiReviewed by JeFreda R. BrownFact checked by Timothy Li

If a company you’ve invested in files for bankruptcy, whether or not you get your money back depends on a number of factors, including the type of bankruptcy and the type of investment you hold.

Key Takeaways

• Companies can file for either Chapter 7 or Chapter 11 bankruptcy if they’re unable to pay their debts.
• Chapter 7 simply liquidates the company’s assets, while Chapter 11 allows the business to continue to operate under a reorganization plan.
• If a company you’ve invested in declares bankruptcy, how much you’re likely to get back will depend on the type of bankruptcy and the kind of investment, such as stocks versus bonds.

Types of Corporate Bankruptcy

The type of bankruptcy proceedings—Chapter 7 or Chapter 11—generally provides some clue as to whether the average investor will get back all, a portion, or none of their financial stake. But even that will vary on a case-by-case basis. There is also a pecking order of creditors and investors, which dictates who gets paid back first, second, and last (if at all). In this article, we’ll explain what happens when a public company files for protection under Chapter 7 or Chapter 11 and how that affects its investors.

Chapter 7

Under Chapter 7 of the U.S. Bankruptcy Code, “the company stops all operations and goes completely out of business. A trustee is appointed to liquidate (sell) the company’s assets, and the money is used to pay off debt,” the U.S. Securities and Exchange Commission explains. An entity known as the stalking horse will enter a low bid for the available assets, forming a floor for bids from other buyers.

But not all debts are treated the same. Not surprisingly, the investors or creditors who signed up for the least risk are paid first. For example, investors who hold the bankrupt concern’s corporate bonds have a relatively reduced exposure to loss: They had already forgone the potential of participating in any excess profits from the company (as they would have had they bought its stock), in return for the safety of regular, specified interest payments on their bonds.

Stockholders, however, have the potential to reap their share of a company’s profits, as reflected in a rising share price. But in return for the possibility of greater returns, they take the risk that the stock might instead lose value. As such, in the case of a Chapter 7 bankruptcy, stockholders may not be fully compensated for the value of their shares. In light of this risk-return tradeoff, it seems fair (and logical) that shareholders are second in line to bondholders when bankruptcy takes place.

Secured creditors assume even less risk than bondholders. They accept very low interest rates in exchange for the added safety of corporate assets being pledged against corporate obligations. Therefore, when a company goes under, its secured creditors are paid back before any regular bondholders begin to see their share of what’s left. This principle is referred to as absolute priority.

Important

After the collapse of Silicon Valley Bank in Santa Clara, California, and Signature Bank in New York City, in March 2023, the U.S. government announced that it was stepping in to protect their depositors, even beyond the normal Federal Deposit Insurance Corporation (FDIC) limits. However, a jointly released statement from the Department of the Treasury, Federal Reserve, and FDIC noted that, “Shareholders and certain unsecured debtholders will not be protected.”

Chapter 11

In a Chapter 11 bankruptcy, the company doesn’t go out of business but is allowed to reorganize. A company filing Chapter 11 hopes to return to normal business operations and sound financial health in the future. This type of bankruptcy is generally filed by corporations that need time to restructure debt that has become unmanageable.

Chapter 11 allows the company a fresh start, but it must still fulfill its obligations under the reorganization plan. A Chapter 11 reorganization is the most complex and, generally, the most expensive of all bankruptcy proceedings. It is, therefore, undertaken only after a company has carefully considered all the alternatives for paying back the debt.

Public companies tend to file under Chapter 11 rather than Chapter 7 because it allows them to continue to run their businesses and participate in the bankruptcy process. Rather than simply turning over its assets to a trustee for liquidation, as it would have to in Chapter 7, a company entering Chapter 11 has the opportunity to retool its financial framework and, ideally, return to profitability. If the process fails, all of the company’s assets are liquidated, and stakeholders are paid off according to absolute priority, as described above. In some cases, a company in reorganization may issue income bonds as a way to raise funds.

When a company files for Chapter 11, it is assigned a committee that represents the interests of creditors and stockholders. This committee works with the company to develop a plan to reorganize the business and get it out of debt, reshaping it into a profitable entity. Shareholders may be given a vote on the plan, but that is never guaranteed. If no suitable reorganization plan can be devised by the committee and confirmed by the courts, shareholders may not be able to stop the company’s assets from being sold off to pay creditors.

In one of the more dramatic examples of corporate bankruptcy in recent years, the failed cryptocurrency exchange FTX filed for Chapter 11 bankruptcy protection in November 2022.

Note

When a company files for Chapter 11 bankruptcy, investors have basically two choices: ride it out to the end, hoping the company will revive, or just bail out and take the loss.

How Bankruptcy Affects Investors

When a company begins bankruptcy proceedings, its stocks and bonds usually continue trading, albeit at extremely low prices. Generally, if you are a shareholder, you will see a substantial decline in the value of your shares in the time leading up to the company’s bankruptcy declaration. Bonds for near-bankrupt companies are usually rated as junk.

Once the company goes bankrupt, there is a very good chance you will not get back the full value of your investment. In fact, there is a strong possibility that you won’t get anything back at all.

During Chapter 11 bankruptcy, as the SEC summarizes, “bondholders will stop receiving interest and principal payments, and stockholders will stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds, or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your old stock in exchange for new shares in the reorganized company. The new shares may be fewer in number and may be worth less than your old shares. The reorganization plan will spell out your rights as an investor, and what you can expect to receive, if anything, from the company.”

Basically, once a company files under any type of bankruptcy protection, your rights as an investor change to reflect the bankrupt status of the company. While some companies do indeed make successful comebacks after undergoing restructuring, many others don’t. And if your stake in the pre-Chapter 11 company ends up being worth anything in the restructured firm, chances are it won’t be as much as it used to be.

During a Chapter 7 bankruptcy, investors are even lower on the ladder. Usually, the stock of a company undergoing Chapter 7 proceedings becomes worthless and investors just lose their money. If you hold a bond, you might receive a fraction of its face value. What you’ll receive depends on the amount of assets available for distribution and where your investment ranks on the priority list.

Secured creditors have the best chance of recouping the value of their initial investments. Unsecured creditors must wait until secured creditors have been adequately compensated before they receive any compensation. Stockholders usually receive little, if anything.

How Many Types of Bankruptcy Are There?

There are six types of bankruptcy in the United States Bankruptcy Code: Chapters 7, 9, 11, 12, 13, and 15.

What Type of Bankruptcy is for Individuals?

Individuals typically file either Chapter 7 or Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, most of the person’s assets will be liquidated to pay creditors. In a Chapter 13 bankruptcy, the person will be allowed to retain more of their assets but must agree to repay their creditors over a certain period of time.

What Is Preferred Stock?

Preferred stock is a special type of stock that some companies issue. In the event of a bankruptcy, holders of preferred stock holders have a greater claim on the company’s assets than the holders of common stock, but less of a claim than its bondholders.

The Bottom Line

From an investor’s point of view, there isn’t much good to say about bankruptcy. No matter what type of investment you made in a company, once it goes bankrupt you are probably going to get less for your investment than you expected.

In general, Chapter 11 is better for investors than Chapter 7. But in either case, don’t expect much. Relatively few companies undergoing Chapter 11 proceedings become profitable again after a reorganization; even if they do, it is rarely a quick process. As an investor, you should react to a company’s bankruptcy the same way you would if its shares took an unexpected dive for other reasons: Recognize the dramatically reduced prospects of the company and ask yourself whether you still want to be involved with it. 

If the answer is no, it might be best to let go of your failed investment. Holding on while the company undergoes bankruptcy proceedings may only lead to sleepless nights and perhaps even greater losses in the future. If nothing else, you may be able to take a capital loss on your taxes.

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Small business owners should know about this retirement-plan option

Reviewed by Eric EstevezFact checked by Suzanne KvilhaugReviewed by Eric EstevezFact checked by Suzanne Kvilhaug

What Is a SIMPLE 401(k) Plan?

A SIMPLE 401(k) is a retirement savings account offered by small business employers with 100 or fewer employees. The SIMPLE 401(k) works just like a regular 401(k) plan, combining it with the simplicity of a SIMPLE IRA with a few minor changes. Employees can defer some of their wages to the plan and employers must either make a matching or non-elective contribution of a certain amount of each employee’s wages.

Employers must meet certain eligibility requirements and the Internal Revenue Service (IRS) sets limits on how much can be contributed each year.

Key Takeaways

• SIMPLE 401(k) plans are retirement savings plans offered by small business employers or companies with 100 or fewer employees.
• This kind of plan combines the features of traditional 401(k)s with the simplicity of SIMPLE IRAs.
• Participants must be at least 21 and have one year of service before they can participate.
• Contributions to the plan are fully vested immediately and employees are allowed to borrow against their account balances.
• Employees who provide SIMPLE 401(k)s can’t offer their employees any other options and contribution limits are lower than traditional 401(k) plans.

How SIMPLE 401(k) Plans Work

As the name implies, the SIMPLE 401(k) is a simplified, stripped-down version of a regular 401(k) plan that is geared toward self-employed individuals and small business owners. And just like SIMPLE IRA accounts, only employers with a staff of 100 or fewer can establish SIMPLE 401(k) plans. Establishing businesses can be structured in any form, including sole proprietors, corporations, and partnerships.

SIMPLE 401(k)s work just like regular 401(k)s. Employees contribute with pretax dollars out of their paychecks, investing the funds in options provided by the plan administrator. The IRS limits annual contribution amounts, which are about two-thirds of those allowed for regular 401(k)s. Employees can contribute a maximum of $15,500 in 2023 and $16,000 in 2024. People 50 and over are allowed to deposit an additional catch-up contribution of $3,500 in 2023 and 2024.

All employer contributions to a SIMPLE 401(k) are subject to an employee compensation cap, which is $330,000 for 2023 and $345,000 for 2024. This is one way the SIMPLE 401(k) differs from a SIMPLE IRA. Unlike traditional 401(k)s, employers are required to make either a matching contribution to their employees’ accounts—up to 3% of each employee’s pay or a nonelective contribution of 2% of each eligible employee’s pay.

Important

Companies that offer their employees a SIMPLE 401(k) plan must file Form 5500 every year.

SIMPLE 401(k) Rules and Regulations

Employees who are at least 21 years old and completed at least one year of service must be allowed to participate in their employers’ SIMPLE 401(k) plans. They must also receive at least $5,000 in SIMPLE compensation from their employers for the preceding year in order to take part.

Funds in a SIMPLE 401(k) must be held in the account until the employee reaches age 59½. Withdrawals made before that point are subject to an early withdrawal penalty of 10%.

The employer must provide a deferral notice to each eligible employee for the year the plan is established and for each year the employer continues to maintain the plan. This notification must be provided at least 60 days before the employee becomes eligible to participate. It must include a statement of the employee’s right to make salary deferral contributions and to terminate their participation in the plan.

Note

The “SIMPLE” in a SIMPLE 401(k) plan is short for Savings Incentive Match Plan for Employees of Small Employers.

Advantages and Disadvantages of SIMPLE 401(k)s

There are a number of different benefits to participating in a SIMPLE 401(k) plan. But there are also several drawbacks. We’ve noted some of the major ones below.

Advantages

Contributions to a SIMPLE 401(k) are immediately 100% vested. An employee who meets the requirements to receive distributions from the plan may withdraw their entire account balance whenever they like and won’t lose it if they switch jobs after the money is in their account.

One of the simplified features is that SIMPLE 401(k) plans do not require nondiscrimination and top-heavy testing to ensure that the plan operates in compliance with IRS rules. Such testing must generally be done by professionals and can be quite costly.

Although withdrawals before the age of 59½ are subject to a penalty, employees can take out loans against their SIMPLE 401(k) balances. They also have the option of making hardship withdrawals from their plans if they need to do so.

Disadvantages

Unlike other retirement options, employer contributions are mandatory for those who offer SIMPLE 401(k) plans to their employees. Employers have one of two options available. They can contribute either 3% of each employee’s pay or they can make nonelective contributions of 2% of each eligible worker’s salary.

IRS rules prohibit a company from offering other types of retirement plans to employees already covered by a SIMPLE 401(k). That said, these companies may choose to maintain a separate retirement plan for other employees not covered by the SIMPLE 401(k).

Contribution caps to SIMPLE 401(k)s are smaller than those for traditional 401(k) plans. Employees can only contribute $15,500 in 2023 to a SIMPLE 401(k) plan with catch-up contributions of $3,500 per year for those 50 and older. Though these amounts increased to $16,000 of contributions with the same catch-up of $3,500 in 2024, these amounts are still lower than other retirement plans. For example, taxpayers can set aside $22,500 for their 401(k)s in 2023 and $23,000 in 2024. Catch-up contributions for these plans are $7,500 in both 2023 and 2024.

Pros

• Immediate 100% vesting for employees

• No discrimination testing for employer

• Loans and hardship withdrawals allowed

Cons

• Mandatory contributions (for employer)

• No other plans allowed

• Lower employee contributions than regular 401(k)

Who Is Eligible for a SIMPLE 401(k)?

A SIMPLE 401(k) is available for small businesses that have 100 or fewer employees who each earn more than $5,000 per year.

What Is the Difference Between a SIMPLE 401(k) and a SIMPLE IRA?

Both SIMPLE IRA and SIMPLE 401(k) plans are options for small business owners to provide retirement benefits to themselves and their employees. The key differences are that SIMPLE 401(k)s allow for loans while SIMPLE IRAs do not, and a SIMPLE 401(k) requires employees to be 21 years or older while SIMPLE IRAs have no age restrictions.

How Much Can You Contribute to a SIMPLE 401(k)?

A SIMPLE 401(k) limits employees to $15,500 in contributions for 2023 and $16,000 in 2024. This is in contrast to a regular 401(k), which has a $22,500 limit in 2023 and a $23,000 limit in 2024. Individuals may also qualify to make catch-up contributions for both plans: $3,500 for a SIMPLE 401(k) and $7,500 for a regular 401(k).

Can I Have a SIMPLE 401(k) and a Traditional IRA?

Yes, you can maintain and contribute to an individual retirement account (IRA) while also having and contributing to an employer-sponsored SIMPLE 401(k) plan.

The Bottom Line

Helping your employees save for retirement is a great way to keep turnover rates down and retention up. It doesn’t hurt in attracting talent, either. It might help keep a small firm competitive with the perks offered by larger corporations.

While SIMPLE 401(k) plans have a lot of benefits, such as easy-to-manage rules, they do have some disadvantages when compared with other savings plans. The mandatory contributions and the paperwork, simplified though it is, can be a burden.

As a result, they’re not for every company but then, few options are. Consult with 401(k) plan providers and your team of tax professionals to see if this retirement vehicle is the best suited for you and your staff.

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WATCH: How Are Property Taxes Calculated?

Property taxes are calculated through use of the mill levy and the assessed property values.The mill levy is the tax imposed on property values. Assessors review local real estate conditions and all relevant information, then they value the property through one of three methods. This video breaks down the process so people can get a better idea of how property taxes are determined.

Fact checked by Vikki VelasquezReviewed by Somer AndersonFact checked by Vikki VelasquezReviewed by Somer Anderson

If you ask many homeowners about their property taxes, they’ll likely tell you they pay too much. Property taxes are real estate taxes calculated by local governments and paid by homeowners. They are considered ad valorem, which means they are assessed according to the value of your property. Since property values rise over time, so do property taxes. Even after you pay your mortgage, the property tax bills keep coming until you no longer own a home. What follows is a review of property tax bills and some ideas that may help you lower yours.

Key Takeaways

• Review your tax bill and look at comparable homes in your area for value discrepancies.
• Don’t build or change your home just before an assessment; this may increase your property value.
• Walk through your home with the assessor to address all points affecting its assessed value.
• Look for local and state exemptions and consider appealing your property tax bill if you believe it’s incorrect.
• Property taxes are calculated by multiplying your municipality’s effective tax rate by the most recent assessment of your property’s value.

Understanding Your Tax Bill

It’s important to know how your municipality calculates your property taxes. Two neighboring towns may calculate them differently, which can be confusing for residents.

Property taxes are computed using two very important figures: the tax rate and the current market value of your property. A municipality sets its specific tax rate, also known as millage or mill rate, based on how much money it needs to pay for important services. State law determines how often the rate can be changed. Some states allow them to be altered annually, while others do so in different increments, such as every five years.

• The local government hires an assessor and estimates your property’s market value, including the land and structures.
• You receive an assessment. In some jurisdictions, the assessed value is a percentage of the market value. In others, it is the same as the market value.
• The assessor may visit your property or complete property assessments remotely using software with updated tax rolls.
• Based on this assessment, your local tax collector’s office sends you your property tax bill.

To prepare your tax bill, your tax office multiplies the tax rate by the assessed value. So, if your property is assessed at $300,000 and your local government sets your tax rate at 2.5%, your annual tax bill is $7,500.

Note

Property tax revenue is used to fund local projects and services such as fire departments, law enforcement, local public recreation, and education. Although these services benefit all residents, property taxes can be quite burdensome for some homeowners. Some states have more favorable property tax rates than others.

1. Ask for Your Property Tax Card

Few homeowners realize they can go down to the town or city hall and request a copy of their property tax cards from the local assessor’s office. Many of these are now online. The tax card provides the homeowner with information the town has gathered about their property over time.

This card includes information about the lot’s size, the rooms’ precise dimensions, and the number and type of fixtures within the home. Other information included may be special features or any improvements to the existing structure.

As you review this card, note any discrepancies and raise these issues with the tax assessor. The assessor will either correct or conduct a re-evaluation. Though you might not think so, mistakes are common. If you find them, the township or city must correct them.

2. Don’t Build

Any structural changes to a home or property will increase your tax bill. A deck, a pool, a large shed, or any other permanent fixture added to your home is presumed to increase its value.

Homeowners should investigate how much a new addition could increase their property tax bill before they begin construction. Call the local building and tax departments. They’ll be able to give you a ballpark estimate of any changes.

Investopedia’s Tax Savings Guide can help you maximize your tax credits, deductions, and savings. Order yours today.

3. Limit Curb Appeal

Tax assessors are given a strict set of guidelines for their evaluations. However, the assessment still contains a certain amount of subjectivity. This means that more attractive homes often receive a higher assessed value than comparable houses that are less physically appealing.

Your property is compared with your neighbors and others in the general vicinity during the evaluation. While it may be difficult, resist the urge to primp your property before the assessor’s arrival. You should be able to plan because the assessor normally schedules a visit in advance.

Make any physical improvements or cosmetic alterations to the home after the assessor finishes the evaluation.

4. Research Neighboring Homes

Information about your home is available at the local town or city hall. Frequently, information about other home assessments in the area is also available.

It is important to review comparable homes in the area and general statistics about the town’s evaluation results. You may find discrepancies that could lower your taxes.

For example, let’s say you have a four-bedroom home with a one-car garage, and your home is assessed at $250,000. Your neighbor also owns a four-bedroom home, but this house sports a two-car garage, a 150-square-foot shed, and a beautiful swimming pool. Despite this, your neighbor’s home is valued at $235,000.

Was there a mistake? Unless your property has some other distinguishing characteristics that explain the discrepancy, the assessor probably made an error.

Important

If you find an error, it pays to bring it to the assessor’s attention as soon as possible so you can get a reassessment.

5. Allow the Assessor Access to Your Home

You do not have to bring the tax assessor into your home. However, if you don’t, the assessor may assume that you’ve made certain improvements to the interior, such as new fixtures or expensive refurbishments. This could result in a bigger tax bill.

Many municipalities have a policy that if the homeowner does not grant full access to the property, the assessor will automatically assign the highest assessed value possible for that type of property—fair or not. At this point, it’s up to the individual to dispute the evaluation, which will be nearly impossible unless you grant access to the interior.

The lesson: allow the assessor to access your home. (If you took out permits for all improvements that you’ve made to the property, the work you did shouldn’t be a problem.)

6. Walk the Home With the Assessor

Many people allow the tax assessor to wander their homes unguided during the evaluation. This can be a mistake. Some assessors may only see the best parts of the home, such as the new fireplace or marble-topped counters in the kitchen. They may overlook the fact that several appliances are out of date or that cracks are visible in the ceiling.

To prevent this, be sure to walk the home with the assessor and point out the good points and deficiencies. This can help ensure you receive the fairest possible valuation for your home.

7. Look for Exemptions

You may qualify for an exemption if you fall into certain categories. Here are some demographic groups and property types for which states and municipalities might lower the tax burden:

• Older adults
• Veterans
• People with certain disabilities
• Agriculture properties
• Homestead exemptions

Check with your taxing authority to see if you qualify for an exemption and then apply for it.

8. Appeal Your Tax Bill

If you believe your bill should be lower but haven’t gotten your tax assessment office to see things your way, don’t fret. You still have an option available: appeal it. If you decide to appeal, do so promptly or you’ll be stuck with the bill you receive from your local tax office.

Filing a tax appeal will probably cost you a small filing fee, which is paid to have someone review your appeal. The tax appeal generally requires the help of a lawyer. Your attorney will charge you a fee—sometimes a part of your savings if your appeal is approved.

Your lawyer will review the steps of the appeal and what information is required. In some cases, you may need to take photos and provide details on the current condition of your property. The board will then review this information, compare it with the most recent assessment and tax bill, and decide. You may hear about it instantly, or a decision could take a few months.

If the board approves your appeal, it will only lower your home’s assessment value, not your effective tax rate. That’s enough to lower your tax bill. Remember, though, that the appeal does not guarantee that your bill will drop. It may remain the same or, in rare cases, may increase if the reviewer feels your assessment is too low.

At What Age Do You Stop Paying Property Taxes?

You’ll owe property taxes as long as you own a home. However, state programs can provide certain individuals, such as older adults, with property tax relief if they meet the criteria. Check with your state or municipality for more information.

What Is a Homestead Tax Exemption?

It’s an exemption that reduces your property’s assessment value and therefore your property tax bill. It applies only to a primary residence.

What If My Property Tax Bill Is Wrong?

If you think it’s incorrect, contact your local tax authority immediately with the reasons for your belief. With that information, office personnel can then double-check on your property’s assessed value, any applicable exemptions that weren’t accounted for, and that the correct tax rate and calculation were used.

The Bottom Line

It can be hard to balance the desire for a beautiful home with the desire to pay as little tax as possible. However, there are some things you can do to reduce your property tax burden without resorting to living in only the lowest-value homes.

Avoid making any improvements right before your house is because of be assessed. Check out the neighbors—if they pay less tax than you but own a similar home, you may be in line for a tax reduction.

The most important thing to remember is don’t assume tax bills are always correct. A little homework and due diligence can help reduce and make more manageable what can be a distinct tax burden for certain homeowners.

Read the original article on Investopedia.

An Introduction To Dark Pools

Dark pools are private exchanges for trading large chunks of securities that are not accessible to the public.They facilitate block trading for institutional investors seeking to avoid impacting the market with their large orders. While criticized for their lack of transparency, dark pools can serve a purpose.If dark pools are not available, and a large institutional investor wants to sell 1 million shares of XYZ stock, the impact will be big—investors may see it as a sign to sell XYZ, and the price could fall.A dark pool lets the investor sell the block. The lack of transparency works in her favor as the price will be better than if the shares are sold on an exchange. The investor also has a much better chance of selling them in a block.Broker-dealers, agency brokers and exchanges own dark pools, whose advantages include reduced market impact and lower transaction costs.But dark pools may not reflect real market prices. If a mutual fund owns 20 percent of company RST’s stock and sells it in a dark pool, unaware investors who later buy RST will pay too much for it. RST could then collapse when the fund’s big sale goes public.

Reviewed by Charles PottersFact checked by Melody KazelReviewed by Charles PottersFact checked by Melody Kazel

Dark pools are private exchanges for trading securities that are not accessible to the investing public. Also known as dark pools of liquidity, the name of these exchanges is a reference to their complete lack of transparency.

Dark pools came about primarily to facilitate block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades.

Dark pools are sometimes cast in an unfavorable light but they serve a purpose by allowing large trades to proceed without affecting the wider market. However, their lack of transparency makes them vulnerable to potential conflicts of interest by their owners and predatory trading practices by some high-frequency traders.

Key Takeaways

• Dark pools are private exchanges for trading securities that are not accessible to the investing public.
• Dark pools were created to facilitate block trading by institutional investors who did not wish to impact the markets with their large orders and obtain adverse prices for their trades.
• They may be looked at unfavorably but are legal and regulated by the SEC.
• Trades that take place in dark pools don’t affect the wider market.
• There are three types of dark pools: broker-dealer-owned dark pools, agency broker or exchange-owned dark pools, and electronic market markers dark pools.

Why Do Dark Pools Exist?

Dark pools emerged in the late 1980s. According to the CFA Institute, non-exchange trading has recently become more popular in the U.S. Estimates show that it accounted for approximately 40% of all U.S. stock trades in 2017 compared with roughly 16% in 2010. The CFA also estimates that dark pools are responsible for 15% of U.S. volume as of 2014.

Why did dark pools come into existence? Consider the options available to a large institutional investor who wanted to sell one million shares of XYZ stock before the advent of non-exchange trading. This investor could do one of the following:

1. Work the order through a floor trader over the course of one or two days and hope for a decent volume-weighted average price (VWAP).
2. Split the order up into, for example, five pieces and sell 200,000 shares per day.
3. Sell small amounts until a large buyer could be found who was willing to take up the full amount of the remaining shares.

The market impact of a sale of one million shares in Company XYZ could still be sizable regardless of which option the investor chose since it was not possible to keep the identity or intention of the investor secret in a stock exchange transaction. With options two and three, the risk of a decline in the period while the investor was waiting to sell the remaining shares was also significant. Dark pools were one solution to these issues.

Note

In contrast to dark pools, traditional exchanges are sometimes described as lit markets.

Why Do Investors Trade on Dark Pools?

Contrast this with the present-day situation, where an institutional investor can use a dark pool to sell a block of one million shares. The lack of transparency works in the institutional investor’s favor since it may result in a better-realized price than if the sale was executed on an exchange.

The institutional seller has a better chance of finding a buyer for the full share block in a dark pool since it is a forum dedicated to large investors. The possibility of price improvement also exists if the mid-point of the quoted bid and ask price is used for the transaction.

Of course, this assumes that there is no information leakage of the investor’s proposed sale and that the dark pool is not vulnerable to high-frequency trading (HFT) predators who could engage in front-running once they sense the investor’s trading intentions.

Important

Since dark pool participants do not disclose their trading intention to the exchange before execution, there is no order book visible to the public. Trade execution details are only released to the consolidated tape after a delay.

Types of Dark Pools

As of the end of December 2022, there were more than 60 dark pools registered with the Securities and Exchange Commission (SEC). There are three types, including broker-dealer-owned dark pools, agency broker or exchange-owned dark pools, and electronic market markers dark pools. We highlight some of the key characteristics of each below.

Broker-Dealer-Owned Dark Pool

These dark pools are set up by large broker-dealers for their clients and may also include their own proprietary traders. These dark pools derive their own prices from order flow, so there is an element of price discovery.

Examples of such dark pools include those from Credit Suisse CrossFinder, Sigma X (from Goldman Sachs), Citi-Match (from Citibank), and MS Pool (from Morgan Stanley).

Agency Broker or Exchange-Owned Dark Pool

These are dark pools that act as agents, not as principals. As prices are derived from exchanges–such as the midpoint of the National Best Bid and Offer (NBBO), there is no price discovery.

Examples of agency broker dark pools include Instinet, Liquidnet, and ITG Posit, while exchange-owned dark pools include those offered by BATS Trading and NYSE Euronext.

Electronic Market Maker Dark Pools

Electronic market maker dark pools are offered by independent operators like Getco and Knight, who operate as principals for their own accounts. Like the dark pools owned by broker-dealers, their transaction prices are not calculated from the NBBO, so there is price discovery.

40%

The percent of U.S. trading volume that occurs in dark pools.

Advantages and Disadvantages of Dark Pools

Pros

• Are legal and regulated by the SEC

• Large orders don’t impact market

• Lower transaction costs

• Sales on the dark pool may fetch a good price

Cons

• Not available to retail investors

• Lack of transparency

• No best price guarantees

• Operators accused of misusing dark pool data to trade against customers

• Dark pool trade sizes have reduced

Advantages

The biggest advantage of dark pools is that market impact is significantly reduced for large orders. Dark pools may also lower transaction costs because dark pool trades do not have to pay exchange fees, while transactions based on the bid-ask midpoint do not incur the full spread.

If the amount of trading in dark pools owned by broker-dealers and electronic market makers continues to grow, stock prices on exchanges may not reflect the actual market. For example, if a well-regarded mutual fund owns 20% of Company RST’s stock and sells it off in a dark pool, the sale of the stake may fetch the fund a good price. Unwary investors who just bought RST shares will have paid too much since the stock could collapse once the fund’s sale becomes public knowledge.

Disadvantages

While dark pools are legal and regulated by the SEC, they have been subject to criticism due to their opaque nature. Because dark pool trades are not available to the public, they have sometimes been used for predatory practices by high-frequency trading firms, using tactics such as pinging dark pools to unearth large hidden orders and then engaging in front-running or latency arbitrage.

The lack of transparency can also work against a pool participant since there is no guarantee that the institution’s trade was executed at the best price. A surprisingly large proportion of broker-dealer dark pool trades are executed within the pools–a process that is known as internalization, even when the broker-dealer has a small share of the U.S. market. The dark pool’s opaqueness can also give rise to conflicts of interest if a broker-dealer’s proprietary traders trade against pool clients or if the broker-dealer sells special access to the dark pool to HFT firms.

Dark pool operators have also been accused of misusing their dark pool data to trade against their other customers or misrepresenting the pools to their clients. According toThe Wall Street Journal, securities regulators have collected more than $340 million from dark pool operators since 2011 to settle various legal allegations.

The average trade size in dark pools has declined to less than 150 shares. Exchanges like the New York Stock Exchange (NYSE), which are seeking to stem their loss of trading market share to dark pools and alternative trading systems, claim that this small trade size makes the case for dark pools less compelling.

Regulating Dark Pools

The recent HFT controversy has drawn significant regulatory attention to dark pools. Regulators have generally viewed dark pools with suspicion because of their lack of transparency. This controversy may lead to renewed efforts to curb their appeal. One measure that may help exchanges reclaim market share from dark pools and other off-exchange venues could be a pilot proposal from the Securities and Exchange Commission (SEC) to introduce a trade-at rule.

The rule would require brokerages to send client trades to exchanges rather than dark pools unless they can execute the trades at a meaningfully better price than that available in the public market. If implemented, this rule could present a serious challenge to the long-term viability of dark pools.

10,000

The minimum number of shares traded in a block trade.

Examples of Dark Pools

When retail investors buy and sell stocks and other securities, they usually go through a brokerage firm or their preferred online trading platform. They decide how many shares they want and choose their order type. Once that’s done, they place the order. These investors normally buy and sell a small number of shares.

Dark pools work differently, though, so let’s take a hypothetical look at how this type of trading works. Say ABC Investment Firm sees a good opportunity in Company 123 and decides to buy 20,000 shares in the company. Since they can’t purchase these shares on the open market, the firm has to go onto a dark pool to make the purchase.

Buying these shares on the dark pool means that ABC Investment Firm’s trade won’t affect the value of the stock. It also won’t alert anyone else about the trade, which means that speculators won’t jump on board and follow suit, thereby driving the price up even higher. As such, no one will know about the transaction until it’s complete.

How Do Dark Pools Affect Stock Prices?

Dark pools are intended to reduce volatility by obscuring large trades. On the open market, large block sales tend to decrease the stock price, by increasing the supply of the security available to trade. Dark pools allow large institutional holders to buy or sell in large volumes, without broadcasting information that could affect the wider market.

Are Dark Pools Legal?

Despite the ominous name, dark pools are not inherently illegal. However, there have been instances of dark pool operators abusing their position to make unethical or illegal trades. In 2016, Credit Suisse was fined more than $84 million for using its dark pool to trade against its clients. Another operator, Barclay’s Capital, paid $70 million. Some have argued that dark pools have a built-in conflict of interest and should be more closely regulated.

What Are Dark Pools in Cryptocurrency?

Cryptocurrency dark pools are similar to the pools in the stock market: they match buyers and sellers for large orders, without a public order book. However, cryptocurrency dark pools may be decentralized through the use of smart contracts. Instead of trading through a trusted intermediary, the buyers and sellers interact through a blockchain-based program that executes the trade without disclosing any confidential information about the transaction or its participants.

Can You Trade on Dark Pools?

Dark pools are privately organized exchanges that are used to trade financial securities. Unlike traditional exchanges, dark pools aren’t available to everyday retail investors. Instead, they’re meant for institutional investors who regularly place large orders for their clients. The purpose is to avoid affecting the market when these large block orders are placed. This allows them to make trades without having to explain their rationale as they look for buyers or sellers.

How Do Dark Pools Differ From Lit Pools?

A dark pool is a private trading system meant for institutional traders. Although it sounds shady, it isn’t. in fact, dark pools are legal and fully regulated by the Securities and Exchange Commission. Dark pools allow traders to make block trades without having to publicize the buy/sell price or the number of shares traded to the public. This means trades are done anonymously and don’t give clues to other traders.

Lit pools are the opposite of dark pools. They show bid/ask prices and the total number of shares traded. They represent the ideal stock market because they are truly transparent.

The Bottom Line

Dark pools provide pricing and cost advantages to buy-side institutions such as mutual funds and pension funds, which hold that these benefits ultimately accrue to the retail investors who own these funds. However, dark pools’ lack of transparency makes them susceptible to conflicts of interest by their owners and predatory trading practices by HFT firms. HFT controversy has drawn increasing regulatory attention to dark pools, and implementation of the proposed “trade-at” rule could threaten their long-term viability.

Read the original article on Investopedia.