financial education

How to decide if Medicare Supplement Insurance is worth it for you

Reviewed by Ebony Howard
Fact checked by Jared Ecker

If you are covered by Medicare you may be wondering if you need a Medicare Supplement Insurancepolicy, also known as Medigap. Read on to see what a Medigap plan is and how it works.

Key Takeaways

• Medigap pays some or all of the costs Medicare doesn’t cover, depending on the level of coverage you choose.
• Medicare alone may not cover extensive treatment or long-term hospitalization.
• Many private insurance companies offer Medigap policies.

What Is Medigap?

Medigap is a supplement to Medicare coverage and policies are designed to provide additional coverage for routine services Medicare covers and, in some cases, all or part of the expenses Medicare does not cover, such as long-term care, vision, or dental coverage.

A Medigap plan helps individuals get reimbursed for the costs they pay directly out of their pocket. These plans are offered by private insurance companies, so it is necessary to compare plans that fit your needs and financial situation.

What Medicare Covers

Medicare consists of Parts A and B along with Medicare prescription drug coverage found in optional Part D. Even routine services come with co-payments and deductibles. Prescription drugs can also deplete your budget if you need expensive medications.

Under the Affordable Care Act (ACA), the prescription price donut hole has been closing each year. At a certain level, $5,030 in 2024, you entered the notorious donut hole in coverage that requires you to pay up to 25% of covered brand-name and generic drug costs. When costs went above $8,000, you pass through the donut hole and owe only 5% of the cost of drugs.

What Medicare Doesn’t Cover

Medigap will help pay for costs that Medicare does not cover. If you are admitted to the hospital, you have 100% hospitalization coverage after the $1,676 annual deductible under Original Medicare Part A in 2025. However, you may owe up to 20% of some other costs, such as anesthesiologist fees.

If you are in the hospital for more than 60 days, you have to pay $419 per day in 2025. There are similar co-payments for long stays in nursing facilities and hospices. Regular doctor visits and outpatient medical care may cost you, too. Your deductible for 2025 is $257, but after that, you’ll pay up to 20% of the Medicare-approved amount for most doctor services. There is no upper limit.

If you do not have coverage for dental expenses, you may want to look into a standalone dental insurance plan. Many plans provide coverage for the types of dental procedures that Medicare recipients may need, including crowns, root canals, dentures, and tooth replacements.

Types of Medigap Plans

Medicare Parts A and B comprise basic coverage, while Part D is an optional prescription drug plan you can buy from a private provider and attach to your Medicare. If you opt for Original Medicare (A and B), plus Part D, and want a Medigap plan for more complete coverage, the most popular choices are Medigap Plan F and Medicare Plan G.

Medigap plans and benefits are fully defined at Medicare.gov.

Medigap Plan F: As of January 1, 2020, Plan F is no longer available to those newly eligible for Medicare. People who already have Plan F will be able to keep it, and people who were eligible for Medicare before 2020 but didn’t have a Medigap plan may still be allowed to choose Plan F.

Medigap Plan G: This plan has almost the same coverage as Plan F except for reimbursement of the Part B deductible. The average Plan G may be cheaper than Plan F. However, costs vary widely according to an applicant’s zip code, gender, and tobacco use, and increase with age.

Medigap Plan K: This plan provides less coverage than F or G and includes an out-of-pocket expense of $7,220 for 2025.

Medigap Plan L: This plan provides less coverage than F or G and includes an out-of-pocket expense of $3,610 for 2025.

Medigap Plan M: This plan offers similar coverage to F and G with some limitations.

Medigap Plan N: This plan offers similar coverage to F and G with some limitations.

Important

Part C, also known as Medicare Advantage, replaces all of the basic government coverage with a private insurance plan; if you choose Part C, you do not need a Medigap Plan.

Medigap vs. Plan C Medicare Advantage

A Medigap policy is a supplement to Parts A and B coverage and pays expenses that Original Medicare doesn’t. A Medicare Advantage Plan (Medicare Part C) is a private replacement for the public Medicare program.

Most of these plans are set up as health maintenance organizations ((HMOs) that replace all of the services of Original Medicare and add additional services, such as preventive health care, within a preselected network of doctors and hospitals.

A Medigap plan, however, gives you more freedom of choice than Medicare Advantage, provided your physician or facility accepts Medicare. As long as you pay your premiums, your policy is renewable for the rest of your life and will only be dropped if you stop paying premiums, you falsify your application, or the insurance company files for bankruptcy.

Warning

Individuals cannot have Medigap and a Medicare Advantage Plan C at the same time.

Is My Spouse Covered Under My Medigap Policy?

No. A Medigap policy covers only one person and doesn’t cover expenses incurred by your spouse. Medicare isn’t like an employer-sponsored plan; you can’t enroll your spouse under your coverage. This means you and your spouse have to purchase separate plans to be covered for supplemental insurance.

How Much Does Medigap Cost?

Since Medigap is privatized insurance, each insurance company offers different premiums for its Medigap policies. The price will be determined by factors such as your age, or how long you’ve been enrolled in Medicare.

Why Do I Need Medigap?

Medigap policy supplements your Original Medicare coverage. Medigap provides more choices and covers a large network of healthcare providers.

The Bottom Line

Medicare Parts A and B comprise basic coverage, while Part D is an optional prescription drug plan. A Medigap policy will supplement this coverage and help pay additional expenses or deductibles. Individuals who choose Medicare Part C, also known as Medicare Advantage do not need a Medigap Plan.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

Prepaid expenses are payments for goods or services that will be received in the future. These expenses are not initially recorded on a company’s income statement for the period when the money changes hands.

Instead, prepaid expenses are first recorded on the balance sheet as an asset. But, as the products and services are received, prepaid expenses are recognized on the income statement for each period when the money is spent.

Key Takeaways

• Prepaid expenses are incurred for assets that will be received at a later time.
• Prepaid expenses are first recorded in the prepaid asset account on the balance sheet.
• The GAAP matching principle prevents expenses from being recorded on the income statement before they incur.
• Once expenses are incurred, the prepaid asset account is reduced and an entry is made to the expense account on the income statement.
• Insurance and rent payments are common prepaid expenses.

What Are Prepaid Expenses?

Prepaid expenses are payments made for goods and services that a company intends to pay for in advance but will incur sometime in the future. Examples of prepaid expenses include insurance, rent, leases, interest, and taxes.

Prepaid expenses aren’t included in the income statement per generally accepted accounting principles (GAAP). In particular, the GAAP matching principle requires accrual accounting, which stipulates that revenue and expenses must be reported in the period that the spending occurs, not when cash or money exchanges hands.

In other words, expenses should be recorded when incurred. Thus, prepaid expenses aren’t recognized on the income statement when paid because they have yet to be incurred.

We’ve outlined the procedure for reporting prepaid expenses below in a little more detail, along with a few examples.

Important

Unless the prepaid expense will not be incurred within 12 months, it is recorded as a current asset.

Recording Prepaid Expenses

When a company prepays for an expense, it is recognized as a prepaid asset on the balance sheet, with a simultaneous entry being recorded that reduces the company’s cash (or payment account) by the same amount. Most prepaid expenses appear on the balance sheet as a current asset unless the expense is not to be incurred until after 12 months, which is rare.

Then, when the expense is incurred, the prepaid expense account is reduced by the amount of the expense, and the expense is recognized on the company’s income statement in the period when it was incurred.

Note

Businesses cannot claim a deduction in the current year for prepaid expenses for future years.

Insurance as a Prepaid Expense

One of the more common forms of prepaid expenses is insurance, which is usually paid in advance. This means that the premium you pay is allotted to the upcoming time period.

For example, Company ABC pays a $12,000 premium for directors’ and officers’ liability insurance for the upcoming year. The company pays for the policy upfront and then, each month, makes an adjusting entry to account for the insurance expense incurred. The initial entry, where we debit the prepaid expense account and credit the account used to pay for the expense, would look like this:

Then, after a month, the company makes an adjusting entry for the insurance used. The company makes a debit to the appropriate expense account and credits the prepaid expense account to reduce the asset value. The monthly adjustment for Company ABC would be $12,000 divided by 12 months, or $1,000 a month. The adjusting entry at the end of each month would appear as follows:

Rent as a Prepaid Expense

Businesses may prepay rent for months in advance to get a discount, or perhaps the landlord requires a prepayment given the renter’s credit. Either way, let’s say Company XYZ is prepaying for office space for six months in advance, totaling $24,000. The initial entry is as follows:

Then, as each month ends, the prepaid rent balance sheet account is reduced by the monthly rent amount, which is $4,000 per month ($24,000 ÷ six months). At the same time, the company recognizes a rental expense of $4,000 on the income statement. Thus, the monthly adjusting entry would appear as follows:

Other Prepaid Expenses

Additional expenses that a company might prepay for include interest and taxes. Interest paid in advance may arise as a company makes a payment ahead of the due date. Meanwhile, some companies pay taxes before they are due, such as an estimated tax payment based on what might come due in the future. Other less common prepaid expenses might include equipment rental or utilities.

As an example, consider Company Build Inc., which has rented a piece of equipment for a construction job. The company paid $1,000 on April 1 to rent a piece of equipment for a job that will be done in a month. The company would recognize the initial transaction as follows:

Then, when the equipment is used and the actual expense is incurred, the company would make the following entry to reduce the prepaid asset account and have the rental expense appear on the income statement:

Regardless of whether it’s insurance, rent, utilities, or any other expense that’s paid in advance, it should be recorded in the appropriate prepaid asset account. Then, at the end of each period, or when the expense is incurred, an adjusting entry should be made to reduce the prepaid asset account and recognize (credit) the appropriate income expense, which will then appear on the income statement.

How Do You Record Accrued Expenses on a Balance Sheet?

In finance, accrued expenses are the opposite of prepaid expenses. These are the costs of goods or services that a company consumes before it has to pay for them, such as utilities, rent, or payments to contractors or vendors. Accountants record these expenses as a current liability on the balance sheet as they are accrued. As the company pays for them, they are reported as expense items on the income statement.

Why Are Prepaid Expenses an Asset?

Prepaid expenses are classified as assets because they represent money that the company has not yet spent.

What Is the 12-Month Rule for Prepaid Expenses?

The 12-month rule allows taxpayers to deduct prepaid expenses in the current year if the asset does not go beyond 12 months from the date of the payment or the end of the tax year following the year in which the payment was made.

Who Benefits from Prepaid Expenses?

Individuals and companies both benefit from prepaid expenses. Individuals ensure that they don’t miss payments for important services like health insurance. Companies benefit by increasing cash flow, securing discounts, or qualifying for business deductions.

What’s the Difference Between Prepaid Expenses and Deferred Expenses?

Prepaid expenses and deferred expenses are both recorded as assets on a company’s balance sheet until the expense is realized. They are both advance payments, but there are some clear differences between the two common accounting terms. One of the key differentiators is time.

The Bottom Line

At times, payments are made for future benefits. In accounting, these payments or prepaid expenses are recorded as assets on the balance sheet. Once incurred, the asset account is reduced, and the expense is recorded on the income statement. The GAAP matching principle, however, prevents these expenses from being recorded on the income statement before the asset is realized.

Reviewed by Eric Estevez
Fact checked by Michael Rosenston

What Is Corporate Structure?

Corporate structure is how a corporation is set up. Modern corporations have a variety of different leadership positions, with different responsibilities. Most public companies have a two-tier corporate hierarchy: the management team reports to the board of directors, who in turn are responsible to the shareholders.

Key Takeaways

• The most common corporate structure in the United States consists of a board of directors and a management team. 
• A board of directors typically includes inside directors, who work day-to-day at the company, and outside directors, who can make impartial judgments.
• Most management teams have at least a Chief Executive Officer (CEO), a Chief Financial Officer (CFO), and a Chief Operations Officer (COO).

Understanding the Basics of Corporate Structure

A company may choose to follow several models of corporate governance. These can have traditional, pyramid-shaped leadership roles, or have flexible leadership structures. Most public corporations consist of a board of governors or directors, and one or more executives. In some cases, the same person may occupy multiple positions.

These bodies exist because the evolution of public ownership has created a separation between ownership and management. Before the late 19th century, many companies were small, family-owned, and family-run. Today, many companies are gigantic international conglomerates with thousands of shareholders.

The modern system of corporate governance exists to ensure that companies represent the interests of their owners (shareholders). The board of directors is elected by the shareholders of the corporation. They are responsible for overseeing the work of the management team, including the chief executive officer (CEO) and other C-suite executives.

The Board of Directors

Elected by the shareholders, the board of directors is made up of two types of representatives. The first type involves inside directors chosen from within the company. This can be a CEO, CFO, manager, or any other person who works for the company on a daily basis.

The other type of representative encompasses outside directors, chosen externally and considered independent of the company. The role of the board is to monitor a corporation’s management team, acting as an advocate for shareholders. In essence, the board of directors tries to make sure that shareholders’ interests are well-served.

Board members can be divided into three categories:

Chair: Technically the leader of the corporation, the board chair is responsible for running the board smoothly and effectively. Their duties typically include maintaining strong communication with the CEO and high-level executives, formulating the company’s business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity. The chair is elected from the board of directors.

Inside Directors: These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level managers from within the company.

Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of the company’s management team.

Outside Directors: While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased perspectives on issues brought to the board. By being detached from management, outside directors provide independent representation of shareholders, broaden the company’s thinking beyond management’s perspective, and help to ensure transparency, accountability, and ethical conduct.

Note

In some corporations, the same person may serve multiple roles on the management team and board of directors. For example, Boeing’s CEO is also the president and a member of the Board of Directors.

The Management Team

As the other tier of the company, the management team is directly responsible for the company’s day-to-day operations and profitability. They often work with lower-level staff managers, who, in turn, convey company orders to supervisors. Supervisors then work directly with junior staff members.

Chief Executive Officer (CEO): As the top manager, the CEO is typically responsible for the corporation’s entire operations and reports directly to the chair and the board of directors. It is the CEO’s responsibility to implement board decisions and initiatives, as well as to maintain the smooth operation of the firm with senior management’s assistance.

Often, the CEO will also be designated as the company’s president and, therefore, be one of the inside directors on the board (if not the chair). However, many believe that a company’s CEO should not also be the company’s chair to ensure the chair’s independence and clear lines of authority.

Chief Operations Officer (COO): Responsible for the corporation’s operations, the COO looks after issues related to marketing, sales, production, and personnel. Often more hands-on than the CEO, the COO looks after day-to-day activities while providing feedback to the CEO. The COO is often referred to as a senior vice president.

Chief Financial Officer (CFO): Also reporting directly to the CEO, the CFO is responsible for analyzing and reviewing financial data, reporting financial performance, preparing budgets, and monitoring expenditures and costs.

The CFO is required to present this information to the board of directors at regular intervals and provide it to shareholders and regulatory bodies such as the Securities and Exchange Commission (SEC). Also usually referred to as a senior vice president, the CFO routinely checks the corporation’s financial health and integrity.

Special Considerations

When you are researching a company, it’s always a good idea to see if there is a good balance between internal and external board members. Also check to see whether there’s a separation of CEO and chair roles and a variety of professional expertise on the board from accountants, lawyers and executives.

Explain Like I’m Five

With a public company, there are two levels: the board of directors, led by the chair of the board, and the management team, led by the CEO. The management team reports to the board, and the board reports to the shareholders.

What Does a Board of Directors Do?

A company’s board of directors is responsible for setting the long-term strategic direction of a company or organization. This can include appointing the executive team, setting goals, and replacing executives if they fail to meet expectations. In public companies, the board of directors is also responsible to the shareholders, and can be voted out in a shareholder election. Board members may represent major shareholders, or they may be executives from other companies whose experience can be an asset to the company’s management.

What Does a Company President Do?

In large companies, the CEO is the highest-ranking executive and the president is the second-highest. However, it is also possible for one person to hold both offices, or for a company to have a CEO and no president. A president is typically responsible for the day-to-day operations of a company, and their role may overlap with a chief operating officer.

What Is the Difference Between a CEO and a Chair of the Board?

In large corporations, the chairperson presides over the board of directors, ensuring effective governance and strategic planning. The management team, including the CEO, is responsible for executing that strategy and meeting the goals set by the board. It is possible for one person to hold both roles, although in larger companies they tend to be separate.

The Bottom Line

Together, management and the board of directors have the ultimate goal of maximizing shareholder value. In theory, management looks after the day-to-day operations and the board ensures that shareholders are adequately represented. But the reality is that many boards include members of the management team. 

Artificial intelligence (AI) is already changing how everyday investors manage their money—and proponents say it’s just getting started.

Sergey Ryzhavin, the head of B2COPY, a specialized trading technology company with 15 years of experience building AI trading systems, has witnessed this transformation firsthand. “There is a strong and growing trend toward outsourcing market analysis and trade execution on personal accounts,” Ryzhavin says. “Each year, fewer individual investors want to manually press the buy/sell buttons themselves.”

Nevertheless, he says, there are still specific areas where human judgment will remain irreplaceable. Below, we take you through what he expects in the coming years.

Key Takeaways

• AI is transforming investing through robo-advising, sophisticated stock screening tools, and automated trading systems that can detect market signals that human analysts often miss.
• While AI is great for data analysis, Ryzhavin says it has inherent limitations in predicting unprecedented events, making a combination of AI tools and human judgment the best approach for most investors.

How AI Is Changing Investing

AI is transforming how people invest, with three key technologies leading the way, according to Ryzhavin: robo-advisors managing diversified portfolios, AI-powered stock screening tools analyzing vast datasets, and automated trading systems executing transactions without human intervention. In addition, a recent industry survey found that more than 90% of investment managers are either using or planning to use AI, with more than half already having done so.

“I believe that AI will surpass human capabilities in almost every aspect of analysis within the next one to two years,” Ryzhavin says. “This includes long-term and short-term analysis, technical analysis, and even psychological insights based on social media data.”

AI is particularly good at detecting critical signals that human analysts might miss, he says. During the early days of COVID-19, Ryzhavin notes, Canadian AI company BlueDot identified an unusual pneumonia cluster in Wuhan nine days before the World Health Organization issued warnings. Similarly, AI models “identified Silicon Valley Bank’s (SVB) financial instability before its sudden fall” in 2023, detecting “liquidity risks and overexposure to long-term government bonds” that human analysts had overlooked, he says.

These systems work continuously, processing data at many times the speed of humans using traditional computing systems while never getting tired or becoming emotionally overreactive to market volatility.

AI’s Inherent Limitations

Ryzhavin noted, though, that AI didn’t just have a heads-up on SVB’s imminent failure. It also exacerbated the bank run once it began, flagging liquidity risks that amplified the rush of withdrawals that caused its collapse.

“AI doesn’t predict the future. It identifies patterns based on historical data,” Ryzhavin says. This means AI-driven investing does very well at data-driven trend analysis but may struggle with unprecedented events or factors that aren’t easily converted into numbers for its use.

AI is also susceptible to many of the same biases as human analysts, like overfitting to historical data, confirmation bias, and herd mentality, he says. Understanding these limitations is crucial for investors hoping to use AI effectively.

“While AI can process vast amounts of information faster than humans, it is still bound by the quality of its training data and underlying assumptions,” he says.

Ryzhavin says complex negotiations like mergers and acquisitions will likely remain human-driven the longest, given that they rely far more on relationship-building. Similarly, venture capital decisions often depend on the intuitive assessments of founders and analyses of future trends.

Ryzhavin recommends that retail investors use multiple AI advisors or instruments rather than relying on just one system, no matter how impressive its track record. “Diversification is important,” he says, noting that being disciplined about managing risk is essential even when using sophisticated AI tools.

‘AI Washing’

“One of the biggest misconceptions I frequently encounter is that AI is a perfect, infallible predictor of market movements—that it can consistently beat the market with little to no risk,” Ryzhavin said. The U.S. Securities and Exchange Commission uses the term “AI washing” in its warnings to investors about firms claiming to gain the benefits of AI and machine learning without ever using such systems.

The Bottom Line

AI is changing investing but Ryzhavin says it’s not the market oracle many suggest. He notes that AI excels at identifying historical patterns rather than perfectly predicting the future.

For retail investors, he argues, success will come from combining AI-powered insights with sound investment principles—diversifying across different AI tools and recognizing the technology’s limitations during unprecedented market events. The future of investing, he says, won’t be about choosing between humans and AI but taking advantage of the strengths of both.

Insurance is typically only top-of-mind for RIA owners when the renewal notice appears or when something unfortunate happens. The time to find out that you and your business are not adequately covered is not in a crisis.

In this episode of “The Deep Dive,” host Jay Hummel chats with Jessica Thayer of Starkweather & Shepley to help you discover where you might be vulnerable. 

Jessica Thayer: Jessica Thayer is the senior vice president and financial services practice leader at Starkweather & Shepley Insurance, where she has worked since 2018. Previously, she worked at Liftman Insurance in Boston and Marsh, a division of Marsh McLennan. Jessica is a Whitman School of Management graduate of Syracuse University and resides in the Greater Boston area. 

Reviewed by Natalya Yashina
Fact checked by Michael Rosenston

What Is an Impairment Charge?

An impairment charge is a process used by businesses to write off worthless goodwill or report a reduction in the value of goodwill. Investors, creditors, and others can find these charges on corporate balance sheets and income statements under the operating expense section.

These figures can be used to determine the financial health of a company. Creditors and investors often review impairment charges to make important decisions about whether to lend or invest in a particular company.

These charges began making headlines in 2002 as companies adopted new accounting rules and disclosed huge goodwill write-offs to resolve the misallocation of assets that occurred during the dotcom bubble. Some of the world’s largest companies reported major losses related to goodwill, including:

• AOL Time Warner: $45.5 billion in 2002
• McDonald’s: $99 million in 2004

Impairment charges came into the spotlight again during the Great Recession. Weakness in the economy and the faltering stock market forced more goodwill charge-offs and increased concerns about corporate balance sheets. This article will define the impairment charge and look at its good, bad, and ugly effects.

Key Takeaways

• An impairment charge is an accounting term used to describe a reduction or total loss of the recoverable value of an asset.
• Impairment can occur because of a change in legal circumstances, economic conditions, technology, a brand’s reputation, the business’s situation in the market, or as the result of a casualty loss from unforeseen hazards.
• Impairment charges may be booked as goodwill for the acquiring company in an acquisition.
• Goodwill is an intangible asset that a company assumes after acquiring another company.
• The Financial Accounting Services Board’s rules for impairment charges of goodwill outline that companies must determine the fair market value of assets on a regular basis.

Understanding Impairment Charges

As with most generally accepted accounting principles (GAAP), the definition of impairment lies in the eyes of the beholder. The regulations are complex, but the fundamentals are relatively easy to understand. Under the new rules, all goodwill is to be assigned to the company’s reporting units that are expected to benefit from that goodwill.

Then the goodwill must be tested (at least annually) to determine if the recorded value of the goodwill is greater than the fair value. If the fair value is less than the carrying value, the goodwill is deemed impaired and must be charged off. It reduces the value of goodwill to the fair market value (FMV) and represents a mark-to-market (MTM) charge.

Individuals need to be aware of these risks and factor them into their investment decision-making process. There are no easy ways to evaluate impairment risk, but there are a few generalizations that often serve as red flags indicating which companies are at risk:

1. The company made large acquisitions in the past.
2. The company has high leverage ratios and negative operating cash flows.
3. The company’s stock price has declined significantly in the past decade.
4. Changes in technology or regulations
5. Changes in the companies operating environment, or changes to the supply and demand situation of its products

Note

Prior to the adoption of the new GAAP accounting rules by the FASB in 2001, companies were allowed to amortize goodwill over a finite time period, sometimes as long as 40 years.

The Good

If done correctly, impairment charges provide investors with really valuable information. Balance sheets are bloated with goodwill that result from acquisitions made during eras of financial bubbles when companies overpaid for assets by buying overpriced stock.

Over-inflated financial statements distort not only the analysis of a company but also what investors should pay for its shares. The new rules force companies to revalue these bad investments, much like what the stock market did to individual stocks.

The impairment charge also provides investors with a way to evaluate corporate management and its decision-making track record. Companies that have to write off billions of dollars due to the impairment have not made good investment decisions. Management teams that bite the bullet and take an honest all-encompassing charge should be viewed more favorably than those who slowly bleed a company to death by deciding to take a series of recurring impairment charges, thereby manipulating reality.

Note

Impairment can be affected by internal factors (damage to assets, holding onto assets for restructuring, and others) or through external factors (changes in market prices and economic factors, as well as others).

The Bad

The Financial Accounting Standards Board (FASB) has rules in place for private and public companies, including those surrounding goodwill. For instance, Accounting Standards Codification (ASC) Topic 350 and Topic 805 allow companies to exercise discretion when allocating goodwill and determining its value.

Determining fair value is just as much an art as it is a science. Different experts can arrive at different valuations. It is also possible for the allocation process to be manipulated to avoid flunking the impairment test. As management teams attempt to avoid these charge-offs, more accounting shenanigans will undoubtedly result.

To help combat this, companies must disclose the fair value measurement, the methods used, reasons for the measurement, and other relevant information.

Important

The goodwill impairment test involves comparing the asset to its fair market value to see if the fair market value has declined below the reported value. If so, impairment must be done.

The Ugly

Things could get ugly if increased impairment charges reduce equity to levels that trigger technical loan defaults. Most lenders require debtor companies to promise to maintain certain operating ratios.

If a company does not meet these obligations, which are also called loan covenants, it can be deemed in default of the loan agreement. This could have a detrimental effect on the company’s ability to refinance its debt, especially if it has a large amount of debt and is in need of more financing. However, this is not common from impairment alone. Usually, other factors would play into a default.

Example of Impairment Charges

Here’s a hypothetical example using a fictitious company to show how impairment charges work. Assume that NetcoDOA has:

• Equity of $3.45 billion
• Total debt of $3.96 billion
• Intangibles of $3.17 billion

To calculate the company’s tangible net worth, we need to use the following formula:

Tangible Net Worth = Total Assets − Liabilities − Intangible Assets

As such, NetcoDOA has a deficit net worth or negative tangible net worth of $3.68 billion ($3.45 billion – $3.96 billion – $3.17 billion). This means the company’s net liabilities are higher than its net tangible assets. Although it may be a cause for concern, companies like NetcoDOA may find themselves in a situation like this for several reasons, including times when changes in future projections impair any present value calculations for assets.

How Do Impairment Charges Work?

Impairment charges became commonplace after the dotcom bubble and gained traction again following the Great Recession. They involve writing off assets that lose value or whose values drop drastically, rendering them worthless. Goodwill refers to any intangible assets a company assumes as a result of an acquisition.

What Is Goodwill?

Goodwill is an intangible asset a company has that is related to the acquisition of one company by another. It represents the part of the purchase price that is higher than the combined total fair value of any assets purchased and liabilities assumed. This can be proprietary technology, employee relations, and brand names.

What Accounted for Cisco’s Impairment Charge in 2001?

Cisco reported an impairment charge of $289 million in 2001. This was the result of an all-stock deal worth $500 million when it acquired a startup company from Texas called Monterey Networks. The loss stemmed from the discontinuation of products Cisco assumed from Monterey following the acquisition.

The Bottom Line

Accounting regulations that require companies to mark their goodwill to market were a painful way to resolve the misallocation of assets that occurred during the dotcom bubble or during the subprime meltdown. In several ways, this metric helps investors by providing more relevant financial information, but it also gives companies a way to manipulate reality and postpone the inevitable.

Fact checked by Pete Rathburn
Reviewed by Charlene Rhinehart

Most investors are aware that the market undergoes periods of both bull runs and downturns. So what happens during periods of extreme market volatility? Making the wrong moves could wipe out previous gains and more.

By using either non-directional or probability-based trading methods, investors may be able to protect their assets from potential losses and may be able to profit from rising volatility using certain strategies.

Key Takeaways

• In financial markets, volatility refers to the presence of extreme and rapid price swings.
• Given increasing volatility, the possibility of losing some or all of an investment is known as risk.
• Directional investing, a strategy practiced by most private investors, requires the markets to move consistently in the desired direction.
• On the other hand, non-directional investing takes advantage of market inefficiencies and relative pricing discrepancies.
• Volatility allows investors to reconsider their investment strategy.

Volatility vs. Risk

It’s important to understand the difference between volatility and risk before deciding on a trading method. Volatility in the financial markets is the quantification of the speed and magnitude of an asset’s price swings. Any asset that sees its market price move over time, has some level of volatility. The greater the volatility, the larger and more frequent these swings are.

Risk, on the other hand, is the possibility of losing some or all of an investment. There are several types of risk that can lead to a potential loss, including market risk (i.e., that prices will move against you).

As the volatility of the market increases, market risk also tends to increase. In response, there can be a marked increase in the volume of trades during these periods and a corresponding decrease in the holding periods of positions. In addition, hypersensitivity to news is often reflected in prices during times of extreme volatility as the market overreacts.

Thus, increased volatility can correspond with larger and more frequent downswings, which presents market risk for investors. Luckily, volatility can be hedged away to some degree. Moreover, there are ways to actually profit directly from volatility increases.

Hedging Against Volatility

Perhaps the most important thing for most long-term investors is to hedge against downside losses when markets turn volatile. One way to do this, of course, is to sell shares or set stop-loss orders to automatically sell them when prices fall by a certain amount. This, however, can create taxable events and, moreover, removes the investments from one’s portfolio. For a buy-and-hold investor, this is often not the best course of action.

Instead, investors can buy protective put options on either the single stocks they hold or on a broader index such as the S&P 500 (e.g., via S&P 500 ETF options). A put option gives the holder the right (but not the obligation) to sell shares of the underlying as a set price on or before the contract expires.

Say that XYZ stock is trading at $100 per share and you wish to protect against losses beyond 20%. You can buy an 80 strike put, which grants the right to sell shares at $80, even if the market falls to, say, $50. This effectively sets a price floor.

Important

Note that if the stock never falls to the strike price by its expiration, it will simply expire worthless and you would lose the premium paid for the put.

Trading Volatility

Investors who wish to take a directional bet on volatility itself can trade ETFs or ETNs that track a volatility index. One such index is the Volatility Index (VIX) created by CBOE which tracks the volatility of the S&P 500 index. Also known as the “fear index,” the VIX (and related products) increase in value when volatility goes up.

You may also consider buying options contracts to profit from rising volatility in addition to hedging your downside. Options prices are closely linked to volatility and will increase along with volatility. Because volatile markets can lead to swings both upwards and downwards as prices gyrate, buying a straddle or a strangle are popular strategies. These both involve simultaneously buying a call and a put on the same underlying and for the same expiration. If prices move a great deal, either strategy can increase in value.

Warning

Because of the way VIX exchange-traded products are constructed, they are not intended to be long-term investments. Rather, they are meant to make short-term bets on volatility changes.

Non-Directional Investing

Most investors engage in directional investing, which requires the markets to move consistently in one direction (which can be either up for longs or down for shorts). Market timers, long or short equity investors, and trend followers all rely on directional investing strategies. Times of increased volatility can result in a directionless or sideways market, repeatedly triggering stop losses. Gains earned over years can be eroded in a few days.

Non-directional equity investors, on the other hand, attempt to take advantage of market inefficiencies and relative pricing discrepancies. Importantly, non-directional strategies are, as the name implies, indifferent to whether prices are rising or falling, and can therefore succeed in both bull and bear markets.

Equity-Market-Neutral Strategy

The principle behind the equity-market-neutral strategy is that your gains will be more closely linked to the difference between the best and worst performers than the overall market performance—and less susceptible to market volatility. This strategy involves buying relatively undervalued stocks and selling relatively overvalued stocks that are in the same industry sector or appear to be peer companies. It thus attempts to exploit differences in those stock prices by being long and short an equal amount in closely related stocks.

Here is where stock pickers can shine because the ability to pick the right stock is just about all that matters with this strategy. The goal is to leverage differences in stock prices by being both long and short among stocks in the same sector, industry, nation, market cap, etc.

By focusing on pairs of stocks or just one sector and not the market as a whole, you emphasize movement within a category. Consequently, a loss on a short position can be quickly offset by a gain on a long one. The trick is to identify the standout and the underperforming stocks.

Volatile markets make risk control measures such as stop losses even more important.

Merger Arbitrage

The stocks of two companies involved in a potential merger or acquisition often react differently to the news of the impending action and try to take advantage of the shareholders’ reaction. Often the acquirer’s stock is discounted while the stock of the company to be acquired rises in anticipation of the buyout.

A merger arbitrage strategy attempts to take advantage of the fact that the stocks combined generally trade at a discount to the post-merger price due to the risk that any merger could fall apart. Hoping that the merger will close, the investor simultaneously buys the target company’s stock and shorts the acquiring company’s stock.

Relative Value Arbitrage

The relative value approach seeks out a correlation between securities and is typically used during a sideways market. What kinds of pairs are ideal? They are heavyweight stocks within the same industry that share a significant amount of trading history.

Once you’ve identified the similarities, it’s time to wait for their paths to diverge. A divergence of 5% or larger lasting two days or more signals that you can open a position in both securities with the expectation they will eventually converge. You can long the undervalued security and short the overvalued one, and then close both positions once they converge.

What Causes Market Volatility?

In general, market volatility increases when there is greater fear or more uncertainty among investors. Either can result from an economic downturn or in response to geopolitical events or disasters. For instance, market volatility rose due to the credit crisis in 2008-09 that led to the great recession. It also spiked when Russia invaded Ukraine in 2022.

What Investments Track the VIX Volatility Index?

Futures on the VIX trade on the CBOE and are available to customers of some brokerages. For those who do not have access to futures, there are also ETFs and ETNs, including the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ), and the ProShares VIX Short-Term Futures ETF (VIXY).

What Is Probability Based Investing?

In addition to hedging, one can also look to fundamental analysis to understand the risk of an individual stock. Even with liquid and pretty efficient markets these days, there are times when one or more key pieces of data about a company are not widely disseminated or when market participants interpret the same information differently. That can result temporarily in an inefficient stock price that’s not reflected in its beta. Holders of that stock are thus implicitly taking on additional risk of which they are most likely unaware.

Probability-based investing is one strategy that can be used to help determine whether this factor applies to a given stock or security. Investors who use this strategy will compare the company’s future growth as anticipated by the market with the company’s actual financial data, including current cash flow and historical growth. This comparison helps calculate the probability that the stock price is truly reflecting all pertinent data. Companies that stand up to the criteria of this analysis are therefore considered more likely to achieve the future growth level that the market perceives them to possess.

The Bottom Line

The first thing to do in a turbulent market is to step back and examine your purpose for investing. It’s hard not to panic when the market goes down or to become an ostrich and do nothing, but neither furthers your goals. Market volatility offers more opportunities to profit in a short amount of time, but it also brings more risk.

Learn What It Takes To Trade in the World’s Biggest, Most Liquid Market

Reviewed by Samantha Silberstein
Fact checked by David Rubin

The foreign exchange market, also known as the forex (FX) or currency market, is the world’s largest and most liquid market. It’s where currencies are traded for others and comprises everything from travelers in an airport getting local currency to global banks keeping the international system going. The FX market is massive, with over $7.5 trillion in currencies traded daily. For perspective, the average daily traded value for U.S. stocks, options, and bonds is under $1.6 trillion as of 2024.

About three-quarters of the market involves just seven currency pairs, all of which include the U.S. dollar (USD) on one side, which gives a sense of the central place the USD still occupies in global finance in the 2020s.

Foreign exchange trading operates 24 hours a day, five days a week. Below, we look at what you need to know to trade in the financial world’s biggest and busiest arena. 

Key Takeaways

• The foreign exchange (forex) market is the largest financial market in the world, with an average daily trading volume of over $7.5 trillion. Its massive size and 24-hour trading make it extremely liquid.
• The forex market is an over-the-counter (OTC) market without a centralized exchange. It consists of a global network of banks, financial institutions, corporations, and individual traders.
• Currencies are always traded in pairs, with major pairs like EUR/USD, USD/JPY, and GBP/USD being the most liquid. The exchange rates between these pairs are determined by supply and demand.
• Beyond speculation, the forex market serves important economic functions like facilitating international trade and investment, enabling currency conversions, and allowing businesses and investors to hedge foreign exchange risk.

How To Trade Forex

Trading foreign exchange markets involves buying or selling one currency in exchange for another. The goal of trading is to profit from the changes in exchange rates between the two currencies. To trade forex, you’ll need to open a trading account with a broker that provides access to the FX market. After opening an account, you will need to deposit funds to use for trading.

Once you have funds in your account, you can start trading by placing buy or sell orders for currency pairs. These orders can be placed through the broker’s trading platform, which provides access to real-time pricing information and charts. To succeed in trading forex, you’ll need to develop a trading strategy that considers market conditions, news events, and chart analysis.

Trades are sized in lots, with the standard lot representing 100,000 of the base currency (the first in a currency pair). If you put a buy order in for USD/CAD, for example, you are speculating on the U.S. dollar appreciating against the Canadian dollar; this is considered a long position. If you put in a sell order for USD/CAD, you are speculating on the Canadian dollar appreciating against the U.S. dollar; this is considered a short position. 

Here are tips to follow before getting started:

Learn the basics: Before trading, familiarize yourself with common forex terminology, such as pips (percentage in points), lots (standard unit sizes), and currency pairs (like EUR/USD). You’ll also need to understand how leverage, spreads, and margins work, as these factors directly impact your potential gains and losses. Here are the important terms to know:

Analyze the market: Successful forex traders rely on both fundamental and technical analysis. Fundamental analysis focuses on economic data, interest rates, and geopolitical events that affect currency values, while technical analysis involves using charts and indicators to predict price shifts from past performance.

Develop your trading plan: Determine and acknowledge your risk tolerance, trading goals, and strategy before placing any trades. Set how much capital you’re willing to risk per trade and select stop-loss and take-profit levels to lower your potential losses. Common strategies include day trading, swing trading, and scalping. For more, check out Investopedia’s “How To Create and Manage an Effective Forex Trading Strategy.“

Steps To Begin Trading Forex 

Getting started trading forex is relatively straightforward. While there are some differences in opening a traditional stock trading account vs. an FX brokerage account, it’s largely the same. 

Step 1: Research and Select a Broker

The first step is determining which brokers will offer you a foreign exchange trading account. If your existing broker supports FX trading and you have an approved margin agreement, you can skip ahead and begin trading.

If not, you’ll want to look at FX brokers and compare them regarding their platform, regulatory compliance, fees, margin rates, and customer support. Investopedia does a regular roundup of forex-focused brokers to consider.

First, ensure the broker is regulated by a respected financial authority like the Commodity Futures Trading Commission (CFTC). Once you’ve identified a broker that fits your needs, opening a forex trading account is fast and easy.

Here are several other factors to consider when choosing a foreign exchange broker:

• Account minimum: The minimum deposits for forex trading accounts are often comparatively low. However, because of the role of leverage in forex trading, it’s a good idea to have enough risk capital in the account to engage in meaningful trading. Even if you can open an account with a $0 minimum, trading with smaller account balances is difficult and can severely limit the range of price action you can handle on any one position. Although there is no hard and fast rule, a balance of $2,500 in risk capital is a good starting point for developing your FX trading skills.
• Customer service: While many forex traders are comfortable using the trading platform of their chosen FX broker, newer customers should consider the quality of customer service offered by their broker. Some are quicker to answer the phone, and others less so. Brokers may also have automated assistance and chat functionality to assist customers. Research tools, such as the quality of technical analysis and fundamental indicator news, are essential for a foreign exchange trader. How fast these tools populate data becomes crucial for trading fast-moving currency markets. Equally important, whether these tools integrate smoothly into the trading platform can make a difference in the trading experience. Some of the best interfaces provide smooth indicator overlays and trading directly from charts.
• Fees: Brokerage fees for foreign exchange trading are generally very reasonable. There are two primary payment methods. One is to pay the brokerage per trade, which usually works as a rate on the notional amount traded and is tiered lower for higher trading volumes. The other primary method is not to have a brokerage fee, but wider bid/offer spreads that price the brokers’ fees into the trading price. Whether you prefer to pay your fees as basis points on the trade size or through pricing spreads will likely depend on how actively you are trading and the average trade size.
• Number and quality of supported markets: Some brokers support up to 200 currency pairs, but there is a great difference in liquidity in the various markets. The top seven most actively traded currency pairs represent 75% of all FX trading, and these markets are very active. Once you get beyond these currency pairs, there is a wide difference in liquidity. Traders can access less actively traded pairs by creating positions using the U.S. dollar as the pivot. As most currencies have a U.S. dollar pair, you can use offsetting positions to create a synthetic currency pair. There would be an available market for this much less active currency pair, but the spreads would be wider, and there would not be almost as much liquidity in this market. 

Demo accounts are a great way to become familiar with trading a particular market on a broker’s platform. Traders new to forex trading would be smart to choose a broker with demo trading so they can learn how to place orders and manage positions effectively without committing capital first.

Step 2: Open Your Forex Trading Account

To open an account, you must provide your personal information, including name, address, tax ID number, and some financial background information. You will also have to answer some questions about your finances and investment goals as part of know your client compliance.

When you open an FX trading account, you’ll often execute a margin agreement because currency trading includes leverage. An options agreement will be required to trade currency options, which can be accomplished through OTC options offered by some forex brokers or exchange-traded options on currency futures. 

Step 3: Verify Your Identity

Your broker will confirm your identity through your passport, license, or national ID. A copy of a utility bill or bank statement will also assist with verifying your address. The broker requests your financial and tax information to follow U.S. government laws and CFTC rules. 

Step 4: Fund Your Forex Account 

Once your account has been approved, you will need to fund it to begin trading. Some forex platforms allow you to begin trading with as little as $100, which, at the 2% margin (or 50:1 leverage) available for some markets, enables you to open a position of $5,000. Funding is typically accomplished by ACH bank transfer, wire transfer, debit card (after verification), or bank check. 

The leverage available in FX markets is one of the highest that traders and investors can find anywhere. Leverage is a loan given to an investor by their broker. With this loan, investors can increase their trade size, which could translate to greater profitability. A word of caution, though: Losses are also amplified.

Step 5: Research Currencies and Identify Trading Prospects 

Once the account is open and funded, you’ll want to choose the currency pairs you wish to trade. You can then use technical analysis to determine their timing points and price levels for trade entry and exit. Like all markets, but especially leveraged markets like foreign exchange, managing your trades well will be crucial for preserving your funds on losing trades and growing as much as possible on profitable ones.

The financial condition of a country, including interest rates, affects the value of its currency, so there is a place for fundamental analysis in currency trading. News and fundamental data releases can also significantly impact currency values.

Beyond fundamentals, technical analysis is critical to currency trading because of the often fast-moving currency markets. Many traders focus exclusively on technical analysis to capitalize on the price action of the forex market, using common technical techniques such as trend lines, channels, breakouts, patterns, and support and resistance levels to identify trading opportunities in the foreign exchange markets. For more, check out Investopedia’s “Technical Analysis: What It Is and How To Use It in Investing.“

Step 6: Size up Your First Forex Trade 

Before making your first FX trade, you’ll want to understand how much capital and leverage are available for trading your currency pair. Since leverage in forex trading can be as high as 50:1, it is critical to understand how much capital you will have at risk on any trade.

A solid rule for beginners is the 1% rule: you should only risk 1% of your account on a particular trade. Other traders may have a 2% or even 5% rule for the capital allocated to any specific trade. 

The parameters of your trades are determined by the amount you are willing to risk and how far you’ll let the market move against your position before taking a loss.

You should also set a take-profit point to systemize your trading, but with the downside risk contained, you always have the option of letting winning positions run.

Many traders use a one-cancels-the-other order to take their profit or loss automatically should either level be reached and to cancel the remaining order. 

Step 7: Monitor and Manage Your Positions 

Once you’ve chosen a currency pair and analyzed the market, place a buy (long) or sell (short) order through your broker’s platform. Monitor your trades regularly and adjust your strategy based on market conditions.

Step 8: Manage Your Risk

Forex trading can be highly volatile, so it’s important to have risk management measures in place. Never risk more than you can afford to lose, and consider using tools like stop-loss orders to automatically exit trades if the market moves against you.

Comparing Forex Brokers
Company	Fees	Account Minimum
IG	Spread cost; Overnight financing costs; Inactivity fees	$250
XTB	Spread cost; Commissions; Overnight financing costs; Inactivity fees	$0
Plus500 CFD Service	Spread cost; Overnight financing costs; Inactivity fees; Currency conversion; Guaranteed stop order	Varies with instrument

The Plus500 CFD platform offers only CFDs, including Forex pairs, with no other services available. All instruments are tradable exclusively via CFDs.

Disclaimer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70%, 76%, and 80% of retail investor accounts lose money when trading CFDs with IG, XTB, and Plus500, respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The Basics of Forex Trading

In currency trading, the first currency listed is the base currency, and the second currency is the quote currency. Take this example:

USD/JPY 134.82

The USD/JPY currency pair comprises the U.S. dollar as the base currency and the Japanese yen as the quote currency. The base currency is always one unit of currency, in this case, $1, and the quote currency is the figure that changes. In this example, $1 USD can buy 142.44 Japanese yen. Throughout the day, this value will fluctuate up and down based on trading. 

Trading the most common currency pairs is typically very easy because these markets are very liquid and have very narrow bid/offer spreads. Another important forex trading term is a pip, the smallest increment a market trades in. This is typically 0.0001, although it is 0.01 for USD/JPY. Spreads in FX are now so narrow that many currency pairs trade in tenths of a pip (out to a fifth decimal place, though it’s the third decimal place for USD/JPY).

In EUR/USD (euro/U.S. dollar) trading, the euro is the base currency, and the quoted rate represents the dollars that each euro buys. Beyond these specialized terms, the foreign exchange market trades like other markets, where bids and offers for buying and selling create price action in the market. Like other markets, you can access trading orders, such as limit and stop loss orders, for entering, managing, and exiting positions.

In addition, some forex brokers offer contracts for difference for currencies and some commodities. These contracts allow traders to use significant leverage, up to 1000:1, for trading currencies without asset transfer. Instead, they only settle the difference in value. That said, there are additional risks with contracts for differences that investors need to consider.

U.S. investors do not have the ability to trade CFDs. The Securities and Exchange Commission and the CFTC prohibit U.S. citizens from trading these assets as they do not pass through regulated exchanges. Foreign investors, however, can do so.

Managing Forex Risks

Like any trading market, FX trading involves risk. Forex trading can be volatile, as markets can quickly adjust to new information and news. While this is like many other markets, the market participants in forex also include central banks. With the largest banks making up a large market share, prices can fluctuate greatly during the day.

Simply put, retail forex traders are small fish in a large ocean. While this volatility and price action appeals to many traders, the price swings involved also add to the risk of getting stopped out of positions and experiencing slippage on price fills. 

Moreover, leverage in currency trading is significantly greater than stocks, with some brokers offering up to 50:1 leverage on more liquid currency pairs. This is considerably greater than the 2:1 leverage offered to stock traders that establish short positions.

Leverage presents greater profitability to traders, but that involves a proportional rise in the risk of losses. The supercharging effect of leverage makes trade selection, size, and position management very important for controlling risks. It should also be noted that less active currency pairs are often more volatile given their lower liquidity.

Note

The most actively traded currencies are the U.S. dollar, the euro, the Japanese yen, the British pound, and the Chinese renminbi.

Ways To Trade in the Forex Markets 

There are several ways to trade foreign exchange. These include trading directly with a bank or financial services provider, trading currency futures listed on exchanges through a commodity trading account, and opening an account with a foreign exchange broker that essentially provides individual traders with access to the interbank market through its own platform.

The types of foreign exchange trading include spot, forward, and futures. 

Spot Forex Market 

Spot foreign exchange is the exchange of one currency for another at the time of the trade for a specific exchange rate. Spot FX trades typically settle with the actual exchange of currencies at the rate traded two days after the trade. There are some exceptions to the spot plus two-day settlement, most notably USD/CAD (U.S. dollar vs. Canadian dollar) which settles one day after the trade date.

When people are talking about the FX market, they are usually talking about the spot currency market.

Forward Forex Market 

Forwards in the foreign exchange market are contracts between two parties to exchange a set amount of one currency for another on a specific date in the future. The difference between this future FX rate and the current spot rate is related to interest rate differences. While the specifics of forward forex trading are not standardized, the market allows users to hedge specific risk amounts over specific days. An example would be locking in the forward foreign exchange rate for a company that needs to meet payroll for a particular amount on a specific date.

Counterparties trying to set a fair currency rate for the future will use the current spot exchange rate and then adjust it based on interest rate differences for the period covered by the transaction. This is done to compensate participants with exposure to the currency with the lower interest rate.

Forex Futures

There are also exchange-traded futures contracts for forex, which are similar to forward foreign exchange but have fixed contract terms and trade on regulated futures exchanges. Currency futures contracts in the U.S. are based on one currency, and the contract is cash-settled in U.S. dollars.

While these markets are standardized, they do not allow users to hedge specific date risks or amounts, which is better done through the forward forex market.

Is Trading Forex Difficult?

Trading in the foreign exchange markets is not necessarily more difficult to trade than other markets. As with all markets, forex has its pros and cons, but the basic market structure is the same. A trader buys or sells a particular amount of a chosen asset and then manages risk through stops and profit-taking levels.

The forex market, like the futures markets, has a tendency to move quickly and can be volatile. It also involves using margin leverage where a trader only needs to post a small percentage of the full value of their positions. This can lead to either large gains or losses, and sometimes both in the same trading session.

How Much Money Do You Need To Start Trading?

While some forex trading platforms will let you start trading with as little as $100, this is a very small amount considering the risks involved with trading the highly leveraged foreign exchange markets. Here again, there are pros and cons to trading in this highly leveraged market. 

While a disciplined trader will keep their risk consistent regardless of their capital level, trading with a smaller stake means that getting a bad fill on a stop loss when a fast-moving market shoots through your stop level could result in an outsize loss of capital. There is very little room for error with a small amount of capital. Realistically, capital of at least $2,500 should be used, and even this is a relatively small amount.

Can You Cash Out Your Forex Account?

Yes. All you have to do is liquidate a trading position, wait for settlement, and transfer the funds from the account.

What Is the Interbank System?

Major FX market participants include the large international banks that make up the interbank market. The interbank market for foreign exchange is available to the other market participants through direct transactions with banks or through other market brokers. Some of these market brokers include platforms making foreign exchange trading available to individual traders. 

Can You Lose Money Trading Forex?

As with every type of investing, the risk of losing money is the price you pay for the chance to profit. While forex markets are now easily traded, most new to FX trading lose money because, like futures markets, forex combines leverage with fast-moving price action. Risk management is critical in forex markets, and that means properly sizing your positions and using the market order tools to stem losses quickly. Forex traders who don’t master these basics do not stay forex traders for very long.

The Bottom Line

The foreign exchange market is the world’s largest and most liquid financial market, where currencies are traded 24 hours a day, five days a week. With an average daily trading volume exceeding $7.6 trillion, it dwarfs other markets and offers prospects for traders and investors.

However, the forex market’s high liquidity and leverage also come with significant risks, making it crucial to develop a solid understanding of currency trades, economic indicators, and risk management strategies before trading. For individual investors, the forex market can provide diversification and a hedge against currency fluctuations in their portfolios.

Reading a book or a newspaper might not seem like an activity directly related to financial success, but famed investor Warren Buffett says it could be the key to securing a better financial future. Buffett, CEO of Berkshire Hathaway (BRK.A), says he reads for about five to six hours every day and credits this habit with helping to shape his investing style and making him billions.

Key Takeaways

• Buffett claims his five- to six-hour daily reading habit has been crucial for his success.
• The legendary investor reads newspapers, magazines, financial reports, investing books, and business biographies.
• His favorite investment books include “The Intelligent Investor” by Benjamin Graham, along with Philip Fisher’s “Paths to Wealth Through Common Stocks” and “Common Stocks and Uncommon Profits.”

Warren Buffett’s Reading Habit

If it seems like a successful investor would spend most of their day in business meetings, Buffett is an exception. In 2015, he told a group of business students that Berkshire Hathaway doesn’t hold work meetings. Instead, he and longtime business partner Charlie Munger devoted a lot of their time to reading and thinking.

“A good part of our success is that we spend a lot of time thinking,” Buffett said. “I can think of no better way to become more intelligent than sit down and read. In fact, that’s what Charlie and I mostly do.”

Todd Combs, a Berkshire Hathaway investment officer, said when Buffett visited his class at Columbia Business School in the early 2000s and was asked for his secret to business, Buffett pulled out a “giant pile of paper” and said he reads 500 pages a week. “It’s like compound knowledge,” he quoted Buffett saying. “If you start today, it will just build over time.”

That reading habit includes financial documents and regulatory filings, along with news articles and biographies.

“I read five daily newspapers. I read a fair number of magazines. I read 10-Ks. I read annual reports, and I read a lot of other things, too,” Buffett said in 2015.

How Reading Can Help Your Finances

Reading helped shape Buffett’s investment style, and he’s been vocal about which books have been most influential in teaching him how to invest and guiding him toward valuable companies.

• “The Intelligent Investor” by Benjamin Graham: Buffett has repeatedly recommended this book, emphasizing that people should read chapters eight and 20 in particular. He said he first read the book in 1950 when he was 19. “I thought then that it was by far the best book about investing ever written. I still think it is,” he wrote in a preface to a revised edition published in 2024.
• “Paths to Wealth Through Common Stocks” and “Common Stocks and Uncommon Profits” by Philip Fisher: Buffett is a big fan of Fisher’s first two books, which advise investors to seek out outstanding growth companies using deep qualitative research and hold onto them for the long term.
• “The Money Masters” by John Train: In this book, Train assesses the investment styles of nine of the most successful investors.

“I don’t know anybody who’s wise who doesn’t read a lot,” Munger said in 2004. “On the other hand, that alone won’t do it. You have to have a temperament really, which grabs the correct ideas and does something with those ideas.”

That’s why Buffett says he loves biographies—because they show people putting their ideas into action. “Charlie and I love to read biographies, and what we like to ask is: ‘What makes these people succeed and what makes the ones that fail?'” he said in 2015.

Here are some of the biographies Buffett has called attention to over the years:

• “Jack: Straight from the Gut” by Jack Welch: Buffett recommended this business memoir by longtime General Electric (GE) executive Jack Welch in his 2001 shareholder letter.
• “First a Dream” by Jim Clayton: Intrigued by the story behind the founder of Clayton Homes, which operated in the manufactured housing sector, Buffett ended up buying one of his businesses—a decision based, in part, on reading this book.
• “Shoe Dog” by Phil Knight: Buffett said this memoir by Nike (NKE) co-founder Phil Knight was the best book he read in 2015.

The Bottom Line

One secret to Buffett’s success is the knowledge he has attained by reading throughout his life. The star investor still spends much of his days reading books, financial reports, newspapers, and magazines. He has been open about which books have proved most influential, helping to shape the investment philosophy that has made him billions.

Fact checked by Suzanne Kvilhaug

Your first paycheck can open up a world of possibilities. Planning for a financially secure future should be one of them. Here’s what you need to know about that first paycheck and how to use it effectively.

Key Takeaways

• A first paycheck is an exciting accomplishment, but you should be careful to use it wisely.
• Consider putting a portion of each paycheck directly into a savings account. Try to build three to six months of emergency savings.
• Pay down any high-interest credit card debt. If you have more than one credit card with balances, pay off the balance with the highest interest rate first while making the minimum payments on your other cards.
• Invest in your company’s 401(k) plan or open an individual retirement account. As a young investor, time and compounding interest are on your side.

Say Hello to Taxes

There’s a big difference between your gross salary and your net, take-home pay. One key difference is taxes. You’ll pay state and federal taxes on your salary, as well as any union dues or other expenses. These payroll deductions will be spelled out on your pay stub.

Another item is the taxes under the Federal Contributions Insurance Act (FICA), which pays for Medicare and Social Security. “FICA tax consists of 1.45% Medicare tax and 6.20% Social Security,” says Easton Price, a certified financial planner at Apella Wealth.

These federal payroll taxes wilmake your paycheck 7.65% smaller. With all those deductions, don’t be surprised if your take-home pay is a lot lower than you hoped.

“Young people certainly might find their net pay to be surprising. Between federal and state tax withholding, FICA taxes, health insurance premiums, or 401k savings – just to name a few examples – there are a lot of dollars potentially being taken out of your gross pay,” says Brittany Brinckerhoff, a financial advisor at Hilltop Wealth Advisors. “So, what you receive in your bank account might feel like a lot less than what you’re technically earning.”

Cost of Benefits

If you get health insurance from your employer, you’ll pay for this benefit out of every paycheck. And if your employer offers a 401(k) retirement savings plan, you should strongly consider contributing to it as well.

How much you put into a 401(k) plan is up to you, but 10% to 15% of your salary is a good guideline if you can afford it. Contributions to traditional 401(k) plans are made with pre-tax dollars and this will lower your taxable income, which you will appreciate come tax time. If you contribute to a Roth 401(k) plan, your contributions are taxed now but you get tax-free gains when you retire.

Above all, try to qualify for a matching contribution from your employer, if they offer one. Let’s say your employer offers a 3% matching contribution. That means if you contribute 3% of your salary to your 401(k), your employer will add another 3% for a total contribution of 6%. That’s essentially free money, which will be very helpful after you retire.

Important

There are annual limits to the amount you can contribute to a retirement plan each year. In 2025, the limit for 401(k) plans is $23,500, and the limit for IRA or Roth IRA plans is $7,000.

Smart Things to Do With Your Paycheck

After your payroll deductions have been taken out, you’ll be left with your net, take-home pay. The first step is to put some money into savings.

“One great ‘trick’ is to have a portion of your paycheck directly deposited into a savings account rather than straight into your checking account,” Brinckerhoff says. “This forced, automated savings can help you build up savings far quicker than if you have to manually put aside money – because it will feel like the money was never available for you to spend.”

Keep track of your spending by building and following a budget. You need to cover all of your monthly expenses, while putting aside enough for savings and occasional recreation.

“Another healthy habit to develop is the 50/30/20 budget,” Price says. “50% of your paycheck is slated for needs, groceries, rent/mortgage, utilities, etc., 30% for wants, entertainment, eating out, travel, etc., and 20% for future you. This can include your 401(k) contributions.”

Once you have a budget, the next step is building up an emergency fund with three to six months of living expenses. You’ll need this money if you have a big car repair, get laid off, or have another big expense.

Paying Down High-Interest Debt

If you have high-interest credit card debt, you’ll want to make a plan to pay it down. A big first paycheck can help.

“If you have a sizable credit card balance and you’re paying double digit interest on it, you should definitely use your first paycheck to pay down the balance,” advises Said Israilov, a fiduciary financial advisor at Israilov Financial.

If you have more than one credit card with balances, focus on paying down the card with the highest interest rate first while still making the minimum payments on your other cards. This is called a debt avalanche. Once the card with the highest interest rate is paid off, move to the card with the next highest interest rate, and so on until all your credit cards are paid in full.

Invest for Your Retirement

And if you have extra cash, you may consider opening a individual retirement account.

“If you have an adequate emergency fund and no debt, your next course of action should be prioritizing your retirement savings,” Israilov says. “If you’re not already contributing to your workplace retirement savings plan, e.g., 401(k), or your IRA or Roth IRA, you should immediately set these up.”

Unlike a 401(k), which is sponsored by an employer, you can open an IRA on your own through a brokerage.

By starting your retirement investing in your 20s, you’ll enjoy decades of compounding interest on your investments.

“People are often shocked by the power of compound growth,” says Gregory Furer, a certified financial planner at Beratung Advisors. “For example, saving just $100 per paycheck starting at age 22, assuming biweekly pay and an 8% annual return, could grow to over $570,000 by age 65.”

The Bottom Line

A first paycheck can be an exciting moment, but it’s important to spend it responsibly. Start by evaluating your net, take-home pay, and make a budget that covers all of your expenses.

Once your budget is in place and you meet all your current expenses, you can make plans for the money left over. If you have credit card debt, now is the time to tackle it. Afterwards, try building up an emergency fund and saving for retirement.