financial education

Assets can be either commodities or securities, although it is less clear with digital assets

Fact checked by Suzanne Kvilhaug
Reviewed by Charlene Rhinehart

A commodity is a basic good that can be interchanged with other goods of the same type, often a raw material used in producing other goods or services. Meanwhile, a security describes a tradable financial instrument with monetary value.

While they are both assets that traders can buy and sell, securities receive stricter regulatory oversight than commodities. Companies that issue securities like stocks and bonds must provide investors with detailed, transparent information, while commodities are subject to less stringent reporting requirements.

The distinction between trading basic goods and trading financial instruments seems clear enough. However, when it comes to digital assets like cryptocurrency, the classification becomes murkier. Depending on your perspective, cryptocurrencies could be considered commodities or securities. How this debate is resolved could have a big impact on the future of crypto.

Key Takeaways

• A commodity is a basic good that can be exchanged with other goods of the same type, while a security is a financial instrument representing an investment in a common enterprise.
• Commodities are subject to less stringent regulations, while securities involve strict reporting requirements designed to ensure transparency for all investors.
• The classification of cryptocurrencies remains a subject of debate, and the determination of whether digital assets are commodities or securities could have widespread implications.

What Is a Commodity?

A commodity is a tangible product, often a raw material that can be used to make other products. Hard commodities include energy goods like oil and gas as well as metals like gold and silver, while soft commodities are generally agricultural goods like grains, livestock, and cotton. Traders can buy and sell commodities on the spot market or by using derivatives such as futures and options.

A lot of commodities trading takes place between companies that use the goods, like food producers that depend on agricultural products, and industrial companies that use metals. However, it is generally recommended that all investors have some exposure to commodities as part of a diversified portfolio. That’s because commodities tend to have a low or negative correlation with other assets like stocks and bonds, often performing well when other areas of the financial market are struggling. Commodities may also be a useful tool for investors aiming to hedge against inflation.

The Commodity Futures Trading Commission (CFTC) regulates the trading of derivatives in the U.S. When the commission was established in 1974, agricultural products dominated futures trading. Since then, the markets overseen by the CFTC have become more complex, with fintech and digital currencies underpinning more intricate commodities transactions.

What Is a Security?

A security is a fungible and tradable financial instrument issued by corporations and governments to raise capital. In general, securities represent equity (the rights to an ownership share in an enterprise), debt (loans that are repaid in periodic installments), or a hybrid of equity and debt.

Securities typically refer to stocks and bonds along with related products like mutual funds and exchange-traded funds (ETFs). However, the legal interpretation of what constitutes a financial security is quite broad. In the case of Howey vs. SEC in 1946, the Supreme Court determined that a contract involving the sale of agricultural land and services represented a security.

This case resulted in a list of criteria—known as the Howey Test—to determine whether instruments should be regulated as a security. According to federal laws, a financial contract meets the threshold of a security if there is an investment of money made in a common enterprise in anticipation of a profit driven by the efforts of others.

In the U.S., the Securities and Exchange Commission (SEC) regulates the buying and selling of instruments that meet the criteria to be classified as securities. Self-regulatory organizations (SROs) such as the National Association of Securities Dealers (NASD) and the Financial Industry Regulatory Authority (FINRA) also play a role in regulating securities.

When a corporation or government entity wants to raise capital from the public by issuing securities, it must follow strict reporting requirements set out by the SEC. These rules are designed to ensure transparency in the securities market, ensuring that investors have access to all the information they need to make informed decisions.

Key Differences Between Commodities and Securities

The fundamental difference between a commodity and a security hinges on what is being bought and sold. There’s also regulatory issues to consider. Here are the main differences between the two.

Definition and Nature

Commodities are raw materials or primary goods that are interchangeable with other goods of the same type, such as oil, gold, or agricultural products. They are primarily used for consumption or industrial production. Securities, on the other hand, represent financial ownership or a claim on an entity. They can’t really be used in manufacturing, as they usually just represent an intangible ownership stake.

Regulation and Oversight

The regulation of commodities and securities falls under different government agencies. In the United States, commodities are primarily regulated by the CFTC. Securities are regulated by the SEC.

Trading Markets

Commodities are mainly traded on specialized exchanges such as the CME or ICE. These exchanges facilitate futures contracts, which allow traders to buy and sell commodities at a predetermined price for future delivery. Securities are, instead, traded on stock exchanges like the NYSE or NASDAQ.

Price Determination

The price of commodities is primarily influenced by supply and demand dynamics. Factors like weather conditions, geopolitical events, and production levels can cause price fluctuations. For example, a drought can drive up the price of wheat, while increased oil production can lower fuel costs. Securities derive their prices from the financial performance and future prospects of the issuing company or government. Stock prices, in theory, are based on the future cash flow of a firm and not necessarily based on the supply and demand of the specific shares.

Tangibility

Commodities are physical goods that can be delivered and stored, making them tangible assets. Investors can purchase and take possession of commodities like gold bars or barrels of oil, though most trading occurs through contracts rather than direct ownership. Securities, meanwhile, are intangible financial instruments that represent ownership or a claim. Though you can physically hold a piece of paper that might represent a security, you can’t touch the actual security in the same way you can a commodity.

Role in the Economy

Commodities are used in the global supply chain since they are used in manufacturing, energy production, and consumer goods. Their availability and prices affect industries ranging from agriculture to technology, and they play an important part as an input into the global economy. Securities, instead, are mainly used by companies to raise capital. They’re also used by investors to generate wealth.

Note

Whether cryptocurrency is classified as a commodity or a security depends on the specific digital asset and how it is used.

Is Cryptocurrency a Commodity or Security?

The differentiation between commodities and securities may seem relatively straightforward when it comes to traditional assets like gold and oil or stocks and bonds. However, digital assets like cryptocurrencies have stretched the delineation between the two types of assets.

The debate over whether cryptocurrencies constitute commodities or securities remains unresolved. In fact, the intricacies of the question may make it impractical to come up with a one-size-fits-all solution, with some cryptocurrency tokens presenting characteristics more like commodities, while there are valid arguments for considering some cryptocurrencies as securities.

The ultimate determination of how to classify crypto will likely have a significant impact on how digital assets are regulated and determine the future of the cryptocurrency industry.

Cryptocurrencies as Commodities

Since securities are subject to tighter regulations, it may come as no surprise that crypto industry executives and proponents argue that cryptocurrencies should be considered commodities. According to their perspective, cryptocurrencies are used as a store of value, similar to commodities like gold. Traders and investors may purchase crypto assets for speculative purposes—hoping to profit from price swings—which is another way that cryptocurrencies mirror commodities.

Another key argument that cryptocurrencies should not be considered securities revolves around their decentralized nature. The Howey test specifies that a security involves investing in a common enterprise and profiting from the efforts of a third party. The lack of a centralized entity underlying cryptocurrencies supports the idea that they should be classified as commodities rather than securities.

Cryptocurrencies as Securities

Although crypto advocates generally argue against the more stringent regulations that would come from classifying the digital assets as securities, subjecting crypto to securities rules could make the assets more attractive to a wider range of investors.

In addition, there are some elements of the cryptocurrency markets that seem to fall closer in line with the definition of a security. For instance, when blockchain or crypto-related companies raise capital through initial coin offerings (ICOs), they issue digital coins that allow investors to participate in the crypto project and earn a share of its profits. Therefore, ICOs resemble the initial public offerings (IPOs) that companies use to bring their stock onto the public markets, lending credence to the idea that they should be similarly regulated as securities.

Other areas of the crypto markets are reminiscent of debt securities. For example, crypto lenders may provide credit in the form of cryptocurrency in exchange for interest or fees—a structure that closely resembles bonds.

Is Bitcoin a Security or a Commodity?

There is an ongoing debate about whether Bitcoin and other cryptocurrencies should be classified as a security or a commodity. The decentralized nature of Bitcoin raises questions about whether the asset meets the criteria of the Howey Test that would classify it as a security. The Commodity Futures Trading Commission (CFTC) considers Bitcoin to be a commodity and asserts that it holds regulatory authority over BTC under the Commodity Exchange Act.

Is Ethereum a Commodity or Security?

Much like Bitcoin, Ethereum remains in a regulatory grey area and subject to differences in opinion about its classification. When it filed its lawsuit against Binance, the CFTC explicitly declared that Ethereum, along with Bitcoin and Litecoin, are considered commodities. However, the SEC has applied the Howey Test and argued that other crypto tokens such as Ripple’s XRP are securities and should be subject to the associated regulations.

Why Is a Commodity Not a Security?

Commodities—such as energy assets like oil, metals like gold, and agriculture products like corn—are not considered securities because they do not involve investing in a common enterprise and profiting from the efforts of others.

Can a Commodity Become a Security?

Commodities can serve as the underlying asset for derivatives such as futures and options. Futures establish an obligation to buy or sell a commodity at a set price and date in the future, while options provide holders with the right (but not the obligation) to buy or sell the commodity.

The Bottom Line

Assets are traditionally classified as either commodities, which are basic goods used in making other products, or securities, which are financial instruments designed to generate profits from a shared enterprise. Digital assets like cryptocurrencies have stretched the limits of these categorizations, with different perspectives on how to classify digital assets. A concrete determination on whether crypto counts as a commodity or a security could have broad implications for the regulatory framework and the future of cryptocurrencies.

Fact checked by Vikki Velasquez
Reviewed by Andy Smith

In the United Kingdom, there are three primary ways to accumulate pension funds to provide a steady income upon retirement. Those types are the government-backed State Pension, the employer-sponsored workplace pensions, and the individually established personal pensions. Depending on how the plan pays out, these plans are further divided into Tier 1 and Tier 2.

Key Takeaways

• Understanding pension types, eligibility, and contribution requirements is important for achieving financial stability in retirement.
• The U.K. State Pension requires reaching pension age and making sufficient National Insurance (NI) contributions, while workplace pensions depend on employment status and earnings.
• Employers in the U.K. are generally required to enroll eligible employees into workplace pensions, with both parties contributing.
• U.K. personal pensions may be an ideal option for self-employed individuals or those seeking additional retirement savings, as they are flexible and open to almost anyone in the country.

Breakdown of Types of Pensions in the U.K.

The U.K. offers three main pension types: the State Pension, workplace pensions, and personal pensions:

• The State Pension is government-provided, with eligibility based on National Insurance contributions and age.
• Workplace pensions are set up by employers and include defined benefit and defined contribution plans.
• Personal pensions are independently managed private schemes, including stakeholder pensions and self-invested personal pensions (SIPPs).

It’s crucial to understand all these options for effective retirement planning in the U.K. Consider seeking financial advice for personalized guidance.

State Pension

A State Pension is a government-provided pension that you receive when you reach the State Pension age—currently 66 for both men and women. The State Pension amount received depends on your National Insurance (NI) contributions record. There are two types of State Pension:

• Basic State Pension: For people who reached the State Pension age before April 6, 2016.
• New State Pension: For people who reach the State Pension age on or after April 6, 2016.

Note

Retirement benefits are the financial compensation or perks that an individual receives after they retire from their job. These benefits can include pensions, social insurance or Social Security payments, and other forms of savings or investment accounts intended to provide income during retirement.

Workplace Pensions

Also known as occupational pensions, these are now required to be set up by employers to provide retirement benefits for their employees in the U.K. There are two main types of U.K. workplace pensions:

• Defined benefit (DB) schemes: Also known as final salary pensions, these guarantee a specific income in retirement based on your salary and years of service with the employer.
• Defined contribution (DC) schemes: In these plans, both you and your employer contribute to your pension savings, and the amount is then invested. The size of your pension depends on the amount contributed and the investment performance.

Personal Pensions

Personal pensions in the U.K. are individual pension schemes, usually defined contribution plans, available to anyone, including those who are self-employed. They are designed to help individuals save money for retirement and offer flexibility in terms of contributions and investment options.

These are private pension schemes that you can set up independently of an employer, or through some workplaces. They are typically managed by insurance companies, banks, or investment firms. You can choose from various investment options, and the eventual pension payout depends on the contributions made and investment performance. Personal pensions generally include:

• Stakeholder pensions: These are low-fee, flexible personal pensions with minimum standards set by the government.
• Self-invested personal pensions (SIPPs): These offer a wider range of investment options compared with traditional personal pensions, allowing you greater control over your pension investments.

Setting Up a Pension in the U.K.

Setting up a pension in the U.K. typically involves the following steps:

• Check eligibility: Confirm if you’re eligible for the State Pension, workplace pensions, or personal pensions based on age, employment, and residency.
• Enroll in a workplace pension: Employers automatically enroll eligible employees into a pension scheme and contribute on their behalf.
• Choose a personal pension: Self-employed individuals or those seeking additional savings can set up a personal pension. Make sure to compare providers, fees, and investment options.
• Make regular contributions: Fund your pension through salary deductions for workplace pensions or direct payments for personal pensions. The State Pension relies on National Insurance contributions.
• Monitor investments: Review and adjust your investments in defined contribution workplace pensions and personal pensions to align with your retirement goals.
• Seek financial advice: Consult a financial advisor for personalized guidance on pension options, investments, and tax implications to maximize your retirement savings.

Remember that setting up a pension is an ongoing process that requires regular monitoring, adjustments, and contributions throughout your working life to ensure a comfortable retirement.

Important

Retirement savings are the funds that an individual sets aside during their working years to provide financial security during retirement. These savings can come from various sources, such as employer-sponsored plans, personal savings accounts, or other investment vehicles designed to help individuals save money for their future.

Who Is Eligible for a Pension in the U.K.?

Eligibility for pensions in the U.K. depends on the type of pension scheme. Here’s a breakdown of eligibility criteria for the main pension types:

State Pension: You must have reached the State Pension age, which is currently 66 for both men and women. You need to have made sufficient National Insurance (NI) contributions or have received NI credits. For the new State Pension, you typically need at least 10 qualifying years on your NI record to receive any payment. The years don’t need to be consecutive.

Workplace pensions: You must be employed by a company that offers a workplace pension scheme. Automatic enrollment criteria: Age from 22 to the State Pension age, earning more than £10,000 per year, and working in the U.K. Employees not meeting these criteria may still be eligible to join the scheme voluntarily.

Personal pensions: There are no specific eligibility criteria for personal pensions, as they are open to anyone looking to save for retirement. Both employed and self-employed individuals can set up a personal pension. Age restrictions may apply, depending on the pension provider and their terms.

It’s essential to understand the eligibility criteria for different pension schemes to plan your retirement effectively. If you’re unsure about your eligibility, consider seeking professional financial advice.

U.K. Pension Withdrawals

In the U.K., the minimum age for accessing private pension funds is currently 55, set to rise to 57 in 2028 under the Finance Act 2021. This applies to defined contribution pensions and self-invested personal pensions, allowing individuals to begin withdrawing their savings before reaching the State Pension age.

The State Pension itself, governed by the Pensions Act 2014, is typically accessible from age 66, increasing to 67 by 2028. Early access before the minimum age is only permitted under exceptional circumstances, such as terminal illness, and may be subject to significant tax penalties.

Pension withdrawals can be structured in different ways, with many opting for a tax-free lump sum and an income drawdown plan. Income drawdown, introduced as part of pension freedoms under the Taxation of Pensions Act 2014, allows retirees to withdraw income while keeping the remainder invested flexibly. However, those who take lump sums beyond the 25% tax-free threshold must adhere to the Money Purchase Annual Allowance, which limits further tax-efficient pension contributions. Retirees also have the option to purchase annuities, which provide a guaranteed income for life, as regulated under the Pension Schemes Act 2015.

Pension Protection and Risks

The Pension Protection Fund (PPF) was established under the Pensions Act 2004 to safeguard members of eligible defined benefit pension schemes when their employers face insolvency and the pension scheme lacks sufficient assets to meet its obligations. Funding for the PPF is sourced from levies imposed on eligible pension schemes, returns on investments, assets from transferred schemes, and recoveries from insolvent employers.

In contrast, defined contribution pension plans accumulate funds based on contributions from employers and employees, which are then invested in various assets. Members of defined contribution schemes are exposed to market risks; fluctuations in investment markets can directly affect the value of their pension pots. This means that individuals bear the investment risk, and poor market performance can lead to reduced retirement income.

Do All British Citizens Get a Pension?

No, not all British citizens get a pension. Eligibility for different pension types depends on factors like age, National Insurance contributions, and employment status.

How Many Years Do I Have to Work in the U.K. to Get a Pension?

For the new State Pension, you typically need at least 10 qualifying years on your National Insurance record to receive any payment.

How Much Is the State Pension in England?

The (full new) State Pension in England as of June 2023 is £203.85 per week.

Can I Still Get My Pension If I Live Outside the U.K.?

Yes, you can still receive your pension while living abroad, but the payment rules and annual increases may vary depending on the country and the type of pension.

The Bottom Line

U.K. pension schemes help secure financial stability during retirement. The three main types are the State Pension, funded by National Insurance contributions; workplace pensions, where employers are required to enroll and contribute for eligible employees; and personal pensions, available to anyone, including self-employed individuals. Understanding eligibility criteria and contribution requirements is essential for effective retirement planning.

Fact checked by Vikki Velasquez
Reviewed by David Kindness

A limited liability company (LLC) is a business structure that helps shield the personal assets of the business owner or owners in the event of a lawsuit, legal judgment, or bankruptcy.

This article explains the steps involved in forming an LLC, as well as how to decide whether an LLC is the right business structure for you.

Key Takeaways

• Limited liability companies (LLCs) provide legal protections for their owners’ assets if the business is sued or goes bankrupt.
• Unlike sole proprietorships, LLCs must register with their home state and any other state in which they plan to do business.
• In addition to the initial filing requirements, states have ongoing compliance rules that LLCs must follow.
• LLCs must also obtain an employer identification number (EIN) from the IRS.

Step 1: Choose a Business Name

Unlike a sole proprietorship, which can simply do business under its owner’s name, LLCs must register a formal name with their state. Typically, the name must clearly indicate that the business is an LLC.

State laws may prohibit or restrict the use of certain words in business names, so it’s worth learning the naming rules for your state and any other states where you plan to do business.

You can also ask the state offices where you will be filing your paperwork to check their records and make sure that the name you have in mind isn’t already taken.

Otherwise, the general rules for naming any kind of business also apply to LLCs. Try to make it unique and memorable.

Consider making it specific enough so that people will have some idea of what your business does, but not so restrictive that it will no longer be a good fit if you decide to diversify and expand into other areas.

Important

Your LLC can have only one legal name at a time, but it can have an unlimited number of DBA (doing business as) names, which can be used on your website, in ads and promotions, and elsewhere.

Step 2: Research State Requirements

LLCs must generally be registered in their home state and any other states where they operate.

According to the U.S. Small Business Administration (SBA), “operating” can include having a physical presence or employees in a state, meeting regularly and in person with clients in that state, or receiving a significant portion of the company’s revenue from clients in that state.

In most states, registration is handled by the secretary of state’s office, or a business office or agency, which can provide details on their state’s requirements. Often, the registration process can be completed online.

Step 3: Prepare LLC Formation Documents

In general, anyone who wants to form an LLC must create and file two documents with the appropriate states: articles of organization and an operating agreement.

• The articles of organization provide basic information, such as the company name, its address, and its members (as the owners are called).
• The operating agreement goes into greater detail about the company’s decision-making structure and the role that each of its owners will play in making decisions.

The SBA recommends that you create an operating agreement to protect yourself and your business, even if it’s not required by a state.

An LLC filing service can help you with the above tasks, for a fee. Here’s our rundown of the Best LLC Services.

Step 4: Appoint a Registered Agent

States require that the owners of an LLC have a registered agent—a person or company designated to serve as the primary contact point between the state and the LLC for any legal or tax matters.

In preparing articles of organization for the states where it plans to do business, the LLC will need to indentify a registered agent. So this is a decision that has to be made early in the process, although LLCs can change registered agents later.

LLCs can select one of their owners, their attorney, or someone else they know to be their registered agent.

However, experts generally advise choosing an individual or company that does this professionally. A professional registered agent is likelier to know the rules and be available whenever needed.

Step 5: File LLC Formation Documents

Once it has prepared its formation documents, an LLC needs to file them with its home state and other states where it intends to do business (often referred to as “foreign states”).

Each state has its own procedures. Relevant instructions—and often applications—are available online.

The filing fees tend to be relatively modest—rarely exceeding $200 in most states—but can add up for an LLC that plans to operate in many locations.

Step 6: Obtain an EIN and Business Licenses

LLCs must obtain an employer identification number (EIN) from the Internal Revenue Service (IRS) to use on their tax forms and for other purposes.

The exception to this is a single-member LLC that is a disregarded entity (i.e., does not elect to be treated as a corporation), with no employees and no excise tax liability. However, if a bank or state requires a federal EIN, this type of LLC can apply for one.

LLCs can apply online at the IRS website and receive a number right away. There is no charge for this service.

In addition, the new LLC may need to apply for federal or state business licenses or permits. This depends largely on the nature of the business.

For example, the federal government licenses some companies in the agriculture, transportation, and broadcasting industries, among others. States may require licenses for businesses such as dry cleaners, plumbers, and restaurants.

Step 7: Maintain Compliance and Record-Keeping

Once it has been established, an LLC must keep up with a variety of ongoing compliance rules. The SBA divides these into external and internal requirements.

External requirements are things that the LLC must do to satisfy federal and state government rules, such as filing the proper forms and paying taxes.

Internal requirements are matters to which the LLC must attend in order to comply with the LLC’s own organizational rules, such as proper record-keeping and holding annual meetings for members.

Most external requirements are imposed on the state level. According to the SBA, those typically include:

• Filing an annual report or biennial statement, depending on which the state requires.
• Paying statement filing fees and possibly franchise taxes. Franchise taxes don’t refer to franchises like hamburger chains, but to taxes that some states impose on companies for the right to do business in them.
• Updating the LLC’s articles of organization with the state if something significant has changed, such as the company name, address, or ownership.

As to internal requirements, the SBA notes that the rules for LLCs are more flexible than those for corporations.

However, LLCs “are generally advised to maintain an updated operating agreement, issue membership shares, record all membership interest transfers, and hold annual meetings.”

Is an LLC Right for You?

LLCs are more complicated to start up and maintain than sole proprietorships, but they offer greater protection for the owner’s personal wealth in case legal issues arise.

If you have a lot of assets that could be at risk, an LLC might be the better choice, especially if you’re going into the kind of business where lawsuits are common.

If your business will have more than one owner, a sole proprietorship is no longer an option. Instead, your choices will be between an LLC, a partnership, an S corporation, or a C corporation.

Partnerships are less complex than LLCs. One type—a limited liability partnership (LLP)—does provide some liability protection to its owners, although less than an LLC in some states.

S corporations are another option. According to the SBA, corporations “offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.”

C corporations are more complex and tend to be very large companies.

What Is Better for Tax Purposes, a Sole Proprietorship or an LLC?

Sole proprietorships and LLCs are treated similarly for tax purposes. Both are considered pass-through or flow-through entities. This means that the business isn’t taxed on its income. Instead, the owners must account for any profits or losses on their personal tax returns. One exception is an LLC that has elected to be treated as a corporation; in that case, the business must pay tax on its profits before they are passed along to the owners, who are also subject to taxes on their share of them.

Can You Convert an LLC to a Sole Proprietorship?

Yes, you can convert an LLC into a sole proprietorship or a sole proprietorship into an LLC.

Do You Need a Physical Address for an LLC?

States require that you provide a valid street address (not a P.O. box) when you register as an LLC. This doesn’t mean that you must have a separate business address. If you are starting a business out of your home, you can file using your home address.

Where Should You Form Your LLC?

Many business owners find it most convenient to form their LLCs in the state where they live. However, you can choose any state you wish.

The Bottom Line

Starting a limited liability company (LLC) involves some extra paperwork and added costs compared with a sole proprietorship.

However, the legal protections that an LLC provides may make it more than worthwhile for some business owners.

Assessing and mitigating risks while making informed crypto investment decisions

Fact checked by Suzanne Kvilhaug
Reviewed by JeFreda R. Brown

Despite high volatility, cryptocurrencies are extremely popular, with a market cap of $2.7 trillion in March 2025. With more clients expressing interest or already investing in crypto, financial advisors are looking for best practices for this new asset class.

Conducting comprehensive due diligence means going beyond just looking at historical returns or projections. Advisors need to dive into the technology, security measures, liquidity, regulations, and other factors that impact the risk and return profile. Ongoing monitoring and adapting to new developments in the fast-evolving crypto space are also essential.

Key Takeaways

• Financial advisors’ fiduciary responsibilities extend to meticulously vetting crypto assets.
• Key due diligence areas include technical analysis, market dynamics, regulatory compliance, and security protocols.
• The job of financial advisors in this area is made more difficult since many crypto assets operate outside regulations from the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC).
• Real-world crypto failures highlight the need for enhanced due diligence, regulatory adherence, and investor education.
• Ongoing monitoring and education are crucial for navigating the risks and evolving regulations in the crypto sector.

Understanding Crypto Due Diligence

Financial advisors have a fiduciary responsibility to act in the best interests of their clients at all times. This includes thoroughly vetting any investment products they recommend and fully understanding the risks and benefits for their clients.

Download Link: Are your clients interested in crypto? Use this discussion guide.

Cryptocurrencies represent a new frontier that many advisors are just beginning to explore. Without proper due diligence, advisors could expose their clients to undue risk. This involves thoroughly vetting and analyzing factors like the cryptocurrency’s underlying technology, development team, market changes, risk metrics, and security provisions.

Through due diligence, advisors can gain an in-depth understanding of a crypto asset and assess their applicability to their client’s portfolios. Ongoing monitoring and adapting to new developments in the field are essential since events evolve quickly in the crypto sphere.

Additionally, regulatory compliance needs to be a central focus during due diligence. This task in the crypto space can be a problem because many crypto assets operate overseas or in other ways to avoid being regulated by the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC).

Yet the financial advisors themselves must adhere to all applicable regulations from bodies like the SEC, the Financial Industry Regulatory Authority (FINRA), and state agencies when considering crypto for clients. This ranges from disclosure requirements to custody procedures, licensing maintenance, transaction reporting, and more.

Rigorous due diligence processes demonstrate an advisor’s commitment to ethical conduct, risk management, and fiduciary duty—upholding the highest standards of financial responsibility. This is critically important given the complexity, risks, and frequent regulatory shifts inherent to the cryptocurrency asset class.

Financial Responsibility in the Crypto Industry

Financial responsibility is the prudent management of monetary assets and transactions to ensure ethics, transparency, risk mitigation, and regulatory compliance. This takes on greater importance in the cryptocurrency realm, given its historical volatility, lack of investor protections, and a frequently shifting regulatory landscape.

For individuals investing in crypto, financial responsibility starts with only allocating disposable income that you are prepared to lose, given the asset class risk.

Setting stop losses, taking profits when prudent, and implementing security measures like multifactor wallet authentication and cold storage (putting assets offline) are also advised. Paying cryptocurrency-related taxes and adhering to reporting requirements are essential as well.

For financial advisors, financial responsibility means thoroughly vetting any crypto assets before making client recommendations through their due diligence processes. Portfolio allocations should match client goals and risk tolerance. As with other types of alternative investments, the ongoing monitoring of crypto holdings, clear client communication, and keeping up with regulatory changes are critical, too.

Conducting Crypto Due Diligence

When conducting due diligence on crypto assets, advisors need to dig deep into the technical, financial, regulatory, and security aspects of a cryptocurrency. Proper due diligence takes considerable time and effort. However, it is the only way for advisors to fulfill their fiduciary duty when dealing with crypto assets.

Core Areas of Crypto Due Diligence

Here are the core areas that financial advisors need to cover in crypto due diligence:

• Assess the legitimacy and technical details: Advisors should review the cryptocurrency’s white paper, development team, blockchain specifications, and consensus protocol. Vetting the utility, security, and capabilities of the platform is essential.
• Analyze market dynamics and liquidity: Evaluate real-world adoption metrics, trading volume, volatility, market capitalization, use cases, and historical returns. Assess liquidity risk and the potential influence that changes in liquidity can have on crypto values.
• Review exchanges, platforms, and the custody of the crypto assets: Vet any crypto exchanges, wallets, custodial services, or trading platforms for security practices, insurance coverage, segregated asset storage, and regulatory compliance.
• Evaluate the cryptocurrency’s volatility, allocation, and risk modeling: Use risk analysis frameworks like value at risk or modern portfolio theory to model crypto asset volatility and how these relate to other parts of the client’s portfolio. Construct an appropriate allocation of crypto based on the client’s risk tolerance.
• Understand the regulatory landscape: Research legal classification, taxation policies, reporting requirements, investor protections, and other regulations applicable to the crypto asset in the relevant jurisdictions, then monitor for ongoing changes. Confirm that the platform is licensed or registered within its jurisdiction and that it is subject to real and frequent third-party financial audits.
• Look for transparency: More credible platforms are upfront about all fees, ensuring that there are no surprises for your client. A platform should maintain open communication, especially during market upheavals or technical challenges.
• Become a skeptic: Approach projects promising sky-high returns with great caution. If the promoters of the crypto are promising excessively favorable returns, it warrants skepticism. A crypto’s promoters need not be fraudulent but can be taken away with their rhetoric and hopes. Many projects are nothing more than replicants of existing cryptocurrencies and blockchains with different names and terms—at the stage the industry is in, it is very rare for something new (and legitimate) to be introduced.

Additional Factors to Review for Crypto Assets

In addition to these core areas, advisors should pay attention to the evolving nature of the crypto industry and consider the following:

• Cybersecurity measures: Assess the cybersecurity measures employed by the crypto asset or project to safeguard against hacks, fraud, and unauthorized access. This includes evaluating the security protocols of both the blockchain and any associated platforms, exchanges, or wallets. Platforms should deploy robust security measures, including two-factor authentication and end-to-end encryption.
• Token governance and ownership structure: Examine the governance and ownership structure of the crypto asset to understand who holds decision-making power and how decisions are made and implemented. This helps assess the level of decentralization and the potential influence of major stakeholders.
• Community and developer engagement: Look into the ongoing interaction among the community, developers, and the project team. A strong, active engagement indicates a healthier ecosystem and support for future development.
• Competence and integrity: An evaluation to assess the competence and integrity of the team behind the crypto project is also crucial. A team that has no or questionable experience or credentials may not engineer a quality product.
• Long-term vision and road map: Review the long-term vision and road map of the crypto asset or project to gauge its ambition and feasibility, and the team’s commitment to achieving its outlined goals.
• Competitor analysis: Conduct a competitor analysis to understand the crypto asset’s positioning within the broader market and identify any unique selling points or advantages over similar projects—or the opposite: points that stand out as potential disadvantages.
• Third-party audits and reviews: Seek third-party audits and reviews of the crypto asset or project, which can provide an independent assessment of its technical, financial, and legal standing.
• The potential for integration and interoperability: Explore the potential for integration with existing systems and its interoperability with other blockchain platforms, which would provide more uses and a greater ability for others to adopt the crypto asset.
• Education and resources: Evaluate the availability of educational resources that the project provides to help investors and users understand the asset, its utility, and the technology behind it.
• Public and media perception: Monitor public and media perception, as it can significantly affect investor confidence and the market for crypto assets.
• Historical performance and resilience: Analyzing historical performance during varying market conditions and the asset’s resilience to past market downturns can shed light on its potential performance.
• Ethical considerations: Assess any ethical issues that might arise with the crypto asset or project, such as energy consumption, data privacy, and social impact. Many crises in crypto have been brought about not by a problem within a platform or asset itself, but from misuse of client funds. Platforms associated with respected crypto entities or established financial institutions generally carry more credibility.
• Review token economics: Understand the underlying “tokenomics” to ensure the platform’s sustainability and long-term viability. How well does it trade? What is its trading volume? How is its liquidity? These should be easy to answer if the asset is worth investing in. If a platform or outlet deals with stablecoins or offers returns, ensure that it can do so.
• Stay updated: The crypto sector rapidly evolves, and projects and companies frequently refresh their services and tools. This might indicate a commitment to innovation, growth, or usability; however, it might also mean they are just trying to catch the next wave of crypto excitement.

Mitigating Crypto-Related Risks

As with any investment, crypto comes with the risk of loss. While the growth of cryptocurrencies presents potential opportunities, advisors need to be able to counsel clients about mitigating the substantial risks involved in crypto.

Some key crypto investment risks include market volatility, regulatory uncertainty, technological vulnerabilities, and liquidity issues. Here’s a closer look at these risks and how advisors can help mitigate them:

• Market volatility: Cryptocurrencies are known for their significant price fluctuations over short periods. Advisors should educate clients on the volatile nature of crypto assets and encourage a long-term investment perspective. Diversifying assets can be a prudent strategy to mitigate the influence of volatility. As with other investments, advise clients to put no more into crypto than they are willing and able to lose.
• Technological vulnerabilities: Crypto assets depend on technology susceptible to hacking, fraud, and operational failures. Any crypto projects or assets should have robust security measures, and advisors should encourage clients to adopt secure wallets and exchanges to help mitigate these risks. The digital nature of cryptocurrencies thus makes them a target for cyberattacks. Utilizing secure and reputable platforms, employing multifactor authentication, and educating clients on best practices for digital security can help mitigate cybersecurity risks.
• Liquidity issues: The liquidity of a crypto asset can vary greatly depending on its market demand, trading volume, and the platform on which it is traded. Advisors should assess the liquidity risk of crypto assets and advise clients accordingly, perhaps recommending assets with higher liquidity and established exchanges.
• Misinformation, scams, and lack of transparency: The crypto sector and the wider online world around it can often be opaque and filled with misinformation. Conducting thorough due diligence, seeking transparent projects, and utilizing reputable sources for information are crucial steps to navigate through misinformation. The crypto space has been a fertile ground for various scams and fraudulent schemes. Ensuring thorough vetting of projects and educating clients on red flags associated with fraudulent activities can help mitigate these risks.
• Operational risks: Operational risks, including system failures or management incompetence, could adversely affect a crypto asset. Try to assess the operational robustness of crypto projects and the competence of their management teams.

Some of the operational risks of cryptocurrency projects include:

• Reputational risks: The reputation of a crypto asset or project can significantly affect its market value. Monitoring public and media perception and steering clear of projects with negative reputations can be prudent.
• Legal and tax implications: Understanding the legal and tax implications of crypto investments is essential. Advisors should seek to stay updated on changes in the legal and regulatory environment, as well as the tax obligations associated with crypto transactions.
• Smart contract risks: Smart contracts automate transactions on the blockchain but could have vulnerabilities or unintended consequences. Assessing the quality and security of smart contracts is crucial.

Advisors have a fiduciary duty to provide well-informed guidance to clients on navigating these risks. By fostering a culture of education, transparency, and prudent risk management, advisors can help clients make informed decisions in the crypto domain, aligning their investments with their financial goals and risk tolerance.

Regulatory Framework and Compliance

The regulatory framework surrounding cryptocurrencies and the due diligence necessary for financial advisors can be complex because of the novel nature of these digital assets and the potential for regulatory changes.

Here are the notable regulations and compliance essentials for individuals and businesses involved in crypto transactions, focused on the United States.

The U.S. is moving toward establishing a streamlined set of regulations for digital assets. The regulatory landscape involves various federal agencies, each with a unique mandate concerning cryptocurrencies:

• The Financial Crimes Enforcement Network (FinCEN): Oversees digital assets concerning anti-money laundering (AML) and countering the financing of terrorism regulations​.
• The SEC: Supervises the issuance and resale of digital assets deemed as securities​. These can include the crypto exchange-traded funds (ETFs) approved in January 2024, the stocks of crypto-mining companies, or even the cryptocurrencies themselves.
• The CFTC: Regulates digital assets that are classified as commodities or used as derivatives​. These can include futures and options contracts listed on crypto, such as Bitcoin or Ethereum.

Note

Various jurisdictions worldwide are either enacting or on the verge of implementing regulatory systems for digital assets. These regulations aim to encourage a conducive environment for innovation, consumer protection, and sector growth while ensuring financial responsibility in the crypto sector.

Several federal laws may apply to crypto assets, depending on the nature of the asset:

• The Bank Secrecy Act (BSA): Along with amendments to the USA Patriot Act and the Anti-Money Laundering Act, the BSA establishes a framework for preventing money laundering.
• The Commodity Exchange Act and Securities Exchange Act: These are relevant for the registration requirements for assets considered securities and commodities​.
• The Responsible Financial Innovation Act: An initiative that creates the beginnings of a comprehensive regulatory framework for digital assets.
• U.S. Department of the Treasury and Internal Revenue Service (IRS) regulations: Newly proposed regulations touch on the sales or exchanges of digital assets, including cryptocurrencies, and relate to information-reporting requirements and the determination of the amount realized, basis, and backup withholding.

Compliance

Compliance is essential for mitigating the risks associated with crypto transactions.

Compliance Requirements

• Registration and compliance with the relevant regulatory bodies: Companies directly dealing with digital currencies must register with FinCEN, the SEC, and the CFTC, depending on the nature of the assets, and follow the relevant regulations.
• Assessing risk and AML programs: Regulated businesses should conduct risk assessments concerning money-laundering activities and implement AML programs proportional to their size and nature​.
• Customer identification programs: Know Your Client (KYC) is the term used for the standard practice in the U.S. of verifying customer identities and legal status during onboarding and transactions​ to meet regulatory requirements.

Case Studies: Lessons Learned From Crypto Failures

The Collapse of FTX Exchange

The crash of the FTX exchange was a significant event in the crypto industry that shed light on the importance of due diligence and financial responsibility.

FTX was once a reputable name in the cryptocurrency exchange domain, known for facilitating crypto trading and derivative products. However, it faced a sudden collapse from mismanagement and fraudulent activities that quickly led in the fall of 2022 to a significant mismatch between its assets and liabilities.

Unlike traditional financial institutions where assets and liabilities are continuously audited, the FTX case exposed a gaping hole in the crypto sector’s self-regulation.

The core issue was that the exchange was supposed to make money off slim fees from each transaction on the exchange while taking care to keep client assets safe. Instead, those assets were put into risky investments, which meant that once clients called for their funds and those couldn’t be provided, its native token, FTT, collapsed in value.

Impact:

• This failure affected not only the stakeholders of FTX but also sent a ripple of uncertainty through the crypto market.
• The collapse of FTX highlighted the need for enhanced financial compliance measures, better management practices, and the utilization of blockchain’s transparency feature to ensure continuous auditing of crypto firms to prevent such catastrophic events.
• The collapse disrupted the crypto market and led to significant financial losses for investors.
• The collapse brought attention to the regulatory shortcomings in the crypto industry, catalyzing discussions around creating more stringent regulations.

Important

Former FTX CEO Sam Bankman-Fried was convicted on Nov. 2, 2023, on seven counts of fraud and conspiracy after his business partners, some of whom were close friends from his teen years, testified against him at trial. Once among the wealthiest people ever under age 30, he faces decades in prison.

The Bankruptcy of Genesis Lending Unit

Genesis was a well-regarded name in the crypto lending sector. However, it faced bankruptcy after not managing its liabilities following a freeze on withdrawals. After filing for bankruptcy in early 2023, its restructuring unit listed $43.8 billion owed to creditors.

This bankruptcy underscored the inherent risks associated with crypto lending platforms, especially in volatile market conditions. It also raised further concerns about the industry’s financial management practices and the need for stricter regulatory compliance within crypto lending platforms.

Impact:

• A significant financial loss for creditors
• A negative ripple effect for other entities in the crypto market
• The dispute between Genesis and crypto exchange Gemini over a crypto lending product called Earn showcased the complex legal and financial intricacies in crypto lending agreements​.

TerraUSD Crash

TerraUSD (UST), an algorithmic stablecoin, was designed to maintain a stable value by being pegged to the U.S. dollar. However, it suffered a severe crash and deviated significantly from the dollar, dropping from $1 to $.35 in 2022. It regained its value by the spring of 2023.

The crash was triggered by a rapid sell-off on digital asset exchanges, which were not adequately buffered by the algorithmic mechanisms. The fallout was significant, leading to legal action and a loss of confidence in the stability of algorithmic stablecoins.

The case underscored the challenges inherent in algorithmically stabilizing currencies and the need for continuous monitoring while managing crypto assets. Also highlighted was the importance of robust stabilization mechanisms and regulatory oversight to ensure the integrity and stability of crypto stablecoins.

Impact:

• The crash disrupted the wider stablecoin market, shaking investor confidence in crypto stablecoins.
• Legal action ensued against the project, further straining its resources and reputation.
• Investors and stakeholders suffered financial losses from the sudden decline in value.

The Bybit Exchange Cyberattack

In 2025, Bybit, one of the largest cryptocurrency exchanges, suffered a $1.5 billion theft due to a large cyberattack, which almost caused the exchange to collapse. The attack was credited to hackers from North Korea, exposing massive holes in Bybit’s security infrastructure and adversely impacting the crypto market.

The attack was specifically on Bybit’s cold wallet storage which resulted in transfers of unauthorized funds. As the attack spread, users panicked, leading to mass withdrawals, severely impacting the exchange’s liquidity.

The attack on Bybit showed the risks users face when entrusting their money to centralized exchanges, and the vulnerabilities of exchange security measures as they do not have the same cybersecurity regulations that traditional financial institutions do.

Impact:

• The cyberattack on the Bybit exchange led to a liquidity crisis, requiring Bybit to secure $280 million in funding to stabilize the situation.
• As Bybit is one of the largest crypto exchanges, it suffered serious reputational damage, highlighting the increased risks of cryptocurrencies.
• The theft from hackers underscored the need for increased checks and security in the cryptocurrency industry.

What Are the Biggest Risks and Challenges With Crypto Investments?

Key risks include high volatility, liquidity constraints, cybersecurity threats, lack of investor protections, regulatory uncertainty, susceptibility to scams, and more. The lack of adoption of crypto tokens for real-world uses, the extreme price swings, and the speculative nature seen in crypto markets in the past present ongoing challenges.

How Can Individuals and Businesses Find Financially Responsible Crypto Outlets?

Ensuring financial responsibility in the crypto sector starts with education and awareness. Individuals and businesses should acquire a good understanding of blockchain technology and the specific cryptocurrencies in which they are investing. Regular financial audits can ensure transparency and financial health, while compliance with existing regulatory frameworks in the jurisdictions in which they operate is crucial to avoid legal complications.

What Are the Compliance Requirements for Those Involved in Crypto Transactions?

The compliance requirements for individuals and businesses involved in crypto transactions vary depending on the jurisdiction. However, common requirements include following KYC and anti-money laundering and combatting the financing of terrorism (AML/CFT) regulations to prevent illegal activities.

Tax compliance is also crucial, with individuals and businesses required to report and pay taxes on cryptocurrency profits in almost any jurisdiction. If a crypto asset is classified as a security, then securities compliance is necessary. Data protection compliance to ensure the protection and privacy of user data is also a crucial aspect of compliance in crypto transactions.

The Bottom Line

Cryptocurrency investments are still relatively new for many financial advisors. They have unique challenges that demand meticulous due diligence. The fiduciary responsibility of advisors extends to in-depth vetting of crypto assets so they can make informed recommendations to their clients.

Beyond analyzing historical returns, advisors should learn about the intricacies of blockchain technology, security protocols, market changes, liquidity, and an ever-evolving regulatory landscape.

The aim is to ensure financial responsibility, risk management, and regulatory compliance in a sector known for its volatility and lack of investor protections. Well-known fraud and conspiracy cases in the sector have created some valuable lessons—they should be used to develop a basis for essential practices that uphold integrity and foster trust.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.

Reviewed by David Kindness

Nike, Inc. (NKE) is a global designer, marketer, and retailer of athletic footwear, sneakers, apparel, equipment, services, and accessories. Most of Nike’s products are manufactured by independent contractors. The company sells its products direct-to-consumer through both retail outlets and its digital platforms as well as through independent distributors and retailers.

The top shareholders of Nike are Phil Knight, Mark Parker, John Donahoe, Swoosh LLC, Vanguard Group Inc., and BlackRock Inc. (BLK).

Nike’s 12-month trailing revenue and net income for 2024 are $51.4 billion and $5.7 billion respectively. The company has a market capitalization of $116.24 billion as of March 9, 2025.

Nike has two classes of stock. Class A shares aren’t available on the open market. They’re convertible into class B shares on a one-for-one basis. Class B shares the normal Nike shares available to all investors. The primary difference is that holders of Class A shares elect nine of the 12 members of Nike’s board. Holders of Class B shares elect the other three.

Phil Knight, the co-founder of Nike, and his son Travis Knight own more than 97% of outstanding Class A shares along with the holding companies and trusts they control. This allows the Knight family to exercise effective control of Nike even though it’s a publicly traded company.

Key Takeaways

• Nike, Inc. is a leading retailer of athletic footwear and apparel.
• Nike was founded by Philip Knight and Bill Bowerman in 1964.
• Class B shares of Nike are publicly traded but Class A shares are largely controlled by the founder and his family.
• Most of Nike’s directors are elected by Class A shares, giving the founder effective control of the company.
• Most Class B shares are held by institutions like Vanguard and BlackRock.

Top 3 Individual Insider Shareholders

This list reflects direct ownership. It doesn’t include indirect ownership of shares or shares that are accessible through stock options.

Important

The term “insider” refers to people in senior management positions and members of the board of directors, as well as people or entities that own more than 10% of the company’s stock. It has nothing to do with insider trading in this context.

Philip Knight

Billionaire Philip Knight directly owns 23,879,487 shares of Class A and 32,215,174 shares of Class B Nike stock, representing 8.0% of outstanding Class A shares and 2.6% of outstanding Class B shares as of June 28, 2024.

Knight co-founded Blue Ribbon Sports, later to be renamed Nike, with his former track coach, Bill Bowerman, in 1964. Nike would become one of the world’s biggest and most powerful brands in sports shoes and apparel over the next six decades, making Knight one of the world’s wealthiest individuals.

Knight ran the company as president from 1968 to 1990, except for a brief interlude, and again from 2000 to 2004. Knight has served on the board of directors since the 1960s and retired as the chair in June 2016. He was appointed Chair Emeritus, a non-voting board member. He was appointed Chair Emeritus, a non-voting board member. He and his family are ranked 47nd on the Forbes list of billionaires with a net worth of $35.4 billion.

Mark Parker

Mark Parker held 2,740,543 shares of Nike stock, representing roughly 0.2% of outstanding Class B shares, as of June 28, 2024.

Mark Parker serves as Executive Chair of Nike, having previously served as the President, CEO, and chair for 14 years. Parker stepped down as CEO in 2019.

Parker’s career at Nike began in 1979 as a footwear designer and he has also held executive leadership positions at the company in business lines such as Consumer Product Marketing, Global Footwear, and Nike Brand.

John Donahoe II

John Donahoe held 1,710,599 shares of Nike stock, representing about 0.1% of all Class B shares, as of June 28, 2024.

Donahoe is the former President and CEO of Nike after succeeding Mark Parker in 2019. He’s served as chief executive at eBay and ServiceNow before his leadership position at Nike and he continues to serve on the board of PayPal.

Top 3 Institutional Shareholders

Institutional investors hold the majority of Nike’s shares at about 80.73% of total shares outstanding.

Swoosh LLC

Swoosh LLC owns 230,750,000 shares of Nike Class A stock and another 230,750,000 of Class B stock, according to the company. That adds up to 77.5% of all outstanding Class A shares and 16.1% of all Class B shares.

Swoosh is the limited liability company created by Phil Knight to hold the bulk of Knight’s shares in Nike. Knight transferred his voting interests in Swoosh to a trust owned by his son, Travis Knight, upon his retirement from his position as chair of Nike’s board in 2016. Travis Knight serves on Nike’s board of directors.

Vanguard Group, Inc.

Vanguard Group owned 109,539,710 shares of Nike, representing 9.0% of all Class B shares outstanding, as of June 28, 2024.

Vanguard is primarily a mutual fund and ETF management company with about $10.1 trillion in global assets under management (AUM). The Vanguard Dividend Appreciation ETF (VIG) tracks an index of U.S. companies with steadily increasing dividends over 10 or more consecutive years and has $105.7 billion in AUM.

BlackRock, Inc.

BlackRock owns 89,773,424 shares of Nike Class B stock, representing 7.3% of the shares outstanding.

The company is primarily a mutual fund and ETF management company with approximately $10.65 trillion in global AUM. The iShares Core S&P 500 ETF (IVV) is among one of BlackRock’s largest ETFs with approximately $575.6 billion in AUM. Nike represents 0.19% of IVV’s holdings.

Diversity and Inclusiveness of Nike

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of more than just who are the shareholders at Nike. We highlight the company’s commitment to diversity, inclusiveness, and social responsibility as a whole.

Find out how Nike reports the diversity of its management and workforce. The ✔ shows if Nike discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall across a variety of markets.

Nike Diversity & Inclusiveness Reporting
	Race	Gender	Ability	Veteran Status	Sexual Orientation
Board of Directors
C-Suite
General Management	✔	✔
Employees	✔	✔

How Did Nike Get Famous?

Nike was originally founded as Blue Ribbon Sports by Phil Knight in 1964. Knight was a runner at the University of Oregon.

Knight was impressed by the speed and quality of the manufacturer after touring a shoe factory in Japan and signed a deal to sell the shoes in the United States under the Blue Ribbon Brand. The company changed its name to Nike in 1971 and adopted the famous Swoosh logo. The defining moment was when the young company signed Michael Jordan in a $2.5 million marketing deal.

What Is the Ownership Concentration of Nike?

About 65.8% of public Nike stock is held by institutional investors with the general public holding an additional 13.3%. Company insiders held 20.7%, as of May 2024.

More than 97% of Class A shares are still controlled by the original owner, Philip Knight, and his family through holding companies and trusts. This gives the Knight family effective control over Nike’s board because the Class A shares elect nine out of 12 directors.

Who Created the Nike Symbol?

The famous Nike swoosh symbol was created by Carolyn Davidson, a graphic design student at Portland State University. It was originally accompanied by a wordmark in Futura Bold Condensed font.

Davidson also provided other work for Nike’s founders in addition to the Swoosh symbol, such as graphics and chart design. Davidson was only paid $35 for the logo but Knight later awarded her 500 shares of the company which are worth about $39,000.

The Bottom Line

Nike is one of the leading brands in high-end athletic wear and one of the most successful and recognized companies in the retail sector. Most of its shareholders are institutional investors like pensions and mutual funds. Founder Phil Knight and his family continue to exercise a controlling influence over the board of directors because of the way share classes are structured.

Reviewed by David Kindness
Fact checked by Yarilet Perez

Inheriting jewelry may come with sentimental value, whether you’re safeguarding family heirlooms, dividing them among heirs, or using them as a valuable resource, like for a home down payment.

However, old age doesn’t always equal financial value. The piece may be a sought-after collector’s item, or it could have lost its appeal over time. Factors such as current gemstone and metal prices, quality of artistry, craftsmanship, and the designer also affect its worth.

Regardless of what you plan to do with the inherited jewelry, one of your priorities should be to determine its value, particularly if you need to insure it. That requires getting a professional appraisal.

Key Takeaways

• If you’ve inherited potentially valuable jewelry, one of your priorities should be having it appraised.
• To find an appraiser, contact one or more of the significant associations that require their members to meet specific standards and adhere to a code of ethics.
• Because gems and precious metals can fluctuate in value, consider having the jewelry reappraised every few years.

How to Find a Jewelry Appraiser

Pretty much anyone can claim to be a jewelry appraiser, whether they own a jewelry store or not. There are no federal or state licensing requirements the way there are for real estate appraisers. So it’s primarily on you to determine whether an appraiser is equipped to evaluate your inherited items.

That involves more than heading to the nearest jewelry store since merely working in the industry doesn’t qualify an individual as an appraiser. What’s more, most jewelry retailers don’t have their gem lab or the instruments required to examine a stone and properly determine its quality. For example, a ring appraisal may call for an appraiser who is familiar with diamonds.

Several industry groups require their members to meet certain qualifications and adhere to a code of ethics. You can locate an appraiser in your area by visiting the following websites, listed here in alphabetical order:

• Accredited Gemologists Association (AGA) 
• American Gem Society 
• American Society of Appraisers 
• Appraisers Association of America
• Appraisers International Society (AIS) 
• Association of Independent Jewellery Valuers 
• International Society of Appraisers 
• Jewelry Judge
• National Association of Jewelry Appraisers 

Besides having a recognized qualification, the appraiser should also be a graduate gemologist (GG) of the Gemological Institute of America (GIA). Having a gemological degree means that an individual can identify and grade gem materials. However, it does not, in itself, provide the training required to become a jewelry appraiser. An appraiser should also be knowledgeable about the current jewelry market.

Never dismiss costume jewelry; some pieces are worth more than you might think.

What to Expect From a Jewelry Appraisal

A competent appraisal, according to the American Society of Appraisers, should:

• Clearly state the kind of value being determined, such as fair market value (used for tax purposes), the replacement value (for insurance coverage), or liquidation value (for bankruptcy or business dissolution).
• Describe the property being valued.
• Detail the procedures used to arrive at the estimate, such as an analysis of comparable sales.
• Specify the qualifications of the appraiser.
• Include the appraiser’s signature.

Important

When appraising jewelry, the appraiser should clearly state whether the value being determined is fair market value, replacement value, or liquidation value.

How Do I Find a Reputable Jewelry Appraiser?

Start by asking your friends and family who they have used in the past. Visit the websites of the American Society of Appraisers or the National Association of Jewelry Appraisers to learn about appraisers in your area.

How Much Does it Cost to Have Jewelry Appraised?

It depends on the appraiser. It could be anywhere from $50 up to $150 per item.

Do Jewelers Offer Free Appraisals?

Yes, but not always. If you know a local and reputable jeweler, they might offer an appraisal of your piece for free, especially if they think you will sell it to them. High-end auction houses, for example, like Sotheby’s, offer a free appraisal estimate. If you think your jewelry is extremely valuable, you can contact Sotheby’s.

How Do You get Antique Jewelry Appraised?

Suppose you have strong reason to believe that your antique jewelry is valuable. In that case, you might try getting it appraised by a high-end auction house like Sotheby’s. Conversely, you could search on the Better Business Bureau to find reputable antique jewelry appraisers.

The Bottom Line

Putting a value on inherited heirlooms requires a qualified professional. To find an appraiser in your area, contact one of the major industry associations listed above for names. Don’t hesitate to ask potential appraisers, “What qualifies you to value this type of jewelry.”

Be prepared to pay a premium given the specialist training and equipment required for the job. Costs can range from about $50 to $75 per item, or $50 to $150 or more per hour, depending on the appraisal’s items. And given that the prices of precious metals tend to fluctuate dramatically, appraisals should be carried out every few years to keep your insurance coverage up to date. Should you decide to sell your inherited jewelry, knowing its value will help you obtain a fair price for it.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

With home ownership seemingly out of reach for many young people today, parents may wonder whether they should just give their house to their children at some point? This can happen when parents downsize or move to another property. However, while such generosity may be admirable, giving a house away is a decision with serious financial consequences for everybody concerned.

Key Takeaways

• Giving your house away means you can’t sell it or access a reverse mortgage if you face unexpected financial challenges.
• Gifting your house may result in your child having a larger taxable gain if they sell the home.
• If you still have a mortgage, it might not be transferable to your child, or they might struggle to refinance it.
• Even if you give the house to your child, if you continue living there, there could be estate tax concerns or family disputes.

Before transferring ownership to your adult child, consider these factors.

1. You May Need the Money One Day

Aside from the funds you have in your retirement accounts, your home equity could be the largest asset you possess. If you give up your house, you won’t be able to sell it and harvest the cash or take out a reverse mortgage to borrow against your accumulated equity should you ever need to. Even if you are financially comfortable now, a large medical or nursing home bill late in life could leave you scrambling to come up with money to pay it.

2. You Could Be Giving Your Child a Huge Tax Bill

If you give your house to your adult child while you’re still living, their tax basis will be the same as yours: whatever you paid for the home plus the cost of any improvements you’ve made over the years. So, for example, if you bought your home 20 years ago for $300,000 and redid the kitchen to the tune of $50,000, your cost basis is $350,000. 

However, if you leave the house to your adult child in your will, rather than making a gift while you’re still alive, the cost basis will step up to the home’s fair market value at the time of your death.

Let’s say your house is worth $700,000 today and will be worth $1 million in another 10 years. A child you give the house to, and who later sells it for $1 million, will owe tax on a gain of $650,000. If they inherited the property instead, the taxable gain would be only $300,000.

In both cases, the child could generally exclude some of that gain by living in the home for at least two years before selling. The exclusion is $250,000 for an individual, $500,000 for couples who file a joint return. But even so, the difference in taxes could be substantial.

3. Your Mortgage Might Be an Obstacle

With more Americans carrying mortgage debt into their retirement years, you might still have a loan on your home by the time you consider giving it to a child. If your mortgage is transferable, your child will become responsible for it, which could be a financial burden. If it isn’t transferable, your child might have to refinance that debt, which might be even more expensive—or impossible, if your child does not have a strong credit history.

4. You Might Still Want to Live There

For estate planning purposes, you might consider giving your house to a child even if you plan to continue living in it. One reason is estate taxes. For tax year 2025, federal estate taxes only affect estates worth $13.99 million or more, so unless you own a mansion, that may not be an issue. Your state, however, may set a lower threshold. Oregon has the lowest exemption levels at $1 million.

If you do want to give your house to a child and still reside there, consult an estate-planning attorney about your options, including putting your home into a trust. One type, the qualified personal residence trust, could also allow you to freeze your home’s value for estate tax purposes, so you wouldn’t have to worry about future appreciation pushing you into estate tax territory.

Of course, there any number of potential downsides to becoming your child’s tenant. One is the potential for a family rift if you disagree on matters like home maintenance or who is responsible for what. And even if you and your child have an ideal relationship, you could find yourself at the mercy of a less-agreeable son- or daughter-in-law someday—perhaps someone who isn’t even in the picture yet.

Can My Child Sell the House Immediately After I Give It To Them?

Yes, your child can sell the house after you give it to them, but depending on the property’s value and their tax basis, they may face steep tax liabilities. If the house appreciates in value, they could owe capital gains tax on the difference between the home’s sale price and its original value (if it was gifted).

Is It Better to Gift the House or Pass It Down In My Will?

If you gift the house while you’re alive, your child may face a larger tax bill due to the capital gains tax. If you leave the house in your will, the property’s tax basis is stepped up to its market value, which can reduce potential taxes for your child. It’s often better to consult with a tax advisor to decide what’s best for your family.

If I Give My House To My Child, Can I Still Claim Tax Deductions Like Mortgage Interest or Property Tax?

Once you transfer the house to your child, you can no longer claim tax deductions for mortgage interest or property taxes on that property since you will no longer own the home.

The Bottom Line

Giving your home to your grown-up child is not a decision to be taken lightly. It is in your and your child’s best interests to consider all of the financial ramifications of such a move. Consult with a financial planner and an estate planning attorney if you plan to remain living in the home. These steps will help ensure that you make a decision that works for everyone.

Reviewed by Michael J Boyle

Mercantilism is an economic policy designed to increase a nation’s wealth through exports, which thrived in Great Britain between the 16th and 18th centuries. The country enjoyed the greatest benefits of mercantilism between 1640 and 1660 when the prevailing economic wisdom suggested that the empire’s colonies could supply raw materials and resources to the mother country and subsequently be used as export markets for the finished products.

The resulting favorable balance of trade was thought to increase national wealth and Great Britain was not alone in this line of thinking. The French, Spanish, and Portuguese competed with the British for colonies under the belief that no great nation could exist and be self-sufficient without colonial resources. Because of this heavy reliance on its colonies, Great Britain imposed restrictions on how its colonies could spend their money or distribute assets.

Key Takeaways

• Mercantilism exists to increase a country’s wealth through its exports.
• British economic growth was propelled by raw materials supplied by its colonies so the nation could export finished products.
• Mercantilism brought about many acts against humanity, including slavery and an imbalanced system of trade.
• During Great Britain’s mercantilist period, colonies faced periods of inflation and excessive taxation, which caused great distress.
• Angry and frustrated American colonists revolted against the British, which led to the American Revolution and the end of mercantilism.

British Mercantilism’s Control of Production and Trade

Mercantilism led to the adoption of enormous trade restrictions, which stunted the growth and freedom of colonial business. Much of the trade that took place before the mid-17th century was controlled by the Spanish and Dutch, including to and from England. That was until the British decided to take the reins of their own shipping rights and eliminate these other nations completely from the equation.

In the 1660s, England passed the Acts of Trade and Navigation. Also known as the Navigation Acts, they were a series of laws designed to make American colonies more dependent on manufactured products from Great Britain. In this vein, British authorities further enumerated a set of protected goods that could only be sold to British merchants, including sugar, tobacco, cotton, indigo, furs, and iron.

But Britain’s rise in the shipping wars didn’t come without a cost. In fact, there were many transgressions and human rights violations that were committed by imperial the country (not to mention other European empires) on its colonies in Africa, Asia, and the Americas during this time. One of the key things to remember, though, is that not many of these transgressions were directly rationalized by mercantilism.

Note

In Wealth of Nations, the father of modern economics Adam Smith argued that free trade promotes a flourishing economy—not mercantilism.

The Slave Trade

Slavery was a common practice throughout the history of human civilization. The earliest records date back thousands of years to Mesopotamia. The Spanish, French, and Dutch used it to take advantage of the resources in parts of the New World. When local Indigenous populations started to decline, Blacks were transported from parts of Europe and Africa to the West Indies and South America. The British also used slavery to boost their position and advance their own interests.

Trade became triangulated during the mid-1600s between the British Empire, its colonies, and foreign markets. This fostered the development of the slave trade by England in many colonies, including America. The colonies provided rum, cotton, and other products that were heavily demanded by imperialists in Africa. In turn, slaves were returned to America or the West Indies and traded for sugar and molasses.

Not only did these new resources provide England with a large source of revenue, but so too did the slave trade. English company Royal Adventurers Trading to Africa and its successor, the Royal African Company were given a monopoly in the trade of slaves as early as the 1660s.

Important

The colonists were, to some degree, seen as tenants who lived on British soil under mercantilist rule. As such, the taxes imposed by the British and the raw materials sent back to England were effectively a form of rent.

Inflation and Taxation

The British government demanded the trade of gold and silver bullion and was always seeking a positive balance of trade. As such, the colonies often had insufficient bullion left over to circulate in their own markets so they took to issuing paper currency instead. The mismanagement of printed currency resulted in periods of inflation.

Great Britain was also in a near-constant state of war. Taxation was needed to prop up the army and navy. The combination of inflation and taxation caused great colonial discontent. Some of the most notable taxes in early American history include:

• In 1733, the British Empire enacted the Molasses Act, which imposed a tax on foreign molasses imports per gallon.
• The British raised revenue by enacting the Sugar Act of 1764. Although it cut the tax on molasses, the law (also called the American Revenue Act or the American Duties Act) was enforced even more strictly.
• The Stamp Act of 1765 required all American colonists to pay a direct tax to England that would help pay for British troops in America. The act also required colonists to use stamped paper produced in England for any printed material.
• Other laws aimed at increasing revenue and ensuring the enforcement of trade regulations included the Commissioners of Customs Act 1767 and the Indemnity Act of 1767.

And of course, there were the Townshend Acts that were passed between 1767 and 1768. These laws imposed taxes on 72 different items imported by England to America, including the tax imposed on tea. The colonists revolted against the tea tax, leading to the Boston Tea Party. Angry over the tax they said provided them with no taxation and the fact that they weren’t able to control their resources and finished goods on their own, colonists dumped crates of imported British tea into Boston’s Griffin’s Wharf in 1773.

How Did Mercantilism Affect the British Colonies?

England enacted new laws during the 16th and 18th centuries, putting tariffs on imports of foreign goods and restricting shipping through English channels. As such, mercantilism became the key economic model of the time. It encouraged the colonists to purchase goods from England rather than rival nations. The colonies sent raw materials to England where they were manufactured into finished products and sold to the colonists. This allowed Britain to monopolize the slave trade, transporting slaves from English ports to America. High inflation and heavy taxation on the colonies caused a rift between the colonists and the British.

How Did Mercantilism Create Discord Between Britain and Its Colonies?

Britain used mercantilism as a way to secure its interests in the New World. Raw materials were shipped back to England where they were converted to finished goods. These products were then shipped back to the colonies as exports, which the colonists purchased. In order to continue its stronghold in America, Britain had to ensure its military was paid for and did this by imposing a series of taxes on the colonists. This included taxes on goods like molasses, sugar, and tea. Angry at being taxed without representation and not being able to control their own resources, the colonists revolted. This eventually led to the American Revolution and independence.

Why Did American Colonists Oppose British Mercantilism?

Britain used mercantilism to boost its own interests during the mid-1600s. But it was almost always at war with its rivals to keep its trade and colonial interests in place. This required a regular stream of revenue, which England received through a series of taxes imposed on the colonists. These laws required that taxes be paid by every colonist on items like sugar, molasses, tax, and printed materials. The colonists, on the other hand, were enraged that they were forced to pay taxes without having a voice in the British government. They were also angry that the British government was the one in charge of how their resources and goods were used and distributed. This discord is what led to the American Revolution.

The Bottom Line

British mercantilism flourished during the middle of the 17th century at a time when England was flexing its muscle in the New World. The idea behind this economic policy was that the colonies existed for the benefit of the Empire, providing a stream of revenue and much-needed resources.

But all this came at a cost. England’s need to enforce its trade regulations and place in the world led to the slave trade and human rights violations in America. England would ultimately pay the price, though, after frustrated colonists who were unhappy about the lack of control on their own soil revolted against heavy taxation.

These two companies dominate the global market for soft drinks

Reviewed by Margaret James

Who Rules the Global Beverage Industry?

Just two corporate powerhouses dominate the global market for soft drinks: PepsiCo. Inc. (PEP) and The Coca-Cola Corp. (KO).

Since 2004, Coca-Cola has been the market leader. Coca-Cola remains the world’s most valuable soft drink brand with a market cap of $307.22 billion as of March 9, 2025. PepsiCo. is a second at $211.814 billion. Keurig Dr. Pepper (KDP) was the third soft drink brand with a $45.234 billion market cap.

Some analysts believe that Pepsi has a shot at surpassing Coca-Cola soon, but not by selling more soda. Pepsi also has a broad lineup of snack brands like Doritos, Cheetos, and Lay’s Potato Chips.

Key Takeaways:

• PepsiCo. Inc. and The Coca-Cola Corporation are the two powerhouses controlling the bulk of the carbonated soft drink (CSD) and beverage industry.
• Both companies have a large global presence, controlling several hundred brand names each.
• Since 2004, Coca-Cola Company has been the market leader, according to industry statistics.
• Pepsi ranks second, followed by Keurig Dr. Pepper.

Understanding the Soft Drinks Industry

Soft drinks belong to the non-alcoholic beverage industry. This industry produces carbonated drinks, juice, bottled water, sports and energy drinks, and hot and iced coffee and tea. The market leaders in this industry are The Coca-Cola Corporation, PepsiCo Inc., and Keurig Dr. Pepper.

The Coca-Cola Corporation and PepsiCo are long-term competitors. Pepsi has been using its famous “Pepsi Challenge” as a promotional slogan since 1975. The challenge was originally a blind taste test in which consumers were invited to try both beverages. Pepsi was the winner, and a long-running ad campaign was born.

World’s Favorite Drinks 2023

The top-selling non-alcoholic drinks worldwide in 2023 were:

1. Coca-Cola Classic
2. Pepsi Cola
3. Red Bull
4. Monster
5. Nescafe
6. Gatorade (owned by PepsiCo)
7. Dr Pepper
8. Sprite (owned by Coca-Cola)
9. Nongfu Spring
10. Lipton

Market Share and Market Cap

Both Coca-Cola, Inc. and PepsiCo dropped in market share by about 5-6% over the trailing twelve months through the first quarter of 2024.

Coca-Cola had a market cap of $261 billion and PepsiCo had a market cap of $242 billion as of the end of the first quarter.

Healthy Directions

Their historic rivalry isn’t the only concern facing executives of Coca-Cola and PepsiCo. Consumer tastes are evolving away from sugary drinks and towards healthier alternatives and energy drinks.

Both companies are trying to evolve with them.

Coca-Cola brands now include Simply juices, smartwater, Dasani, and vitaminwater.

PepsiCo owns Quaker Foods, Tropicana, and Aquafina,

Coke vs. Pepsi: Who Sells More Soft Drinks?

Coca-Cola’s carbonated soft drinks brands dominated the U.S. market at a 69% U.S. market share in 2023, according to AdAge. Pepsi brands were a distant second at 27%.

Coke vs. Pepsi: How Are They Different as Companies?

One big difference is that Coca-Cola has stuck pretty much to non-alcoholic drinks while expanding. Its brands include Fanta, Minute Maid, Fresca, Barq’s, and Costa Coffee, among others.

PepsiCo, meanwhile, has expanded heavily into foods, particularly snack foods. Its brands include Lay’s and Ruffles potato chips, Tostitos, Starbucks Frappaccinno, and Sabra Hummus, as well as Quaker Oats.

Who Cares About the Cola Wars?

You’d be surprised. A February 2024 story in the website Deadline reports that Sony Pictures won a hot bidding war for “Cola Wars,” a movie script that tells the riveting story of underdog PepsiCo’s epic decades-long rivalry with reigning cola king Coca-Cola.

The Bottom Line

Times have changed since the development of carbonated beverages. Consumers have begun to seek out healthier alternatives. Both cola brands have seen a recent decline amid increased competition, and analysts foresee a continued downward trend for the two main brands.

However, these two companies are expected to continue to dominate the overall beverage market.

Reviewed by Margaret James
Fact checked by Betsy Petrick

Jumbo vs. Conventional Mortgages: An Overview

Jumbo and conventional mortgages are two types of financing borrowers use to purchase homes. Both loans require homeowners to meet certain eligibility requirements, including minimum credit scores, income thresholds, repayment ability, and down payments.

Both are also mortgages issued and underwritten by lenders in the private sector, as opposed to government agencies like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service (RHS).

Although they may serve the same purpose—to secure a property—these two mortgage products have several key differences. Jumbo mortgages are used to purchase properties with steep price tags—often those that run into the millions of dollars. Conventional mortgages, on the other hand, are smaller and more in line with the needs of the average homebuyer. They also may be purchased by a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac.

Key Takeaways

• Jumbo loans are mortgages that exceed the conforming loan limits.
• Jumbo and conventional mortgages are two types of private loans borrowers use to secure properties.
• A conventional mortgage usually falls within a certain size, as set by the FHFA annually, and adheres to certain government guidelines.
• A jumbo mortgage is in excess of FHFA standards, typically starting around $650,000, and cannot be backed by government-sponsored enterprises like Fannie Mae or Freddie Mac.
• Jumbo mortgages tend to have more stringent requirements for borrowers than conventional loans do.

Jumbo Mortgages

As their name implies, jumbo mortgages are loans intended for financing high-priced properties. They involve big sums, often running into the millions. Luxury homes and those found in highly competitive local real estate markets are generally financed via jumbo mortgages.

Largely because of their size, jumbo mortgages or loans are nonconforming. That means they fall outside of Federal Housing Finance Agency (FHFA) restrictions on loan sizes and values and are, therefore, restricted from receiving backing from Fannie Mae or Freddie Mac. They also exceed the maximum conforming loan limit in their respective counties.

$806,500

The 2025 maximum conforming loan limit for a single-family home in most of the United States. Jumbo mortgages typically involve any amount higher than this limit.

Other factors that disqualify jumbos from being conforming loans may include well-off borrowers with unique needs or interest-only mortgages that culminate in balloon payments, wherein the entire borrowed balance is due at the end of the loan term. Despite this, many jumbo loans still adhere to the guidelines for qualified mortgages (like not allowing excess fees, loan terms, or negative amortization) set by the Consumer Financial Protection Bureau (CFPB).

To qualify for a jumbo loan, borrowers must have an excellent credit score. Borrowers should also be in a higher income bracket. After all, it takes a lot of money to keep up with the regular mortgage payments and other related costs. And because lending requirements have become stricter following the financial crisis, borrowers are required to have low debt-to-income (DTI) ratios.

Jumbo Loan Requirements

Because federal agencies don’t back jumbo loans, lenders take on more risk when offering them. You’ll face more stringent credit requirements if you’re trying to secure one. You’ll also need to meet some minimum requirements to qualify, including:

• Proof of income: Come prepared with two years’ worth of tax documentation or similar paperwork to prove that you have a reliable, consistent source of income. Lenders will also want to see you have enough liquid assets to cover six months’ worth of mortgage payments or more.
• Credit score and history: The higher, the better. There’s a very low probability that lenders will approve you for a jumbo mortgage if your credit score falls far below 700.
• DTI ratio: Your debt-to-income ratio (monthly debt obligations compared to your monthly income) should be no more than 43% to 45% to qualify for a conventional mortgage. Lenders will typically look for an even lower DTI for jumbo mortgages—at the most 43% and ideally 36% or even less—because the loans are so large.
• Loan to value: LTV for jumbo loans may be stricter than a conventional mortgage, often requiring an LTV of 80% or lower. This means that the loan can finance no more than 80% of the property’s purchase price.
• Down payment: Because of the LTV requirements, you will likely need to come up with at least 20% upfront as a down payment.

Conventional Mortgages

Technically, a conventional mortgage is any mortgage not backed by the federal government. So anything that’s not an FHA loan, VA loan, or a USDA loan but offered and issued by private lenders such as banks, credit unions, and mortgage companies can be considered a conventional loan or mortgage.

Unlike jumbo loans, conventional mortgages may be either conforming or nonconforming. Conforming loans are those whose size limits are set by the FHFA and whose underwriting guidelines are set by Fannie Mae and Freddie Mac. These guidelines factor in a borrower’s credit score and history, DTI, the mortgage’s loan-to-value (LTV) ratio, and one other key factor—the loan size.

Conforming loan limits are adjusted annually to keep pace with the average U.S. home price, so when prices increase, loan limits increase by the same percentage as well. For 2024, the national maximum for conforming conventional loans is $766,550 for a single-unit dwelling, an increase of $40,350 from 2023.

Important

Each year, between 100 and 200 counties around the U.S. are designated as high-cost, competitive areas. Maximum loan limits in these areas can go up to $1,209,750 in 2025, up from $1,149,825 in 2024. New York City, Los Angeles, and Nantucket are a few such locations. So, mortgages in these real estate markets would be considered “jumbo” if they exceeded these amounts.

Fannie Mae and Freddie Mac will purchase, package, and resell virtually any mortgage as long as it adheres to their conforming loan guidelines and the FHFA’s size limits. Why is this significant? Because these two government-sponsored agencies are the major market makers for mortgages, and the ability to sell a loan to them—as most lenders eventually do—makes that mortgage far less risky from the lender’s viewpoint. So they are more likely to approve an application for it and offer better terms.

Note

Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.

Like jumbo loans, conventional loans require a down payment, a minimum credit score, a certain income level, and a low DTI ratio. You’ll generally need a credit score of at least 620 (considered “fair”) before a lender will approve you for a conventional mortgage.

However, not all conventional mortgages conform to these guidelines, and those that don’t are considered nonconforming loans. These tend to be more difficult to qualify for than conforming mortgages because they’re not backed by the government or marketable to Fannie and Freddie, so eligibility and terms are left to the lenders.

Note

If you want to get technical, a jumbo loan is, in lender-speak, a conventional, nonconforming loan.

Jumbo vs. Conventional Loans: A Comparison

In the past, interest rates for jumbo loans were much higher than those for traditional, conventional mortgages. Although the gap has been closing, they still tend to be slightly higher. You may even find some jumbo rates that are lower than conventional rates. A mortgage calculator can show you the impact of different rates on your monthly payment.

Jumbos can cost more in other ways, though. Down payment requirements are more stringent, at one point reaching as high as 30% of the home purchase price, though it is more common now to see jumbo loans requiring a down payment of 15% to 20%, higher than the 10% to 15% that some conventional loans require (and of course far higher than the 3.5% that FHA and other federal loans allow).

The higher interest rates and down payments are generally put in place primarily to offset the higher degree of risk involved with jumbos because Fannie Mae or Freddie Mac does not guarantee them.

Jumbo mortgages often have higher closing costs than normal mortgages because they are large loans.

Lenders expect more of jumbo borrowers, too. Their credit scores need to be higher (preferably above 700), their DTIs lower, and their bank account balances must cover 12 months’ worth of homeownership expenses—just about double the requirement for conventional mortgage borrowers. In other words, jumbo mortgagors are expected to be people with few debts and lots of liquid assets.

Here’s a comparison of typical terms for jumbo and conventional mortgages.

Conventional vs. Jumbo Mortgages Comparison
	Conventional Loan	Jumbo Loan
Typical Down Payment	3%-20%	10%-20%
Minimum Credit Score	620	700
Debt to Income Ratio	43%-45%	36%-43%
Cash Reserves Needed	0-6 months’ homeownership expenses	Up to 12 months’ homeownership expenses
Maximum Loan-to-Value Ratio	97%	90% or less
Backed by FNMA/FRMC?	Yes	No

How Are Jumbo Mortgage Rates Set?

Like conventional mortgages, rates are influenced based on Federal Reserve benchmarks and on individual factors such as the borrower’s credit score. Jumbo mortgage rates will rise and fall in line with the Fed’s short-term interest rates.

Additionally, because these loans cost more than half a million dollars and pose a great risk to lenders, borrowers will face more rigorous credit requirements. This includes having a much higher credit score (often at least 700) and a lower debt-to-income ratio. Lenders will also want borrowers to prove they have a certain amount of cash in reserve. The better your credit profile, the lower your jumbo mortgage rate will be.

Are Jumbo Loan Rates Higher than a Conventional Mortgage?

Jumbo loans, even though they are larger in size, often have lower interest rates today than conventional mortgages.

Which Should I Choose: A Jumbo or Conventional Loan?

A jumbo loan will automatically be applied if your mortgage exceeds $766,550. If you are buying a pricier home that exceeds the conventional loan limits, you will have to choose a jumbo loan unless you can come up with a down payment large enough to get the loan’s value under that limit.

What Are Mortgage Points?

Mortgage points, also known as discount points, are a fee borrowers pay lenders in order to receive a lower interest rate. In other words, you are prepaying interest for a period of time in order to pay less on the overall lifetime costs of your loan.

One mortgage point costs 1% of your loan amount. For instance, if you take out a loan for $500,000, you’ll pay $5,000 to reduce your rate by 0.25%. It may not seem like a huge amount, but it can add up to tens of thousands of dollars in interest over the life of the loan.

How Big a Mortgage Can I Afford?

How much you can borrow will depend on factors such as your credit score, income, assets, and the value of the property. Jumbo mortgages are generally the best for someone who is a high-income earner—essentially, someone who can afford the higher payments.

Even if lenders offer a specific loan amount, it doesn’t mean you need to purchase a home up to that limit. Carefully consider how much you want to pay and can easily afford so that you can achieve your other financial goals, like saving for retirement.

The Bottom Line

A jumbo mortgage is a large-sized loan issued by private financial institutions that’s earmarked for highly-priced properties—at around $650,000 or more. A conventional loan is a more general umbrella term for any privately issued—as opposed to federally subsidized—mortgage.

Many conventional loans are conforming: They’re within a size threshold set annually by the FHFA and can be sold to mortgage market makers Fannie Mae and Freddie Mac. Other conventional loans are not and are deemed nonconforming.

But the bottom line is that typically, conventional loans are smaller than jumbos and have less stringent requirements and standards.