investment

Reviewed by Erika Rasure
Fact checked by David Rubin

The Federal Reserve is widely considered to be one of the most important financial institutions in the world. Its monetary policy decisions can send waves through not only the U.S. markets, but also the rest of the world.

In this article, we will look at the formation of the Federal Reserve and follow its history as it riled the market before sending it to new highs.

Key Takeaways

• Despite early attempts in the U.S. after the revolutionary war to form a central bank by Alexander Hamilton, these efforts failed due to political unfeasibility.
• After the panic of 1907, and at the urging of J.P. Morgan and other prominent financiers, Congress passed the Federal Reserve Act in 1913, establishing the Fed as America’s central bank.
• During World War II, the Federal Reserve aided the war effort by marketing war bonds and keeping interest rates low.
• After the war, the Fed established its independence from other arms of government via the Treasury-Fed Accord.

America Before the Federal Reserve

The United States was considerably more unstable before the creation of the Federal Reserve. Panics, seasonal cash crunches, and a high rate of bank failures made the U.S. economy a risky place for international and domestic investors to place their capital.

The lack of dependable credit stunted growth in many sectors, including agriculture and industry. Early Americans also did not want a central bank. They saw this as a model based on the British crown and the Bank of England. New America did not want to be made in the image of Britain, and it also favored a more decentralized state-by-state approach to its political economy.

Still, there were some early attempts. Alexander Hamilton, the first secretary of the Treasury, was instrumental in the formation of the first national bank in America, known as the First Bank of the United States. Located in Philadelphia within Independence National Historical Park, the structure was completed in 1797 and stands today as a National Historic Landmark. It was one of four major financial innovations at the time, including the U.S. government’s assumption of the state war debts, the establishment of a mint, and the imposition of a federal excise tax. Hamilton’s aim with these measures was to establish financial order, national credit, and resolve the issue of fiat currency.

However, this first attempt at an American central bank was short-lived, and its charter was not renewed (it was re-established later for another short period of years, as the second Bank of the United States, which was even shorter-lived). Hamilton proposed the Bank of the United States in 1790, and it opened in Philadelphia the following year. In April 1792, it opened a New York branch, Wall Street’s second bank. The charter of the First Bank of the United States was for 20 years (1791-1811).

J.P. Morgan and the Panic of 1907

After many decades of lacking a central bank, it was J.P. Morgan who ultimately forced the government into acting on the central banking plans it had been considering off and on for almost a century. During the Bank Panic of 1907, Wall Street turned to J.P. Morgan to steer the country through the crisis that was threatening to push the economy over the edge into a full crash and depression. Morgan was able to convene all the principal players at his mansion and command all their capital to flood the system, thus floating the banks that, in turn, helped to float the businesses until the panic passed.

The fact that the government owed its economic survival to a private banker forced the necessary legislation to create a central bank and the Federal Reserve.

Learning From Europe

In the years between 1907 and 1913, the top bankers and government officials in the U.S. formed the National Monetary Commission and traveled to Europe to see how the central banking was handled there. They came back with favorable impressions of the British and German systems, using them as the base and adding some improvements gleaned from other countries. Congress ultimately passed the 1913 Federal Reserve Act—legislation that created the current Federal Reserve System. Congress developed the Federal Reserve Act to establish economic stability in the United States by introducing a central bank to oversee monetary policy. The law sets out the purpose, structure, and function of the Federal Reserve System. Congress can amend the Federal Reserve Act and has done so several times.

The 1913 Federal Reserve Act, signed into law by President Woodrow Wilson, gave the 12 Federal Reserve banks the ability to print money to ensure economic stability. The Federal Reserve System created the dual mandate to maximize employment and keep inflation low. The Federal Reserve was thus given power over the money supply and, by extension, the economy. Although many forces within the public and government were calling for a central bank that printed money on demand, President Wilson was swayed by Wall Street arguments against a system that would cause rampant inflation. So the government created the Federal Reserve, but it was by no means under government control.

The Great Depression

The government soon came to regret the freedom it had granted the Federal Reserve as it stood by during the crash of 1929 and refused to prevent the Great Depression that followed.

Even now, it is hotly debated whether the Fed could have stopped the depression, but there is little doubt that it could have done more to soften and shorten it by providing lower interest rates to allow farmers to keep planting and businesses to keep producing. The high interest rates may even have been responsible for the unplanted fields that turned into dust bowls. By restricting the money supply at a bad time, the Fed starved out many individuals and businesses that might otherwise have survived.

2%

The target interest rate for the Federal Reserve’s monetary policy.

World War II and the Post-War Recovery

It was World War II, not the Federal Reserve, that lifted the economy out of the depression. The war benefited the Federal Reserve as well by expanding its power and the amount of capital it was called on to control for the Allies.

During the war, the Federal Reserve pledged to keep interest rates low to support the war effort. The Fed worked closely with the Treasury to market war bonds to the public and purchased government debt at 0.375%, a steep discount from the peacetime range of 2% to 4%.

Inflation soared after the war ended, and the Fed pivoted its priorities to raising interest rates. This caused political friction with the Treasury, which was more worried about maintaining bond prices. As inflation reached 21%, Truman summoned the entire Federal Open Market Committee to the White House and pressured them to maintain the wartime peg.

For the Fed, it was clear that monetary policy was at risk of becoming compromised by political considerations. After negotiations with the Treasury, the two agencies announced the Treasury-Fed Accord, which established the Federal Reserve as the primary authority on monetary policy while leaving fiscal policy to the Treasury. The accord also solidified the Fed as an independent agency rather than an arm of the presidency.

Inflation or Unemployment?

Over the following decades, the Fed continued to calibrate the economy using monetary policy, but its official mission remained the prevention of banking panics. Stagflation and unemployment hit the U.S. in the 1970s, highlighting the Fed’s importance in promoting economic growth.

The Federal Reserve Act of 1977 formally established the Fed’s dual mandate of lowering unemployment and preventing inflation. By controlling interest rates, the Fed can make corporate credit easy to obtain, thus encouraging business to expand and create jobs. Unfortunately, this increases inflation as well. On the flip side, the Fed can slow inflation by raising interest rates and slowing down the economy, causing unemployment. The history of the Fed is simply each chairperson’s answer to this central question.

When Was the Federal Reserve Created?

President Woodrow Wilson signed the Federal Reserve Act on Dec. 23, 1913, officially establishing the Fed as the country’s central bank. The founding of the Fed came in response to the financial panic of 1907, with advocacy from J.P. Morgan and other prominent financiers. Prior to this, the U.S. was the only major financial power in the world without a central bank.

What Is the Purpose of the Federal Reserve?

The Federal Reserve has a dual mandate of ensuring price stability (limiting inflation) and achieving maximum employment. It also regulates the activity of banks and aims to protect consumers.

Is the Federal Reserve Independent?

The Federal Reserve System operates under a mandate from the U.S. Congress. However, Congress granted autonomy to the Fed with the intention of allowing the central bank to carry out its mission in the absence of political pressure. Although this independence has been tested at times throughout history, the Fed’s three sections—the Federal Open Market Committee, the Board of Governors, and the Fed’s regional banks—maintain independence from the federal government as they fulfill their responsibilities.

The Bottom Line

Criticisms of the Federal Reserve continue. Boiled down, these arguments center on the image people have of the caretaker of the economy. You can either have a Fed that feeds the economy with ideal interest rates leading to low unemployment—possibly leading to future problems—or you can have a Fed that offers little help, ultimately forcing the economy to learn to help itself.

The ideal Fed would be willing to do both. Although there have been calls for the elimination of the Federal Reserve as the U.S. economy matures, it is very likely that the Fed will continue to guide the economy for many years to come.

Reviewed by Chip Stapleton
Fact checked by Daniel Rathburn

The letters or numbers used to express a credit rating or credit score express the creditworthiness of the individual, business, or government being assessed. Credit ratings are usually expressed in letters such as “AAA” or “BB.” Credit scores, which are normally assigned to individuals, are expressed as numbers ranging from 300 to 850.

Key Takeaways

• Credit ratings use letters like AAA or C to signal how likely a company or government is to default on its obligations.
• Your personal credit score is a number between 300 and 850 that tells lenders how risky it is to lend money to you.
• The better your rating or score, the more likely you are to get approved for credit as well as on better terms, such as lower interest rates.

Credit Ratings for Business and Governments

Credit rating agencies assign ratings that express whether or not an entity is likely to be able to meet its debt obligations. Three agencies create the majority of the world’s credit ratings: Fitch Ratings, Moody’s Ratings, and S&P.

Since the beginning of the 20th century, these three credit rating agencies have been producing ratings and investment analysis. A typical credit rating scale uses the following letter ratings: AAA, AA, A, BBB, BB, B, CCC, CC, C, and D.

Pluses and minuses are added to letters AA through C to further distinguish ratings, and ratings are often also accompanied by outlook ratings. Symbolized by “NEG,” “POS,” “STA,” “RUR,” and “SD,” these abbreviations stand for negative, positive, stable, rating under review, and selective default, respectively.

These ratings are used by individual and institutional investors, who are trying to decide if they want to buy securities or investments backed by any country.

Only AAA credit ratings are considered to be top-notch. Ratings of BB or lower are considered to be “junk” ratings, while ratings between these two categories are OK but are under observation by the credit rating agencies.

Note

The primary credit rating agencies are Moody’s, Fitch, and S&P. The primary credit score companies are Equifax, TransUnion, and Experian.

Credit Scores for Individuals

Consumer credit scores are expressed in numbers rather than letters, and although scores are generated by each of the three major credit reporting agencies (Experian, TransUnion, and Equifax), the most commonly used consumer credit score is the one created by Fair Isaac Corporation (FICO).

FICO scores range from 300 to 850. FICO scores above 800 are considered to be exceptional. Credit scores ranging from 740 to 799 are very good or above average, while scores ranging from 670 to 739 are good. Scores between 580 and 669 are considered below average or not good, while those lower than 580 are considered risky or bad.

When a borrower’s credit score expresses that they are risky, it simply means they have a higher likelihood of defaulting on the loan than a borrower with an excellent credit score.

Having a low credit score or a score that is considered to be risky does not necessarily mean that a lender will refuse to lend to you. However, the lender will be aware of the potential financial risk and may compensate by charging higher interest, having shorter terms, or requiring a cosigner.

How Will I Use This in Real Life?

Understanding your credit score and the role it plays in your life will help with your finances. Your credit score and credit history are analyzed by lenders before they extend you credit. The better your profile, the more likely it is that you will be approved for a loan, but also you’ll receive better terms.

Better terms generally translate to a better interest rate and more money being lent to you. The lower your interest rate, the lower your cost over time. So if you want to buy a house through a mortgage or a car through an auto loan, having a good credit score matters.

Credit scores are also important for other aspects of life, such as being approved to rent an apartment and sometimes even getting a job.

Credit ratings are important to understand if you’re an investor interested in the fixed-income markets, such as bonds. They tell you how likely it is that a company will repay its debt to you. Higher ratings mean more of a chance (safer) but also a lower return. Lower ratings mean less of a chance (riskier) but higher returns.

Knowing the trade-off between risk and return will help you make investment decisions that fit your risk tolerance and financial goals.

What Is a Good Credit Score?

A good credit score ranges from 670 to 739. Scores above this are very good to exceptional, and scores below this range are considered not good to poor. Approximately 71% of Americans have a good score or better.

How Do I Improve My Credit Score?

To improve your credit score, pay all your bills on time, reduce your outstanding debt, don’t close old accounts, don’t open too many new accounts at the same time, and fix errors on your credit report. If you follow these actions, your credit score should improve over time.

Are Non-Investment Grade Bonds Risky?

Yes, non-investment-grade bonds are risky. These bonds have a low credit quality, signaling a high chance of default by the issuer. While these bonds are risky, they pay higher yields than investment-grade bonds to entice investors. As such, they can be part of an investor’s investment strategy.

The Bottom Line

Credit ratings and credit scores are essential tools for assessing creditworthiness. Whether that be for businesses, governments, or individuals, these ratings help investors, organizations, and lenders assess risk and make smart financial decisions.

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

The first American corporations were developed in the 1790s, becoming institutions in the young nation’s economy. The role of the American corporation has affected the global economy and influenced innovation throughout the centuries.

Key Takeaways

• The first American corporations were developed in the 1790s.
• Textile corporations helped spark the Industrial Revolution.
• The period after the Civil War saw the development of the railroad industry.
• In 2023, technology giants like Apple and Meta were leaders among American corporations.

The First Corporations

Small banking corporations existed in the first years after the American Revolution. However, most historians note that the first industrial corporation was the Boston Manufacturing Co. in 1813. Its business model was imported from Great Britain, where textile corporations helped spark the Industrial Revolution.

Corporations could raise capital from diverse sources, providing a mechanism for savers and producers. Voting rights were much less protected in the early years through processes of “graduating” certain shareholders, but corporations still embodied a new type of investment.

An Industrial Revolution

Corporations have played a crucial role in the economic, political, and cultural identity of the United States. Easy access to capital and business development provided by the corporate structure was the force behind the Industrial Revolution.

Industrial growth created a new group of wealthy industrialists and a prosperous middle class and grew the blue-collar working class comprised of newly arrived immigrants. The U.S. became the world’s greatest innovator and one of its leading economic powers during the “Gilded Age,” as the latter half of the 19th century was dubbed.

Corporate development was dealt a blow toward the turn of the 20th century with the introduction of antitrust legislation which aimed to prohibit anticompetitive behavior and corporate mergers that deprived American consumers of the benefits of competition. Corporation structure has changed over its more-than-200-year history, which may be attributed to the imposition of government regulations, savvy shareholder demands, and foreign competition.

The Gilded Age

Mark Twain dubbed the decades after the Civil War the “Gilded Age.” It was a period dominated by political scandal and the “Robber Barons,” the growth of railroads, the economization of oil and electricity, and the development of America’s first giant national and international corporations.

Some wealthy corporations soon became rent-seekers, reinforcing Henry Clay’s idea of state-assisted industrialization. Historian Charles A. Beard wrote that government gifts tended to go to the largest investments. Ironically, two influential names in American corporate history, John Rockefeller and Andrew Carnegie, were noteworthy for fighting against government favors and subsidized competitors.

After the Stock Market Crash of 1929, corporations and the financial sector were attributed blame for the onset of the Great Depression. Reinforcing this sentiment was the book “The Modern Corporation and Private Property,” published in 1932, in which authors Adolf Berle and Gardiner Means argued that those who legally have ownership over public companies, the shareholders, have been separated from their control, leaving management and the directors to manipulate the resources of companies to their advantage without scrutiny.

Post-World War II and the 21st Century

The public perception of corporations rebounded after World War II. After 1945, American corporations grew. As a leading power, the United States took an active role in rebuilding the war-torn cities abroad and saw the restoration of Western European economies as an investment to protect markets for American goods.

U.S. corporations were challenged by multinational Japanese companies in the 1980s and 1990s. Management style and industrial policies of Japanese companies, from bottom-up decision-making to quality control, boosted the country’s economy. Japan’s trade surpluses concerned the United States. 

A decade or more later, many corporations, like AIG, found themselves embroiled in scandals during the 2008 financial crisis. According to Gallup polling in 2010, only 49% of Americans held a positive view of U.S. corporations. By 2021, that figure fell to 46%.

Important

In the U.S., public corporations are regulated by federal law through the Securities and Exchange Commission.

The Role of Technology

As of 2023, several American technology corporations were ranked in the global top ten corporations by market capitalization. Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Meta (META), and Alphabet (GOOG) help transform other industries, such as real estate, manufacturing, and retail with digital advancements to support innovation.

In a McKinsey Global Survey of technology executives, the COVID-19 crisis changed how companies in all sectors and regions do business by accelerating the digitization of their customer and supply-chain interactions and internal operations.

What Is the Largest Corporation in the United States?

As of June 2025, Microsoft ranked highest with a market capitalization of $3.57 trillion.

What Is the Difference Between a Corporation and a Company?

Corporations and companies have different management structures. Corporations must operate in the best interest of their stakeholders. They offer shares of stock for sale, creating a public ownership scenario. Companies are commonly sole proprietors and small partnerships that do not offer shares to the public. Because a company is independently owned, this allows for internal management decisions. 

What Role Does the Board of Directors Play in a Corporation?

Shareholders choose the board of directors of a public corporation. The board’s primary responsibility is to protect the shareholders’ best interests and is legally required to do so.

The Bottom Line

Since the American Revolution, corporations have formed in the United States and have influenced the global economy. A corporation is owned and overseen by a group of shareholders, and its board of directors executes its business plan. 

A guide to smart investing strategies that actually work

Reviewed by Robert C. Kelly
Fact checked by Yarilet Perez

While the stock market is always going to come with uncertainty, certain tried-and-true principles can help investors boost their chances for long-term success.

Building wealth in the stock market isn’t simply about finding “hot stocks” or timing market swings perfectly. Instead, successful long-term investors focus on time-tested strategies that help them weather market volatility while growing their portfolios over the years or decades.

Some investors lock in profits by selling their appreciated investments while holding onto underperforming stocks they hope will rebound. But good stocks can climb further, and poor stocks risk zeroing out completely. Below, we provide 10 tips for successful long-term investing that can help you prevent mistakes while positioning yourself to generate profits.

Key Takeaways

• Long-term investing success relies more on disciplined strategy than finding “hot” stocks or timing market swings.
• Successful investors typically hold their winners longer while being willing to cut losses on underperforming investments.
• Research shows investors who stay invested through market cycles with diversified portfolios have the highest probability of positive returns.
• Following proven principles like focusing on future potential rather than past performance helps avoid common investing mistakes.
• Having a clear investment strategy and sticking to it consistently is more important than trying to maximize every trade.

1. Adopt a Long-Term Perspective

It’s best to avoid the “get in, get out” mentality of quickly trying to profit from trades. If you’ve done your research and found a solid stock that continues to be a good investment, holding onto it for the long term should bring profits.

“It’s important to decide whether one is an investor or a trader. For most people in most situations, a long-term, buy-and-hold, diversified, low-cost investment approach is likely more suitable than active trading,” said David Tenerelli, CFP. “This is because it helps the investor ignore the ‘noise’ and instead focus on a disciplined approach.”

Important

Tenerelli suggested that a good strategy for long-term investing is dollar-cost averaging—putting a set amount away periodically, no matter what. “It takes discipline to continue to buy investments during a market downturn, but a shift in mindset can help—rather than fearing financial loss, an investor can reframe it as buying stocks ‘on sale,'” he said.

While large short-term profits often entice market newcomers, long-term investing is essential to greater success. And while short-term active trading can make money, this involves greater risk than buy-and-hold strategies.

Just small, periodic investments in the S&P 500 starting in 2000, for example, would have netted terrific gains, despite wars, pandemics, financial crises, and market bubbles.

2. Don’t Chase a Hot Tip

That “can’t-miss” stock tip from your neighbor? It’s probably best to ignore it. Even if it comes from someone who seems knowledgeable, investing based on tips is like building a house on sand. No matter the source, never accept a stock tip as valid. Always do your own analysis of a company before investing.

Tips do sometimes pan out, depending upon the source’s reliability, but long-term success demands your own research.

Note

Every stock purchase deserves your own careful examination—understanding what the company does, how it makes money, and why it might succeed in the future.

3. Don’t Sweat the Small Stuff

Rather than panic over an investment’s short-term movements, tracking its big-picture trajectory is better. Have confidence in an investment’s larger story, and don’t be swayed by short-term volatility.

Don’t overemphasize the few cents difference you might save from using a limit versus market order. Sure, active traders use minute-to-minute fluctuations to lock in gains, but long-term investors succeed based on periods lasting years.

Note

“The best time to invest is when you have the money. Buy and hold until you reach your financial goals rather than trying to time the market,” said Christina Lynn, a behavioral finance researcher and certified financial planner at Mariner Wealth Advisors.

4. Look Beyond the Price-to-Earnings (P/E) Ratio

The P/E ratio, which compares a company’s stock price to earnings, is valuable information but not the whole story. A low P/E doesn’t automatically mean a stock is cheap, just as a high P/E doesn’t always signal an overpriced stock.

For example, for a long time, Netflix Inc. (NFLX) looked expensive by P/E standards. Nevertheless, it was creating massive shareholder value. You need to consider growth rates, market position, and many other factors.

In addition, P/E ratios should be taken within the context of specific industries and economic sectors. Below is a table showing some of the differences sector to sector:

5. Resist the Lure of Penny Stocks

Penny stocks—typically shares trading for less than $5—might seem like bargains, but they’re often more like lottery tickets than investments. Their low prices often reflect serious business problems rather than opportunity.

In fact, penny stocks are often riskier than higher-priced stocks because they tend to be less regulated and often see much more volatility.

Important

Read Investopedia’s 10 Rules of Investing by picking up a copy of our special issue print edition.

6. Pick a Strategy and Stick With It

There are many ways to pick stocks, and sticking with a single philosophy is important. Having an investment strategy is like having a road map—it keeps you on course when markets get rocky. Consistency is key, whether you prefer value, growth, or dividend investing.

Consider how noted investor Warren Buffett stuck to his value-oriented strategy and steered clear of the dotcom boom of the late 1990s, consequently avoiding major losses when tech startups crashed.

7. Focus on the Future

Investing requires making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed.

In “One Up on Wall Street,” legendary investor Peter Lynch wrote, “If I’d bothered to ask myself, ‘How can this stock possibly go higher?’ I would never have bought Subaru after it had already gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that.”

It’s important to invest based on future potential versus past performance.

Note

A company’s potential for growth matters more than its past performance for its stock price.

8. Sell the Losers and Let the Winners Ride

One of the most challenging aspects of investing is knowing when to sell. Many investors do exactly the wrong thing: They sell their winners too early while hanging onto losing investments, hoping they’ll bounce back.

Peter Lynch made much of his fortune by identifying stocks that became “tenbaggers“—investments that increased 10 times in value. But capitalizing on these rare winners required the discipline to hold onto them even after they had doubled or tripled, as long as the company’s growth potential remained strong.

Note

The key is evaluating each investment on its own merits rather than using arbitrary rules like “sell after a 20% gain.”

But this required the discipline of hanging onto stocks even after they’ve increased many times over, if he thought there was still significant upside potential.

While accepting losses can be psychologically difficult, holding onto losing investments too long can be dangerous. There’s no guarantee a declining stock will recover, and that money could be better invested elsewhere. 

9. Be Open-Minded

Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies can become the blue-chip names of tomorrow.

This is not to suggest that you should devote your entire portfolio to small-cap stocks, but there are many great companies beyond those in the Dow Jones Industrial Average. For example, NVIDIA (NVDA) was a backwater stock trading for pennies not that long ago. By the mid-2020s, it was a driver of major gains for its investors.

10. Keep Taxes in Mind, But Don’t Obsess

Tax efficiency matters, but it shouldn’t drive your investment decisions. Think of taxes like air resistance when driving—worth considering, but not the main factor in choosing your route.

Long-term capital gains rates (for investments held over a year) are generally lower than short-term rates, but making good investment decisions should be your primary focus.

What Is Long-Term Investing?

Long-term investing is generally considered to be three years or more. Holding onto an asset, such as stocks or real estate, for more than three years is considered long-term. When individuals sell holdings at a profit, capital gains taxes are charged for investments held for longer than one year. Investments held for less than a year are charged taxes at an investor’s ordinary income, which is not as favorable as the capital gains tax rate.

What Is the Safest Investment With the Highest Return?

No investment is 100% safe, but some are safer than others, and some have higher returns. Such assets include certificates of deposit, high-yield savings accounts, Series I savings bonds, Treasury Bills, and money market funds.

What Are the Drawbacks of Long-Term Investing?

The primary con of long-term investing is its opportunity cost. Funds tied up in long-term investments can’t be used for other investments, particularly short-term profitable opportunities. However, long-term gains might make missing out on those prospects seem minor in comparison.

The Bottom Line

Successful long-term investing isn’t about finding the next hot stock or timing market swings perfectly—it’s about following time-tested principles consistently.

By focusing on fundamentals like holding quality investments for the long term, doing thorough research rather than following tips, and maintaining discipline during market volatility, investors can build wealth steadily over time.

While no strategy guarantees profits, applying these 10 principles can help investors avoid common pitfalls and make better-informed decisions for their financial futures.

Reviewed by Somer Anderson
Fact checked by Katrina Munichiello

What exactly does it mean when someone calls a place a 5-star hotel and is it really worth it? It doesn’t help that the same hotel may have three different ratings, depending on the travel website you visit or the tourist guidebook you read. Let’s explore these stars and see whether a place that scores five stars is really worth a hundred dollars a night more than its three-star competitor.

Key Takeaways

• The U.S., Europe, and the rest of the world tend to have different hotel star ratings.
• In the U.S., a variety of private agencies and websites award stars, and criteria for the categories vary.
• Overall, hotel ratings in the U.S. and North America tend to be on a scale of one to five.
• A one-star rating may simply mean that the hotel offers basic accommodations and limited amenities.
• Meanwhile, five-star hotels are some of the most luxurious properties in the world.

Star Light, Star Bright: Is That Star Rating Right?

The star rating system was designed to measure the quality of hotels. While you may assume a one-star rating means a “disgusting hole in the wall where illegal activities take place” and a five-star rating means “Oprah Winfrey stayed here and loved it,” that’s not always the case.

A one-star rating doesn’t always suggest a bloody shoot-out recently took place on the premises; it may simply mean that the hotel offers basic accommodations and limited amenities.

Reaching for the Stars

So who determines how many stars each hotel receives? In Europe, local government agencies and independent organizations hand out star ratings to hotels. In the U.S., stars are awarded by a variety of different groups, from travel guidebooks and national consumer travel associations to travel agencies and websites.

To make things more confusing, each travel website has its own hotel star system. So the same property may receive three stars on Travelocity, five stars on Orbitz, and four stars on Expedia. Luckily, most of these travel websites and associations provide a guide to their personal hotel star rating system. For the most part, the North American hotel star system breaks down as seen below.

1-Star Rating: The Bare Necessities

A one-star hotel is simply a place to rest your head for the night. Generally owned by a sole proprietor, these hotels offer modest rooms with nothing more than a bed and a bathroom. There are no restaurants on-site, but there should be one within walking distance of the hotel.

These hotels don’t offer extra amenities or special services. In other words, you’re not going to get a nightly turndown service with a Godiva chocolate on your pillow here. However, you should have access to nearby public transportation and reasonably priced meals and entertainment.

2-Star Rating: A Few Extras

Although similar to a one-star hotel, a two-star hotel is generally part of a larger chain or franchise as opposed to being individually owned (think Econo Lodge or Days Inn). The accommodations are similar to a one-star hotel’s: simple and basic.

However, two-star hotel rooms include a television and a phone. Plus, these hotels typically offer an on-site restaurant or dining area and daily housekeeping service. The front desk at a two-star hotel is usually open 24 hours a day.

3-Star Rating: Moving on Up

Three-star hotels are typically part of larger, more upscale hotel chains, such as Marriott, Radisson, and DoubleTree. These hotels are generally more stylish and comfortable than one- and two-star hotels, and they offer a wider range of services and amenities: a fitness center, a pool, business services, an on-site restaurant, room service, conference rooms, and valet services.

The hotel rooms are larger, with higher-quality, contemporary furnishings, and often include fancy extras like flat-screen TVs with extended cable. Three-star hotels are located near a major expressway and local attractions, and they are often geared toward business travelers.

Note

Credit cards with points that you can allocate towards hotels can help with the cost of traveling.

4-Star Rating: Upscale Comfort

Also known as superior hotels, four-star hotels are large, upscale establishments, fully staffed, and complete with tons of extras like currency exchange kiosks. The spacious rooms are beautifully designed with premium furnishings and include luxurious touches like lavish bedding and fine bath products.

Four-star hotels offer loads of special services and amenities, including concierge services, fine dining, multiple pools and hot tubs, high-class fitness centers, bellhops, room service, valet parking, day spas, limousine services, and an array of special suites.

5-Star Rating: G-L-A-M-O-R-O-U-S

Now we’re talking lifestyles of the rich and famous. Five-star hotels are the most luxurious hotels in the world. These fine establishments boast extravagant lobbies, unparalleled service, and unequaled comfort. They resemble architectural works of art, featuring cutting-edge interior design and opulent furnishings.

As a guest in a five-star hotel, you will not have to lift a finger (except for when you hand over that credit card, of course). Many of these hotels provide their guests with a personal butler or designated concierge.

The massive five-star guest rooms are glamorous and elegant, often including premium linens, a personal Jacuzzi tub, a large-screen LCD TV with high-definition cable, high-speed Internet access, fresh flowers, lavish bath products, and speedy, around-the-clock room service.

For the most part, five-star hotels also offer gourmet restaurants, on-site entertainment, state-of-the-art fitness centers, multiple heated pools and hot tubs, valet parking, spa services, tennis courts, and golf course access. Champagne wishes and caviar dreams!

Which City Has the Most Five-Star Hotels Worldwide?

As of 2023, the city with the most five-star hotels in the world is London, with 75, followed by Dubai (61), New York (59), Paris (56), and Miami (46).

How Many Five-Star Hotels Are in the United States?

As of 2025 and according to the 2024 Forbes Travel Guide Star Award, there are 79 five-star hotels and resorts in the US.

What Is the Most Expensive Hotel Room in the World?

The Royal Mansion, located in the Atlantis, The Royal in Dubai, and the Empathy Suite, in Palms Casino Resort in Las Vegas, tie as the most expensive rooms in the world at $100,000 per night.

The Bottom Line

There’s no question that the hotel star rating system can be vague, confusing, and downright arbitrary. However, with a little bit of research, it is possible to pinpoint the perfect hotel to suit your unique needs and your budget.

While you’re doing your hotel homework, you should also check out what other consumers have to say. Many travel websites include guest ratings in addition to their own star ratings, and though you should take personal bias and quirks into account, they’re often quite candid and apt.

Understanding the financial path to LGBTQ+ parenthood

Reviewed by Samantha Silberstein
Fact checked by Ryan Eichler

Deciding to start a family is as much a financial decision as an emotional one. This is especially true for lesbian, gay, bisexual, transgender, and queer (LGBTQ+) people, who often rely on alternative paths, such as adoption and surrogacy, to have children. Despite the challenges, parenthood is on the rise in the LGBTQ+ community. According to a survey from the Family Equality Council, 77% of LGBTQ+ millennials are already parents or are considering having children.

Family planning can be a complex and costly process for LGBTQ+ people. Understanding your options is important so that you will be financially prepared for the future ahead.  

Key Takeaways

• Despite high costs and other obstacles, the number of LGBTQ+ parents and prospective parents is on the rise.
• Costs of adoption, surrogacy, and legal fees can sometimes add up to well over $100,000.
• LGBTQ+ families can prepare for the financial impact of starting a family by understanding the costs and sticking to a budget.
• Learning about your employer’s family leave time policies and if any paid leave is available is helpful when planning for the arrival of a newborn.
• The Family Medical Leave Act allows a parent to take off 12 weeks of unpaid leave from their jobs.

The Price of LGBTQ+ Parenthood

In recent years, increasing public acceptance and advancements in reproductive technology have opened doors for LGBTQ+ people who want to become parents. However, starting a family through nontraditional methods can be challenging and expensive.

Many LGBTQ+ couples and individuals who want to have a child have to adopt or find a surrogate. Both of these options can be costly, and there are sometimes legal barriers to overcome.

Adoption Costs

One of the most common ways to start a family nonbiologically is through adoption. Overall, adoption is the least expensive way to bring a child into a family, depending on the route that you take. For example, it may not cost anything to adopt a foster child, but you could spend up to $70,000 if you adopt a child from a foreign country.

Potential Costs of Adoption
Type of Adoption	Estimated Cost
Foster Care Adoption	$0–$2,600
Domestic Adoption	$20,000–$45,000
International Adoption	$25,000–$70,000

Source: Family Equality Council

Surrogacy Costs

Having a child through surrogacy is another option for LGBTQ+ people who want to start a family. There are two types of surrogacy arrangements: traditional surrogacy and gestational surrogacy. Traditional surrogacy is when the birth mother carries a child who she has conceived from donor sperm. Gestational surrogacy is when a third person gives birth to a baby conceived outside the womb from donor egg and sperm through in vitro fertilization. Both options provide ways for an LGBTQ+ person to have biological children.

Surrogacy is generally more expensive than adoption, and there are many factors to consider when determining the overall cost. Important considerations to make include:

• Who will be the surrogate?
• Will you use an agency or a matching service to find one?
• Is the surrogate a close friend or family member?
• Gestational surrogacy is typically the most expensive option, but one in which the surrogate has no genetic connection to the baby. One of the most significant expenses that potential parents face during this process is surrogate compensation. In addition to paying a surrogate a base compensation, other additional costs may include legal fees, medical expenses, travel expenses, counseling, and a monthly allowance for pregnancy-related expenses.

Intrauterine Insemination (IUI) Costs

If one or both of the partners is able to conceive children, then intrauterine insemination (IUI) may be a less costly option. Some families arrange to have extra vials of sperm frozen and stored to have more than one child from the same donor, making their children born from the same mother full siblings.

Potential Costs of Surrogacy/Insemination
Option	Estimated Cost
Sperm — Known Donor	$25–$300 for optional testing
Sperm — Anonymous Donor	$300–$1,500 per vial
Sperm Freezing	$250–$1,500
Sperm Storage Fees	$175–$750 per year
Egg Freezing	$7,000–$12,000
Egg Storage Fees	$350–$700 per year
Intrauterine Insemination (IUI)	$250–$4,000
In Vitro Fertilization (IVF)	$13,500–$21,000+
Reciprocal In Vitro Fertilization (R-IVF)	$15,000–$23,000
Gestational Surrogacy	$60,000–$150,000+
Traditional Surrogacy	Varies

Source: Family Equality Council

Legal Fees

Adoption and surrogacy aren’t always easy for LGBTQ+ people. Only 29 states plus Washington D.C. have laws in place that prohibit discrimination against prospective adoptive parents based on their sexual orientation or gender identity. In 14 states, state-licensed child welfare agencies can legally refuse to place children with same sex-couples and LGBTQ+ individuals if they say it is against their religious beliefs.

Like adoption, states have their own laws when it comes to surrogacy. In some states, surrogacy is not permitted, and surrogacy contracts are not legally valid. In April 2024, the state of Michigan decriminalized paid agreements for surrogacy, where previously contracts for compensation were illegal and subject to criminal penalties.

Becoming a legal parent can be another obstacle. A birth certificate alone is sometimes not substantial proof of parentage in court dealings or medical emergencies. Legal fees to establish parentage range from $100 to $3,000. This includes situations in which the donor’s parental rights are terminated or rights are secured for a nonbiological parent. If an LGBTQ+ couple seeks a stepparent or second-parent adoption, they can expect to pay $250 to $3,000.

How to Prepare Financially

Whether you are adopting a child or using a surrogate or IUI, the cost of bringing a child into your home is only the beginning of your family’s financial journey. According to the Brookings Institution, it will cost an estimated $310,605 to raise a child born in 2015 to the age of 17, factoring the future impact of inflation. These figures were calculated for middle-income families with two children.

Furthermore, this represents a substantial increase from the U.S. Department of Agriculture’s (USDA) 2017 estimate, which reported that the cost of raising a child born in 2015 was approximately $233,610 for middle-income married couples.

This figure includes basic costs that a middle-income family would incur from the child’s birth through age 18, such as food, shelter, transportation, healthcare, clothing, childcare, and education (not including college).

This might seem overwhelming to prospective parents, particularly those who also have to plan for costs such as adoption or fertility treatments. Having a plan in place will give you peace of mind and help you ensure financial security for the future.

Here are some budgeting tips that can help LGBTQ+ families start off on the right financial foot.

Plan for Family Leave Time

It’s important to understand which benefits your employer offers for new parents, such as pay, length of time off, benefits for fathers compared to mothers, etc. According to a 2023 report from the Society for Human Resource Management, 40% percent of U.S. employers offer paid maternity leave, and 32% offer paid paternity leave.

Your company may not offer paid time off, but you may qualify for benefits under the Family and Medical Leave Act (FMLA) for 12 weeks of unpaid leave.

Important

FMLA leave is unpaid time away from your job but some employers offer paid leave as well depending on the company.

Explore LGBTQ+ Family-Building Grants

Some organizations will provide financial assistance to LGBTQ+ families who want to start a family. For example, HelpUsAdopt.org offers adoption grants up to $30,000 for couples and individuals looking to adopt a child. It is free to apply for grants, and the program supports all types of families.

LGBTQ+ families can also receive financial assistance for reproductive technology. One example is the Baby Quest Foundation, which provides grants to individuals and couples who can’t afford in vitro fertilization, sperm and egg donation, egg freezing, and surrogacy costs.

There is also a federal tax credit for up to $17,280 in qualified adoption expenses per child in 2025, up from the $16,810 in 2024. The credit is nonrefundable, but you can carry over any remaining credits to future tax years for up to five years.

Create and Stick to a Budget

Whether you are adjusting your budget for your growing family or starting from scratch, the most important thing is to make sure the budget works for you. Start by adding up your monthly household net income. Next, list all of your fixed and variable monthly expenses, including things like:

• Mortgage or rent
• Groceries
• Car payment
• Wireless bill
• Streaming services
• Childcare

Given the unique circumstances of LGBTQ+ family planning, it may be best to consult a professional who is familiar in family law.

Debt, Savings, and Fun

Monthly debt obligations also should be included with your expenses. For example, if you used a loan or credit card to pay for fertility treatments, you’ll want to make sure that you allocate enough for the payment.

Next, determine your savings goals. This should include long-term savings, such as a retirement fund, and three to six months’ worth of expenses saved in an emergency fund. You may also want to consider a college savings plan, such as a 529 plan, for your child(ren). Calculate the amount you need to save each month to meet your goals, and include this amount in your budget.

Don’t forget about “fun money.” Having children means that you’ll likely spend more money on birthday celebrations and holidays. Be sure you have enough set aside so that your family can enjoy these moments. You can link your bank account to a budgeting app or software to help you stay on track. Or, if you prefer, keeping track of your budget in a good old-fashioned spreadsheet works, too.

Review Insurance and Estate-Planning Documents

Now that you are responsible for another human being, it’s essential to ensure that you have adequate health and life insurance for your family. Term life insurance, which pays out a death benefit if the beneficiary dies during a stated term, is usually a good option for parents.

Parents should also have a last will and testament that specifies who would get custody of their children if something happens to both parents. You can create a will by using a free service online or hiring a financial planner specializing in estate planning.

Can LGBTQ+ Couples Legally Adopt a Child?

Yes, same-sex couples can adopt. Ruling by the Supreme Court has allowed that same-sex couples can adopt in all 50 states.

Can LGBTQ+ Couples Adopt From all Countries?

No, not all countries have the social standards and legislation that the United States does in allowing same-sex couples from adopting a child. Full joint adoption by LGBTQ+ couples is not legal in all countries.

Why Is Adoption So Expensive?

Adoption is expensive because of the wide assortment of professionals involved in ensuring the process is performed legally. This includes the time of lawyers, social workers, doctors, government administrators, counselors, and more.

The Bottom Line

Today, LGBTQ+ families and individuals have significantly more options when it comes to starting a family than earlier generations did. However, these options can come with a hefty price tag. It’s important not to take these steps without thinking through the financial aspects and planning in advance.

Only a small slice of Generation Z is in the habit of paying themselves first. Just 15% of Gen Zers set aside a percentage of every paycheck in savings, and only one in five contribute to a 401(k) or other retirement account, according to a 2024 Bank of America survey.

The good news: Even modest, consistent steps made in your early 20s can snowball into real security by your 30s. Here are some tips on how to begin.

Key Takeaways

• In your 20s and need to start saving? Even $25 a week can build a four-figure cushion in a year.
• Automating transfers removes willpower from the equation and helps you budget around what’s left.
• Taking advantage of an employer retirement match offers a 100% guaranteed return. Don’t walk away from free money.

Start With an Emergency Fund

Nearly 60% of Gen Zers say they lack enough savings to cover three months of expenses in case of emergency. But Gen Z isn’t alone in that. According to Federal Reserve data, about half of all adults (55%) have three months of emergency savings.

A target of three months’ expenses can feel impossible when rent eats 30% or more of your net income. So break down the goal: Aim first for a $500 to $1,000 “starter” fund in a high-yield savings account. Once that mini-fund is in place, redirect fresh dollars to higher-impact goals, such as saving for retirement or paying off debt, knowing that a flat tire won’t derail your plan.

• Set it and forget it: Set a recurring transfer to land in your savings account on payday, so you never “see” the money.
• Park it somewhere separate: Keeping that money out of sight—but still accessible—curbs the urge to dip in for concert tickets or other non-essential expenses.
• Use windfalls: Tax refunds, cash gifts, bonuses, or side-gig payments can help fast-track this first milestone.

Put Your Saving on Autopilot

The biggest advantage that 20-somethings have is time, but that benefit evaporates without consistent saving. Behavioral research shows that “set-it-and-forget-it” systems beat good intentions every time. Try layering these tools:

• Percentage-based transfers: If your cash flow is lumpy—say, from hourly work or gig income—link your checking account to an app like Oportun, Qapital, or Catch that skims, for example, 10% of every deposit into savings.
• Budget frameworks: Whether you try the 50/30/20 rule or a zero-based budget, giving every dollar a “job” ensures that saving isn’t an afterthought.
• Round-up apps: Micro-investing platforms like Acorns round purchases to the nearest dollar and funnel small change into ETFs. It won’t replace a full retirement plan, but it builds investing muscle while balances are modest.

Consistency also means revisiting the numbers at least once a year. As raises come in, nudge your savings rate up before lifestyle creep soaks up the extra cash.

Capture ‘Free Money’ Early

If your workplace offers a 401(k) match, contributing at least as much as that match percentage is equivalent to getting a 100% immediate return—a deal you will never find in the market. But four out of five Gen Zers are leaving that money on the table. Don’t be one of them.

• No plan at work? Open a Roth IRA. Contributions (up to $7,000 in 2025) come from after-tax dollars but can be withdrawn tax- and penalty-free in a pinch. They act as both a quasi-emergency fund and a tax-advantaged retirement stash, which is valuable for new savers.
• Automate escalations: Many 401(k) plans let you increase contributions by up to 1% every January. Set it once and let compounding do the future heavy lifting.
• Consider a side-hustle SEP IRA: Freelancers can shelter up to 25% of net self-employment income in a Simplified Employee Pension. Even a few hundred dollars a year will cut your tax bill while boosting long-term savings.

The Bottom Line

Getting on the road to financial security while you’re still in your 20s is about proving to yourself that you can live on slightly less than you earn and then letting automation and time—via compounding—do the work. Start with a small cash buffer, automate transfers so saving happens first, and scoop up every dollar of employer or IRS-sanctioned “free money.” Do that consistently, and the habits you forge now will matter far more than the balance you see today.

Reviewed by Somer Anderson

British Petroleum, PLC, also known simply as BP, is one of the world’s largest integrated oil and gas companies. It is involved in almost every step of the oil and natural gas supply chain, from exploration to the sale and marketing of energy products, and its shares often appear in the portfolios of institutional investors.

BP also engages in the production of renewable energy through wind farms that it owns. BP’s history dates back to the early 1900s. The company, headquartered in London, was founded by William D’Arcy in 1909, a year after oil was discovered in the Middle East.

Key Takeaways

• BP is a major integrated oil and gas company that owns several well-known brands and does business throughout the world.
• BP’s Castrol subsidiary manufactures industrial and automotive lubricants for the international market.
• In 1998 BP purchased Amoco, the largest oil and natural gas producer in the United States, as well as a major gasoline station chain.
• BP also owns Aral AG, which operates gas and diesel stations in Germany.
• Through its purchase of the ARCO gas station chain, BP America now owns the U.S. convenience store chain ampm.
• BP’s other convenience store subsidiary, Thorntons, operates in conjunction with gas stations in the Midwest.

BP Financials

BP has a footprint in more than 60 countries worldwide as both a producer and seller of energy-related products. It produced 775,000 barrels of oil equivalent (BOE) per day in 2024. Its U.S. operations accounted for 376,000 BOE per day.

In 2024, BP operated in three primary segments—gas and low carbon energy, oil production and operations, and customers and products. That year it reported adjusted earnings before interest, depreciation, and amortization (EBITDA) of $38 billion and a profit of $1.2 billion. It had a market capitalization of $80.93 billion as of June 18, 2025.

Here, in alphabetical order, are five of its major brands:

1. Amoco

• Type of business: Oil and natural gas production, retail gas stations
• Acquisition price: $48.2 billion
• Acquisition date: 1998
• FY 2023 revenue: Included in BP’s consolidated financials
• FY 2023 net profit: Included in BP’s consolidated financials

Originally known as Standard Oil of Indiana, Amoco was North America’s largest natural gas producer by 1912.

Amoco and BP merged in 1998, making BP Amoco the largest oil and natural gas producer in the United States. That merged company was renamed BP in 2001. BP reintroduced Amoco as a BP brand for the U.S. retail fuel sector in 2017.

2. ampm

• Type of business: Convenience stores
• Acquisition price: $27 billion
• Acquisition date: 2000
• FY 2023 revenue: Included in BP’s consolidated financials
• FY 2023 net profit: Included in BP’s consolidated financials

In 1999, BP Amoco purchased most of the assets of the Atlantic Richfield Company (ARCO), and its ARCO gas stations were integrated under the BP name. BP also took ownership of the U.S. West Coast ampm convenience store chain, whose first location opened in 1978, through this purchase.

These stores are now found associated with BP-owned gas stations and offer grab-n-go sandwiches and snacks, among other items. There are more than 1,000 ampm stores in America “from California up to Washington state.”

3. Aral

• Type of business: Gas and diesel stations
• Acquisition price: £4 billion
• Acquisition date: 2002
• FY 2023 revenue: Included in BP’s consolidated financials
• FY 2023 net profit: Included in BP’s consolidated financials

Aral is a well-known brand of fuel stations in Germany operated by Aral AG, a BP-owned company. Germany has approximately 2,400 Aral stations, making it the largest gas station chain in the country. Aral stations offer fuel and diesel to customers and may also provide natural gas and propane.

In addition, many Aral stations have a car wash and a convenience store store offering snacks and beverages. BP says that besides being Germany’s largest fuel seller, Aral is also “the country’s third-largest fast-food retailer.”

4. Castrol

• Type of business: Industrial and automotive lubricants
• Acquisition price: $4.7 billion
• Acquisition date: 2002
• FY 2023 revenue: Included in BP’s consolidated financials
• FY 2023 net profit: Included in BP’s consolidated financials

Castrol is a U.K.-based producer of industrial and automotive lubricants sold in more than 150 countries. The company was founded by Charles Wakefield in London in 1899. It was acquired by BP in 2002.

21,200

The number of retail sites BP owns worldwide.

5. Thorntons

• Type of business: Gas stations, convenience stores
• Acquisition price: Unreleased
• Acquisition date: 2021
• FY 2023 revenue: Included in BP’s consolidated financials
• FY 2023 net profit: Included in BP’s consolidated financials

Hungry Midwestern motorists who stop to refuel their cars can also refuel themselves with to-go food, coffee, snacks, and travel supplies at Thorntons, which now has more than 200 locations. BP refers to Thorntons as a “sister chain” to its ampn stores and says that “the two chains do not overlap.”

In addition to those five companies, other major BP-owned brands include Air BP (aviation fuel), BP Connect (New Zealand service stations), BP Pulse (electric vehicle charging stations), TravelCenters of America (truck stops and restaurants), and Wildbean Cafe (food and coffee retailer in the U.K., Europe, Australia, New Zealand, India, Indonesia, South Africa, and China, with locations mostly attached to BP-owned service stations).

What Companies Are Owned by BP?

BP owns Air BP, Amoco, ampm, Aral, BP Connect, BP Pulse, Castrol, Thorntons, TravelCenters of America, and Wild Bean Cafe.

Are Shell and BP the Same Company?

Shell and BP are two of the largest oil and gas companies. They are not the same company.

What Company Did BP Buy Recently?

BP’s major recent purchase was TravelCenters of America, in a deal completed in 2023. By acquiring the truck stop chain BP gained some 290 locations on major highways across the U.S.

The Bottom Line

All of the companies owned by BP are in one way or another related to its gas and oil business. For instance, BP, Aral, and Amoco gas station customers can also purchase Castrol lubricants as well as snacks and drinks to go at ampm or Thorntons. The company is also developing a substantial footing beyond the world of fossil fuels, particularly with its BP Pulse electric vehicle charging stations.

Reviewed by Erika Rasure
Fact checked by Katharine Beer

One of the biggest challenges investors face when it comes to cryptocurrencies is not getting caught up in the hype. Digital currencies have quickly risen to prominence in the portfolios of many retail and institutional investors. At the same time, analysts have continued to caution investors about the volatile nature and unpredictability of cryptocurrencies.

If you’ve decided to invest in the cryptocurrency market, it’s important, as with any other investment, to do your research. Below, we’ll explore what you should know before you invest.

Key Takeaways

• When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype.
• Take time to learn about the different currencies offered and research blockchain technology like consensus mechanisms.
• Understanding the differences between a hot and cold wallet; consider investing in both.
• There are many primers on blockchain technology that are written for the layperson in addition to technical white papers.
• Perform test transactions as you begin moving money around networks to ensure your transfers are successful.

Consider Why You Are Investing in Cryptocurrency

Perhaps the most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies.

Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.

Begin by taking a comprehensive approach to evaluate your personal risk appetite, investment goals, and portfolio diversification. You may be interested in cryptocurrency as an alternative asset to what you already hold. You may also be interested in potentially higher returns with the understanding that this reward comes with potentially higher risks.

Before investing in cryptocurrency, gain a personal understanding of what you hope to achieve as this will help set the course for your actions. 

Secure Your Keys

A private key is a secret alphanumeric code that allows a user to access and control their digital assets. In a way, it’s basically just the password that grants ownership and control of the funds associated with a specific cryptocurrency address. Anyone who can access the private keys of an address has access to all of the funds in that address. This is why it’s essential to keep private keys secure and never share them with anyone.

Private keys are typically generated by a cryptocurrency wallet, and your keys are automatically generated. It’s important to note that if a user loses their private key, they’ll lose access to their funds forever. Therefore, it’s crucial to keep private keys safe and secure by storing them offline in a cold wallet or using a reputable custodial service.

Keeping your cryptocurrency on exchanges is a simple way to keep your cryptocurrency liquid and easy to exchange. However, because exchanges technically have access to your keys in this case, you may be more susceptible to losing your funds should the exchange fail or be hacked. Consider solutions to safely storing your private keys, such as writing them down using old-fashioned paper and pencil. 

Your keys are a series of words that are virtually impossible for hackers to guess. Never tell anyone your keys, and store them in a safe location.

Get a Feel for the Industry

Investors should develop a sense of how the digital currency world works before investing. This is particularly true for those who are new to digital currencies. Take the time to learn about the different currencies offered. With thousands of different coins and tokens available, it’s crucial to look beyond the biggest names like Bitcoin or Ether. 

It’s also important to explore blockchain technology to get a sense of how this aspect of the cryptocurrency world works. For example, every blockchain has a consensus protocol to ensure the integrity of the ledger. However, there are different types of consensus protocols. For example, proof-of-work protocols are those that require substantial mining setups to validate transactions. Meanwhile, proof-of-stake protocols reward holders with the highest stakes with validation rewards.

Understanding different aspects of this may impact your investment. For instance, you may be able to stake your cryptocurrency to generate rewards and increase your holdings. On the other hand, proof-of-stake coins may be inflationary if the rewards given to validators are not closely monitored. 

Important

You can earn passive income from cryptocurrency via staking rewards.

Consider Hot and Cold Wallets

When you buy a cryptocurrency, you can store it in a cold wallet or a hot wallet. The main difference between a hot and cold wallet is their level of security and convenience. Hot wallets are convenient for frequent trading and spending of cryptocurrency but are more vulnerable to hacking and theft. Cold wallets are more secure but less convenient for frequent use. 

The main difference is the connectivity to the wallet. A hot wallet is connected to the internet and can be accessed easily. Examples of hot wallets include online exchanges, mobile wallets, and software wallets. Though hot wallets are great for ease of transacting, hot wallets are also more vulnerable to hacking and theft. If a hacker gains access to your hot wallet, they can potentially steal all your cryptocurrency holdings.

On the other hand, a cold wallet is not connected to the internet. This type of wallet may be a hardware wallet or paper wallet. Though a cold wallet offers a higher level of security, they are more difficult to use. Though they are not vulnerable to online attacks or hacking attempts, it’s harder to buy and sell securities from a cold wallet. 

As you embark on your cryptocurrency journey, consider which wallet makes more sense to you. In many cases, investors have both and store more material values or more valuable cryptocurrency via their cold wallet. Then, any balances they may be willing to lose or wish to play with may be kept in the hot wallet. 

Read Cryptocurrency White Papers

More important than word of mouth, though, are the specifics of a digital currency itself. When you’re considering an investment, take the time to find the project’s white paper. Every cryptocurrency project should have one, and it should be easily accessible (if it’s not, consider that a red flag).

Read the white paper carefully; it should tell you everything about what the developers of the project intend for their work, including a time frame, a general overview, and specifics about the project. If the white paper does not contain data and specific details about the project, that is generally seen as a negative. The white paper is a development team’s chance to lay out the who, what, when, and why of their project. If the white paper feels incomplete or misleading, then it might speak to fundamental issues with the project itself.

In addition, developers may issue updates to their white paper, especially as it surrounds their development roadmap. Be wary of projects whose timelines continually shift with minimal progress.

Perform Test Transactions

Cryptocurrency is unlike banks in many aspects. One of the most vital reasons to understand this is should you accidentally send money to the wrong place, it may be impossible (literally) to recover. In some cases, you may lose your money forever.

As you join the cryptocurrency world, understand the importance of test transactions. Test transactions are an essential step when sending cryptocurrency because they allow you to confirm that the transaction will be successful before sending a significant amount of funds. Though they result in higher fees, they very well may be worth preventing a large error.

Test transactions involve sending a small amount of cryptocurrency to a test address. It is meant to simulate a real transaction without actually sending funds to another party. This allows you to test the sending and receiving process, confirm that your wallet is working correctly, and ensure that you have the correct address for the recipient. Once the test transaction has successfully been performed, you can copy the same transaction information for larger exchanges.

Note

A test transaction should be small, such as $1.00. Once the transaction goes through, you’ll know you can send larger amounts.

Patience Is Key

After diligent research, you have likely developed a feel for the cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile.

Remember that digital currencies are highly speculative. For every overnight Bitcoin millionaire, many other investors have poured money into the virtual token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before you invest, you help give yourself the best chance of success.

What Is Cryptocurrency?

Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Is Investing In Cryptocurrency a Good Idea?

While analysts caution investors about the volatile nature and unpredictability of cryptocurrencies, some investors are willing to take the risk for the potential reward. It’s critical to do your research beforehand to determine if investing in cryptocurrency is right for you.

How Do I Learn More About Crypto I Want To Buy?

To learn more about cryptocurrencies, join an online community of cryptocurrency investors and enthusiasts, such as that found on Reddit, to see what the community is discussing. Read the white paper that outlines specific details about the cryptocurrency project that you’re considering. Every project should have an easily accessible white paper—if it’s not, consider that a red flag.

The Bottom Line

When it comes to cryptocurrencies, one of the biggest challenges for investors is not getting caught up in the hype. Analysts continue to caution investors about the volatile nature and unpredictability of cryptocurrencies. If you’ve decided to invest in the cryptocurrency market, it’s important—same as with any other investment—to do your research. Consider why you’re interested in this particular investment vehicle, and familiarize yourself with cryptocurrencies and blockchain technology, to be more fully equipped to determine whether this type of investment opportunity is worthwhile for you.

Investing in cryptocurrencies and initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date when this article was written, the author owns Bitcoin and Ripple.

If you’re having trouble repaying your student loans, you may be able to get some relief by entering into forbearance, meaning your monthly payments will be paused or temporarily reduced. However, even though you may pay less in the short term, there can be hidden costs—such as accruing more interest—that may affect your long-term financial health.

Key Takeaways

• Student loan forbearance offers temporary relief by pausing or reducing payments.
• Interest will likely accrue during forbearance, potentially increasing total repayment costs.
• Forbearance can prevent default but may indirectly impact your ability to qualify for new credit.

Understanding Student Loan Forbearance

Student loan forbearance is a temporary pause or reduction in student loan payments. In some cases, you have to request forbearance from your loan servicer on the grounds of financial hardship. For federal student loans, your servicer is also required to grant you forbearance in some situations, such as if you’re serving in the National Guard or AmeriCorps and meet certain additional criteria.

Non-mandatory forbearance, known as general forbearance, can be granted for up to 12 months at a time and no more than three years altogether. Mandatory forbearance, meanwhile, can be granted for up to 12 months and then potentially renewed, without a cumulative limit. These time frames only apply to federal student loan forbearance; private loan forbearance terms can vary by lender.

What Are the Potential Pitfalls of Student Loan Forbearance?

The biggest benefit of student loan forbearance is that it provides immediate financial relief. If you’re struggling to repay your student debt, pausing or temporarily reducing what you owe can help prevent you from defaulting or needing to take out higher-interest debt, such as personal loans.

However, forbearance also comes with some downsides. The main issue is that interest typically continues to accrue while you’re in forbearance. As such, you could end up paying more in interest than if you hadn’t paused payments (assuming you don’t make any payments while in forbearance, which you can do if you so choose).

Important

For most federal student loans, interest that accrues during a forbearance won’t capitalize when that period ends, meaning you’ll still owe that amount, but it won’t be added to your principal balance right away.

Another problem is that entering forbearance might hurt your chances of qualifying for new credit. A forbearance may be listed on your credit report, which prospective lenders may still take into account, even if this doesn’t directly impact your score. Additionally, confusion around when your forbearance period starts and ends can cause you to miss or make late payments, hurting your credit score.

The Bottom Line

While student loan forbearance can get you out of a jam if you’re having trouble keeping up with payments, it only provides temporary relief. In the long run, you might end up paying more or hurting your credit, so it’s not a decision to take lightly. However, if forbearance helps you avoid defaulting on your student loans, you might be better off requesting a forbearance. Consider consulting with a trusted financial advisor to determine what makes the most sense for your situation.