BUSINESS

Reviewed by Michael J Boyle
Fact checked by Yarilet Perez

The Federal Reserve System is the central bank of the United States and conducts the nation’s monetary policy. The primary goals of the Fed’s monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates. The Fed also seeks to ensure the stability of the financial system.

The Fed uses its balance sheet to help it accomplish those goals. The Fed decides what assets it holds and whether to expand or shrink its holdings. When the Federal Reserve buys debt instruments like Treasury notes or mortgage-backed securities, it is seeking to increase their price and lower yields, while signaling a looser monetary policy to support the economy. Conversely, the sale of Fed assets is a policy tightening approach that constrains financial conditions and asset values.

The Federal Reserve has dramatically expanded its securities holdings to cushion the economic shocks of the 2008 global financial crisis and, later, the COVID-19 pandemic.

Key Takeaways

• The Federal Reserve regularly discloses the assets and liabilities on its balance sheet
• The Fed’s assets include Treasuries and mortgage-backed securities purchased under large scale asset purchase programs (LSAPs).
• Fed liabilities include U.S. currency in circulation and the reserves deposited by commercial banks.
• During economic crises, the Fed can expand its balance sheet by buying more assets under LSAPs, a policy also known as quantitative easing (QE).

The Balance Sheet of the Federal Reserve Bank

Like any balance sheet, the Fed shows its assets and liabilities. The Fed discloses them weekly in Table 5 of its H.4.1 report.

The Fed’s assets consist primarily of U.S. Treasury notes, bonds, and agency mortgage-backed securities. Its liabilities are mostly U.S. currency in circulation, bank reserves held in Fed accounts, and reverse repurchase agreements collateralized by Treasury securities.

Financial market participants track changes in the Fed’s balance sheet to monitor its implementation of monetary policy. During the 2008-9 financial crisis, large-scale asset purchases increased the complexity of the Fed balance sheet, drawing heavy public scrutiny.

Note

Unlike other government agencies, the Federal Reserve is not funded from tax dollars. Instead the Fed pays its bills with the interest it collects from Treasurys and other assets on its balance sheet.

The Fed’s Assets

Anything the Federal Reserve buys is an asset. Since the Federal Reserve has an unlimited supply of currency for asset purchases, the size of its balance sheet is constrained primarily by the availability of eligible assets as well as practical considerations of politics and policy.

Treasury Securities

Traditionally, the Fed’s assets have mainly consisted of U.S. Treasury securities. Treasury securities, primarily notes and bonds, accounted for $4.2 trillion of the Fed’s $7 trillion in assets as of April 24, 2025.

Treasury notes are issued in maturities ranging from two to 10 years, while Treasury bonds have maturities of more than 10 years. Treasury bills, or T-bills, are short-term debt with maturities of four, eight, 13, 26, and 52 weeks.

Mortgage-Backed Securities

Mortgage-backed securities, which entitle buyers to cash flows from a basket of mortgage loans, are the second largest asset type by value on the Fed’s balance sheet. These fixed-income securities are created and sold to investors by banks and financial institutions, including government-sponsored enterprises like Fannie Mae and Freddie Mac. The Fed owned $2.2 trillion of mortgage-backed securities as of April 24, 2025.

Other Fed Assets

Fed assets also include loans extended to banks through the repo and discount window, lending under a variety of credit facilities established to support the smooth functioning of credit markets and economic growth, and foreign currency held under central bank liquidity swaps ensuring the availability of dollars for foreign institutions.

The Fed’s Liabilities

Currency in circulation, including a significant proportion in use overseas as well as any dollar bills in your pocket, was historically the largest Federal Reserve liability, until it was surpassed in 2010 by bank reserves on deposit with the Fed. Since 2019, the overnight rate the Fed pays on bank reserves has been its primary tool in setting the federal funds rate.

Fed liabilities of $6.7 trillion as of April 24, 2025, included $3.3 trillion in deposits by banks and the U.S. Treasury, $2.3 trillion in Federal Reserve notes (i.e., currency in circulation), and $467 billion in reverse repurchase agreements.

Reverse repurchase agreements, or reverse repos, are borrowings of Treasury’s from commercial counterparties used to hold the federal funds rate in the Fed’s targeted range.

When a bank converts some of its Fed reserve balance into currency, it increases currency in circulation and decreases reserves on deposit with the Fed, without changing the overall level of Fed liabilities.

The Fed’s Balance Sheet Expansion

Quantitative easing (QE), or large-scale asset purchases, was first used by the Fed in the wake of the 2008 global financial crisis to address the zero lower bound problem, which is what happens when a central bank drops short-term rates to zero but the economy fails to return to its expected growth trajectory.

In addition to directly lowering long-term interest rates by purchasing long-dated securities, quantitative easing is also intended to signal the central bank’s bias toward looser monetary policy as a further growth spur. The signaling function of quantitative easing has at times ensured that benchmark bond yields rose while the Fed was buying only to drop once the purchase program was discontinued.

The Federal Reserve conducted three rounds of large-scale asset purchases between 2008 and 2014. The Fed resumed asset purchases on a dramatically expanded scale amid the economic slump in the early stages of the COVID-19 pandemic, buying $1.7 trillion of Treasury securities between the middle of March and the end of June 2020.

Does the Federal Reserve Print Money?

The Federal Reserve does not literally print money—that’s the job of the Bureau of Engraving and Printing, under the U.S. Department of the Treasury. However, the Federal Reserve does affect the money supply by buying assets and lending money. When the Fed wants to increase the amount of currency in circulation, it buys Treasurys or other assets on the market. When it wants to reduce the amount of currency in circulation, it sells the assets. The Fed can also affect the money supply in other ways, by lending money at higher or lower interest rates.

Where Does the Fed Get Its Money?

Unlike other government agencies, the Federal Reserve is not funded by taxes. Instead, the Fed pays its bills with the interest earnings from the Treasurys and other assets on its balance sheet. After paying its bills, any net surplus is transferred to the Department of the Treasury.

Who Owns the Federal Reserve?

The Federal Reserve system is set up as a combination of public and private interests. While the Board of Governors is a federal agency, each Federal Reserve bank is structured as a private corporation, with its member banks acting as shareholders. Each Federal Reserve Bank is governed by a board of directors. Six of the directors are elected by the member banks, and three by the Board of Governors.

The Bottom Line

All of us are connected to the Fed’s balance sheet in one way or another. The currency notes that we hold are liabilities of the Fed, as are bank reserves boosted by our deposits. The Fed’s assets include a range of credit lines established to ensure the economy’s stability at times of crisis, as well as U.S. Treasuries and other securities. Changes in the level and composition of the Fed’s balance sheet can ultimately affect all U.S. consumers and businesses.

Reviewed by Andy Smith
Fact checked by Vikki Velasquez

One of the first things most new investors learn is that dividend stocks are a wise option. Generally thought of as a safer option than growth stocks—or other stocks that don’t pay a dividend
—dividend stocks occupy a few spots in even the most novice investors’ portfolios. Yet, dividend stocks aren’t all the sleepy, safe options we’ve been led to believe. Like all investments, dividend stocks come in all shapes and colors, and it is important to not paint them with a broad brushstroke.

Here are the three biggest misconceptions about dividend stocks. Understanding them should help you choose better dividend stocks. 

Key Takeaways

• Many investors look to dividend-paying stocks to generate income in addition to capital gains.
• A high dividend yield, however, may not always be a good sign, since the company is returning so much of its profits to investors (rather than growing the company).
• The dividend yield, in conjunction with total return, can be a top factor as dividends are often counted on to improve the total return of an investment.

1) High Yield Is Best

The biggest misconception of dividend stocks is that a high yield is always a good thing. Many dividend investors simply choose a collection of the highest dividend-paying stock and hope for the best. For a number of reasons, this is not always a good idea. 

Remember, a dividend is a percentage of a business’s profits that it is paying to its owners (shareholders) in the form of cash also quoted as its payout ratio. Any money that is paid out in a dividend is not reinvested in the business. If a business is paying shareholders too high a percentage of its profits, it may be a sign that management prefers not to reinvest in the company given the lack of upside. Therefore, the dividend payout ratio, which measures the percentage of profits a company pays out to shareholders, is a key metric to watch because it is a sign that a dividend payer still has the flexibility to reinvest and grow its business.

Some sectors of the market have a standard for high payouts and its also part of the sector’s corporate structure. Real estate investment trusts (REIT) and master limited partnership (MLP) are two examples. These companies have high payout ratios and high dividend yields because it is ingrained in their structure.

2) Dividend Stocks are Always Boring

Naturally, when it comes to high dividend payers most of us think of utility companies and other slow-growth businesses. These businesses come to mind first because investors too often focus on the highest-yielding stocks. If you lower the importance of yield, dividend stocks can become much more exciting.

Some of the best traits a dividend stock can have are the announcement of a new dividend, high dividend growth metrics over recent years, or the potential to commit more and raise the dividend (even if the current yield is low). Any of these announcements can be a very exciting development that can jolt the stock price and result in a greater total return. Sure, trying to predict management’s dividends and whether a dividend stock will go up in the future is not easy, but there are several indicators. 

• Financial flexibility: If a stock has a low dividend payout ratio but it is generating high levels of free cash flow, it obviously has room to increase its dividend. Low CapEx and debt levels are also ideal. On the other hand, if a company is taking out debt to maintain its dividend, that is not a good sign.
• Organic growth: Earnings growth is one indicator but also keep an eye on cash flow and revenues as well. If a company is growing organically (i.e. increased foot traffic, sales, margins), then it may only be a matter of time before the dividend is increased. However, if a company’s growth is coming from high-risk investments or international expansion then a dividend could be less certain.

3) Dividend Stocks are Always Safe

Dividend stocks are known for being safe, reliable investments. Many of them are top-value companies. The dividend aristocrats—companies that have increased their dividends annually over the past 25 years—are often considered safe companies. When you look at the S&P 100, which provides a list of the largest and most established companies in the U.S., you will also find an abundance of safe and growing dividend payers.

However, just because a company is producing dividends doesn’t always make it a safe bet. Management can use the dividend to placate frustrated investors when the stock isn’t moving. (In fact, many companies have been known to do this.) Therefore, to avoid dividend traps, it’s always important to at least consider how management is using the dividend in its corporate strategy.

Dividends that are consolation prizes to investors for a lack of growth are almost always bad ideas. In 2008, the dividend yields of many stocks were pushed artificially high due to stock price declines. For a moment, those dividend yields looked tempting. But as the financial crises deepened, and profits plunged, many dividend programs were cut altogether. A sudden cut to a dividend program often sends stock shares tumbling, as was the case with so many bank stocks in 2008.

What Is the Dividend Yield?

The dividend yield, expressed as a percentage, is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price. Dividends are typically paid on a quarterly basis, and mature companies are the most likely to pay dividends.

The dividend yield may help investors decide whether a company’s stock can be a good addition to their portfolios. but they should remember that higher dividend yields do not always mean good investment opportunities: a high dividend yield may result from a declining stock price.

What Is the Difference Between a Stock Dividend and a Cash Dividend?

A stock dividend is paid out in the form of company shares, and it’s not taxable until the shares are sold. A cash dividend, on the other hand, is paid out as cash and is taxable for that year.

What Is the Difference Between Dividend Stocks and Dividend Funds?

A dividend stock is an individual stock, and a dividend fund is a mutual fund or ETF that invests in multiple dividend stocks.

The Bottom Line

Ultimately, investors are best served by looking beyond the dividend yield at a few key factors that can help to influence their investing decisions. The dividend yield, in conjunction with total return, can be a top factor as dividends are often counted on to improve the total return of an investment. Looking only to safe dividend payers can also significantly narrow the universe of dividend investments.

Fact checked by Vikki Velasquez

The Grayscale Bitcoin Trust (GBTC) is a digital currency investment product that makes bitcoins available to individual and institutional investors. Unlike a direct investment in bitcoin, which may require a deeper understanding of blockchain technology and cryptocurrency exchanges, GBTC offers a more traditional investment in the form of shares.

The trust was originally launched in 2013 but was only available to institutional and accredited investors. On Jan. 21, 2020, GBTC became a Securities and Exchange Commission (SEC) reporting company, registering its shares and making the trust the first digital currency investment vehicle to have this status. In January 2024, Grayscale was finally approved to operate GBTC as a spot bitcoin ETF, along with 10 other funds.

Key Takeaways

• The Grayscale Bitcoin Trust (GBTC) allows investors to access Bitcoin through a traditional investment vehicle.
• Initially launched in 2013, the trust was available only in OTC markets.
• After many regulatory battles, the SEC approved Grayscale’s application to turn the trust into an ETF in January 2024.
• One of the GBTC’s main advantages is its robust security system, designed to safely store the trust’s cryptocurrency.
• Critics argue that GBTC carries significant risks, including volatility and high premiums.

Understanding the Grayscale Bitcoin Trust (GBTC)

Grayscale Bitcoin Trust (GBTC) debuted in September 2013 as a private, open-ended trust for accredited investors. In 2015, it received FINRA approval to trade publicly, which meant that investors could buy and sell public shares of the trust under its ticker symbol, GBTC. 

The trust is solely and passively invested in BTC, enabling investors to gain exposure to BTC as a security while avoiding the challenges of buying, storing, and securing the bitcoins directly. Shares are designed to track the BTC market price with fewer fees and expenses.

GBTC was initially available only as a private placement until 2015, when it began trading publicly on the OTCQX, an over-the-counter (OTC) market, under the alternative reporting standard for companies not required to register with the SEC. 

At the time, GBTC was modeled on popular commodity investment products like the SPDR Gold Trust, a physically backed gold ETF. The company later added additional trusts to make investments in ether, litecoin, and other cryptocurrencies.

Starting in 2017, Grayscale began seeking regulatory approval to operate GBTC as an exchange-traded fund that would be more accessible to retail investors. However, the SEC repeatedly rejected ETF applications, citing fears of market manipulation and investor risk.

The regulator ultimately approved Grayscale’s application for a bitcoin spot ETF in January 2024, along with 10 other applications. GBTC was listed on the NYSE Arca as an ETF on Jan. 11, 2024.

How GBTC Works

As an exchange-traded fund—a type of exchange-traded product (ETP)—GBTC shares can trade on both a primary and a secondary market. The primary market is available only to certain institutional investors.

When an authorized partner wishes to invest, Grayscale buys bitcoins on the cryptocurrency market and issues an equivalent number of GBTC shares in exchange for capital. Those shares can then be sold on the stock market to retail investors.

The trust holds a significant amount of actual bitcoins, and the price of its shares is meant to reflect the value of bitcoin held per share. However, GBTC shares have frequently traded at a large premium or discount to the actual value of the underlying bitcoin, known as its net asset value (NAV), something that appears to have changed since it converted to an ETF.

Advantages and Disadvantages of GBTC

Advantages

One of the primary advantages of GBTC is its ability to provide simplified access to bitcoin, especially for individuals unfamiliar with the ins and outs of cryptocurrency trading and digital wallets.

Unlike direct investments in bitcoin, which require a good understanding of blockchain technology and cryptocurrency exchanges, GBTC allows investors to trade shares in traditional brokerage accounts. This streamlined access can appeal to those seeking exposure to bitcoin’s price movements without learning the intricacies of cryptocurrency transactions.

GBTC is available for investors to buy and sell in the same way as virtually any ETF. GBTC can be traded through brokerage firms and is also available within tax-advantaged accounts like individual retirement accounts or 401(k)s.

This presents a potential tax benefit for investors, allowing them to gain exposure to bitcoin in a tax-friendly manner, a significant advantage considering the capital gains tax implications of direct cryptocurrency investments​.

Another significant advantage of GBTC is its security. Storing cryptocurrency safely is a notorious challenge, and Grayscale says its assets are safeguarded in line with the best industry standards.

Investing in GBTC sidesteps the common security risks of cryptocurrency exchanges and wallet providers. These platforms are frequently targeted by hackers, and many investors have lost funds from security breaches.

Disadvantages

GBTC is known for its high management fees (1.5%) compared with other pooled investment vehicles. The fee structure could erode returns, especially in a bear market, making it a less cost-effective option for investors looking to gain exposure to bitcoin.

The high fees are frequently cited as one of the main problems with GBTC when compared with other traditional investment vehicles or even other bitcoin ETFs.

Pros

• Available through brokerage accounts, IRAs, and 401(k)s

• Crypto assets held are protected by industry-leading security measures

• Is an SEC reporting company

Cons

• Can have large premiums or discounts to NAV

• Relatively high management fee

• Can be highly volatile

Regulatory Issues

Regulatory concerns about GBTC largely stem from the SEC’s cautious approach toward cryptocurrency-based financial products. In 2021, GBTC filed an application with the SEC for full ETF approval.

The application was held up at the SEC, along with similar applications by other prospective ETF providers. In 2023, a federal appeals court ruled that the SEC had improperly rejected Grayscale’s application and had not clearly explained why GBTC should be treated differently from similar products.

The regulator ultimately chose not to appeal the court’s ruling, which required it to review its decision on GBTC. In January 2024, the SEC announced its approval of GBTC along with 10 other exchange-traded funds.

Impact on GBTC’s Value

The trust’s shares traded at a discount to NAV for extended periods due to regulatory uncertainty, with the discount reaching nearly 50% at one point. After the SEC approved the conversion of GBTC into a spot Bitcoin ETF, the fund began trading close to or even at a premium to NAV.

The regulatory maze surrounding GBTC’s ETF conversion reflects broader concerns by regulators regarding investor protection, market manipulation, and the stability and maturity of the cryptocurrency market. The outcome of its ETF application set a significant precedent for how other cryptocurrency investments will be treated.

What Makes GBTC Different From Directly Owning Bitcoin?

GBTC offers a way to invest indirectly in bitcoin through an exchange-traded fund and gain exposure to bitcoin price movements. Owning bitcoins directly means you actually own the individual tokens.

Can Anyone Invest in GBTC?

Generally, any retail investor can invest in GBTC as it is a publicly traded investment product. GBTC shares trade on the NYSE Arca exchange, along with other exchange-traded products, and can be bought through a brokerage account.

What Are the Tax Implications of Investing in GBTC?

Investing in GBTC has different tax implications compared with holding bitcoin directly. Typically, the trust structure may provide certain tax advantages or considerations that individual investors should review with a tax advisor. The taxation of cryptocurrency and crypto-related investments is complex, and the tax treatment of GBTC shares may vary based on individual circumstances and tax laws.

How Does the Premium or Discount to NAV Affect GBTC’s Appeal to Investors?

The premium or discount to NAV in the GBTC mirrors the difference between the trust’s market price for its shares and the value of the underlying bitcoin per share. A premium suggests that investors are willing to pay more for the exposure to bitcoin than the actual value of the bitcoin held, and vice versa. A premium or discount indicates how the shares appeal to other investors.

A premium might mean there is strong demand, but it also suggests that investors are paying more than the underlying asset’s value. Alternatively, a discount could provide an opportunity to buy, but could also be a negative sign about the market’s view of the trust or bitcoin. Understanding these dynamics can help you make more informed decisions regarding potential investments in GBTC.

The Bottom Line

GBTC provides a convenient way for investors to access Bitcoin without direct ownership. It’s available to individuals and institutions through brokerage accounts, IRAs, and 401(k)s. GBTC offers simplified bitcoin exposure but has downsides like high management fees and limited flexibility.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and XRP but does not own shares of GBTC.