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Candlestick charts are a cornerstone in technical analysis and perhaps one of the earliest forms of technical analysis, having been developed in the 18th century in Japan by rice trader Munehisa Homma. They help traders and investors quickly assess price movements and short-term market sentiment.

Key Takeaways

• Candlesticks originated in Japan and are useful for recognizing market sentiment and the balance of power between bulls and bears.
• Key components include the real body, shadows, and color.
• Understanding bullish and bearish patterns helps predict short-term price movements.
• Candlesticks offer visual and analytical advantages over other chart types.
• Due to their limitations, they are best used alongside other technical tools.

History of Candlesticks

With its origins in 18th century Japan, candlestick charting was built on the idea that market prices are influenced by both trader psychology and the balance of power between the bulls and bears. By studying historical price changes, Homma identified patterns that signaled shifts in sentiment and market control, helping him anticipate price reversals and trends. His system became widely adopted among Japanese merchants and evolved into a structured approach to market analysis.

The use of candlestick charts remained confined to Japan until Nison introduced them to Western financial markets in the late 20th century. Nison’s research and teachings highlighted the power of candlestick formations in predicting price movements, leading to widespread adoption among traders across stocks, forex, and commodities markets.

Today, candlestick charts have been integrated into the architecture of technical analysis, offering traders a visually intuitive way to assess market sentiment.

Components of a Candlestick

Each candlestick represents a specific period and is made of three (3) components:

• Real Body or Body: This is the rectangular section of the candlestick and shows the range between the opening and closing prices. Long bodies indicate strong buying or selling pressure, while short bodies suggest indecision.
• Shadows or Wicks: These extend above and below the body, marking the highest and lowest prices reached during the period, offering insights into market volatility.
• Color: The color of the candle provides a quick snapshot of price direction. A bullish candlestick is typically green or white and means the closing price is higher than the opening price, indicating upward momentum. Inversely, a bearish candlestick, generally red or black, signals that the closing price was lower than the opening price, reflecting downward pressure.

How to Read a Candlestick

Similar to bar charts, candlestick charts comprise four price points: open, high, low, and close. The high is marked by the top of the upper shadow or the real body if there is no shadow, while the low price is represented by the bottom of the lower shadow or the real body if there is no lower shadow.

Finally, the closing price’s relationship to the open determines whether the candlestick is bullish or bearish. If the price closes above the open price, the candlestick is bullish. On the other hand, if the price closes below the open price, the candlestick is bearish. With colored candlesticks, you can recognize bullish or bearish candlesticks instantly.

By analyzing these four price points over multiple candlesticks, traders can identify market sentiment and how the bulls and bears are faring against each other, helping to predict potential price changes.

Common Candlestick Patterns

Bullish Patterns

Bullish Engulfing Pattern

This pattern consists of two candlesticks. The first is a small, bearish candle followed by a larger, bullish candle. As the name implies, the larger candle completely engulfs the previous candle’s body. That is, it opens below the lowest point of the smaller candle’s body, but the bulls take over and push the price to a close above the highest point of the previous candle’s body. This indicates a shift from bearish to bullish, reflecting strong buying pressure that may mark a potential reversal.

Bullish Harami Pattern

Another bullish candlestick pattern is the bullish harami. This is a two-candlestick reversal pattern. It consists of a large bearish candlestick followed by a smaller bullish candlestick that is completely contained within the body of the previous larger candle. This formation suggests that selling pressure is weakening, and on the second day, buyers are reasserting control. Confirmation is seen when the harami is followed by a strong bullish candle.

Bullish Harami Cross

This is a variation of the bullish harami pattern where the second candlestick is a doji, signifying very little difference, if any, between the open and close. Unlike the bullish engulfing pattern, which shows the bulls gaining the upper hand, the doji reflects a stalemate. This often means selling pressure has faded the bulls are about to take over for a while.

Rising Three Methods

This bullish continuation pattern signals a temporary consolidation before the prevailing uptrend resumes. The components include a strong bullish candlestick, followed by three or more smaller, bearish candlesticks that remain within the range of the first candle. Finally, another strong bullish candlestick closes above the most recent bullish candle’s close.

The smaller bearish candles reflect a brief period of profit-taking or a pause in buying without much selling pressure. The final bullish candle confirms that buyers have regained control and the price is likely to continue moving higher.

Morning Star

The morning star is a three-candlestick pattern that appears at the bottom of a downtrend. This first candle is a long bearish candle, while the second is a small-bodied candle that indicates a stalemate, much like the bullish harami cross. Lastly, there is a strong bullish candle that confirms the reversal. This pattern suggests that on the third day of the pattern, buyers have gained control. It often leads to an uptrend.

Bearish Patterns

Bearish Engulfing Pattern

This pattern consists of two candlesticks. The first is a small, somewhat bullish candle at the top of an uptrend, followed by a larger bearish candle that completely engulfs the previous candle’s body. The bearish engulfing pattern indicates a shift in market sentiment from bullish to bearish, suggesting an impending price decline. It typically marks the end of an uptrend.

Evening Star

This is a three-candlestick pattern that appears at the top of an uptrend. The first candle is a long bullish candle. It is followed by a small-bodied candle that signals market indecision. Finally, a strong bearish candle confirms the reversal. This pattern suggests buying momentum is weakening and sellers are taking control. It often leads to a downtrend.

Bearish Harami​

This is a two-candlestick pattern that signals an uptrend’s potential reversal. It comprises a large bullish candlestick that is followed by a smaller, bearish candlestick that is completely contained within the body of the previous candle. The bearish harami signals that buying momentum is weakening, and sellers may be starting to take control. A strong bearish candle would confirm the reversal.

Bearish Harami Cross

This is a variation of the bearish harami, where the second candle is a doji, showing near identical opening and closing prices. This signals strong indecision and weakening bullish momentum. A strong bearish candle would confirm the reversal.

Falling Three Methods

The falling three (3) methods is a bearish continuation pattern that indicates a temporary consolidation before the downtrend resumes. It consists of a strong bearish candlestick, followed by three or more smaller bullish candlesticks that stay within the range of the first candle, and finally, another strong bearish candlestick that closes below the first candle’s close. The smaller bullish candles represent a brief pause in selling pressure, but their inability to break higher suggests that bears remain in control. The final bearish candle confirms the continuation of the downtrend.

Comparing Candlestick Charts to Other Chart Types

Candlestick charts offer superior visual representation and pattern recognition, making them ideal for active traders. While bar charts provide similar data, they lack the intuitive visual signals offered by candlesticks. Line charts, though useful for spotting trends, do not provide detailed price action.

Feature	Candlestick Charts	Bar Charts	Line Charts
Price Points	Open, High, Low, Close	Open, High, Low, Close	Close Only
Visual Clarity	High	Moderate	Low
Pattern Recognition	Strong	Strong	Weak

Practical Applications of Candlestick Charts

Candlestick charts help traders analyze potential market turning points by more clearly illustrating what’s happening in the battle between the bulls and bears than bar charts or line charts. Practical applications include:

• Trend Identification: Traders and investors analyze candlestick patterns to determine whether a market is trending, though for this purpose they’re best used in conjunction with an indicator such as the Average Directional Index.
• Confirmation: Used with other technical analysis indicators as well as support and resistance levels, candlestick formations can flag and confirm short-term market turning points.

Limitations and Considerations

Candlesticks do have limitations. Their predictive power is limited mostly to the short term, and they are most useful to swing traders. Relying solely on candlestick patterns can lead to misinterpretations and suboptimal decision making. Incorporating additional indicators, volume analysis, support and resistance levels, and even fundamental analysis can help traders and investors make more informed and accurate decisions.

The Bottom Line

Candlestick charts help traders and investors analyze price movements, market sentiment, and trend reversals. Developed in Japan, they use opening, high, low and closing prices to form predictive patterns. Since patterns can produce false signals, confirming them with support, resistance and other technical tools is essential.

Fact checked by Suzanne Kvilhaug
Reviewed by Andrew Schmidt

Environmental, social, and governance (ESG) scores are an essential tool for investors to assess a company’s sustainability and ethical performance. These scores typically range from 0 to 100, with a score of less than 50 considered relatively poor and more than 70 considered good.

Below, we will guide you through the basics of ESG scores, their key components, who the main rating agencies are, and how to access them—as well as provide some insight into their implications for investors.

Key Takeaways

• ESG scores provide a measure of a company’s environmental, social, and governance performance.
• Various criteria are used to evaluate companies on these three dimensions.
• Third-party ESG rating agencies offer different methodologies and scoring systems.
• ESG scores can be found online via brokerage platforms, financial portals, and rating agency websites.
• Investors use ESG scores to make informed investment decisions and assess the sustainability of a company’s operations.

ESG Scores: The Basics

ESG scores are a measure of how well a company addresses risks and concerns related to environmental, social, and corporate governance issues in its day-to-day operations. These scores are important for socially responsible investors who want to invest in companies with strong ethical and sustainability practices, as they provide insight into a company’s long-term performance and resilience.

ESG scores can serve as a basis for comparing companies and funds across different factors, such as a company’s carbon footprint and labor practices. These individual factors are combined and weighted to come up with a single ESG score that can be found for a significant portion of publicly traded funds and securities.

However, it is essential to note that ESG scores come from different providers that have their own ratings scheme and evaluation metrics, which means they are not standardized. Moreover, some ratings firms place greater emphasis on the E, S, or G parts. This lack of standardization can lead to variations in scores for the same company across different rating agencies.

As a result, investors should use ESG scores as a starting point for their research and compare them across multiple providers to get a comprehensive understanding of a company’s sustainability performance. Furthermore, investors should also consider other factors, such as financial performance and industry trends, when making their investment decisions to ensure a well-rounded approach to evaluating potential investment opportunities.

What Do ESG Scores Measure?

ESG scores evaluate companies based on various criteria, which are classified into three main categories:

Environmental Issues

• Carbon footprint
• Energy efficiency
• Renewable energy usage
• Water usage
• Pollution
• Waste management
• Biodiversity impact

Social Issues

• Labor practices
• Pro-diversity efforts
• Human rights
• Community relations
• Health and safety

Governance Issues

• Board diversity and structure
• Executive compensation
• Shareholder rights
• Business ethics
• Risk management
• Supply chain management

ESG Rating Agencies and Methodologies

ESG rating agencies are third-party companies that create ESG scoring systems. Each agency has a unique methodology and set of criteria for evaluating companies. Some rating agencies use a 0 to 100 scale, while others, like MSCI, classify companies as leaders, average, or laggards.

There are more than 140 ESG rating agencies in the United States alone, and each agency has its own methodology, which can be found on their respective websites or on resources such as the IRIS Carbon beginner’s guide to ESG rating agencies and methodologies. Below, we list some of the most influential ESG rating agencies and a brief overview of their scoring methodology.

Some of the Most Relevant ESG Rating Agencies & Data Providers

• Bloomberg ESG Data: Bloomberg provides a variety of data and proprietary scores that investors can use to assess company or government disclosure and performance on a wide range of ESG and thematic issues. Bloomberg’s ESG and thematic scores can integrate into company research and portfolio construction. Bloomberg’s proprietary quant model is informed by sustainability and industry frameworks, research, and analysis to reduce noise, normalize data, address size bias, and reduce disclosure gaps.
• Dow Jones Sustainability Indexes: The Dow Jones Best-in-Class World Index represents the top 10% of the biggest 2,500 companies in the S&P Global Broad Market Index based on long-term environmental, social, and governance criteria. The Dow Jones Sustainability North America Composite Index comprises the top 20% of the largest 600 North American companies based on the same criteria.
• MSCI ESG Research: According to MSCI, a “leader” (rated AAA and AA) indicates that a company leads its industry in managing the most significant ESG risks and opportunities. “Average” (rated A, BBB, or BB) companies are described by a mixed or unexceptional track record of managing ESG risks and opportunities relative to industry peers. A “laggard” (rated B or CCC) trails its industry based on its high exposure and failure to manage significant ESG risks.
• Sustainalytics: Sustainalytics is a leading ESG research and analytics firm. It produces ESG scores on a scale of 0 to 100, with a higher score indicating better environmental, social, and governance performance. The scores are normalized by industry to allow for comparability between companies operating in the same sector. In addition to the overall ESG score, Sustainalytics provides scores for each of the three dimensions (environmental, social, and governance) on the same 0 to 100 scale. This granularity enables investors to gain a more in-depth understanding of a company’s performance in each of the three ESG categories.
• LSEG Data & Analytics: LSEG is another prominent provider of ESG scores. Its scores are presented on a scale of 0 to 100, with higher scores indicating better environmental, social, and governance performance. The scores are percentile-ranked—for example, a score of 80 would indicate that a company performs better than 80% of its peers in the same industry.
• S&P Global: S&P Global uses its “Shades of Green” methodology to assess how a company contributes to “a low carbon and climate resilient future.” The ratings are red, yellow, light green, medium green, and dark green, with red being the lowest rating and dark green being the highest.
• ISS ESG: ISS rates companies from a scale of A+ to D- with the letter rating corresponding to excellent, good, medium, or poor. It provides a holistic approach to rating sustainability, assessing the risk and impact on all stakeholders, including employees, suppliers, customers, ecosystems, and communities.
• CDP Scores: CDP (formerly known as the Carbon Disclosure Project) focuses on environmental impact, or the “E” in ESG. CDP scores focus on individual companies and their efforts to disclose, manage, and reduce their environmental impact. Companies participating in the CDP disclosure process receive a score (A to D-) based on their transparency, risk management, and climate change mitigation efforts. A higher score (e.g., A or A-) indicates better environmental performance and commitment to addressing climate change. CDP scores are designed to incentivize companies to improve their environmental performance and provide investors with valuable information on corporate sustainability practices.
• Climetrics: CDP also introduced Climetrics scores, the world’s first climate impact rating system for investment funds. This innovative rating system enables investors to make climate-conscious investment decisions by assessing the climate impact of various funds. Climetrics ratings use a scale of one to five green leaves, with one leaf representing a low climate impact score and five leaves indicating the highest climate impact score. The ratings take into account several factors, such as a fund’s portfolio holdings, its asset manager’s climate performance, and the company’s climate-related disclosures.
• Corporate Knights Global 100: Corporate Knights has been ranking the world’s 100 most sustainable corporations since 2005, based on a rigorous assessment of public companies around the world with revenue of at least $1 billion. Companies are scored on each of the key performance indicators relative to their industry peers, and the top 100 performers are included in the Global 100 ranking. The list aims to showcase best practices and serve as a benchmark for investors and companies seeking to adopt more sustainable business models.
• FTSE Russell ESG Scores: FTSE Russell’s ESG Scores and data model allow investors to understand a company’s exposure to, and management of, ESG issues in multiple dimensions measuring ESG risk and performance on 8,000 securities across 47 developed and emerging markets. The ESG Scores are composed of an overall rating that breaks down into underlying Pillar and Theme Exposures and Scores. The Pillars and Themes are built on over 300 individual indicator assessments that are applied to each company’s unique circumstances.
• RepRisk: RepRisk produces The RepRisk Index (RRI). The RRI dynamically captures and quantifies reputational risk exposure related to ESG issues. The scale ranges from 0 to 100 with 0 to 24 denoting low-risk exposure and 75 to 100 denoting extremely high-risk exposure.

Note

ESG ratings can be based on qualitative or quantitative data or a combination of the two.

How to Obtain a Company’s ESG Scores for Free

Obtaining ESG scores for free can be challenging, as many ESG rating agencies charge for access to their data and research. However, there are some resources and platforms where you can find ESG scores or related information for free:

• Yahoo! Finance: Yahoo! Finance provides sustainability scores for companies, powered by Sustainalytics. You can search for a specific stock or exchange-traded fund (ETF) on Yahoo! Finance and then click on the “Sustainability” tab to see the ESG scores.
• MSCI ESG Ratings: MSCI offers a free search tool that allows you to check the ESG rating of select companies or funds. Visit the MSCI ESG Ratings website, and enter the company or fund name in the search bar.
• Corporate sustainability reports: Many companies today elect to publish annual sustainability reports, which often include ESG-related data, policies, and achievements. You can usually find these reports on a company’s website in the “Investor Relations” or “Sustainability” sections.
• CDP: CDP runs a global disclosure system that enables companies, cities, and regions to measure and manage their environmental impacts. While CDP scores are not ESG scores per se, they provide valuable insights into a company’s environmental performance. You can access CDP’s public disclosure data for free on its website.
• Brokerage websites: Many online brokers today have ESG analytics and ratings available to their customers, although the metrics and scores featured may vary between platforms and may only be available to active customers.

Keep in mind that, while these resources can provide access to some ESG information for free, they may not offer the most comprehensive, in-depth data and analysis provided by paid ESG rating services.

What Is Considered a Good ESG Score?

Many ESG scores range from 0 to 100, with scores below 50 considered poor and scores above 70 deemed good. Other schemes feature a leaders-average-laggards scoring system that ranges from AAA to CCC.

Most scoring is carried out so that a company is comparable to peers in the same industry. Investors should research the specific rating agency’s methodology to understand how these scores are calculated and their implications.

What Can ESG Scores Tell Investors?

Investors use ESG scores to make informed investment decisions, evaluate a company’s long-term prospects, and assess the sustainability of its operations. High ESG scores indicate that a company is effectively managing environmental, social, and governance risks, which can lead to better financial performance and lower investment risk. Investors who are interested in socially responsible investing or who value ESG can use these scores to identify which potential investments are worthwhile and which should be avoided.

What Are Some Limitations of ESG Scores?

One limitation of ESG scores is the lack of standardization in methodologies and criteria used by the various rating agencies, which employ different approaches to assess and weigh ESG factors. This can lead to inconsistent results and make it difficult for investors to compare scores across different providers.

Another limitation is the potential for greenwashing, where companies may misrepresent or exaggerate their ESG efforts to improve their scores and attract SRI investors. Additionally, ESG data may be self-reported by companies, which raises concerns about data quality, accuracy, and reliability. ESG scores may also not capture all relevant aspects of a company’s sustainability performance, as certain issues may be overlooked or underestimated due to limitations in data availability or methodology.

Finally, ESG scores often focus on larger-cap companies and may not provide adequate coverage of small-cap and midcap companies, which could limit the investment universe for responsible investors.

In conclusion, while ESG scores can be a valuable tool for assessing companies’ sustainability performance, investors should be aware of their limitations and consider them as one of several factors in their investment decision-making process.

What Is the Most Popular ESG Reporting Framework?

For ESG scores to be calculated, companies must report and disclose relevant information and data. The Global Reporting Initiative (GRI) Standards are considered the most popular and widely adopted ESG reporting framework globally. Established in 1997, the GRI is an independent international organization that provides a comprehensive set of sustainability reporting guidelines for organizations of all sizes and sectors.

The popularity of the GRI Standards can be attributed to their flexibility, relevance across industries, and global recognition by various stakeholders, including investors, nongovernmental organizations (NGOs), and regulators. By adopting the GRI Standards, organizations can demonstrate their commitment to sustainability, identify and manage ESG risks, and communicate their progress to stakeholders.

Other notable ESG reporting frameworks include the Sustainability Accounting Standards Board (SASB) Standards, the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations, and the United Nations Global Compact (UNGC).

The Bottom Line

ESG scores serve as a valuable tool for investors to assess companies’ environmental, social, and governance performance, enabling them to make informed, responsible investment decisions. By evaluating factors such as carbon footprint, energy efficiency, labor practices, and corporate governance, ESG scores provide insights into a company’s long-term sustainability and resilience.

However, due to the lack of standardization, potential for greenwashing, and other limitations, investors should consider ESG scores as one aspect of their investment decision-making process, rather than relying solely on them. ESG scores can be found online for free in some cases, or by subscription. Financial portals and brokerage websites may also contain ESG ratings and analytics.

By using ESG scores in combination with other financial and nonfinancial factors, investors can better identify companies that align with their values and contribute to a more sustainable global economy.

Reviewed by Somer Anderson

While the terms pre-qualification and pre-approval are sometimes used interchangeably, they have distinct meanings and purposes. Typically, getting pre-qualified is more of a preliminary step to determine the size of a mortgage you could get. Meanwhile, being pre-approved means receiving conditional approval for the loan amount you’re going to borrow.

Key Takeaways

• Pre-qualification is typically based on data you submit and is more of a preliminary estimate of the mortgage size you could qualify for.
• Pre-approval is usually the more involved step and signals what a lender can offer you, though it isn’t an actual guarantee.
• While both have their purposes, pre-approval tends to be more useful for showing sellers you’re ready to buy.

Pre-Qualified

“Pre-qualification is a less involved step, with less verification steps completed in most cases,” said Phil Crescenzo Jr., Southeast division president of Nation One Mortgage Corporation. “A pre-qualification may be given with information entered from an applicant but not yet verified, such as with income or assets.”

Using this information, the lender can determine the mortgage amount that you’d likely be eligible for, without doing a hard credit pull that could hurt your credit score. It might then issue a formal pre-qualification letter or simply state the amount it’s willing to lend you. This process can take anywhere from a few minutes to a couple of days.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the United States Department of Housing and Urban Development (HUD).

A pre-qualification letter usually doesn’t carry the same weight to home sellers as a verified pre-approval letter. Still, sometimes buyers prefer to start with getting pre-qualified, as this can be useful for narrowing down lenders.

“If a buyer may not be ready to move forward immediately, but wants a preliminary review to get an idea of where they stack up financially while providing less information, they might only want or need pre-qualification,” Crescenzo said. “If a client didn’t want a credit inquiry, but wanted a soft pull, this could also be a reason to ask for a process that’s less involved.”

Pre-Approved

Pre-approval typically requires completing a mortgage application and the lender doing a hard inquiry to determine creditworthiness. With that information, the lender can give a more accurate estimate of what the borrower will be approved for once they’re ready to complete a mortgage application. This offer is usually good for a period of up to 60 days.

Important

A pre-approval doesn’t guarantee the final loan amount, as the lender may learn new information during the full underwriting process that changes what it’s willing to offer.

“A pre-approval is what I call ‘show me.’ What I mean by that is let me see the real documents that I—or underwriting—will need for an approval: pay stubs, W-2s, bank statements, credit report, tax returns, etc.,” said Kevin Leibowitz, president and CEO of Grayton Mortgage. “We’re not completely underwriting the file, but it is a thorough review of a borrower’s profile.”

This thorough review can be valuable for prospective buyers, and some borrowers may prefer skipping right to the pre-approval process rather than getting pre-qualified first.

“A pre-approved buyer is more likely to win an offer over a less prepared buyer or realtor,” said Crescenzo. “The more information and detail that can be confirmed in advance, the smoother the process will be once an offer is accepted and processing begins. I would recommend a full pre-approval process whenever it’s possible and time allows.”

By pulling your credit, the lender can also better tailor the interest rate to suit your creditworthiness. Additionally, a pre-approved borrower may be able to qualify for an interest rate lock under certain circumstances, potentially in exchange for a fee. Most of the time, however, the lender will offer you a floating rate that’s tied to market conditions. You can still lock in a fixed rate after you’ve secured your mortgage, though the original rate may have changed by the time you close on the loan.

You may be able to lower the interest rate you’re offered by taking certain steps before you apply for a mortgage. “I’ve seen way too many what I call ‘skeletons in the closet’ on credit reports. Many of these items can be incorrect, and some can be addressable,” Leibowitz added. “It’s better to start the process early so that there’s time to fix/address items that were unknown or not discussed.”

Key Differences

How the pre-qualification and pre-approval processes work can vary by lender. Typically, however, getting pre-qualified and being pre-approved will differ in the following ways:

	Pre-Qualification	Pre-Approval
Mortgage Application	Not required	Required
Application Fee	None	Varies
Credit Check	Soft inquiry	Hard inquiry
Financial Data	Self-reported	Lender review
Estimated Down Payment	Varies	Required
Loan Amount	Estimate	Specific
Interest Rate Information	Not provided	Provided

Special Considerations

In some cases, buyers can benefit from getting both a pre-qualification and pre-approval. If it’s still early in the homebuying process, a pre-qualification could be worth it in order to get a rough estimate of what you’ll be able to borrow. Then, once you’re ready for a more in-depth review of your finances, you could move forward with a pre-approval. In other cases, it could make sense to skip pre-qualification.

“From our process, we only issue pre-approvals. We want to do a bit of the heavy lifting upfront to make sure that our clients are set up for success and don’t have surprises later on in the process,” Leibowitz said.

Once you’re ready to make an offer on a home, the buyer and seller typically enter into a purchase agreement. Borrowers would then provide a copy of this and any other documents that the lender may request as part of the full underwriting process. Additionally, the lender will then hire someone to conduct a home appraisal to help them ascertain the value of the home. 

Finally, if all goes well, you’ll receive a mortgage commitment letter. This is a formal offer from the lender to loan you a certain amount, though this can be retracted if your financial situation changes or either you or the property are later found to have fallen short of the lender’s qualifications.

The Bottom Line

Getting pre-qualified and pre-approved can help you determine what kind of home you can afford. Pre-qualification is usually the simpler step, but it offers less certainty over how much the lender will actually approve you for. As such, consider getting a pre-approval before you start trying to negotiate with a home seller.

Reviewed by Ebony Howard

A Master Limited Partnership (MLP) is a hybrid between a partnership and a publicly traded company. There are significant tax advantages to owning MLP units. However, despite these benefits, MLPs may not be the ideal investment for an Individual Retirement Account (IRA).

Understanding Master Limited Partnerships

MLPs offer significant liquidity for investors. An investor can buy and sell units through a national stock exchange. Many MLPs operate capital-intensive businesses, such as oil and gas pipelines and storage facilities—the energy sector. Congress limited the use of MLPs to entities operating in certain sectors in 1987. This limitation includes those operating businesses associated with natural resources. MLPs issue units, as opposed to shares, as standard companies do. An investor who buys units in an MLP is considered a limited partner in the business. The business end of the MLP is operated by the general partner.

Distributions from MLPs to unit holders receive favorable tax treatment under the IRS code.An MLP is a pass-through entity, and partnership income is only taxed at the level of the partner. Distributions are not taxed when they are received, unlike stock dividends, which are taxed the year they are realized. Instead, the distributions are considered a reduction in the cost basis of the MLP investment. If you hold the MLP long enough and your cost basis reaches zero, distributions are taxed as capital gains in the year of distribution.

Tax Liability

The tax liability from the distributions is only realized when the interest in the MLP is sold. The delay in taxation causes the MLP to be a tax-deferred investment. When you eventually sell all of your shares, appreciation of the units will be treated as capital gains, not ordinary income.

Since MLP tax liability is deferred, it is not the best candidate to hold in an IRA. Income from an MLP is not taxed at the corporate level, which avoids the common problem of double taxation for corporations. At tax time, the investor receives a K-1 schedule from the MLP stating the investor’s portion of the MLP’s net income. This MLP income is not tax-deferred if the units are held in an IRA. Holding this security in an IRA account eliminates the tax benefits of an MLP investment.

A downside of holding MLPs is that many of them invest in pipelines that run through several states. You may have to pay state income taxes, but some states offer exemptions.

What Are the Tax Benefits of Owning an MLP?

MLPs offer significant tax advantages because they are pass-through entities. This means that income generated by the MLP is only taxed at the investor’s level, not at the corporate level.

How Are MLP Distributions Taxed?

MLP distributions are not taxed when received. Instead, they reduce the investor’s cost basis in the MLP. When the investor sells the MLP units, any appreciation of the units is taxed as capital gains. If the cost basis reaches zero, distributions are taxed as capital gains.

Do I Need to Worry About State Taxes With MLPs?

Yes, MLPs that operate across multiple states may trigger state income taxes, depending on the location of the MLP’s operations. Some states offer exemptions, so it’s important to be aware of state tax rules when investing in MLPs.

The Bottom Line

Master Limited Partnerships can offer attractive tax advantages, making them a popular investment choice for those seeking income-generating assets. Because of how taxes are structured, MLPs are not suitable for all investment accounts, especially IRAs. It’s important for investors to understand the federal and state tax implications before investing in MLPs.

Let’s just say they’re measured in quintillions. That’s a number followed by 18 zeroes

Fact checked by Timothy Li
Reviewed by Robert C. Kelly

Every year, the National Collegiate Athletic Association (NCAA) men’s and women’s basketball tournament whips fans into a frenzy, earning the event the nickname “March Madness.” Much of the interest stems from the ever-popular bracket challenge, where groups of individuals pay into a pool and attempt to pick the most winners. Whoever guesses the most games correctly wins the pool.

In 2014, Warren Buffett created a challenge for his Berkshire Hathaway employees: Whoever could correctly predict the outcome of all 67 games of the men’s bracket would win $1 billion. However, as Buffett doubtless knew, the odds of picking a perfect bracket are infinitesimally small.

Key Takeaways

• Each year, sports fans participate in March Madness bracket challenges, where they attempt to predict the winners of the NCAA basketball tournaments.
• In 2014, famed investor Warren Buffett promised $1 billion to any employee of his firm who correctly predicted every game of March Madness (for the men’s tournament).
• This offer has since been modified to $1 million for life for the winner, and the Berkshire Hathaway employee with the best bracket earns $100,000.
• The odds of picking a perfect bracket (all 67 games, including play-ins) are about one in 147.6 quintillion. For a 63-game bracket (excluding play-ins), the odds are one in 9.2 quintillion.

Understanding the NCAA Bracket

Early estimates indicated that $2.72 billion was expected to be wagered on the 2024 NCAA Men’s and Women’s Division I Basketball Tournaments through a mix of same-game parlays, prop bets, and bracket pools. Additionally, in 2024, ESPN’s Men’s Tournament Challenge set a new record with 22.6 million completed brackets.

The structure of the NCAA bracket is devised as a “loser-go-home” single-elimination format. Two teams play each other, and the winner advances while the loser is eliminated. The bracket consisted of 64 teams from 1985 on; however, the bracket was expanded in 2011 to include several early “play-in” games, and the field was expanded to 68 teams.

Because each team can either win or be immediately eliminated, the NCAA bracket consists of 67 games. At the end of 67 games, 67 teams will have lost and only one team, the NCAA champion, will remain.

Note

Some may state that the odds of guessing each game isn’t truly 50/50, as some teams will be favorites or have specific advantages. Throughout this article, the assumption is that each team has the same probability of winning any game they are in.

What Is Warren Buffett’s Bracket Challenge?

In 2014, legendary value investment guru Warren Buffett got in on the March Madness action when his investment company, Berkshire Hathaway, instituted its own bracket challenge. The challenge provided that any perfect-scoring employee—anyone who correctly predicts every game of the men’s tournament—would win $1 billion. Over time, this was modified to $1 million, every year, for life. The challenge promised smaller payouts for participants who came close.

In 2018, for example, the Berkshire Hathaway March Madness contest resulted in eight high-but-not-perfect scorers, who divided a $100,000 consolation prize, each pocketing $12,500.

What Are the Odds of Winning Buffett’s Bracket Challenge?

There are several different ways to calculate the odds of picking a perfect bracket. Some rely more heavily on math, while others allow for some looser assumptions.

Statistically, correctly picking all 67 winners is overwhelmingly unlikely. Consider the following mathematical facts:

• Each game has two possible incomes: Team A wins and Team B loses, or vice versa.
• To calculate the total number of ways that a player may fill out a bracket, you would need to take the total number of possible outcomes for each game (two) and multiply it out 67 times: (2 × 2 × 2…× 2, or 2^67).
• The odds of projecting all 67 winners is one in more than 147 quintillion.

Given how aggressively the odds are stacked against bettors, most bracket challenge participants don’t realistically expect to achieve a score of 100%. But many believe that they have a viable chance of predicting the teams that become known as the Sweet 16, which refers to the clubs that linger long enough to participate in the regional semifinal round.

Note

In the NCAA tournament, the teams of each region are assigned a seed number, ranging from 1 to 16, where the best team is given the first seed and the worst team receives the 16th seed. The opening games pit seeds against their numerical opposites. For example, the first-seeded team plays the 16th seed; the second seed plays the 15th seed; and so forth.

What Are the Odds of Partially Perfect Brackets?

Continuing with the assumption that each game has a 50/50 chance of being predicted correctly, there are still long odds to achieve even partially perfect odds through certain rounds. The table below outlines the odds of guessing all games correctly through each round (assuming a 68-team format in which each play-in game is predicted).

Odds of Correctly Predicting March Madness Games
# of Games	A Perfect…	Odds
36	first round	1 in 68.7 billion
52	Sweet Sixteen	1 in 4.5 quadrillion
60	Elite Eight	1 in 1.2 quintillion
64	Final Four	1 in 18.4 quintillion
66	Championship Game	1 in 73.8 quintillion
67	bracket	1 in 147.6 quintillion

If you or someone you know has a gambling problem, call the National Problem Gambling Helpline at 1-800-GAMBLER, or visit NCPGambling.org/Chat to chat with a helpline specialist. 

What About a 64-Team Bracket?

In some tournaments, the four play-in games may or may not count toward crafting a perfect bracket. Participants may not be required to submit their brackets until Thursday morning—the full first round of game play begins that afternoon. The good news is this means fewer games to predict; the bad news is there are still very long odds.

Running with the same mathematical assumptions as above, the task is to guess 63 games correctly. This results in a one-in-9.2-quintrillion chance of a perfect bracket. On the plus side, there’s a one-in-4.3-billion chance of guessing a perfect full first round after 32 games.

What Is Warren Buffett’s Bracket Challenge?

For several years, Warren Buffett’s company, Berkshire Hathaway, has offered to pay any employee who correctly calls the entire March Madness tournament $1 million a year for life. The tournament takes place over 63 games, plus four play-in games.

What Are the Odds of Having a Perfect March Madness Bracket?

The odds of scoring a perfect bracket across 67 games are about one in 147.6 quintillion. The odds of a perfect bracket across 63 games are roughly one in more than 9 quintillion. It is overwhelmingly unlikely that anyone will create a perfect bracket.

Has Anyone Ever Scored a Perfect March Madness Bracket?

No one has ever accurately guessed all games in a March Madness bracket. The closest brackets were in 2019, when one person accurately guessed the first 49 games in a row. Before that, in 2017, one person accurately guessed 39 consecutive games.

Who Has Scored the Best March Madness Bracket Ever?

With 49 games accurately predicted in a row, Gregg Nigl of Columbus, Ohio, scored the best March Madness bracket ever recorded, according to the NCAA. In 2019, the neuropsychologist was the first person to reach the Sweet 16, eventually breaking the streak in its second game when two-seed Tennessee lost to three-seed Purdue.

The Bottom Line

For millions of sports fans, filling out NCAA March Madness bracket challenge forms is an annual tradition. One of the biggest March Madness prizes available is at the investment firm Berkshire Hathaway, where Warren Buffett has offered any employee who creates a perfect bracket $1 million a year for life. No one has yet claimed the prize, although some employees with relatively high-scoring brackets have taken home some consolation cash for their efforts.

Six ways to legally pay less in taxes

Fact checked by Vikki Velasquez

Avoiding taxes completely isn’t legal or desirable; money has to come from somewhere to fund the social services and public works on which your community depends.

While you can’t avoid taxes entirely, it’s possible to lower your tax bill through strategic financial moves. You don’t have to be a top earner, either. Average, middle-class earners can use six strategies to lower their income taxes legally.

Key Takeaways

• The interest income from municipal bonds is generally free from federal income tax.
• You can use pretax dollars to contribute to certain retirement and employee benefit accounts.
• Business owners can deduct many expenses, including some health insurance costs.
• When you sell taxable assets, you can be taxed at a lower capital gains rate if you have held them for more than a year.
• Tax deductions and credits can lower both your taxable income and the amount of tax you owe.

1. Consider Investing in Municipal Bonds

When you buy a municipal bond, you are loaning money to the issuer in exchange for repayment with interest. Municipal bonds, which are issued by states or localities to fund things like roads and schools, tend to pay lower interest rates than corporate bonds. But they come with a distinct tax advantage: if you hold the bond until it matures, you don’t have to pay federal income tax on the interest you earn. In many cases, you also won’t have to pay state or local taxes if you live where the bond was issued.

Historically, municipal bonds have also had lower default rates than corporate bonds. From 1970 to 2022, the default rate for munis was 0.08%. By contrast, corporate bonds defaulted at a significantly higher rate of 6.9% in the same period.

Warning

In some cases, municipal bonds aren’t completely tax-free. If you purchase them at a discount equal to or greater than 0.25% per year until maturity, the bond is subject to a de minimis tax. This means that interest and gains from the discounted amount are taxed at ordinary income rates.

2. Take Long-Term Capital Gains

Investing strategically can lower your tax bill because income from long-term capital gains is taxed at lower rates than ordinary wages or job income.

Long-term capital gains apply to sales of assets that you’ve held for more than one year. This type of income is taxed at rates of 0%, 15%, or 20%, depending on your income bracket. By contrast, the tax rates for ordinary income go as high as 37%.

Capital Gains Tax Rates 2025
Filing Status	Income	Tax Rate
Single	up to $48,350	0%
	up to $533,400	15%
	above $533,400	20%
Married filing jointly	up to $96,700	0%
	up to $600,050	15%
	above $600,050	20%

Short-term capital gains, which apply to the sale of assets that have been held for less than a year, are taxed at ordinary income rates. If you plan to sell stocks, bonds, real estate, or other assets that generate capital gains, consider choosing assets that you have held for a year or more to lower your tax bill.

You can also use a tax-loss harvesting strategy to offset capital gains with losses. This involves deducting losses from gains to lower your total taxable income. If you plan to use tax-loss harvesting, talk with a tax professional to make sure you are doing it correctly.

3. Start a Business

Starting a side business can come with a variety of tax advantages. The IRS allows business owners to deduct many expenses that are necessary and regular in the course of operating their business. Possible deductions include:

• Home office
• Portion of home utilities and internet
• Vehicle use for business
• Business cell phone
• Self-employed retirement plan contributions
• Business travel

If you are self-employed, you can even deduct health insurance premiums if you meet specific requirements. When combined, these deductions can significantly lower your taxable income.

Important

To take these tax deductions, you must be operating your business intending to make a profit, not as a hobby. The IRS uses several factors to determine whether your work qualifies as a business, including whether you realize a profit in three to five years.

4. Take Advantage of Retirement and Employee Benefits

If your employer offers a retirement account such as a 401(k) or 403(b) plan, having contributions taken from your paycheck can reduce your taxable income by up to $23,500 in 2025. If you are age 50 or older, you can contribute an additional $7,500 for a total of $31,000. A 55-year-old who makes $100,000 per year and maxes out their 401(k) contributions can reduce their taxable income to $69,000 and pay significantly less tax for the year.

If you don’t have a retirement plan through your work, you can still contribute up to $7,000 per year to a traditional individual retirement account (IRA), which also reduces your taxable income. If you have both an employer-sponsored plan (or your spouse does) and a traditional IRA, you may be able to deduct all or some of your IRA contributions, depending on your total income.

Many employers also offer other benefits, known as “fringe benefits,” that can reduce your total taxable income. These can include:

• Reimbursement for adoption expenses
• Flexible spending account (FSA)
• Dependent care FSA or dependent care assistance
• Educational assistance
• Tuition reduction
• Commuting cost reimbursement
• Group term life insurance

These benefits are either taken out of your paycheck or reimbursed to you by your employer after you pay them. Some of these benefits are excluded (or partially excluded) from being taxed and not reported on your W-2; others, like reimbursement for adoption expenses, are excluded from income tax but not other taxes and are still reported on your W-2.

5. Contribute to a Health Savings Account (HSA)

If you have a high-deductible health insurance plan, you can choose to open a health savings account (HSA) to go along with it. Like a 401(k), an HSA is funded with deductions from your paycheck. Contributions reduce your taxable income by an equal amount.

In 2025, the maximum deductible contribution to an HSA is $4,300 for individuals and $8,550 for families. A family with a $100,000 income who maxes out their HSA contributions for the year can reduce their taxable income to $91,450.

The funds in an HSA never expire. You can keep your HSA after you have a different health plan or leave your employer, including investing the money it in so it grows until you are in retirement. You don’t have to pay tax on the earnings, and any withdrawals from the account aren’t taxed if you use them to pay for qualified medical expenses.

6. Claim All Your Deductions and Credits

Claiming all the deductions and tax credits to which you’re entitled can significantly lower your tax bill.

A deduction lowers your taxable income. Many deductions are only available if you itemize rather than taking the standard deduction. However, some deductions can be claimed whether or not you itemize, including:

• Alimony payments
• Student loan interest
• Work-related education expenses for some government, military, self-employed, and disabled individuals
• Moving expenses for military service members
• Teacher expenses up to $300

If you itemize, you can also deduct donations to charity, capital losses, home mortgage interest, property taxes, medical or dental expenses that total over 7.5% of your adjusted gross income, and more.

Tax credits are an even better way to lower your taxes because they are a dollar-for-dollar reduction in the tax you owe. Common tax credits for low-to-average earners include:

• Child Tax Credit: $2,000 tax credit for each qualifying child, stepchild, sibling, or descendant claimed as a dependent on your tax return. To claim the full CTC, you cannot earn more than $200,000 if you’re a single filer or $400,000 if you’re married filing jointly.
• Child and Dependent Care Tax Credit: A portion of expenses spent on care for an eligible child or other dependent while the legal caregiver works or searches for work. Care can be for young children as well as children and adults who are mentally or physically incapable of caring for themselves.
• Earned Income Tax Credit (EITC): Tax credit aimed at working, low-income taxpayers based on income, marital status, and number of children. In 2025, the EITC is worth $8,046 with three or more qualifying children, $7,152 with two, $4,328 with one, and $649 with no children.
• American Opportunity Tax Credit: Up to $2,500 per year for the first four years of higher education expenses for eligible students.
• Lifetime Learning Credit: Worth $2,000 per return or a maximum of 20% of up to $10,000 of qualified educational expenses.
• Savers Credit: Credit for savings set aside by moderate- and low-income taxpayers, worth up to half your contributions to a retirement plan, IRA, or ABLE account.

The Bottom Line

You have to pay taxes, but you don’t have to pay more than you legally owe. By maximizing your deductions, credits, and employee benefits, and being strategic with your investments, you can save hundreds or even thousands of dollars on your taxes.

If you aren’t sure which strategies you qualify to use, talk to a tax professional. They can help you maximize your savings without getting into trouble with the IRS.

AI can boost efficiency and accuracy in inventory planning, logistics, data analysis, forecasting, writing business plans, and more

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

Artificial intelligence (AI) can be used across many aspects of business planning, improving the accuracy and efficiency of processes like inventory planning, logistics, financial and sales analysis and forecasting, and project management. Entrepreneurs looking to launch a new business can also use AI to their advantage in writing a business plan.

However, the specific roles and applications of AI in business planning can vary depending on the nature and requirements of the business or industry.

Key Takeaways

• AI can significantly improve the accuracy and efficiency of data analysis for business planning and help identify new sales and business growth opportunities.
• Incorporating AI in business planning can improve forecasting by offering predictive capabilities.
• Automation of repetitive tasks and processes, such as pulling data for analysis, is another benefit of using AI in business planning.
• Ethical considerations such as potential biases in AI algorithms, as well as technical limitations with AI algorithms, must be addressed in any AI-driven business planning.

Benefits of Using AI in Business Planning

Business leaders looking to use artificial intelligence for business planning can benefit from the insights and efficiencies it provides. Here are some of the ways in which businesses can use AI for different business planning applications.

Improved Accuracy and Efficiency of Data Analysis

As many machine learning algorithms are designed to recognize patterns and process a large quantity of data in relatively little time, they can spot trends and offer insights that might not otherwise be evident. This can help in analyzing and deriving insights from large volumes of customer, order, financial, or other business-related information.

Enhanced Forecasting and Predictive Capabilities

Also referred to as predictive analytics, the ability of AI to make inferences about future outcomes using existing data can be a huge asset across many different business areas. For example, the food service company Sysco uses AI for inventory management as well as warehouse and delivery logistics planning. Another impactful business application for predictive AI models is financial and inventory planning.

Automation of Repetitive Tasks and Processes

Any business planning workflow that currently includes a manual, rote, or repetitive task might be a good candidate for automation using AI. Examples might include pulling data into a spreadsheet for analysis, generating or formatting data, processing documents or information, or requesting approvals.

Identification of New Business Opportunities

AI can help identify new growth strategies and opportunities in marketing and sales. Using AI-enabled customer relationship management (CRM) software can offer insights on lead generation, upsell or cross-sell opportunities, and customer service strategies. It can also provide businesses with the data to better personalize their offerings and target different segments of their customer base.

AI Tools and Platforms for Writing Business Plans

Many generative AI tools and software platforms are available to assist entrepreneurs with the task of writing a business plan. Here is a list of popular AI-based business plan generators.

ChatGPT

Although not a dedicated business plan generator, ChatGPT is one of the most well-known and accessible generative AI tools. Users can prompt ChatGPT to quickly generate ideas, draft outlines or sections, and edit or make text suggestions.

However, any information that ChatGPT provides on things like market research may not be up to date or reliable. Any data and references should be double-checked to ensure both factual and contextual accuracy, and the writing should be reviewed to ensure it aligns with the writer’s desired tone of voice.

Although a free version is available, a paid subscription to ChatGPT Plus costs $20 per month.

Notion AI

Notion is an AI-enabled workspace and project management tool. Although it can be used for more than just generating a business plan, Notion offers both free and paid AI-supported business plan templates.

As an AI-powered productivity tool, Notion can help users quickly generate text as well as automate workflows and tasks. This makes it a useful option for those who wish to use it for individual and team project execution as well as planning.

However, for those who simply wish to generate a business plan, the platform may present a bit of a learning curve and require an investment of time to understand how to use it properly.

Notion has a free plan, but its paid plans start at $8 per month.

ProAI

ProAI is an AI platform specifically tailored to business planning, research, and strategy solutions. It has dedicated tools for generating business plans, financial models, and pitch decks, as well as an AI business advisor that users can consult. It can also guide users in raising capital, including suggesting investors, funding amounts, and approaches.

Users input their business information and goals and link their social media, analytics, accounting software, and other data to the program, and it learns and adapts accordingly. As such, ProAI is a good tool for those looking for accuracy and assistance with financial projections.

However, compared to other tools, ProAI can take considerable time to generate a business plan (up to several days, depending on the depth and level of customization required). There are also potential privacy concerns associated with the sensitivity of data being shared.

ProAI plans start at $114 per year.

Simplified

Simplified is another workflow and productivity tool, with a suite of AI-powered programs to help users create all kinds of content, manage social media channels, and more. Their AI writing tool can offer suggestions and includes templates for specific types of business plans, from food trucks to real estate services.

Simplified’s business plan generator is geared toward solo entrepreneurs, small businesses, and startups. As it is easy to learn how to use, it is a good option for those who don’t want to invest significant time in understanding a new software. It can also generate different types of content, integrate with other platforms, and allow multiple users to collaborate, making it a useful tool for project management and execution.

However, the tool as a whole is not specifically designed for business planning, so it can be limited in terms of data analysis and industry-specific details.

Up to 2,000 words can be generated for free; after that, paid plans start at $20 per month.

Upmetrics

As a dedicated business planning tool, Upmetrics promises to simplify business planning with its AI-powered insights. It includes an AI assistant, a business plan builder with over 400 customizable sample plans, and a pitch deck creator. It also offers financial forecasting and templates to suit different business models.

Upmetrics can both generate and edit text, and users can adjust the tone of the content. It also offers users the ability to collaborate on documents, design cover pages, and drag and drop sections into the template.

Potential downsides might include privacy concerns around sharing financial and other business data, as well as relatively limited template options and customization options.

Upmetrics plans start at $7 per month.

AI Tools for Business Plans
AI Tool	Pricing	Description	Text Generation	Text Editing	Collaboration	Business Plan Templates	Financial Projections
ChatGPT	Free; paid plan is $20/month	All-purpose generative AI chatbot	✓	✓
Notion AI	Free; paid plan starts at $8/month	AI-enabled workspace tool	✓	✓	✓	✓
ProAI	Paid plan starts at $114/year	Dedicated AI business planning tool and business plan generator	✓	✓		✓	✓
Simplified	Free for up to 2,000 words; paid plan starts at $20/month	AI-enabled workspace tool	✓	✓	✓	✓
Upmetrics	Paid plan starts at $7/month	Dedicated AI business planning tool and business plan generator	✓	✓	✓	✓	✓

How to Use AI in Business Planning

AI can be used for business planning at many different stages, starting from when the initial vision for the business is being created. Here’s how to incorporate AI into your business planning.

1. Write a business plan with an AI business plan generator. Whether you use one of the generators mentioned above or one of the many other tools available online, AI-enabled writing programs can provide anything from a draft outline to a comprehensive document to work from. However, don’t rely entirely on AI for a finished product; it’s important to review and check your business plan for things like accuracy, tone, and flow.
2. Use AI-powered automation to improve your business operations. To optimize the day-to-day operating processes of your business, pinpoint any workflows that include manual, rote, or repetitive tasks, such as note taking, data entry, or transcription. Then seek out AI automation tools to save time, make the tasks more efficient, and reduce errors.
3. Analyze your business data with AI. As your business starts to generate data, whether from leads, orders, sales, customer interactions, social media, or finances, AI can be helpful in capturing and analyzing it. In turn, this data can provide crucial information for making decisions about the future of the business in terms of both offerings and growth opportunities.
4. Capture insights with AI to forecast, plan, and set goals. Predictive AI models can be a huge asset in business planning, helping entrepreneurs draw conclusions about future states of business based on historical and current data. While this has obvious applications for business financials, it can also be useful for consumer trend forecasting, customer service, and logistics and inventory planning.

Ethical Considerations in AI-Driven Business Planning

As with any AI application, using AI for business planning is not without ethical concerns.

It’s important to be transparent about the use of AI to both stakeholders and customers in order to maintain relationships of trust and accountability. It’s good practice to make it clear to customers when they are interacting with AI, as with an AI chatbot or a piece of writing generated by AI, for example.

It’s also important to communicate with stakeholders, employees, and decision makers about the reasons for choosing to implement AI in the business and how it will be used, monitored, and maintained so that the appropriate policies and oversight are put in place.

Understanding and communicating how any AI model is programmed and why is also an important accountability and ethics consideration. Many AI models have been shown to reproduce patterns of bias and discriminatory behavior when it comes to gender, race, and other aspects of identity. For example, fintech software algorithms have been shown to replicate historical behaviors of discrimination against marginalized and racialized individuals because those algorithms learn from historical datasets.

Future Trends of AI in Business Planning

As AI models improve and their applications become more mainstream, expect to see AI becoming a feature in all kinds of programs, from financial software to go-to office productivity suites. This will offer both easily accessible information and automation.

Businesses will be able to create ever more personalized offerings for their customers, thanks to AI integrations in CRM software that can draw insights from large volumes of customer data.

AI tools are also changing the competitive landscape of business and entrepreneurship by making previously specialized creative and technical skills like writing, designing, and coding more accessible.

Companies that nimbly adopt and develop strategies to use AI may unlock a significant advantage, though soft skills and a human touch remain as important as ever. A 2023 survey by software company Redpoint Global found that although 73% of consumers believe there is a positive potential for AI in customer experience, 77% of consumers believe that positive customer experiences still require human interaction.

Can I Use ChatGPT to Write a Business Plan?

Among other types of content, ChatGPT can help users quickly generate a business plan by providing ideas, drafts, outlines, or suggestions. However, it’s advisable to review and validate any information that it provides to ensure it’s up to date and accurate.

Are There Free AI Tools for Writing Business Plans?

Many free generative AI tools, like ChatGPT, can assist in writing business plans. Notion and Simplified are examples that include business plan templates for specific types of businesses.

What AI Tools Can Be Used for Business Strategy?

Upmetrics and ProAI are two dedicated business planning AI tools that can provide research, strategy, financial forecasting, and presentation templates.

What Is the Future of AI in Business Strategy?

Areas where AI could further transform business strategy in 2025 include:

• Using decision intelligence to help companies augment existing business intelligence capabilities. Decision intelligence is the application of AI and other technologies to enhance decision making across all areas of a business.
• Using generative AI to transform content marketing and creative processes for businesses. Generative AI is a type of artificial intelligence that can produce content such as audio, text, code, video, images, and other data.
• Using swarm learning to improve performance across departments of a business. Swarm learning is decentralized machine learning that enables peer-to-peer collaboration without sharing data.
• Using embedded analytics to improve decision making across every business area. Embedded analytics is data analysis technology integrated directly into a business software application, platform, or web portal instead of being a separate tool.

The Bottom Line

AI can contribute to better efficiency in business processes, identify opportunities for growth, and provide insights by analyzing large volumes of data, making it a great asset to business planning. However, it’s worth taking a step back before implementing any AI tool in business planning to assess where and how AI can have the most impact.

Just like any other digital tool or technology, AI should be used to complement and bolster existing and future workflows, and should be implemented with an eye to both strategy and accountability.

From selling soft drinks to making billions of dollars

Reviewed by JeFreda R. Brown

Warren Edward Buffett, the legendary value investor, turned an ailing textile mill into a financial engine that powered what would become the world’s most successful holding company.

Known as the “Oracle of Omaha” for his investment prowess, Buffett has amassed a personal fortune of over $150 billion, according to Forbes. He inspires legions of loyal fans to make a yearly trek to Omaha, Neb., for an opportunity to hear him speak at Berkshire’s annual meeting, an event ironically dubbed “Woodstock for Capitalists.”

Key Takeaways

• Warren Buffett started investing at a young age, buying his first stock at age 11 and his first real estate investment at age 14.
• Buffett studied under the legendary value investor Benjamin Graham while pursuing a business degree at Columbia University (Harvard had rejected him).
• Buffett bought the ailing Berkshire Hathaway textile company, later to be used as a vehicle to acquire other businesses and make investments.
• Buffett is a true value investor, buying underpriced but solid companies and holding them for the long term.
• Buffett has always been a philanthropist and has pledged the vast amount of his personal fortune of more than $150 billion to the Bill & Melinda Gates Foundation upon his death.

Early Life and Education

Buffett was born to Howard and Leila Buffett on August 30, 1930, in Omaha, Nebraska He was the second of three children, and the only boy. His father was a stockbroker and four-term U.S. congressman. Howard Buffett was a member of the Republican party and espoused libertarian views.

Making money was an early interest for Warren, who sold soft drinks and had a paper route. When he was 14 years old, he invested the earnings from these endeavors in 40 acres of land, which he then rented for a profit.

At his father’s urging he applied to the University of Pennsylvania and was accepted at age 16. Buffett left that university after two years, transferring to the University of Nebraska.

Upon graduation his father once again convinced him of the value of education, encouraging him to pursue a graduate degree. Harvard rejected Buffett, but Columbia University accepted him. Buffett studied under Benjamin Graham, the father of value investing, and his time at Columbia set the stage for a storied career, albeit one with a slow start.

Upon graduation, Graham refused to hire Buffett, even suggesting that he avoid a career on Wall Street. The reason was that Graham himself had been rejected by Wall Street firms, which he believed was because he was Jewish.

Thus, Graham made it a policy only to hire Jews for his Wall Street company. Buffett returned to Omaha to work at his father’s brokerage firm. He married Susan Thompson in 1952, and they started a family. After three years Graham had a change of heart and offered Buffett a job in New York.

Note

Unlike his mentor Benjamin Graham, Buffett wanted to look beyond the numbers and focus on a company’s management team and its product’s competitive advantage in the marketplace when considering an investment.

Notable Accomplishments

Once in New York, Buffett had the chance to build on the investing theories he had learned from Graham at Columbia. Value investing, according to Graham, involved seeking stocks that were selling at an extraordinary discount to the value of the underlying assets, which he called the “intrinsic value.” Buffett internalized the concept but had an interest in taking it a step further.

In 1956, he returned to Omaha, launched Buffett Associates, and later purchased a house. In 1962, he was 30 years old and already a millionaire when he joined forces with Charlie Munger, whom he first met in 1959.

Their collaboration eventually resulted in the development of an investment philosophy based on Buffett’s idea of looking at value investing as something more than an attempt to wring the last few dollars out of dying businesses.

Along the way, the pair purchased Berkshire Hathaway (BRK.A), a dying textile mill. What began as a classic Graham-style value play became a longer-term investment when the business showed some signs of life.

Cash flows from the textile business were used to fund other investments. Eventually, the original business was eclipsed by the other holdings. In 1985, Buffett shut down the textile business but continued to use the name, eventually growing Berkshire Hathaway into a multi-billion-dollar holding company.

How Buffett Grew Berkshire Hathaway

When Buffett first bought shares in Berkshire Hathaway in 1962, the struggling textile firm was facing low-cost competition that threatened to push it under. Entranced by the stock’s low cost compared to its book value and net working capital, he purchased a controlling interest in 1965.

Shares were trading around $8 when Buffett bought the stock, rising to almost $20 in the late 1960s, when he became CEO. As of September 2024, shares in Berkshire Hathaway Class A stock trade at more than $679,000.

How did he do it? Buffet used the textile company’s profits to buy other companies, including the life insurance firm National Indemnity. The useful thing about life insurance companies, Buffett found, is the float: the capital available after premiums have been paid but before claims are paid out.

Buffett could use this float to invest further, buying securities and other businesses that could generate more money to be invested in more firms and more shares. He closed his investment partnerships by 1969, offering Berkshire Hathaway shares in lieu of cash, and bought insurance companies as wholly owned subsidiaries under the Berkshire umbrella.

He bought See’s Candies in 1972, a purchase that generated more cash flow for investing. He also invested in American Express, Bank of America, Coca-Cola, and Apple, among many others, focusing on solid brands and businesses with a secure economic moat.

Buffett bought for the long haul, preferring to buy and hold his investments, which tended to terrifically appreciate in value over time. He chooses firms with innovative, shareholder-focused management and high profit margins, seeking solid fundamentals when they’re available at a discount.

Buffett closed the last Berkshire Hathaway textile mill in 1985, growing the company steadily as a conglomerate instead. As of September 2024, Berkshire Hathaway owns more than 65 companies outright, with a market cap of more than $975 billion.

Wealth and Philanthropy

What do you do with your money when you are the world’s most successful investor? If you’re Warren Buffett, you give it away. Buffett stunned the world in June 2006 when he announced the donation of the vast majority of his wealth to the Bill & Melinda Gates Foundation, which focuses on world health concerns, U.S. libraries, and global schools, among other issues. It is one of the world’s largest transparent charities.

Buffett’s donations will come in the form of Class B shares of Berkshire Hathaway stock. His total donation to the Gates Foundation is 10 million shares. It will be given out in 5% increments until Buffett’s death or until the foundation fails to meet the spending stipulation or the stipulation that either Bill or Melinda Gates remains actively involved in the foundation’s activities. Buffett’s 2006 donation was 500,000 shares, valued at approximately $1.5 billion.

In June 2022, the foundation’s CEO, Mark Suzman, sent an email to the employees of the Bill & Melinda Gates Foundation. The email was also shared on the foundation’s website that Buffett’s contributions since 2006 have totaled more than $36 billion.

The Wall Street Journal reported that his 2024 donation of 9,930,357 shares of Berkshire Hathaway stock amounted to $4 billion. Buffett expects stock price appreciation to increase that amount over time.

Note

In 2024, another stock donation of 695,122 shares was evenly divided among three charities run by Buffett’s children. An additional 993,035 shares went to a foundation run in honor of his first wife.

While the enormous size of the donation to the Gates Foundation was certainly a big surprise, Buffett’s charitable endeavors are nothing new. He’d been giving money away for 40 years through the Buffett Foundation, eventually renamed the Susan Thompson Buffett Foundation, which has one purpose: It offers college scholarships to low-income students in Nebraska.

Buffett always planned to give the bulk of his wealth to charity but initially insisted that that would occur posthumously. The change of heart is quintessential Buffett—rational, decisive, maverick, and blazing a path all his own. “I know what I want to do, and it makes sense to get going,” he famously said upon making the change.

Buffett’s Investing Strategy

Buffett’s investment philosophy is based on the principle of acquiring stock in what he believes are well-managed, undervalued companies. When he makes a purchase, his intention is to hold the securities indefinitely. Coca-Cola, American Express, and Costco all met his criteria and have remained in Berkshire Hathaway’s portfolio for many years.

In many cases he purchased the companies outright, continuing to let their management teams handle the day-to-day business. A few of the better-known firms that fit into this category include See’s Candies, Fruit of the Loom, Dairy Queen, Pampered Chef, Heinz, and GEICO.

Buffett’s mystique remained intact until technology stocks became popular. As a resolute technophobe, Buffett sat out the incredible run-up in technology stocks during the late 1990s.

Sticking to his guns and refusing to invest in companies that didn’t meet his mandate, Buffett earned the scorn of Wall Street experts and was written off by many as a man whose time had passed.

The tech wreck that occurred when the dotcom bubble burst bankrupted many of those experts. Buffett’s profits doubled.

Personal Life

Despite a net worth measured in billions, Warren Buffett is legendarily frugal. He still lives in the five-bedroom house he bought in 1958 for $31,500, drinks Coca-Cola, and dines at local restaurants, where a burger or a steak is his preferred table fare.

For years he eschewed the idea of purchasing a corporate jet. When he finally acquired one, he named it the Indefensible—publicly recognizing his criticism about money spent on jets.

Buffett married Susan Thompson in 1952. They separated in 1977 but remained married until her death in 2004. They had three children, Susie, Howard, and Peter. Thompson introduced her husband to Astrid Menks, a waitress, and Buffett and Menks began living together in 1978. They were married in August 2006.

Legacy

Considered to be the greatest investor of all time, Buffett has profoundly affected finance, business, philanthropy, investing, and more, and the principles he has shared throughout his life have shaped the minds of many entrepreneurs, investors, and others.

As chairman and CEO of Berkshire Hathaway, Buffett turned a small company into a multi-billion dollar conglomerate, acquiring some of the most prominent businesses in the U.S. His investment philosophy, rooted in value investing (buying undervalued stocks with the potential for long-term growth) has become a key strategy for investors around the world.

Buffett has maintained a folksy character, doling out pearls of wisdom when he speaks, and maintaining a frugal life, living in a home he purchased decades ago. His modest lifestyle despite his immense wealth has cemented him as a person of humility.

This character can also be witnessed through his philanthropic efforts, particularly through The Giving Pledge, which he co-founded with Bill and Melinda Gates, where he has promised to donate most of his wealth and suggests other people of such means do the same.

His belief in long-term investing, living simply, and positive business ethics have earned him a glowing reputation, one that will continue to influence people for decades to come.

How Did Warren Buffett Amass His Fortune?

Buffett’s fortune was built by highly researched and timely purchases of undervalued stocks and companies, which he would then hold for the long term. For most of the companies he bought, he let existing management remain in place, as they had obviously done a good enough job to make their company attractive to Buffett in the first place. He has been in stocks for the long haul, holding companies such as Coke and American Express for decades. (He still owns both.)

What Are Some of Buffett’s Pearls of Wisdom?

“If you aren’t willing to hold a stock for 10 years, don’t even think about holding it for 10 minutes,” wrote Buffett in 1996 in a letter to Berkshire Hathaway shareholders. Another famous quote, part of a 2008 opinion piece in the New York Times, is, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Indeed, Buffett is well known for his many investing aphorisms, which always come back to the simple rules of value investing.

What Does Warren Buffett Plan to Do With His Fortune?

The simple answer is give it away, which he plans to do by making mega-donations, primarily to the Bill & Melinda Gates Foundation, as he has established a great rapport with both of them and shares and respects their philanthropic causes, such as world health and women’s rights. Warren Buffet is legendarily generous in giving to causes he deems worthy, so it is no surprise he would give away the vast majority of his wealth to causes in need of funding.

The Bottom Line

The future looks to hold an increase in the amount of money that Buffett will continue to give. As he told BBC News in 2006: “I am not an enthusiast of dynastic wealth, particularly when the alternative is six billion people having much poorer hands in life than we have, having a chance to benefit from the money.”

Buffett has made his fortune by relying on the time-tested rules of value investing, meaning finding high-quality companies at fair market valuations. He then holds these investments for the long term, some indefinitely, always allowing the power of compounding to work its magic.

Fact checked by Suzanne Kvilhaug
Reviewed by JeFreda R. Brown

Cryptocurrencies have experienced intense growth since Bitcoin launched in 2009—both in market capitalization and public awareness. So it should come as no surprise that many retirement investors are wondering if crypto has a place in their 401(k)s or similar employer-sponsored retirement plans.

The momentum in crypto may be challenging for 401(k) plan administrators. With some providers now making it possible to include crypto among investments, plan fiduciaries must decide whether the asset class is a good choice to help people save for their retirement nest eggs.

Key Takeaways

• Retirement savers are interested in adding cryptocurrencies to their 401(k)s.
• Plan administrators should weigh the pros and cons of including cryptocurrencies in 401(k) plans.
• The U.S. Department of Labor has guided 401(k) plan investments in cryptocurrencies, indicating that plan fiduciaries should exercise caution.
• Plan administrators can add cryptocurrency as an investment option to their 401(k) plans, and some providers offer or plan to offer crypto access.
• Employers should implement strategies to mitigate risks associated with crypto investments and ensure compliance with regulations and fiduciary responsibilities.

Cryptocurrency Legalities and Regulations

Qualified retirement plans like 401(k)s must meet the minimum standards under the Employee Retirement Income Security Act (ERISA). The law does not specify which assets retirement investors can or cannot include in their 401(k), including cryptocurrencies.

Instead, the federal law imposes fiduciary responsibilities on the people who make decisions about retirement plans. This means that plan administrators, trustees, and the plan’s investment committee members must perform their due diligence and act in the best interest of the plan participants.

It’s up to the people who hold these fiduciary roles to determine whether it’s prudent to make crypto and other digital assets available to plan participants. The regulatory uncertainty surrounding cryptocurrency regulations could make it difficult for plan administrators to grapple with this question. But, there has been little progress on meaningful legislation to clarify the rules related to digital assets.

In March 2022, the U.S. Department of Labor (DOL) issued guidance for retirement plan decision-makers who may consider crypto’s place in retirement plans. In a strongly worded Compliance Assistance Release, the DOL advises “plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Note

A 2022 survey by Charles Schwab showed that 32% of 401(k) participants wish they could invest in cryptocurrencies through their plan. The interest was more pronounced among younger generations, with nearly half of millennial and Gen Z respondents expressing the desire to spice up their retirement portfolio with crypto; however, a 2023 survey showed that investments in crypto for retirement savings were down from 25% in 2022 to 14% in 2023.

Advantages and Disadvantages of Cryptocurrencies in 401(k) Plans

Plan administrators and other fiduciaries must weigh the pros and cons of offering participants cryptocurrency as an investment option in their retirement accounts. Let’s consider the potential benefits and risks of providing retirement investors access to cryptocurrency assets in their 401(k)s.

Advantages

Cryptocurrency enthusiasts argue that it has the potential for large returns that would otherwise be impossible with traditional investment types available through 401(k) plans. As such, 401(k) participants who manage to capitalize on an upswing in the crypto market could receive a nice boost toward their retirement goals.

Other benefits of adding crypto to retirement plans like a 401(k) include:

• The outperformance of cryptocurrencies when compared to traditional assets like stocks and bonds over the past decade
• Opportunities for growth and flexibility as cryptocurrencies become more accepted and are adopted as investment options for retirement plans

Disadvantages

The DOL’s statement highlights numerous concerns about the suitability of crypto as a retirement investment. In addition to risks relating to fraud, theft, and loss, the agency remains concerned that:

• These assets are speculative and volatile.
• Plan participants could lack the knowledge they need to make informed decisions about crypto.
• Cryptocurrency investments also present custodial, valuation, and regulatory concerns for those responsible for protecting the interests of plan participants.

Pros

• Potential for high returns

• Outperforms compared to typical plan assets

• Growth opportunity through potential increase in acceptance

• Flexibility for participants to select from broader range of investment choices

• Increasing availability from 401(k) plan providers

Cons

• High volatility and speculative nature

• Potential for fraud, theft, and loss

• Plan participants aren’t versed enough to determine valuations and make informed decisions

• Custodial issues and risks related to storing crypto assets

• Uncertain and evolving regulatory environment

Adding Cryptocurrencies to a 401(k) Plan

After carefully weighing the risks of offering cryptocurrency assets to retirement investors against the potential rewards, 401(k) plan administrators who decide to move forward have a couple of choices for making digital assets available to participants.

Administrators can generally opt to include cryptocurrency within the plan’s core investment options or through a setup similar to a self-directed brokerage window.

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

Including cryptocurrency on the core investment menu makes these assets available to all participants in the plan. The potential drawback is that ERISA requires plan advisors to verify the suitability of any investments included on the core menu. In other words, if a crypto asset included on a plan’s core menu is determined to be imprudent, then plan fiduciaries are at risk of liability.

The other possibility is offering crypto through a self-directed window—a separate account that participants can open within their retirement plan to access a broader array of assets.

Making available a self-directed option allows participants greater freedom to allocate their retirement portfolios, providing access to funds not on the core menu, individual stocks and bonds, and cryptocurrency assets (if they’re available through the 401(k) provider).

Important

Plan administrators may allow investors to invest in crypto-related exchange-traded funds (ETFs) in their 401(k). In January 2024, the Securities and Exchange Commission (SEC) approved 11 Bitcoin ETFs that began trading on exchanges like the NYSE Arca and Nasdaq.

Mitigating Crypto Risks and Ensuring Compliance

The DOL advised 401(k) fiduciaries about approaching crypto with “extreme care.” Fortunately, there are a few things administrators can do to limit risk and ensure their plan remains compliant with all relevant rules and regulations.

One important measure is to leave the choice of whether to allocate retirement funds to crypto assets entirely up to the plan participants.

As such, they should always be available as a plan option, and administrators should steer clear of making riskier assets a required or automatic investment choice. Offering crypto through a self-directed window rather than within the core menu may be one way of clarifying that investing in these assets is not obligatory.

Another way to mitigate risk is to institute limits on the percentage of a participant’s portfolio that can be allocated to cryptocurrency assets. This lets retirement investors benefit from the diversification provided by crypto without exposing an unadvisable portion of their investments to heightened levels of risk.

The choice of plan provider can also be a key factor in ensuring compliance. Plan fiduciaries who wish to offer crypto investments could benefit from working with an experienced provider in making digital assets available to retirement investors.

Knowledgeable providers can offer educational materials to help participants make more informed decisions about crypto, and they can work with plan fiduciaries to install the proper guardrails to protect retirement investors against ill-advised or excessively risky allocations.

What Are the Potential Benefits and Risks of Including Cryptocurrencies in 401(k) Plans?

Cryptocurrency investments could benefit retirement investors by diversifying their portfolios and exposing them to the possibility of high returns. However, holding cryptocurrencies in a retirement account also exposes the investor to the volatility and instability of these digital assets.

The regulatory ambiguity surrounding cryptocurrencies and the possibility of more restrictive rules in the future also raise questions about the suitability of these assets for long-term wealth accumulation, which is central to the goals of retirement investors.

What Guidance Has the U.S. Department of Labor Provided Regarding 401(k) Plan Investments in Cryptocurrencies?

The U.S. Department of Labor issued a Compliance Assistance Release in March 2022 advising 401(k) plan administrators and other plan fiduciaries to adopt an extremely cautious approach when considering whether cryptocurrency assets constitute appropriate retirement investments.

How Can Plan Administrators Add Cryptocurrency as an Investment Option to Their 401(k) Plans?

Retirement plan administrators can either add cryptocurrency assets to the menu of core investment options or initiate or expand a self-directed window that allows participants the freedom to choose cryptocurrency investments. Both of these options depend on the services and offerings of the plan provider.

What Strategies Can Employers Implement to Mitigate Risks Associated With Crypto Investments in 401(k) Plans?

Employers and retirement plan administrators who decide to offer cryptocurrency investments can take several steps to limit the associated risks. Plan fiduciaries should stress that cryptocurrency allocations remain entirely optional, and there may be a benefit to providing participants with educational resources about any available assets.

Setting a limit on the percentage of a retirement portfolio that can be allocated to cryptocurrency can also be an effective guardrail, and working with plan providers who are experienced in offering crypto assets to retirement investors can help ensure a smoother process.

The Bottom Line

Many investors may be interested in including cryptocurrency assets within their retirement portfolio. Still, retirement plan administrators have the responsibility to tread carefully regarding the investment choices that they make available.

Due to the liability administrators inherit when creating plans, they should exercise caution regarding including cryptocurrency in retirement plans and highlight the volatility and other risks associated with the asset class for participants.

Plan administrators should carefully weigh these risks before allowing participants to invest in cryptocurrency. Administrators who decide to offer crypto investments can put some safeguards in place, like allocation limits and enhanced educational resources, to reduce risks and remain compliant with regulations.

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Day trading can be profitable for a select few, but the data suggests most traders will lose money.

Ever watched a TV series or a movie where a trader appears to make millions with just a few clicks of a mouse? That’s the Hollywood version of day trading—buying and selling securities within a single trading day. It’s easy to see why this approach has captured the imagination of so many people-who wouldn’t want to work market hours from home, be their own boss, and potentially earn millions?

But what’s the reality behind these depictions of success? Day trading can indeed be profitable, but it’s exceptionally challenging—and most people who try it end up losing money.

According to both academic and industry research, the success rate in day trading is quite low. Depending on the source, only around 3% to 20% of day traders make money. But that 20% estimate probably has as much to do with the time period studied—the dotcom bubble. It’s hard to know for sure, but it’s probably fair to say that up to 95% of day traders lose money.

So is day trading still worth pursuing? This article cuts through the hype to provide a practical guide for those considering entering this high-stakes arena.

Key Takeaways

• Day traders attempt to profit from intraday price moves and rarely hold positions overnight.
• The vast majority of day traders lose money.
• The factors that determine the potential upside of day trading include the limited amount of capital needed to get started, strategies used, markets chosen, and luck.
• Successful day traders are disciplined and stick with their strategy; they manage risk by using stop-loss orders and establishing profit-taking points.

Understanding Day Trading

Unlike investors who commit to long-term buy-and-hold positions or swing traders who might hold positions for days or weeks, day traders look to turn quick, small profits in a single trading day, liquidating all positions before the market close to protect against risks that could materialize overnight. They can hold positions for hours, minutes, and even seconds. Some trade once a day, while others can trade dozens or even hundreds of times a day.

Day traders attempt to exploit small price changes in highly liquid assets such as stocks, currencies, futures, or options. They use technical analysis as the basis of their trading system and leverage helps them increase their potential earnings (but it can also amplify their losses). Successful day trading demands in-depth market knowledge, swift decision-making, and access to real-time data.

Consider a hypothetical example: A day trader might start their morning looking at a stock that appears to be gapping higher on positive earnings news. They buy 500 shares at $50 and hope to sell at $51 (for a $500 profit). They set a stop-loss at $49.50. After holding for several minutes and seeing the price rise to $50.75, they might decide to exit with a $375 gross profit (before fees and taxes) before momentum fades.

Traders using different systems might trade make dozens or even hundreds of transactions in a day. This is why regulators created specific rules for so-called “pattern day traders“—anyone executing four or more day trades within five business days—requiring them to maintain at least $25,000 in their margin trading accounts.

Challenges and Risks

But why is day trading so challenging? First, it’s extremely difficult to predict price movements in such a short-term time frame. While swing traders or position trades can use established trends, and the buying of large institutions, to profit, intraday price movements are often driven more by news and emotion than trends.

Second, even a winning system will lead to consistent losses in the hands of a day trader with poor control of their emotions and impulses. The emotional and psychological biases inherent in human decision-making further complicate day trading, when important decisions must be made quickly.Overconfidence can lead to excessive risk-taking and overtrading, while loss aversion leads to poor decisions like selling winners to early and holding on to losers for far too long.

With the rise of algorithmic, high-frequency trading, amateur day traders are also now competing against professional firms with virtually unlimited resources and advanced technology—all while battling their own psychological biases like fear and greed.

Even if a trader has developed a winning system and mastered their emotions, they still have to overcome slippage and transaction costs and then pay taxes on whatever profits are left. Will they make enough money to live on and continue trading? Probably not.

Day Trading vs. Long-Term Investing
Aspect	Day Trading	Long-Term Investing
Time horizon	Seconds, minutes, hours	Months, years, decades
Decision drivers	Technical indicators, momentum, breaking news	Stock fundamentals, diversification
Transaction frequency	High (usually multiple times daily)	Low
Capital requirements	$25,000 minimum)	Can start with any amount
Tax implications	Short-term capital gains (higher than long-term rate)	Long-term capital gains

Is Day Trading Profitable?

While a small number of traders show exceptional success, the uncomfortable truth about day trading profitability is revealed in various academic studies and broker data:

• According to a study by the Brazilian Securities and Exchange Commission, approximately 97% of 1,600 day traders who persisted for more than 300 days lost money.
• One study of day trader profitability put their average net annual return at -$750 (a loss).
• A multi-year analysis of day traders in Taiwan found that a majority lose money in any given year, and less than 1% of the most profitable day traders from the prior year go on to earn positive abnormal returns the next year.
• Active day traders in the U.S. underperform a value-weighted index by an average 10.3% annually.
• Day traders engaging in more frequent and larger trades are more likely to suffer losses.
• An SEC report looking at records of 12 forex brokerages revealed around 70% of retail FX day traders lost money each quarter.

These dismal statistics point to an undeniable conclusion: The evidence is overwhelming that the vast majority of day traders will lose money.

Factors Influencing Day Trading Profitability

Despite the inherent challenges and poor outlook for day trading as a lucrative full-time job, there are certain factors that can influence the probability of success.

For those still determined to try day trading, several tools and resources are essential for getting started:

Factors that Help

1. Capital adequacy: Sufficient starting capital provides a buffer against inevitable losses and allows proper position sizing. Pattern day trader rules require a minimum balance of $25,000 in a margin account, but a buffer is needed to make trades to account for initial losses.
2. Knowledge and skills: A deep understanding of market mechanics, price action, and trading psychology is needed. Books, courses, and mentorship programs from legitimate trading educators are helpful.
3. Disciplined approach: Stick to an objective, predefined trading plan. Maintain focus and diligence. Day traders are only human and like nearly everyone else they can succumb to emotional biases with money on the line. Some of those biases include fear of missing out (FOMO), confirmation bias, overconfidence, loss-aversion, and anchoring bias.
4. Risk management: Limit potential losses with stop-loss orders or trailing stops. Set daily loss limits and keep backups and logs.
5. Technology and tools: Use professional-grade trading platforms, real-time data, and analytical software with reliable internet connections and backups. Many online brokers today offer reliable, low-latency platforms with advanced charting capabilities, order-execution tools, and market-depth information.
6. Market conditions: More liquid, actively-traded securities will have tighter bid-ask spreads.

Important

Emotional control and adherence to a well-defined trading plan are vital for day trading success.

Developing a Trading Strategy

A robust day trading strategy should include:

1. Entry and exit rules: Have specific, objective criteria for initiating and closing positions.
2. Position sizing: Follow established guidelines for determining appropriate position sizes based on account size, risk tolerance, and expected drawdowns.
3. Loss parameters: Fix maximum loss amounts per trade and per day.
4. Time frames: Understand the specific time frames you’ll analyze and trade within.
5. Securities selection: Become familiar with the criteria you’ll use for selecting the strategies and securities you’ll trade, whether stocks, futures, or forex pairs.

Most brokers and platforms today offer demo accounts for making “paper trades” to help beginning traders test their trading strategies. Before risking real money, new traders should invest time in simulation and paper trading to develop and validate their approach.

The Bottom Line

Day trading offers the allure of quick profits but comes with enormous risks. Indeed, the odds are not in the average day trader’s favor. Success requires substantial capital, sophisticated tools, advanced knowledge, psychological discipline, and effective risk management. Even for those with these advantages, only a minority of day traders achieve consistent profitability.