Fact checked by Vikki Velasquez
Reviewed by Samantha Silberstein

A U.S. president’s policies can greatly affect gross domestic product (GDP), an indicator used to measure a country’s economic activity. GDP is the monetary value of all finished goods and services produced in a country during a specific period. GDP growth measures the change in GDP between two periods.

Both GDP and GDP growth are used to reflect economic performance during a presidential administration. However, the indicators come with limitations since they can be affected by events and circumstances beyond a president’s control.

Key Takeaways

• A president’s fiscal and monetary policies can significantly impact GDP, which is a crucial measure of economic activity.
• President Franklin D. Roosevelt had the highest average annual GDP growth at 10.1% from increased government spending for World War II.
• President Herbert Hoover had the worst annual GDP growth of all U.S. presidents so far at -9.3% due to the Great Depression.
• The biggest drop in GDP growth was in 1932, the worst year of the Great Depression, when GDP growth was -12.9% during Hoover’s term.

Essentially, GDP serves as a report card on the overall health of the economy. The metric is closely followed by policymakers, investors, and businesses when making strategic decisions. The White House and Congress use GDP to prepare the federal budget, and the Federal Reserve uses it to make decisions about monetary policy.

In this article, we are using real GDP to show the average annual GDP growth rate by president since it accounts for inflation.

Note

Real GDP is the value of a country’s total output of goods and services adjusted for inflation or deflation.

Historical U.S. GDP Growth

According to economists, the ideal average annual GDP growth should be 2% to 3% each year. President Franklin D. Roosevelt had the highest average annual growth at 10.1% because of increased government spending for World War II. President Herbert Hoover had the worst annual GDP growth of all U.S. presidents so far at -9.3%, due to the Great Depression, which began and lasted through his term. The biggest drop in GDP growth was in 1932, the worst year of the Great Depression, when GDP growth was -12.9% during Hoover’s term.

Rapid GDP growth does not always equal a strong economy—if the economy grows too quickly, it can cause inflation or create a bubble.

At the same time, if the economy slows down too much, and too fast, that can cause a recession. The goal is to maintain the GDP at a steady rate that can be sustained over time, so presidents with average GDP growth of 2% to 3%—which economists consider a healthy range—will have the best growth.

GDP Growth by President 

Here’s a breakdown of the GDP growth rate under each U.S. president—starting with Hoover in 1929—and the events that affected each person’s presidency. 

Herbert Hoover (1929–1933)

Average Annual GDP Growth Rate: -9.3%

President Herbert Hoover had the worst average annual GDP growth rate so far at -9.3%. That’s because in October 1929, during Hoover’s first year of his term, the stock market crashed and led to the Great Depression, the most severe and longest economic recession in modern world history.

Hoover took a laissez-faire (low government intervention) approach in response to the Great Depression and vetoed several bills that would have provided relief to Americans impacted by the recession. He also signed the Smoot-Hawley Tariff Act into law which raised the costs of important goods and affected trade. The GDP growth rate fell to -12.9% in 1932, while unemployment soared to 25% in 1933. 

Franklin D. Roosevelt (1933–1945)

Average Annual GDP Growth Rate: 10.1%

President Franklin D. Roosevelt had an average annual GDP growth rate of 10.1% during his four-term presidency, the highest growth rate of presidents so far. FDR introduced a series of government programs known as the New Deal to help stimulate the economy during the Great Depression. The New Deal aimed to maintain infrastructure, create jobs, and boost businesses across the country. The New Deal also included programs such as Social Security.

While the New Deal did help the economy recover and helped reduce income inequality in the United States, some economists question its true impact on the economy and even say it may have prolonged the recession by several years. Critiques of the New Deal say too much government aid may have hindered the economy’s natural way of rebounding after a deep recession. Still, economists consider 1941 as the end of the Great Depression since GDP increased and unemployment dropped. This was also the year when the U.S. entered WWII.

FDR’s social programs also came with major tax increases and national debt. Roosevelt contributed the largest percentage increase to the U.S. national debt between his New Deal initiatives and, more significantly, spending on World War II.

Harry S. Truman (1945–1953)

Average Annual GDP Growth Rate: 1.4%

President Harry Truman had an average annual GDP growth rate of 1.4%. The economy went through two mild recessions during Truman’s term: one in 1945 due to a drop in government spending after the end of WWII and another from 1948 to 1949 as the economy corrected in the wake of a postwar spending boom. 

Truman had the difficult job of transitioning the economy from wartime to peacetime without sending it into a recession and, in large, did manage to maintain a healthy peacetime economy. Truman also wanted to extend some of the New Deal economic programs, such as higher minimum wage and housing. Still, only a few of his proposals became law due to facing opposition in Congress. Truman’s Marshall Plan sent $12 billion to help rebuild Western Europe after WWII, boosting the U.S. economy by creating a demand for American goods. The Korean War began during Truman’s term in 1950, leading to $30 billion in government spending that helped boost economic growth under Truman. 

Dwight Eisenhower (1953–1961)

Average Annual GDP Growth Rate: 2.8%

President Dwight D. Eisenhower had an annual GDP growth rate of 2.8%. During his time in office, the economy went through three recessions and the Korean War ended in 1953. Eisenhower helped boost economic growth with his Federal-Aid Highway Act in 1956, which was aimed at rebuilding the country’s interstate highways. The government spent a total of $119 billion on the project.

The economy contracted into a recession again from 1957 to 1958 when the Federal Reserve raised interest rates. However, Eisenhower refused to use fiscal policy to stimulate the economy in favor of maintaining a balanced budget. 

John F. Kennedy (1961–1963)

Average Annual GDP Growth Rate: 5.2%

President John F. Kennedy had an average annual GDP growth rate of 5.2%. Kennedy and his administration helped end the 1960 recession (the fourth major recession since WWII) by increasing domestic and military spending. Kennedy also raised the minimum wage and increased Social Security benefits. 

Lyndon B. Johnson (1963–1969)

Average Annual GDP Growth Rate: 5.2%

President Lyndon B. Johnson had an average annual GDP growth rate of 5.2%. LBJ was sworn in two hours after Kennedy’s assassination and was re-elected in 1964 after getting 61% of the vote.

Johnson increased government spending and pushed through tax cuts and the civil rights bill proposed during Kennedy’s term. Johnson’s Great Society program in 1965 created social programs such as Medicare, Medicaid, and public housing. While the economy grew under LBJ with strong businesses and low unemployment, prices began to rise rapidly and inflation ticked up. However, Johnson did not raise taxes to curb spending and cool inflation. Johnson also escalated the Vietnam War, which began during his term, but he was unable to end it.

Richard Nixon (1969–1974)

Average Annual GDP Growth Rate: 2.7%

President Richard Nixon had an average annual GDP growth rate of 2.7%. Though Nixon attempted to cool the inflation that began during LBJ’s term without causing a recession, his economic policies caused a period of stagflation that lasted for a decade. This period was a result of double-digit inflation and economic contraction.

Nixon imposed tariffs and wage-price controls, which led to layoffs and slower growth. The value of the dollar also fell during Nixon’s term when he ended the gold standard. The aftermath of Nixon’s economic policies are called the Nixon Shock.

Gerald R. Ford (1974–1977)

Average Annual GDP Growth Rate: 5.4%

President Gerald R. Ford had an average annual GDP growth rate of 5.4%. The economy had contracted and was in a recession from 1974 to 1975 due to stagflation from Nixon’s time. Ford and his administration cut taxes and reduced regulation to stabilize the economy, and ended the recession. However, inflation still remained high.

Jimmy Carter (1977–1981)

Average Annual GDP Growth Rate: 2.8%

President Jimmy Carter had an average annual GDP growth rate of 2.8%. Stagflation continued into Carter’s term, and was made worse by an energy crisis that led to soaring gas prices and shortages. Carter deregulated oil prices to stimulate domestic production and also deregulated the airline and trucking industries. The Iranian hostage crisis in 1979, however, led to economic contraction. Carter also had the highest inflation rate among U.S. presidents to date.

Ronald Reagan (1981–1989)

Average Annual GDP Growth Rate: 3.6%

President Ronald Reagan had an average annual GDP growth rate of 3.6%. The economy went into a recession in 1981 after the Fed raised interest rates to 20% in an effort to cool inflation.

Reagan’s economic policies, later known as Reaganomics, aimed to end the recession through decreased government spending, tax cuts, increased military spending, and reduced social spending. While these policies helped bring inflation down, Reagan added over $1.86 trillion to the national debt and made the budget deficit worse. Critics of Reagan’s economic policies also say he widened the nation’s wealth gap, and that his deregulation of the financial services industry may have contributed to the Savings and Loan Crisis in 1989.

George H.W. Bush (1989–1993)

Average Annual GDP Growth Rate: 1.8%

President George H.W. Bush had an average annual GDP growth rate of 1.8%. Bush’s administration had to contend with the fallout of the Savings and Loan Crisis, which unfolded during the 1980s and 1990s and contributed to a recession in 1990–1991. In 1989, Bush agreed to a $100 billion government bailout plan to help banks out of the Savings and Loan Crisis. Bush also raised taxes and cut government spending in an effort to reduce the budget deficit.

Bill Clinton (1993–2001)

Average Annual GDP Growth Rate: 4.0% 

President Bill Clinton had an average annual GDP growth rate of 4%. The economy grew for 116 consecutive months, with 22.5 million jobs created in Clinton’s two terms. Clinton signed the North American Free Trade Agreement (NAFTA) which increased growth by getting rid of tariffs between the U.S., Canada, and Mexico. Clinton also lowered the national debt, creating a budget surplus of $70 billion. Clinton raised taxes on the wealthy and briefly cut government spending to reform welfare.

George W. Bush (2001–2009)

Average Annual GDP Growth Rate: 2.4%

President George W. Bush had an average annual GDP growth rate of 2.4%. Bush’s two terms came with major events such as the 9/11 attacks (2001), Hurricane Katrina (2005), and the 2008 recession. Bush launched the War on Terror by creating and expanding the U.S. Department of Homeland Security (DHS) in response to the 9/11 attacks. Bush also faced the Great Recession in 2008, which was considered the most severe recession since the Great Depression. Bush’s military spending and significant tax cuts in response to the recession added about $4 trillion to the national debt.

Barack Obama (2009–2017)

Average Annual GDP Growth Rate: 2.3%

President Barack Obama had an average annual GDP growth rate of 2.3%. Obama ended the 2008 recession he inherited with the American Recovery and Reinvestment Act (ARRA), an $831 billion stimulus package passed by Congress aimed at cutting taxes, extending unemployment benefits, and improving infrastructure and education. However, Obama is the president who added the most to national debt, in dollar amounts, with his recession relief measures.

Still, Obama bailed out the auto industry in the U.S. and created 11.3 million new jobs during his two terms. Inflation and interest rates also remained low. He also ended the Iraq War and reduced troops in Afghanistan. Obama’s economic policies, now known as Obamanomics, were controversial at the time, and his role in ending the 2008 recession is still debated today.

Important

Note that the following section only highlight’s Trump’s first term in office.

Donald Trump (2017–2020)

Average Annual GDP Growth Rate: 2.3% 

President Donald Trump had an average annual GDP growth rate of 2.3%. While there were no major wars or recessions during Trump’s presidency, he did face the COVID-19 pandemic in 2020, his last year in office. Trump increased spending and cut taxes, while the Fed raised interest rates in response to Trump’s expansionary fiscal policies.

Trump placed import taxes on products from China, particularly steel and aluminum, to boost sales of American-made products. However, it hurt the sales of American exports instead, as China responded by placing tariffs on products it imported from the U.S. It also increased costs for American consumers. 

The economy went into recession with the onset of the COVID-19 public health crisis in March 2020 as businesses closed down and Americans sheltered in place. The recession was short but severe, and the Trump administration responded by declaring a state of emergency and passing a $2 trillion stimulus package called the CARES (Coronavirus Aid, Relief, and Economic Security) Act. The CARES Act provided relief for businesses and individuals through stimulus payments and a pause on student loan payments, among other measures, but it was not enough to pull the economy out of the pandemic-induced recession.

Joe Biden (2021–2025)

Average Annual GDP Growth Rate: 3.2%

President Joe Biden has had an annual average GDP growth of 3.2%, with a cumulative real GDP increase of 12.6% over his term highlighted by a 5.7% growth in 2021. Biden took office in the middle of the COVID-19 pandemic and signed the American Rescue Plan Act in 2021, which was a $1.9 trillion stimulus package to provide economic relief from the pandemic.

While the recession caused by the pandemic was severe, it was short-lived. However, it was followed by record-high inflation, partly due to the Russian invasion of Ukraine, which caused soaring gas in 2022, supply chain snarls, higher demand for goods, and increased consumer spending from federal stimulus checks. The Federal Reserve responded by raising interest rates 11 times since March 2022 in an attempt to cool inflation. In July 2024, inflation cooled to 2.9%, and the Fed signaled a potential rate cut.

How Does the President Impact GDP?

Since GDP is the most popular way to measure economic growth, it can show us how the economy performed under each U.S. president. How the economy does under a president is an important factor that voters consider when evaluating a president’s time in office. Also, economic policies are one of the main issues that presidents address while running for office.

Presidents indeed play a role in determining GDP. The president and Congress set fiscal policy to help direct the economy. The executive and legislative branches, for instance, can lower taxes and increase government spending to boost the economy, or the opposite.

While the president plays an important role in guiding the economy, external factors that can slow down the economy—such as wars, recessions, or public health crises—also significantly impact the economy and can be out of the president’s control. In addition, the Federal Reserve—which is independent of the federal government—sets monetary policy, which influence the economy as well.

What Is the Difference Between Real GDP and Nominal GDP?

Nominal GDP is the total value of all goods and services produced over a given time period, either quarterly or annually. Real GDP is nominal GDP, just adjusted for inflation. Economists use real GDP because it is a more accurate measure of economic growth since it adjusts for inflation.

Which President Has the Highest GDP Growth Rate in U.S. History?

President Franklin D. Roosevelt had the highest average annual GDP growth rate so far, at 10.1%. However, FDR also contributed the largest percentage increase to the U.S. national debt between his New Deal initiatives and spending on World War II.

What Is the Ideal GDP Growth Rate?

According to economists, the ideal average annual GDP growth should be 2% to 3% each year.

Can GDP Be Misleading?

While GDP is a widely used and accurate indicator, it’s not always a perfect one and has some drawbacks. That’s because it gives more of an overall picture of the economy and does not really account for informal or underground economic activity, income disparities, or the actual economic well-being of citizens. It’s an overall picture of the country’s output and not necessarily a comprehensive measure of a nation’s development or well-being. However, it does show how the economy contracts and expands through the business cycle in response to various economic events.

The Bottom Line

Looking at GDP growth is one of the most widely used measures of economic growth as it is considered one of the most accurate economic indicators. Since a president’s economic policies can have a significant impact on GDP, it can be used as a way to examine how the economy did under each U.S. president.

However, it is important to remember that some economic events such as severe recessions, natural disasters, public health crises, and other catastrophic events can affect the economy and have little to do with who is in office. Still, the way a president, along with the central bank, sets and enacts monetary policy in response to such events also influences the economy.

Fact checked by Ryan Eichler
Reviewed by JeFreda R. Brown

What Is the Risk-Reward Calculation?

Are you a risk-taker? When you’re an individual trader in the stock market, one of the few safety devices you have is the risk-reward calculation. The actual calculation to determine risk vs. reward is very easy. You simply divide your net profit (the reward) by the price of your maximum risk.

Sadly, retail investors might end up losing a lot of money when they try to invest their own money. There are many reasons for this, but one of those comes from the inability of individual investors to manage risk. Risk-reward is a common term in financial vernacular, but what does it mean?

Key Takeaways

• Calculate risk vs. reward by dividing your net profit (the reward) by the price of your maximum risk.
• To incorporate risk-reward calculations into your research, pick a stock, set the upside and downside targets based on the current price, and calculate the risk-reward.
• If the risk-reward is below your threshold, raise your downside target to attempt to achieve an acceptable ratio; if you can’t achieve an acceptable ratio, start with a different investment.

Understanding Risk vs. Reward

Investing money into the markets has a high degree of risk, and you should be compensated if you’re going to take that risk. If somebody you marginally trust asks for a $50 loan and offers to pay you $60 in two weeks, it might not be worth the risk, but what if they offered to pay you $100? The risk of losing $50 for the chance to make $100 might be appealing.

That’s a 1:2 risk-reward, which is a ratio where a lot of professional investors start to get interested because it allows investors to double their money. Similarly, if the person offered you $150, then the ratio goes to 1:3.

Now let’s look at this in terms of the stock market. Assume you did your research and found a stock you like. You notice that XYZ stock is trading at $25, down from a recent high of $29.

You believe that if you buy now, in the not-so-distant future, XYZ will go back up to $29, and you can cash in. You have $500 to put toward this investment, so you buy 20 shares. You did all of your research, but do you know your risk-reward ratio? If you’re like most individual investors, you probably don’t.

Special Considerations

Before we learn if our XYZ trade is a good idea from a risk perspective, what else should we know about this risk-reward ratio? First, although a little bit of behavioral economics finds its way into most investment decisions, risk-reward is completely objective. It’s a calculation, and the numbers don’t lie.

Second, each individual has their own tolerance for risk. You may love bungee jumping, but somebody else might have a panic attack just thinking about it.

Next, risk-reward gives you no indication of probability. What if you took your $500 and played the lottery? Risking $500 to gain millions is a much better investment than investing in the stock market from a risk-reward perspective, but a much worse choice in terms of probability.

In the course of holding a stock, the upside number is likely to change as you continue analyzing new information. If the risk-reward becomes unfavorable, don’t be afraid to exit the trade. Never find yourself in a situation where the risk-reward ratio isn’t in your favor.

How to Calculate Risk-Reward

Remember, to calculate risk-reward, you divide your net profit (the reward) by the price of your maximum risk. Using the XYZ example above, if your stock went up to $29 per share, you would make $4 for each of your 20 shares for a total of $80. You paid $500 for it, so you would divide 80 by 500, which gives you 0.16.

This means that your risk-reward for this idea is 1:0.16. Most professional investors won’t give the idea a second look at such a low risk-reward ratio, so this is a terrible idea. Or is it?

Using the Risk-Reward Calculation

To incorporate risk-reward calculations into your research, follow these steps:

1. Pick a stock using exhaustive research.
2. Set the upside and downside targets based on the current price.
3. Calculate the risk-reward.
4. If it is below your threshold, raise your downside target to attempt to achieve an acceptable ratio.
5. If you can’t achieve an acceptable ratio, start over with a different investment idea.

Once you start incorporating risk-reward, you will quickly notice that it’s difficult to find good investment or trade ideas. The pros comb through charts each day—sometimes hundreds of them—looking for ideas that fit their risk-reward profile. Don’t shy away from this. The more meticulous you are, the better your chances of making money.

Limiting Risk and Stop Losses

Unless you’re an inexperienced stock investor, you would never let that $500 go all the way to zero. Your actual risk isn’t the entire $500.

Every good investor has a stop-loss or a price on the downside that limits their risk. If you set a $29 sell limit price as the upside, maybe you set $20 as the maximum downside. Once your stop-loss order reaches $20, you sell it and look for the next opportunity.

Because we limited our downside, we can now change our numbers a bit. Your new profit stays the same at $80, but your risk is now only $100 ($5 maximum loss multiplied by the 20 shares that you own), or 100/80 = 1:0.8. This is still not ideal.

What if we raised our stop-loss price to $23, risking only $2 per share or $40 loss in total? Remember, 40/80 is 1:2, which is acceptable. Some investors won’t commit their money to any investment that isn’t at least 1:4, but 1:2 is considered the minimum by most. Of course, you have to decide for yourself what the acceptable ratio is for you.

Notice that to achieve the risk-reward profile of 1:2, we didn’t change the top number. When you did your research and concluded that the maximum upside was $29, that was based on technical analysis and fundamental research. If we were to change the top number, in order to achieve an acceptable risk-reward, we’re now relying on hope instead of good research.

What Is Risk?

Risk is defined in financial terms as the chance that an outcome or investment’s actual gain will differ from the expected outcome or return. Risk includes the possibility of losing some or all of an original investment.

What Is Reward?

Reward is defined in financial terms as the potential profit or return that an investor can expect to gain from an investment. Essentially, it’s the positive outcome of taking on a risk.

What Are the Elements of a Risk-Reward Calculation?

To calculate risk-reward, divide your net profit (the reward) by the price of your maximum risk.

• Net profit is the total amount of money that an investor keeps after subtracting all costs and expenses associated with their investments, including commissions, fees, and taxes.
• Maximum risk is the potential for the largest possible loss on an investment. It typically occurs when an investor puts all their money into a single, highly volatile asset, potentially losing the entire investment if the asset performs poorly.

The Bottom Line

Every good investor knows that relying on hope is a losing proposition. Being more conservative with your risk is always better than being more aggressive with your reward. Risk-reward is always calculated realistically, yet conservatively.

Correction—May 29, 2023: This article has been revised to correct the examples of ratios throughout, placing the figure for risk as the first element of the ratio and the potential reward as the second element.

Triple-Leveraged Funds Promise Big Returns But Pack Hidden Dangers

Reviewed by Andy Smith

Suppose you’re sure you can make a trade now that would net you a 5% gain. That would be great, but what if you could instead net a 15% profit? That’s the appeal of triple-leveraged (3x) exchange-traded funds (ETFs), investments that aim to triple the returns of the markets they track. But this magnification of gains has a flip side that some investors don’t fully grasp until it’s too late.

For experienced day traders, 3x ETFs can be worthwhile and beneficial tools. However, these products hide mathematical quirks that make them ticking time bombs for long-term investors. Even a choppy but flat market can steadily erode significant value through compounding—meaning you could lose money even when the market ends up exactly where it started. Below, we examine the advantages and disadvantages of trading in these funds.

Key Takeaways

• Triple-leveraged (3x) exchange-traded funds (ETFs) come with substantial risk and aren’t appropriate for long-term investing.
• Compounding can cause large losses for 3x ETFs during volatile markets, such as occurred with several such funds in the volatile markets of the 2020s.
• Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day.
• Because their high leverage creates a risk of enormous single-day losses, it’s not recommended to hold leveraged ETFs overnight.

When 3X ETFs: Recent Cautionary Tales

As with other leveraged ETFs, 3x ETFs track a wide variety of asset classes, such as stocks, bonds, and commodity futures. The difference is that 3x ETFs apply even greater leverage to gain three times the daily or monthly return of their respective underlying indexes. The idea behind 3x ETFs is to take advantage of quick market moves. They are not meant to—and shouldn’t—be held for the long term and aren’t recommended to be held even overnight.

Numerous market events in the 2020s provided stark examples of how quickly these investments can go very, very wrong. While quick-footed day traders might navigate these waters with less trouble, anyone else was likely given expensive lessons in the potential hazards for your portfolio.

For example, in late August 2024, the Direxion Daily Semiconductor Bull 3x Shares (SOXL) plunged 22.5% in a single day as tech stocks stumbled—its worst performance since March 2020, the start of the pandemic. That was after the fund had dropped more than 60% from July into August 2024. The 22.5% plunge took place after a mid-month rebound, demonstrating the extreme volatility of SOXL.

Here are just some of the other critical moments faced by triple-leveraged fund investors in the 2020s:

March 2020 (COVID Crash)

• ProShares UltraPro QQQ (TQQQ) plunged 70% in weeks.
• Many other triple-leveraged ETFs lost over half their value.
• Some investors mistakenly bought the dip, not understanding daily resets, which we’ll discuss below.

April 2020 (Oil Price Collapse)

• Leveraged oil ETFs were ravaged when oil futures briefly went negative.
• Several funds were forced to restructure or liquidate.
• Small investors were caught off guard by complex oil futures mechanics.

January-February 2022

• TQQQ dropped more than 40% as the U.S. Federal Reserve signaled rate hikes.
• Tech-focused leveraged funds were hit especially hard.
• While funds like the Invesco QQQ Trust ETF (QQQ) were hit hard, investors in the 3X TQQQ were devastated.
• Rising rates exposed risks of growth stock leverage.

March 2022 (Nickel Market Crisis)

• WisdomTree’s 3x Short Nickel ETF collapsed to zero.
• Nickel prices soared 250% in days during what ended up being a short squeeze.
• The fund was forced to redeem all shares, wiping out investors.

September-October 2022

• TQQQ fell 30% amid inflation fears.
• Semiconductor leveraged funds like SOXL also suffered steep declines.
• This showed the dangers of concentrating in a given sector while also using leveraged funds simultaneously.

August-September 2024

• SOXL plunged 22.5% in one day.
• Tech sector leveraged funds were hit especially hard in a broad sell-off.
• Many new investors learned painful lessons about using these funds for anything other than day trading or other extremely short-term trading, especially during market volatility.

Note

Leveraged ETFs are intended for very short holding periods, typically less than a trading day. Over time, their value will tend to decay even if the underlying price moves favorably.

Key Lessons From Recent Major ETF Losses

• Never hold these funds overnight unless you’re prepared for potential major losses.
• Market volatility can trigger catastrophic declines even when the underlying index only drops moderately.
• Even good news can hurt—a choppy rise in prices can erode value through daily resets.
• The more volatile the sector (like tech or commodities), the riskier the leveraged ETF.

To understand how these disasters can unfold so quickly, let’s examine four key risk factors: how daily compounding works against you, how these funds amplify the volatility of markets, the complex derivatives these funds use, and the “constant leverage trap” that makes recovery from losses nearly impossible.

Derivatives: The Engine Behind the Leverage

Triple-leveraged ETFs don’t simply borrow money to amplify returns. Instead, they use complex financial contracts called derivatives to create their leverage, typically a mix of futures contracts, swaps, and options.

Each of these has specific risks:

• Futures contracts can move differently than the actual market they track.
• Swaps depend on other financial firms keeping their promises to pay.
• Options can expire worthless if market timing is off.

If any of these building blocks fails, the ETF can crumble. Here are the risks you’re indirectly signing onto:

• Market risk: The chance that the derivatives’ value moves differently than expected. For example, a futures contract tracking the S&P 500 might fall more sharply than the index itself during market stress.
• Counterparty risk: The chance that the other party in a derivative contract can’t or won’t pay up. If a bank providing swap contracts to a leveraged ETF fails, the fund could face severe losses.
• Liquidity risk: The possibility that an ETF can’t easily buy or sell its derivative positions at all or without moving market prices. During market turmoil, derivatives can become much harder to trade, forcing funds to accept unfavorable prices.
• Interconnection risk: How problems in one part of the financial markets can spread to others. When derivatives markets seize up, it can create a domino effect hitting multiple funds and market sectors simultaneously.

This complex web of risks means that even if the market index a fund tracks moves as expected, the fund itself could perform very differently because of trouble with its derivative positions.

Volatility: Triple the Gains and Triple the Losses

For most investments, volatility makes for sometimes nausea-inducing ups and downs. But for triple-leveraged ETFs, volatility can be lethal. Even small market swings get amplified into dramatic price moves that can quickly snowball into major losses.

Consider the difference between the Nasdaq-100 tracking fund QQQ and its triple-leveraged cousin TQQQ, whose price chart is above. When tech stocks hit turbulence in March 2020, QQQ dropped about 28%—a significant but manageable decline. TQQQ, however, plummeted 70% during the same period. That’s ends up far worse than simply triple the loss, thanks to the fund’s daily reset mechanism magnifying each day’s volatile moves.

Even in calmer markets, TQQQ regularly sees daily price swings of 5% or more, while QQQ might move just 1% to 2%. This extreme volatility makes these funds especially dangerous for overnight holding— a post-market news announcement that might knock QQQ down 3% could send TQQQ plunging 9% or worse before you can even place a trade.

The Daily Reset Trap

In addition to simple volatility, investors in triple-leveraged ETFs need to beware the daily reset trap. These funds must reset their leverage every day because they must maintain exactly 300% exposure to their target index at all times.

So each day at market close, the fund adjusts its holdings to get back to that 300% target. Let’s look at an example.

First, an Up Day

• An index that starts at 100.
• A 3x leveraged ETF that starts with $100, designed to move three times the index.
• The index borrows money to maintain exposure to $300 worth of assets (3x the index)
• On day one, the index rises from 100 to 110 (+10%)
• On day one, the 3x ETF gains 30%, with a new value of $130.
• Under the daily reset, the ETF must now control $390 worth of assets (3 x $130), because it must maintain three times the fund’s total assets in exposure to the index. So it buys another $90 of exposure.

Then, a Down Day

So far so good, because the index went up on day one. But let’s look at what happens when the market goes down the next day.

• The index falls 10% (the same percentage as the previous day’s rise), from 110 to 99.
• The 3x ETF should lose 30%, so its value drops from $130 to $91.
• So since the start of trading on day one, the index has gone up 10% then down 10%, yet lost 1% of its overall value.
• Meanwhile, the 3x ETF has gone up 30% and down 30%—but lost 9% of its original value.

This illustrates the peril of the daily reset and holding such a highly leveraged instrument for multiple days, especially in a choppy market.

Compounding

This brings us to compounding, which also heightens the risk for investors (as well as the potential reward). With compounding, gains and losses stack up quickly even over very short periods, particularly in choppy markets.

With compounding, the daily reset trap can become even more painful if you continue to hold. Extending our example above, consider what would happen if the index again rose 10% on the third day and fell 10% on the fourth. The index would end up at 98.01, a loss of 1.99%, but the 3XETF’s value would be $82.81, a loss of 17.19%—all while going up and down by the same percentage.

Important

Even in flat but volatile markets, these funds can lose money because of a mathematical effect called compounding.

High Expense Ratios

Beyond the inherent risks of these investments, triple-leveraged ETFs also have very high expense ratios, which make them unattractive for long-term investors. All mutual funds and exchange-traded funds charge their shareholders an expense ratio to cover the fund’s total annual operating expenses.

The expense ratio is expressed as a percentage of a fund’s average net assets, and it can include various operational costs. The expense ratio, which is calculated annually and disclosed in the fund’s prospectus and shareholder reports, directly reduces the fund’s returns to its shareholders.

Even a small difference in expense ratios can cost investors a substantial amount of money in the long run. Triple-leveraged ETFs often charge around 1% per year. For example, TQQQ, which seeks to triple the daily returns of the Nasdaq 100, has an expense ratio of 0.84%.

Compare that with typical stock market index ETFs, which usually have low expense ratios. For example, the Invesco QQQ, which is not leveraged and tracks the same index as the TQQQ, the Nasdaq 100, has an expense ratio of 0.20%.

What Does It Mean When an ETF Is Leveraged 3x?

An ETF that is leveraged 3x seeks to return three times the return of the index or other benchmark that it tracks. A 3x S&P 500 index ETF, for instance, would return +3% if the S&P rose by 1%. It would also lose 3% if the S&P dropped by 1%.

What Research Is Needed to Trade in Triple-Leveraged ETFs?

Leveraged ETFs require considerations such as how they are constructed and how often their portfolio is rolled over and rebalanced. For instance, some may use option contracts while others use structured notes. Leveraged ETFs also tend to have relatively high expense ratios, which also has to be considered.

What Happens If Triple-Leveraged ETFs Go to Zero?

Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero. Before this happens, leveraged ETFs can undertake a reverse stock split, creating higher-priced shares but reducing the number of ETF units outstanding. Ultimately, if the fund’s share prices drop low enough and there is no demand for a reverse split, the ETF may be delisted.

The Bottom Line

Triple-leveraged ETFs might seem attractive with their promise of tripling market returns, but they can be ticking time bombs for investors who aren’t careful. These complex products are designed for sophisticated day traders, not buy-and-hold investors. Even when markets are relatively flat, these funds can lose substantial value through daily resets and compounding.

Add in high fees, complex derivatives, and the potential for complete collapse if markets drop sharply, and it’s clear why financial experts warn that 3x ETFs should be approached with extreme caution—if at all. For most investors seeking market exposure, traditional non-leveraged ETFs offer a much safer path to achieving their investment goals.

Marcus offers competitive CD rates with terms from 6 to 72 months

Fact checked by Michael Rosenston

Marcus’ high-yield CDs come with competitive rates on all terms, with the highest APY of 4.30% offered on a 9-month term. The APYs on its No-Penalty CD are lower, but this CD type gives you the option of withdrawing your money early without penalty. Finally, Marcus’ Rate Bump CD only comes with one term of 20 months, but it gives you the option to upgrade your rate once if rates increase during your term.

Compare Marcus CDs some of the best high-yield CDs.

Marcus High-Yield CD Overview

In addition to its high-yield CDs, Marcus offers two other CD types: a no-penalty CD and a rate bump CD.

• No-penalty CD: Terms for a no-penalty CD are 7 months, 11 months, and 13 months. The minimum deposit is $500 and the APR is 4.15%.
• Rate bump: The rate bump CD is a 20-month CD with a minimum deposit of $500 and an APY of 3.90%.

Marcus CD Rates: Key Features

• Marcus no-penalty CD key features: An APY of 4.15%, a minimum balance of $500, term range of 7–13 months, and no early withdrawal fee.
• Rate bump CD key features: An APY of 3.90%, a minimum balance of $500, a term of 20 months, an early withdrawal fee of 90 days interest on terms less than 1 year 180 days interest on terms of 1–5 years 270 days interest on terms more than 5 years (with a grace period of 10 days). This CD lets you upgrade your rate once if Marcus raises the rates on its 20-month CDs during your term. 

Compare Marcus CD Rates

Marcus CDs offer competitive rates on its CDs and a range of CD options and types. You can likely find a CD that meets your needs with Marcus, but you may also find higher rates by shopping around and reviewing other CDs rates and terms.

Pros and Cons of Marcus CDs

Pros

• Competitive CD rates

• A range of CD terms

• Rate bump option

Cons

• No branch locations

Pros Explained

• Competitive CD rates: Marcus offers rates on its CDs that are higher than rates on many others.
• A range of CD terms: Marcus CD terms range from 6 months to 72 months, giving you flexibility. Marcus also offers three CD types: a high-yield CD, a no-penalty CD, and a rate bump CD. 
• Rate bump option: With a 20-month Marcus CD, you have the option to increase your CD rate once in its term if broader interest rates rise.

Cons Explained

• No branch locations: Marcus by Goldman is an online bank, so if you want in-person service you should consider CDs from another financial institution.

About Marcus

Marcus by Goldman Sachs is an online bank that offers a variety of accounts, including three types of CDs: a high-yield CD, a no-penalty CD, and a rate bump CD. 

Marcus customers can also open a high-yield savings account or credit card, including either a rewards card, business card, or family credit card.

The Marcus No-Penalty CD doesn’t charge an early withdrawal penalty, but you must wait seven or more days from your opening deposit to make a withdrawal.

Alternatives to Marcus CDs

• High-yield savings accounts: If you’re willing to open an online savings account elsewhere, you may be able to earn higher rates than what Marcus CDs offer. See the best high-yield savings account rates to compare how much you could earn.
• High-yield checking accounts: You may find relatively high rates with some checking accounts. Be aware of their requirements and limits. The best high-interest checking accounts give you easy access to your money.
• Certificates of deposit (CDs): Marcus competitive rates on its CDs. You can also choose from a range of CDs from other financial institutions.
• Money market account: Money market account can also provide a return on your savings. Check the best money market account rates to see how it compares.
• Treasury securities: These government-backed bills, notes, and bonds sometimes offer even higher rates than CDs and may be more liquid. 

Frequently Asked Questions (FAQs)

Are Marcus CDs FDIC-Insured?

Yes, Marcus CDs are FDIC-insured. Provided by Goldman Sachs Bank USA, an FDIC member, Marcus CDs are FDIC-insured for up to $250,000.

What Is the Early Withdrawal Penalty for Marcus CDs?

The early withdrawal penalty on Marcus CDs varies depending on the CD’s term length. The penalty is 90 days of interest on terms less than one year, 180 days of interest on terms of one to five years, and 270 days of interest on terms more than five years. 

What Is the Minimum Opening Deposit for Marcus CDs?

The minimum opening deposit for Marcus CDs is $500. This minimum deposit applies to all three CD types that Marcus offers: high-yield CDs, no-penalty CDs, and rate bump CDs.

Your Guide to CDs

• What Is a Certificate of Deposit (CD)?
• What Is a Brokered CD?
• What Is a CD Ladder?
• Pros and Cons of CDs
• How to Invest With CDs
• How to Open a CD
• How to Close a CD
• CDs vs. Annuities
• CDs vs. Stocks
• CDs vs. Mutual Funds
• CDs vs. ETFs
• CDs vs. Savings Accounts
• Short-Term vs. Long-Term CDs
• CD Rates News
• Best 1-Year CD Rates
• Best 18-Month CDs
• Best Jumbo CD Rates
• Best 6-Month CD Rates
• Best 3-Month CD Rates
• Best Bank CD Rates

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Each woman reached a milestone in American politics, business, or social movements.

Reviewed by Erika Rasure

Gender discrimination has historically placed barriers to the success of women in the workplace, politics, and education. However, many women have forged a path for future generations by being the first to break down barriers to become the first female doctor or the first elected official in the United States.

Key Takeaways

• In the 19th century, women began to break into previously all-male professions, such as medicine and law.
• Advances in the 20th century included House and Senate seats, a Cabinet appointment, and leading roles in the desegregation and labor movements.
• In the 21st century, women have assumed notable leadership roles in the federal government and financial sectors.

1809

In 1809, Mary Kies became the first woman to receive a patent, for a method of weaving straw with silk. 

1849

In 1849, Elizabeth Blackwell graduated from Geneva Medical College in New York and became the first female doctor in the U.S. Dr. Blackwell founded the New York Infirmary for Women and Children, along with an affiliated medical college for women. The infirmary helped expand medical training to women and medical care to the poor.

1864

In 1864, Dr. Rebecca Lee Crumpler became the first Black woman physician in the United States, graduating from the New England Female Medical College. Dr. Crumpler relocated to Richmond, Va., after the Civil War, where she worked for the Freedmen’s Bureau on the health needs of freed slaves. Dr. Crumpler later wrote the first medical text by a Black author.

1869

In 1869, Arabella Mansfield was the first woman admitted to practice law in the U.S., in Iowa.

1870

Ada H. Kepley is the first woman in the United States to graduate from law school.

1872

The first female presidential candidate in the U.S., Victoria Claflin Woodhull, was nominated by the Equal Rights Party.

1887

Susanna Madora Salter is the first woman elected mayor of an American town, in Argonia, Kansas.

1889

Dr. Susan La Flesche Picotte was the first Native American physician in the U.S., to graduate from the Woman’s Medical College of Pennsylvania as valedictorian. Dr. Picotte opened a hospital in the Omaha Reservation town of Walthill, Nebraska.

1916

The first woman is elected to the U.S. House of Representatives: Jeannette Rankin of Montana.

1928

Amelia Earhart flew an aircraft solo across the Atlantic Ocean.

1932

Hattie Wyatt Caraway of Arkansas became the first woman elected to the U.S. Senate.

1933

The first female Cabinet member, Frances Perkins, was appointed as Secretary of Labor by President Franklin D. Roosevelt. Perkins helped enact a minimum wage, unemployment compensation, and a limit on the employment of children. Perkins also played a role in drafting the Social Security Act.

1955

In March, 15-year-old Claudette Colvin refuses to move to the back of a bus in Birmingham, Alabama. Colvin became one of the plaintiffs in the first federal court case to challenge bus segregation. Later that same year, Rosa Parks refused to give up her seat on the bus to a White man in Montgomery, Alabama. Her protest sparked the 381-day Montgomery Bus Boycott that ended segregation on buses.

1962

Dolores Huerta co-founded the National Farm Workers Association with César Chávez, playing a key role in organizing the 1965 strike of 5,000 grape workers. Huerta championed women’s issues and worked to elect more Latinos and women to public office during the 1990s and 2000s.

1964

Patsy Mink became the first woman of color in Congress, representing Hawaii. Mink was one of the principal authors of Title IX of the Education Amendments of 1972, the landmark legislation that prohibits gender discrimination in education.

1967

Muriel Siebert was the first woman to buy a seat on the New York Stock Exchange. Siebert was later selected to become New York’s first female superintendent of banking in 1977.

1968

Shirley Chisholm was the first Black woman elected to Congress. Representing New York for 14 years, Chisholm advocated for early education and child welfare policies. 

1972

Katharine Graham became the first woman to be CEO of a Fortune 500 company, the Washington Post Company. Graham had been president of the company, which was owned by her family, since the death of her husband in 1963 and ran it until 1991. She was in charge when The Washington Post published the Pentagon Papers in 1971 and when Post reporters Bob Woodward and Carl Bernstein uncovered the Watergate conspiracy in 1972.

1980

Paula Hawkins of Florida, a Republican, became the first woman to be elected to the U.S. Senate without following her husband or father into the job. Hawkins was the leading sponsor of the Missing Children’s Act of 1982 and fought for laws to make it easier for women to enter the job market. 

1981

Sandra Day O’Connor was appointed as the first woman to serve on the U.S. Supreme Court. The court overturned state laws designating a husband “head and master” with unilateral control of property owned jointly with his wife. It also ruled that excluding women from the draft is constitutional.

1984

U.S. Rep. Geraldine Ferraro, D-N.Y., was the first woman to be nominated as the vice presidential candidate on a major-party ticket.

1989

U.S. Rep. Ileana Ros-Lehtinen of Florida was the first Latina and Cuban American to serve in Congress. A moderate Republican, Ros-Lehtinen was the first female to chair a standing committee, the Committee on Foreign Affairs. In her 30-year political career, she was a member of the LGBT Equality Caucus and the Climate Solutions Caucus. 

1997

Madeleine Albright, who served as U.S. ambassador to the United Nations, became the first female Secretary of State.

2007

U.S. Rep. Nancy Pelosi, D-Calif., became the first female Speaker of the House.

2009

Michelle Obama became the first Black first lady of the United States. President Barack Obama appointed Sonia Sotomayor as the first Latina Supreme Court judge.

2014 

Economist Janet Yellen became the first woman to chair the Federal Reserve System.

2016

Hillary Rodham Clinton secured the Democratic presidential nomination, becoming the first U.S. woman to lead the ticket of a major party. She lost to Republican Donald Trump in the election.

2018

Banker Stacey Cunningham became the first female president of the New York Stock Exchange. 

2021

U.S. Sen. Kamala Harris, D-Calif., was the first woman, the first Black American, and the first person of South Asian descent to be vice president of the United States, serving alongside President Joe Biden. First Lady Jill Biden, an English professor at Northern Virginia Community College, became the first first lady to keep her day job.

2022 

President Biden nominated Ketanji Brown Jackson to the Supreme Court in 2022. She was approved by the Senate and took her seat on June 30, 2022, becoming the first Black woman to sit on the Supreme Court.

2024

Following President Joe Biden’s decision not to run for a second term, Kamala Harris accepted the Democratic Party’s nomination as the first Black and South Asian American woman to run for President of the United States. She lost the election to Donald Trump.

Who Was the First American Woman to Become a Doctor?

Dr, Elizabeth Blackwell was the first woman in the U.S. to become a doctor, in 1949 after graduating from the Geneva Medical College in New York. In 1864, Dr. Rebecca Lee Crumpler was the first Black American woman physician and the first Black American author of a medical text.

Who Was the First American Woman To Run for President?

Victoria Claflin Woodhull was the first woman presidential candidate in 1872. Woodhull, who championed women’s suffrage, was nominated by the Equal Rights Party.

Who Was the First American Woman CEO of a Fortune 500 Company?

In 1972, Katherine Graham became the first woman CEO of a Fortune 500 company, The Washington Post.

The Bottom Line

Without the trailblazing work of many women in history, positions in medicine, politics, and law may not have opened for women of future generations. Women still face barriers due to gender-based discrimination, and many professions are still dominated by men.

Reviewed by Thomas Brock
Fact checked by Suzanne Kvilhaug

Companies can do several things with their profits. They can keep them as retained earnings, reinvest them to help them grow, or share them with their investors as dividends. Dividend payments are decided by the board of directors and must be approved by shareholders. These payments can be issued as cash or as shares of stock.

But what happens when a company needs to cut its profit-sharing? A dividend cut occurs when a dividend-paying company either completely stops paying out dividends or reduces the pay out. This most often leads to a sharp decline in the company’s stock price, because this action is usually a sign of a company’s weakening financial position, which makes the company less attractive to investors.

Key Takeaways

• Dividend cuts are most often a negative sign for a company’s financial health.
• Companies usually make drastic dividend cuts because of financial challenges like declining earnings or mounting debts.
• Sometimes companies may cut dividend payments for more positive reasons, like preparing for a major acquisition or a stock buyback.

Financial Reasons

Dividends are usually cut due to financial reasons like weak earnings or a funding crunch. Typically, dividends are paid out from the company’s earnings, and if earnings decline over time, the company either needs to increase its payout rate or access capital from other places, such as its short-term investments or debt, to meet the past dividend levels. 

If the company uses money from non-earnings sources or takes up too much of the earnings, it may put itself into a compromising financial position. For example, if it has no money to pay off its debts because it is paying out too much in dividends, the company could default on its debts. It usually won’t come to this, though, as dividends are usually near the top of the list of things cut when the company is faced with financial challenges.

This is exactly why dividend cuts are seen as a negative. A cut is a sign that the company is no longer able to pay out the same amount of dividends as it did before without creating further financial difficulties.

Note

Some of the most common industries that pay dividends include financials, oil and gas, utilities, healthcare, and basic materials.

Room for Growth

While most investors rightly consider a drastic dividend cut a negative sign for a company’s health, it isn’t always such a harbinger of doom for a company. 

Under certain conditions, when the pricing and conditions are just right for a stock buyback; weathering a major recession becomes the priority; or a company needs to accumulate cash on hand for a big merger or acquisition. 

In these cases, a dividend cut—even a rather drastic one—may not necessarily be a sign of trouble or even a sign that selling the stock is your best course of action. As with any financial decision, doing due diligence and careful research is key to successful investing. 

Examples of Dividend Cuts

Although most dividend-paying companies do everything they can not to slash them, there are cases when companies have no other alternative. The following are a few cases when companies decided to cut their dividends:

• Royal Caribbean Cruises: The cruise holding company suspended its quarterly dividend in 2008 as a cost-cutting measure. The aim was to improve the company’s profitability and liquidity.
• Wells Fargo: The bank cut its dividend by 85% in 2009 following the financial crisis. Originally 34 cents, Wells Fargo’s dividend dropped to five cents as a way to help cushion it from future losses.
• 3M: The company slashed its dividend after spinning off Solventum, its healthcare business. It adjusted its dividend payout ratio to 40% of adjusted free cash flow—a move that was expected by many experts.

Are Dividend Stocks Worth It?

This depends on your investment goals and financial situation. But, many investors like having dividend stocks in their portfolio. These companies offer a steady source of income and can help offset some of the risks associated with other investments in your portfolio.

What Is a Dividend Yield?

The term dividend yield refers to the dividend paid by a company expressed as a percentage of its share price. Put simply, it’s a financial metric that indicates a company’s dividend payout relative to its stock price. A company’s dividend yield is calculated by dividing the total annual dividends per share by the current share price.

What Is an Ex-Dividend Date?

An ex-dividend date is the date at which a shareholder becomes eligible to receive dividends. In simple terms, it is the cutoff date for dividend eligibility. This is typically one business day before the record date. Shareholders who purchase the stock before the ex-dividend date become eligible to receive the dividend. Those who begin investing in the stock on or after the date must wait until the next period to receive dividends.

The Bottom Line

Companies that can grow their dividends are seen as stable and attract investors looking for income as well as capital gains. Sometimes, however, it can hurt a company’s bottom line to distribute profits as dividends rather than retain earnings to solidify the company’s financials. Companies may cut dividends in response to an economic downturn, a spate of negative earnings, or more serious threats to the company’s health. Other times, the cut may be more strategic and orient towards future growth or allow for buybacks.

Fact checked by Kimberly Overcast
Reviewed by Akhilesh Ganti

Debt is not always a bad thing, especially in business. Debt provides liquidity to the financial markets by giving borrowers access to the capital they need. Individuals, businesses, and governments issue debt for a variety of reasons, trading the promise of repayment plus interest in the future in exchange for cash that is immediately accessible in the present.

Debt instruments come in different forms, some more obvious than others. Keep reading to find out more about debt instruments and the most common types issued by lenders.

Key Takeaways

• A debt instrument is an asset that individuals, companies, and governments use to raise capital or to generate investment income.
• Using debt instruments, investors provide fixed-income asset issuers with a lump sum in exchange for interest payments at regular intervals.
• Fixed-income issuers repay the full principal balance of a bond or debenture at the maturity date.
• Mortgages, loans, lines of credit, and credit cards are also considered debt instruments.

What Is a Debt Instrument?

A debt instrument is an asset that an entity uses to raise capital or to generate investment income. The basic premise is that the entity takes on debt to investors or lenders, which it will eventually have to repay, in return for immediate, liquid cash. Debt instruments can be used by individuals, businesses, or governments.

For instance, a company may need to finance the purchase of a new piece of equipment, while government agencies may require financing for projects such as infrastructure improvements or to fund their day-to-day operations.

This type of instrument essentially acts as an IOU between the issuer and the purchaser. The purchaser becomes the lender by providing a lump-sum payment to the issuer or borrower. In exchange, the issuing company guarantees the purchaser full repayment of the investment at a later date. The terms of these types of contracts often include the payment of interest over time, resulting in cumulative profit for the lender.

A vehicle that is classified as debt may be deemed a debt instrument. These can include traditional forms of debt including loans and credit cards, as well as fixed-income assets such as bonds and other securities. As noted above, the premise is that the borrower promises to pay the full balance back with interest over time.

Fixed-Income Assets

These assets are investment securities offered to investors by corporations and governments. Investors purchase the security for the full amount and receive interest or dividend payments over regular intervals until the instrument matures.

At this point, the issuer repays the investor the full principal amount invested. Bonds and debentures are among the most popular types of fixed-income debt instruments.

Bonds

Bonds are issued by governments or businesses. Investors pay the issuer the market value of the bond in exchange for guaranteed loan repayment and the promise of scheduled coupon payments. This is the annual rate of interest that a bond pays. It is generally expressed as a percentage of the bond’s face value.

This type of investment is backed by the assets of the issuing entity. If a company issues bonds to raise debt capital and declares bankruptcy, bondholders are entitled to repayment of their investments from the company’s assets.

Debentures

Debentures are often used to raise short-term capital to fund specific projects. This type of debt instrument is backed only by the credit and general trustworthiness of the issuer. Both bonds and debentures are popular among investors because of their guaranteed fixed rates of income. But there is a distinction between the two.

The primary difference between a debenture and other bonds is that the former has no asset backing it or collateral. The bondholders’ investment is expected to be repaid with the revenue those projects generate.

Important

Remember, if you invest in a debt instrument such as a bond, you become the lender. You become the borrower when you need capital, as is the case with a loan or credit card.

Other Types of Debt Instruments

Banks and other financial institutions also issue debt instruments. Most consumers, though, know these as credit facilities. Consumers apply for credit for a number of reasons, whether that’s to purchase a home or car, to pay off their debts, or so they can make large purchases and pay for them at a later date.

Banks use the money they receive from savers to lend out to others. Banks receive interest on top of the principal they lend out, a small portion of which is deposited into their clients’ savings accounts. These can be collateralized or not, depending on the type of facility and the borrower’s credit history.

Mortgages

These debt instruments are used to finance the purchase real estate. This could be a piece land, a home, or a commercial property. Mortgages are amortized over a certain period of time, allowing the borrower to make payments until the loan is paid off.

Lenders also receive interest over the life of the loan. The risk of default is reduced for the lender because mortgages are collateralized by the real estate itself. This means if the debtor stops paying, the lender can begin foreclosure proceedings to repossess the property and sell it to pay off the loan. The lender is free to pursue the borrower for any remaining balance.

Loans

Loans are possibly the most easily understood debt instrument. Most people use loans at some point in their lives. They can be acquired from financial institutions or individuals and can be used for a variety of purposes, such as the purchase of a vehicle, to finance a business venture, or to consolidate other debts into one.

Under the terms of a simple loan, the purchaser is allowed to borrow a given sum from the lender in exchange for repayment over a specified period of time. The purchaser agrees to repay the total amount of the loan, plus a pre-determined amount of interest in return.

Lines of Credit (LOC)

Lines of credit give borrowers access to a specific credit limit issued based on their relationship with a bank and their credit score. This limit is revolving, which means the debtor can draw on it regularly as long as they maintain their payments. Just like other credit facilities, borrowers pay principal and interest. LOCs may be secured or unsecured based on the needs and financial situation of the borrower.

Here’s an example of how they work. Let’s say Mr. C has a $20,000 LOC. He uses it to pay down some debt, buy some furniture, and pay a contractor for some work around his home. This totals $11,000. Mr. C still has $9,000 available. But if he makes a $5,000 payment to pay down his balance, he has access to $14,000 that he can use freely.

Credit Cards

A credit card provides a borrower with a set credit limit they can access continuously over time. Like a line of credit, consumers are able to use their credit cards as long as they make their payments.

Borrowers have two payment options:

1. Pay the balance in full each month and avoid paying any interest charges.
2. Make a smaller payment, down to the minimum monthly payment.

Paying less than the full balance on the card means the cardholder carries the remaining balance over to the next month. In most cases, this means a percentage of the remaining balance will be added as interest, which the cardholder also becomes responsible for paying off. The amount of interest added depends on the cardholder agreement.

Are Bonds a Smart Investment?

Bonds don’t have the same potential for long-term returns that stocks do, but they are more reliable. This is why they are often called fix-asset investments. Bonds don’t grow as quickly, so an entire portfolio invested in bonds will likely fall behind the rate of inflation. However, most portfolios will shift toward a greater allocation of bonds over time to minimize volatility as investors near retirement.

What Is a Consolidation Loan?

A consolidation loan allows you to reduce the number of debts and loans you are responsible for. When you take out a consolidation loan, you add up the amount you owe on other debts, then pay them back with the money you borrow from a single new loan. You are then responsible for paying off the new loan. This simplifies your monthly payments and may allow you to pay less in interest over time, depending on the terms of the loan.

What Is a Secured vs. Unsecured Loan?

A secured loan requires collateral, while an unsecured loan does not. Collateral is something you promise in exchange in you default on your loan. It is a form of assurance for the lender. For example, if you have a mortgage, the property you buy with the mortgage is your collateral. If you default on your mortgage, your mortgage lender can claim the property to repay your remaining debt.

The Bottom Line

Debt instruments allow the issuer to raise capital for a variety of reasons. They often come in the form of fixed-income assets such as bonds or debentures. In other parts of the financial industry, financial institutions issue them in the form of credit facilities.

In both cases, the borrower agrees to repay the lender the principal balance plus any interest by a certain date.

Fact checked by Ariel Courage
Reviewed by Khadija Khartit

Both intrinsic value and market value are ways of valuing a company. Both can be used by shareholders, new investors, or government agencies to understand the worth of a business. However, though they are theoretically measuring the same thing, the information they provide can have significant differences.

Market value is simpler to measure but strongly impacted by outside factors such as investor demand. Intrinsic value is harder to calculate but based on the fundamentals of a company, rather than on market sentiment.

Learn how each type of value is calculated and what it can tell you about a business.

Key Takeaways

• Intrinsic value and market value are two distinct ways to value a company.
• Market value is a measure of how much the market values the company, or how much it would cost to buy it.
• Market value is easy to determine for publicly traded companies but can be more complicated for private companies due to what information is available and accessible.
• Intrinsic value is an estimate of the actual value of a company based on its business fundamentals. it is separate from how the market values it.
• Value investors look for companies with higher intrinsic value than market value. They see this as a good investment opportunity.

Intrinsic Value vs. Market Value

Intrinsic value is an estimate of the value of a company based on its expected capacity to produce future free cash flows throughout its life. It is an internal value regardless of what the market sets as a value for it at a specific point in time.

Market value is the current value of a company as reflected by the company’s stock price. Therefore, market value may be significantly higher or lower than the intrinsic value. Market value is also commonly used to refer to the market capitalization of a publicly-traded company and is obtained by multiplying the number of its outstanding shares by the current share price. 

Important

Both market value and intrinsic value are easier to calculate for publicly traded companies than for companies that are privately held. This is because financial information, including financial statements and share price, are readily available for public companies but often difficult to find for private ones.

Intrinsic Value

Intrinsic value is a core metric used by value investors to analyze a company. The idea is that it is best to invest in companies that have a higher true value than the one being assigned to it by the market.

Intrinsic value is a type of fundamental analysis. Tangible and intangible factors are considered when setting the value, including:

• Financial statements
• Market analysis
• The company’s business plan
• Tangible assets, such as machinery or property
• Intangible assets, such as goodwill or brand recognition

There is an inherent degree of difficulty in arriving at a company’s intrinsic value. Due to all the possible variables involved, such as the value of the company’s intangible assets, estimates of the genuine value of a company can vary greatly between analysts. Another difficult factor in determining intrinsic value is how to value illiquid assets such as real estate and business lines.

Some analysts utilize discounted cash flow analysis to include future earnings in the calculation, while others look purely at the current liquidation value or book value as shown on the company’s most recent balance sheet. Other difficulties can come from the fact that the balance sheet is an internally produced company document and may not be a completely accurate representation of assets and liabilities.

Market Value

Market value is the company’s value calculated from its current stock price. It rarely reflects the actual current value of a company. Market value is, instead, more a measure of public sentiment about a company.

Market value reflects supply and demand in the investing market, indicating how eager (or not) investors are to participate in the company’s future. This can be impacted by a variety of factors such as:

• Positive or negative press about the company
• Positive or negative press about a competitor
• Public knowledge of the industry
• Opinions of board members, founders, or other public figures
• Global economic or political events

Because market value is strongly impacted by public opinion and external economic conditions, it is more likely to fluctuate than intrinsic value. A company with a high market value but a low intrinsic value is considered overvalued; one with a low market value but a high intrinsic value is considered undervalued.

Using Intrinsic vs. Market Value When Investing

The market value is usually higher than the intrinsic value if there is strong investment demand, leading to possible overvaluation. The opposite is true if there is weak investment demand, which can result in the undervaluation of the company.

For example, imagine a potential investor calculates Company A’s intrinsic value and finds that its shares should be trading at $50 per share. However, due to low demand in the market, they’re currently only trading at $25 per share. Company A’s intrinsic value is higher than its market value, which means the price per share is likely to rise. A value investor would be likely to buy shares of Company A because of the high potential for profit.

On the other hand, if Company B’s intrinsic value shows that its shares should be trading at $25 per share, but they’re currently trading at $50 per share, the company is likely overvalued. This could be due to a number of factors, such as negative press coverage of a competitor or being part of an industry that’s seen as “up and coming” regardless of the fundamentals of the company. A value investor would avoid buying shares of Company B because, if the market value were to move closer in line with the intrinsic value, they would lose money.

What Is a Value Investor?

A value investor is someone who looks for stocks that are trading at a lower price than they should based on a company’s intrinsic value or book value. These stocks are currently undervalued, which means they are likely to increase in price and make a profit for an investor.

Why Are Some Stocks Undervalued or Overvalued?

Stocks can become undervalued or overvalued for a number of reasons. Movements in the market can create herd mentality, when large numbers of people sell as a stock’s price is falling or buy as it is rising. Positive coverage of a company or its founders can cause its stock to rise in value, even if the fundamental value of a the company hasn’t changed. Negative coverage of a competitor or of the company’s overall industry can also cause a change in stock prices regardless of the value of the actual company.

What Is Used to Calculate a Company’s Intrinsic Value?

A company’s intrinsic value is often calculated using discounted cash flow (DCF) analysis. In this type of analysis, the company’s cash flows are estimated based on how the business may perform in the future. Those cash flows are then discounted to today’s value to obtain the company’s intrinsic value.

The Bottom Line

Intrinsic value and market value are both ways of valuing a company. Intrinsic value is a form of fundamental analysis that looks at a company’s underlying financials to determine its value. Market value uses what investors are willing to pay for a company to show its current value on the market.

Market value is easier to calculate, but it is impacted by external factors such as public opinion of the company or industry. Intrinsic value is more difficult to calculate but is a more accurate picture of the company’s worth. Both factors are used by value investors, who look for companies with a high intrinsic value but low market value to find investments that are likely to make a profit.

Fact checked by Betsy Petrick

If you’re trying to boost your credit score, you may be willing to try anything, including taking out a personal loan. It can work, but how much success you’ll have depends on your unique financial situation. The best prsonal loans can help establish a positive credit history, and they also help if you use the funds to pay off debt and keep it off. We’ll help you decide if this is the best course of action for you or if you should focus on other credit-building strategies.

Key Takeaways

• If you use a personal loan to pay down existing debt and you repay the loan, you might see your credit score improve.
• Taking out a personal loan and using the funds for purchases like a vacation, medical expenses, or big-ticket items can harm your score even more.
• To boost your credit score, you could focus on paying down existing debt, using a secured card, and becoming an authorized user on another person’s credit card.

Should You Use a Personal Loan to Build Credit?

A personal loan typically is unsecured and can be used for many reasons, such as a home renovation or a large purchase. Unlike a mortgage, you don’t always have to put down collateral to qualify.

Personal loans can be a useful credit-building tool, especially if you don’t have much credit history. Taking out a loan and paying it back on time and in full can do wonders for your score. Each payment you make is recorded with credit monitoring bureaus that look at various factors to determine your score.

Payment history accounts for 35% of your credit score and how much you owe makes up another 30%. So, whether you’re taking out the loan to establish a credit history or using the funds to pay off existing debt, responsible repayment of a personal loan can boost your score. Taking out a personal loan and paying it off shows lenders you can pay back money properly.

Pros

• Adds to your credit mix

• Consolidating debt can make it easier to manage

• Interest rates are fixed

• Can improve your score if you pay off outstanding debt

• Can help establish credit history

Cons

• Missing a payment can hurt your score

• Hidden fees and charges

• Higher interest rates for poor credit

• Easy to take out too big of a loan

Considering a Personal Loan? First, Ask Yourself These Questions

Personal loans may be right for some people, but for others, not so much. After all, you’re taking on substantial debt. If you miss payments or struggle to pay off the loan, your credit score will suffer. Before you apply for a personal loan, run through these questions to get an idea if personal loans are the right move for you:

• What is the interest rate?
• How much interest will you pay in total?
• Can you afford the monthly payments?
• Are there any fees and penalties?

Why you want to take out the loan is one of the biggest issues to consider. You won’t be able to take out a personal loan for things like education expenses, a down payment on a house, or investing, for instance.

Alternatives to Boost Your Credit Score

Taking out a personal loan to pay off your debt is tempting, but you have other credit-building options that don’t involve taking on more debt. Here are just a few:

• Ask someone to add you as an authorized user on their card: If your credit is poor or nonexistent, you might not qualify for a personal loan. If that’s the case, ask a trusted relative or friend to add you to their credit card as an authorized user. This helps you establish and build credit.
• Use a secured credit card: Instead of using an unsecured credit card, start using a secured one to avoid interest and overspending. To use a secured card, deposit money into the account. This becomes your card’s credit limit.
• Use less than 30% of your credit card limit: Credit monitoring bureaus look at how much debt you have in comparison to available credit. This is known as your credit utilization ratio. FICO recommends keeping your ratio under 30%.
• Always make your payments on time: Whether you’re paying your credit card bill, phone bill, or bill for streaming services, you should make a point of paying at least the minimum on time. Missed payments can cause your credit score to plummet.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

If you’re an investor in real estate, especially in a large metropolitan area, you might have considered opening your rentals to Section 8 tenants. This federal program assists those with low incomes to find housing by subsidizing a portion of their monthly rent.

As a landlord, there are pros and cons to accepting housing vouchers. So, before you make the decision to do so, it’s wise to thoroughly research what to expect.

Key Takeaways

• Section 8 properties provide much-needed affordable housing to low-income families.
• Section 8 housing is nearly always in demand and may have long waiting lists. 
• Before purchasing property to use as Section 8 rentals, it is essential to be aware that the building must pass an inspection by the U.S. Department of Housing and Urban Development (HUD). 
• Landlords must follow strict HUD procedures when it comes to evicting tenants. 
• Families must meet eligibility guidelines to be awarded Section 8 housing.

What Is Section 8 Housing?

The Housing and Community Development Act of 1974 established the Housing Choice Voucher Program, which was an amendment to Section 8 of the Housing Act of 1937. This program assists low-income renters by providing vouchers that pay approximately 70% of their monthly rent and utilities.

Section 8 housing is overseen by the U.S. Department of Housing and Urban Development (HUD), and it is administered by public housing agencies (PHAs) in every state. PHAs determine Section 8 eligibility for their area based on income and family size.

In general, a family’s income must be below the 50% median income for their area to qualify for Section 8, but this can vary based on the city and the state. Because demand for Section 8 vouchers is so high in many areas, the waiting lists can be very long. Some families wait many years to receive assistance.

Note

Local PHAs may close their waiting lists—for example, in Los Angeles County, the waiting list was closed as of February 2025.

Once a family receives their Section 8 voucher, it is up to them to find a suitable property that accepts Section 8 tenants. Local PHAs normally have lists of such properties, while websites such as GoSection8 make it easy to search for rentals by zip code. The housing voucher generally covers 70% of standard rent for that area, with the family responsible for paying the remaining 30%.

Benefits of Section 8

Rent Is Paid on Time

One of the biggest perks of renting to Section 8 tenants is having 70% of your rent paid right on time each month. If you have struggled in the past to collect rent from tenants, you can count on partial payments on every unit.

Payments Are Deposited Monthly

The government will deposit your portion of the rent money right into your bank account on the same day each month.

No Shortage of Tenants

There is a huge need for affordable housing across the U.S. Waitlists for Section 8 properties are a testament to that fact, so you should have ample potential renters. Owning Section 8 property in an area where rentals tend to sit vacant for lengthy periods can be beneficial.

Challenges of Section 8

Extensive Property Inspections

Before you can accept renters, your property must pass an extensive inspection by HUD personnel. If your property is deemed insufficient, you have 30 days to make necessary corrections before being reinspected. After the initial inspection, your property will undergo repeated inspections, generally on an annual basis.

Rent Is Capped

The local PHA determines the fair market rent for your unit, which is the maximum you can charge. Plus, the rent cannot be more than 40% of a prospective tenant’s income. This often leads to Section 8 landlords charging their tenants less than they could a non-Section 8 tenant.

Evictions

While you are entitled to evict Section 8 tenants, you will need to follow HUD procedures to do so. HUD is usually more restrictive than the local eviction process. So if you are concerned about the potential of difficult evictions, this is something to consider.

How Do I Rent to Section 8 Tenants?

In order to rent to Section 8 tenants, you must apply for a permit from your local Public Housing Authority. This will require an inspection of your building. Once you are approved, you may start interviewing tenants who are planning to use housing choice vouchers to pay their rent.

Who Are Section 8 Tenants?

Section 8 tenants are individuals and families who meet the income thresholds to use housing choice vouchers to pay part of their rent.

Can Any Building Be Rented to Section 8 Tenants?

If you buy a building you plan to rent out to Section 8 tenants, you will need to make sure it meets all the local building codes and passes an inspection by your local Public Housing Authority.

The Bottom Line

Whether you are new to the world of real estate investment or an old hand, at some point you are likely to consider opening your property to Section 8 tenants. Before making the decision, it is prudent to arm yourself with knowledge of both the good and the bad about renting to this particular niche.

Only you, along with your property manager, can decide whether the pros outweigh the cons in your particular situation. If you do decide to move forward, it’s good to know that you’ll be providing safe housing to families who need it.