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Personal finance content, original research studies and data visualizations. At SmartAsset we write content and develop tools to help people make complex financial decisions.

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All About FINRA (Financial Industry Regulatory Authority)

Investing can be an intimidating endeavor with all its terminology and the complexities of the market. But you shouldn't let that stop you. Investing provides a great way to grow your money. There are some risks associated with investing due to the volatility of the market to be sure. However, you can count on certain agencies, laws and financial advisors to help you succeed. That's where FINRA comes in.

What Is FINRA?

After the 1929 stock market crash, it became clear that the securities industry needed more regulation. In 1939, the National Association of Securities Dealers (NASD) was created to oversee all broker-dealers and registered representatives in the country. Then in 2007, the U.S. Securities and Exchange Commission (SEC) approved the formation of FINRA, or the Financial Industry Regulatory Authority. This new agency would serve as a mix between the NASD and the New York Stock Exchange's regulatory branch.

Now, as a private (non-governmental) agency, FINRA regulates the securities industry, ensuring honesty and fairness for investors. The agency oversees dealers, brokers and all other public investors.

What Does FINRA Do?

FINRA oversees and regulates brokerage firms, stock brokers and exchange markets. As a private, non-profit agency, it mandates how investors and securities participants can behave and interact. Should any participants be non-compliant, the agency has the authority to discipline those involved. At its center, FINRA works to protect investors and maintain market integrity.

First, FINRA sets the rules that brokers must follow. These rules detail ethical and professional practices to prevent fraud and bad practices. FINRA regularly reviews brokers to enforce these regulations. Agency examiners will even review ads and brochures to ensure they comply. Further, brokers and firm representatives must regularly report their activities to FINRA.

If brokers break any rules, FINRA can fine, suspend or bar them from the industry. FINRA will then record any and all disciplinary actions on its website. That way, when you're looking for a broker, you can check if it has a record.

FINRA also works to maintain market transparency. On average, the organization processes 37 billion transactions a day. In 2016 alone, it referred more than 785 fraud and insider trading cases to the SEC. With technology and country-wide personnel, FINRA regularly looks for signs of unfair market advantages and fraud.

FINRA does provide forums to deal with disputes. Should you experience an issue with a broker, you can file a dispute with FINRA. Experts can then help resolve the issue.

Lastly, FINRA strives to educate investors through public resources on its website. For one, you can learn more about the financial industry and how to identify investment fraud. You can also make use of their tools to compare costs of different funds, weigh investment risks, assess possible scam and more. You can also seek funding for local financial educational programs.

FINRA Licensing

To maintain its goals of financial education and high standards, FINRA administers licenses for brokers-dealers. Any company or individual who wants to sell securities in America needs to register with FINRA to get a license. To obtain the license, a candidate must pass a set of exams and continuing education programs. Both will cover all aspects of the securities industry to ensure that the license and those who hold it maintain the highest standards.

As FINRA members, brokers and firms must abide by the rules set by the agency. They must also pay an annual membership fee. This fee helps keep the agency running, along with any disciplinary fines it might charge.

Brokers that aren't registered with FINRA can be forced to pay fines, face legal penalties and even close down if necessary. Essentially, the agency serves as the gateway for individuals and firms to participate in the investment industry.

The Takeaway

FINRA's main goal is to keep the markets fair for investors by holding brokers to high ethical standards. It plays a huge role in monitoring America's financial system, with no extra cost to taxpayers as a private agency. So even if investing seems scary from afar, you can trust that FINRA can look out for you and your best interests.

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What Is the Minimum You Need to Invest for a Mutual Fund?

Whether you're new to investing or have been doing it for years, mutual funds offer a great way to invest your money. It allows you to invest in multiple stocks and bonds without the hassle of choosing and buying each individually. Plus, mutual fund companies can do all this work for you. While convenient, mutual funds aren't always accessible to all investors due to their potentially high minimums.

What Is a Mutual Fund?

When you invest in a mutual fund, you put a fund company in charge of buying your shares and bonds. This serves as an alternative to buying various individual stocks on your own. You might already be familiar with mutual funds, through your employer-sponsored 401(k). In that case, your employer’s chosen fund company manages your and your coworkers’ 401(k) investments. That way, you don’t have to do all the calculations yourself to try and optimize your earnings.

Mutual funds do require you to choose the fund you want. Mutual funds include stocks, bonds, money market and index funds. Each mutual fund will hold a different mix of these investment subsets, with some containing only stocks, for example, while other balanced funds offer a more diversified mix.

When choosing your mutual fund, it helps to take into account your risk tolerance for investing and your savings goals timeline. For example, let’s say you’re in your 20s and have just started your 401(k) mutual fund. You have a long way to go until retirement, so you can afford to be more aggressive with your investments. If you experience some losses, you have plenty of time to make it up. But of course, if you’re not the aggressive type, you can always choose a safer investment approach.

Average Minimum Investment for Different Mutual Funds

The downside to mutual funds is that they can carry some high minimum investment requirements, especially for a beginner investor. On average, you can be expected to front a minimum of $2,500 to open a mutual fund. However there are funds that require amounts as little as $500. Because of this large difference in minimum investment amounts, it helps to shop around before selecting a mutual fund. Typically, lower minimums will work better for younger investors who don’t yet have thousands of dollars to spare. More experienced investors may still want to take advantage of the low minimums to better spread out their investments through multiple funds.

Imposing minimums allows the mutual fund to keep the cash flowing and daily management running. You can sometimes find a mutual fund that offers more investment perks with a higher minimum, although the higher minimum itself isn’t required for all investors. You may also see lower minimums for different types of accounts like IRAs. 401(k) mutual funds do not require a minimum.

Minimums at Common Mutual Fund Companies

Vanguard - $3,000

Fidelity Investments - $2,500

Charles Schwab - $0

TD Ameritrade - $0

Should You Invest the Minimum?

A good thing about mutual fund minimums is that the exact amount varies and depends on the fund manager. This means that not every manager will require a high amount. Again, this is when it comes in handy to shop around for investment managers and mutual funds before making your pick. That way, you won’t end up forced to meet a high minimum when you don’t actually have the funds to spare.

If you are able to meet a mutual fund’s minimum and you like the mix of funds you’ll get, then you should invest at least the minimum. Investing more money means you have more assets to allocate and more room for growth. The minimum is certainly a good place to start. If anything, whether you’re a beginner or seasoned investor, you can add more money to the fund as you go along.

What Are Alternatives to Mutual Funds?

No need to worry if you wanted to get started with mutual fund investing, but can’t meet the minimums. You have other options. One such option is working through an online brokerage. These allow you to make your own stock and exchange-traded fund (ETF) trades, which cost about $5 each. Plus, you won’t have to worry about meeting sky-high minimums.

You can also choose to open an account with a robo-advisor. Operating entirely online instead of with an in-person financial advisor, a robo-advisor allows you to set your investment goals and preferences and then forget about it. Plus, most robo-advisors carry low minimums, if there is a minimum at all. For example, neither Betterment nor Wealthsimple require a minimum investment, while Hedgeable requires a mere $1. Keep in mind, though, that not all robo-advisors are so lenient with their minimums. For one, Vanguard’s robo-advisor arm, Vanguard Personal Advisor Services, requires a $50,000 minimum investment. Other robo-advisors impose a more average investment minimum.

There are also newer investment alternatives like Acorns, Stash and Motif. As a robo-advisor, Acorns has no minimum requirement and enables you to invest your spare change. Stash does require a $5 minimum, but it gives you the freedom to invest in causes you care about. Finally, Motif works as both a broker and robo-advisor, offering single stocks for $5 per month and 30-stock bundles (or motifs) for $10 per month. Motif does have a minimum requirement, although at $300, it falls well below the average mutual fund minimum.

The Takeaway

Mutual funds are a great way for almost anyone to get started with investing. The main hurdle though is the minimums that come with mutual funds. While they do start at $500, minimums do tend to run pretty high. This can put many investors off of mutual funds. Luckily, there are a number of alternatives to mutual funds. Plus, you can still find low-minimum funds to start your investing journey.

If you're overwhelmed by the options or have some questions you need answered, remember you can always turn to a professional for help. A financial advisor can help you figure out how to most effectively invest your money. SmartAsset's financial advisor matching tool can help you find an advisor to work with who will meet your needs. After you answer a series of questions about your financial situation and goals, the tool will pair you with up to three advisors in your area who suit your needs.s

Tips for Investing on a Budget

It's a common misconception that you have to have tons of money to start investing. However, that couldn't be further from the truth. Especially with Acorns, Stash and more, investing smaller amounts of money has become more accessible. Plus, these kind of investment services can manage your investments for you at a much lower fee structure than traditional investment advisors.

If you're comparing investing in ETFs vs. mutual funds, each has its pros and cons. For example, mutual funds require you to pay a management company while you can more passively manage your own ETFs. On the other hand, the fees of each ETF you buy can easily add up.

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5 Financial Loose Ends to Tie Up Before the New Year

As you head into the end of the year, it'll be easy to get bogged down while shopping for gifts and planning holiday parties. But it's a good idea to take time to do a bit of financial housekeeping as well. If you haven't added any of these financial moves to your holiday to-do list, tackling them now can ensure that you're on the right track when January rolls around.

1. Put Your FSA to Work

If you have a flexible spending account (FSA) through your employer, you'll need to act fast to make sure you don't miss out on any benefits. These plans typically have a December 31 cutoff date and if you don't spend your balance down by then, it might not carry over into the new year. The IRS lets employers extend the deadline until March 15th, but not all companies agree to do this.

FSA funds can pay for many medical products and services, including eye exams, glasses and contact lenses. You can also use the money in your account to cover the cost of a visit to the dentist or the chiropractor. Since so many expenses can be paid for using the money in your FSA, there's really no excuse for letting that money slip through your fingers.

2. Get a Tax Break for Giving Back

The holiday season is all about giving and making a charitable donation or two can work to your advantage. According to the IRS, you can deduct donations of cash or goods to qualified organizations, generally up to 50% of your adjusted gross income for the year. If you normally itemize your deductions, you can reduce your income tax burden by writing off your contributions.

If you'd rather donate your time instead of your money, you can still get a deduction for your efforts. Under the tax code, certain expenses that go along with volunteering are deductible, including required equipment, uniforms and travel expenses. Just keep in mind that you'll need access to all of your receipts to support the deduction.

3. Get Your Paperwork in Order

Tax season officially kicks off in January. And the more prepared you are, the easier it'll be to file your tax return. At the end of the year, it's a good idea to go through your files and clear out any paperwork you don't need.

You can sort out receipts for your deductible expenses in one pile and organize important financial documents like investment statements in another. Then you can recycle copies of old bills and anything else that's just taking up space.

4. Take Required Minimum Distributions if Necessary

If tax-deferred accounts such as a traditional IRA, 401(k) or SEP-IRA factor into your retirement savings strategy, you're required to withdraw a minimum amount of money from them each year once you turn 70 1/2. With the exception of the year in which you reach that milestone, the deadline for taking the required minimum distribution is December 31. If you don't pull the money out in time, you'll be subject to a 50% tax penalty on the amount you were supposed to withdraw.

5. Make Financial Gifts to Your Heirs

The federal gift tax comes into play when you give money to individuals instead of charities, but it's possible to get around it with some careful planning. For 2015, you can gift up to $14,000 per person without having to worry about the tax. The limit doubles for married couples filing jointly.

If you've got a sizable estate, handing out your money annually could be better than divvying up your wealth in a will. The more you give away now, the less estate tax your heirs will have to pay later. And as long as you're staying within the annual limits, you can avoid the gift tax.

Bottom Line

The way you end one year sets the tone for how you start the next one. Tying up all of your financial loose ends is important if you want to make a smooth transition into the new year.

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10 Steps to Reach Financial Stability

Imagine a world where you don’t have to constantly stress about money. You have enough to cover your bills and regular expenses. More than that, how would you like to know that you can afford to live the lifestyle you want to live? These things are all possible when you are financially stable. So what is financial stability and how can you get there? Let's take a look.

What Is Financial Stability?

When you are financially stable, you feel confident with your financial situation. You don’t worry about paying your bills because you know you will have the funds. You are debt free, you have money saved for your future goals and you also have enough saved to cover emergencies. Financial stability isn’t about being rich. In fact, it isn’t a number at all. It's more of a mindset. When you have financial stability, you don’t have to stress about money and you can focus your energy on other parts of your life.

This may sound like a dream, but financial stability is something you can achieve. It will take some time and you will need to put in the work. If you follow these 10 steps though, you can reach your financial dreams.

1.  Make Your Finances Personal

It’s very important to say this right off the bat: your personal finances are personal. That doesn't mean personal in the sense that you can’t talk to anyone about your money. Making your finances personal means focusing on your situation and not worrying about anyone else’s situation.

This is one of the most important things for helping you to reach financial stability. We live in a culture where we constantly compare ourselves to others. We are told that we need to live a certain lifestyle because that’s how successful people live.

Block out all that noise! Forget about keeping up with the Joneses. It doesn’t matter if your friends earn more money than you. The only thing that matters is how much you have and how you can use what you have to reach your goals.

Another important part of this rule is forgetting about the "right way" to do things. Yes, some financial decisions are generally better than others. However, many things in personal finance depend on the person. There isn't one specific method or timetable that's best for everyone.

If you create a savings goal and you miss it, don’t beat yourself up for doing the wrong thing. Just look at what happened. What went well and what didn’t go well? Use that information to improve for next time.

2. Understand That Your Most Important Investment is Yourself

Before you ever think about investing money in the stock market, you should look to invest in yourself. Invest the time, energy and money to teach yourself the skills you need. This includes college degrees. It also includes other knowledge and skills. Learning things that don’t directly relate to your job can sometimes help you just as much as work-related skills. Employers typically want well-rounded employees who can contribute to a company in multiple ways. They also want someone who shows the drive and ambition to improve themselves.

Did your interviewing skills hold you back from getting that dream job? There are classes, books and online resources that you can use to improve for next time. Improving your skills is always a good investment. It opens you up to more opportunities and increases your career-earning potential.

At the same time, your health is vital for your success. One thing that drains a savings account very quickly is medical bills. While you can’t prevent all illnesses, a healthy diet with regular sleep and exercise can go a long way. That also means limiting your stress. Find ways to relax and unwind.

3. Earn Income by Doing Something You Enjoy

The primary way for most people to earn money is through a job. So if you’re thinking about financial stability, the best place to start is with a job that pays you a steady income. Even better is to find a job that you enjoy.

Doing work that you enjoy will make things that much easier. For some people this means changing careers. It could mean changing companies because you don’t like the people or structure at your current company. Maybe the key for you is to get a part-time job and to start freelancing. That may not sound like the conventional way to do things, but your happiness (and sanity) is more important that following convention.

4. Start a Budget

That’s right, budgeting. You’ve most likely heard this advice before. Budgets aren’t as bad as they may sound though. A budget is just a tool to help you spend money on the things you want to spend money on.

First of all, why is a budget important? When you keep a budget, you can track where your money is going. It’s easy to spend more than you should if you don’t actually know how much you’re spending. So more than anything else, a budget helps you keep track of your money.

Once you know how you spend your money, you can make a plan. There are always essential things that you have to spend money on. That could include your rent or mortgage, utility bills, food, car payments or transportation to and from work. These essential things should make up about half of your spending. (Experts generally recommend that your rent/mortgage not make up more than 30% of your monthly spending.)

Then you should try to put 10% to 20% of the remaining money toward your future. That means your retirement account, emergency fund and other savings accounts. Once you do all that, you can live off the remaining money. To make sure you don’t overspend, you might want to figure out how much you should spend each month on common things like eating out or buying clothes. Regardless of exactly what you spend money on, try to spend purposefully. Put your money toward the things that are important to you. Then cut back on the rest.

5. Live Below Your Means

Like creating a budget, this is advice that many people have heard. The trouble is that many of us have a hard time following it. As mentioned in step one (Make Your Finances Personal), we live in a world where we constantly hear about the things that we "should" buy. It’s very easy to spend money on extra things that we don’t need. However, living below your means is key for your long-term financial success. If you regularly spend all of your money, or more money than you make, you can’t expect to grow any savings.

Living below your means works in tandem with budgeting. Your budget tells you how much money you have and can spend each month. Then you can work with that number to make sure you don’t overspend.

6. Create an Emergency Fund

Before you think too much about putting money into retirement or toward your debt, you should work to build an emergency fund.

An emergency fund is a way to protect yourself from the unexpected. There’s always a chance that you lose your job and have to get by for a bit with no regular salary. Maybe you need to make a big car repair or take a trip you hadn’t planned for. An emergency fund will cover some or all of the costs and help you through a tough time. An emergency fund will also ease your mind by giving you a backup plan.

Sometimes people skip an emergency fund in favor of saving for retirement. Then a big expense comes up and they have to pull money from their retirement account in order to cover it. Removing money early from your retirement account should always be a last resort. It detracts from your retirement savings and you’ll probably have to pay penalties. For example, you have to pay a 10% penalty if you make early withdrawals from a 401(k).

7. Pay off Your Debt

Debt will always make it difficult to reach financial stability. Once you know how much you can comfortably spend (through budgeting) and once you have an emergency fund, focus on getting rid of debt. Pay off any credit card debt you may have and avoid future debt on your cards. Have student loans? Make extra payments to get rid of them as quickly as possible. Just because you signed a 10-, 20- or 30-year payment plan doesn't mean you can't pay off your loans sooner. Paying your loans sooner will actually save you money in the long run because you'll pay less in interest.

The only caveat here is a mortgage. If you have a mortgage, you have some time to pay it off. Prioritize all other debts before your mortgage. You should still make all your mortgage payments, but put extra money toward your other debts first. Once you have your other debt paid off and once you have savings for retirement (step eight), then you can focus on paying off your mortgage early (if you want to).

8. Invest for Retirement

When you’re young, it’s hard to think about retirement. Why should you save money for something that’s decades away? Unfortunately, this thinking is why the average American has no retirement savings. If you want to reach financial stability, you also need to plan for the days when you won't have a salary. This is especially true if you have any plans for retirement. Want to travel after you retire? Want to volunteer or take some local classes? Those are all great things, but you can't do them without money.

Prioritize your retirement now and you will thank yourself in the future. Even if you don’t have a lot to save for retirement, start now. Someone who starts early will earn more in the long run thanks to the magic of compound interest.

As you think about saving for retirement, start with your work. Many employers offer a 401(k) or 403(b) plan. Take advantage of those, especially if they offer employer matching. Employer matching is when your employer will match some or all of the contributions you make to your company retirement plan. Not taking advantage of employer matching is like passing up free money.

If your employer doesn’t offer a retirement plan, you can open an individual retirement account (IRA).

9. Make Sure to Have Some Fun

When you focus on saving money or paying off debt, it’s easy to forget about fun. After all, fun like things usually cost money. But don’t get so focused on your money that you forget to live. Enjoying your life will help to keep you happy and healthy.

When you look at how much you can afford to spend each month, try to budget in a certain amount just for fun. Maybe you can get a massage every couple of months or go to a show. Keep on the lookout for cheap and free events too. Go for a hike or invite friends over for a game night. Another great way to have fun is celebrating your financial successes. Did you just pay off one of your credit cards? Try one of these five frugal ways to celebrate your debt successes.

10. Stick With It!

In an ideal world, you would stay within your budget every month. Your car would never need repairs and you would never lose your job. Unfortunately, we don’t live in an ideal world. Unexpected things come up and sometimes you just spend more money than you anticipate. It's OK. It happens to the best of us. Try not to get discouraged when things don't go as planned.

Even when things aren't going well, follow through. Stick with it even if you fall off for weeks, months or years. Don't worry about doing things perfectly. Do your best and try to get just a little better every day.

The Bottom Line

Financial stability is the freedom to live life on your terms without worrying about how you'll pay your next bill. This seems like an unreachable dream for many people but it is very much within your reach. Follow the 10 steps above and you will put yourself on the path to financial security.

One bonus step you could take is to work with a financial advisor. A financial advisor can help you with everything from creating a budget to getting ready for retirement. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three financial advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Tips for Reaching Financial Security

An emergency fund will provide security when unexpected things come up. Where you keep your emergency fund is a personal decision. Some people keep their emergency fund in their regular savings account. If you decide that you need an emergency fund of $10,000 then you can just make sure there are $10,000 in your savings account that you never touch. It can be tempting to spend that money though. In that case, you could create a separate savings account or open a money market account.

Credit card debt is an everyday struggle for some people. If you have a hard time with overspending, consider using cash. Cash sounds inconvenient in today's world but with cash, you cannot spend more than you have. So if you only want to spend $50 on clothes this week, then carry $50 cash that you can spend on clothes.

Whether your save for retirement through a work plan or an IRA, there are a few things to keep in mind. Investing is the way to build wealth. Investing sounds intimidating, but it doesn't have to be. Choose a portfolio (a mix of stocks, bonds, cash, etc.) that is diverse. That means don't put all of your money into one company's stock or into the stock of five companies that all work in the same industry. The simplest way to diversify is putting your money in an index fund. Index funds, like the S&P 500 index fund, provide instant diversification because they mirror the entire stock market. You can also invest in exchange-traded funds (ETFs). An ETF is similar to an index fund because it is consists of multiple stocks.

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All About Incentive Stock Options

When most people think of employee benefits, they think of health insurance, 401(k)s, and maybe some free food. But for folks at the top of their fields, benefits may include stock options. If you've got a job that comes with incentive stock options (ISOs), it's important to know how those options work and what they can do for you. For one thing, they come with favorable income tax treatment. But let's not get ahead of ourselves. Read on for our guide to ISOs.

Incentive Stock Options: The Basics

Incentive stock options are perks given to certain employees as part of their hiring package. ISOs give employees the "option" to buy company shares at a pre-determined price known as the grant price. ISOs have a big tax advantage. If employees exercise their options after the price of the company stock has risen, there is no tax on the difference between the value of the stock and the price an employee pays for it. In fact, you don't have to report an ISO as income, either when you receive the options or when you exercise them.

And there's more: If you exercise your options, hold the shares for at least one year after purchase and two years after being granted the options, when you sell those shares the profit is taxed as long-term capital gain. Because the tax rate on long-term capital gains is lower than the income tax rate, you'll come out ahead.

ISOs and the AMT

So we know there's an income tax advantage to ISOs. But before you get too excited about your low taxes, remember the Alternative Minimum Tax (AMT). The AMT is designed to capture some income taxes from folks who have a lot of tax-free income. ISOs can trigger payment of the AMT, so it's important to make sure you're doing your taxes carefully for each year you hold ISOs. The bargain element of an ISO is the difference between the price you pay for the stock and its market value. You must report the bargain element as an income adjustment for AMT purposes when you purchase the stock. Later, when you sell the shares, you may have to pay the AMT.

Vesting

ISOs are often subject to a vesting schedule. An employee who is higher up on the corporate ladder may be offered ISOs that only vest after a certain number of years, or that vest partially year by year. Because ISOs are used to attract and retain valuable employees, employers don't want their new hires to take them and run. Hence the vesting schedule. In some cases, companies may "claw back" ISOs if they become unaffordable.

ISOs vs. Non-Qualified Stock Options

ISOs are also known as Qualified Stock Options. That's to distinguish them from what are known as Non-Qualified Stock Options. So what's the difference? For one thing, ISOs come with more favorable tax treatment than non-qualified stock options. Non-qualified stock options don't "qualify" for the same income tax break that ISOs enjoy. They don't come with that bargain element that makes ISOs so attractive.

Instead, employees must report as regular income the difference between the price they pay for company shares (the grant price) and the market value for those shares. Non-qualified stock options are easier for employers to administer. Plus, employers can deduct the cost as a business expense. Not surprisingly, non-qualified stock options are more common than ISOs.

Bottom Line

If you're offered options as part of your employee benefits package, that can be cause for celebration. It's a good idea to take the time to sit down with your employer or your company's HR department to make sure you understand the specifics of the options offer. And remember that ISOs are not a guaranteed financial home run. First, you must make the initial investment of purchasing the shares. Then, you'll have to hold those shares long enough to qualify for the long-term capital gains rate. There's no guarantee that you'll make a profit at the end of that holding period.

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What Are Blue-Chip Stocks?

Buying a stock means getting into some risky business. Sure, they can help you earn money that you could put toward many things - a retirement account, an emergency fund, a down payment - but you also run the risk of putting yourself in hot water if the company you've invested in goes under. But some stocks are riskier than others. If you're risk-averse, you may want to consider blue-chip stocks.

Blue-Chip Stock Basics

Just about any group you can think of has its all-stars that lead the rest of the pack (think baseball). Stocks are no different. The name "blue-chip" is said to be a reference to the game of poker, in which the blue-colored chips are worth more than the others. So if you're looking to invest in some top-quality shares, you may not have to look any further than blue-chip stocks. They're usually well-known companies that stand out from competitors in their industries. Investing in one of these blue-chip stocks will usually be less stressful for the risk-averse investor.

Why? Because blue-chip companies often have a firm footing in the economy with large revenues and total shares worth billions of dollars. They've usually been around a while with a proven track record of doing well financially. Blue-chip growth tends to be slow and steady, so these stocks are considered to be safer than those tied to smaller-cap companies. Still, history has shown us that even this type of stock can nosedive in the event that the market crashes.

How to Invest in Blue-Chip Stocks

Investors beware: there is a catch to dealing with the big, successful corporations that issue blue-chip stock. Investing in a share of blue-chip stock can be pricey. And even though your dividend could be high, your total return (the benefit of investing compared to its cost) might actually be fairly low. Another disadvantage to buying into blue-chip stocks could be their slower moving pace, especially if you're on a mission to find a set of stocks that are going to increase in value quickly.

If you want to keep track of how blue-chip stocks are doing on a regular basis, take a look at the Dow Jones Industrial Average. This is a price-weighted average that lists 30 blue-chips stocks. Or check out another market index like the S&P 500 Dividend Aristocrats or the Nasdaq-100.

In order to buy a share in one of these prominent companies, you can purchase one at a time through a broker, a dividend reinvestment plan or a direct stock purchase plan. A dividend reinvestment plan (also known as DRIP), works just like it sounds. If you've already received dividends from investing in another stock, you're simply using those funds to buy another share instead of having the money deposited into a different account for personal use.

Direct stock purchase plans aren't available for every single large-cap company. But if a direct stock purchase plan is available for the one you want to invest in, you're essentially buying a share straight from a corporation instead of going through an intermediary. If one blue-chip stock isn't enough for you, it's also possible to buy a whole group of shares via an exchange-traded fund (ETF) or a mutual fund.

Blue-Chip Companies

The criteria for becoming a blue-chip stock isn't set in stone. The companies that have made the list are fairly large businesses that are highly valued in the market, have consistently had high earnings, have good credit and have made their shareholders plenty of money in dividends for years. It's an exclusive club that doesn't frequently change or add new members. The averages committee manages the list of stocks for the Dow. The last change - replacing AT&T with the tech giant Apple - was the first shift to take place in a while. It was big news at the time (in March 2015).

Blue-chip stocks cut across various industries and some notable ones include Walmart, American Express, Nike, Microsoft, Home Depot, JPMorgan Chase and Exxon Mobil. There is no official ranking of which blue-chip stocks are the best (as that could change), but some of the top 10 stocks with the biggest dividends paid to investors include American Capital Agency Corp., Southern Copper Corp., NuStar Energy, AT&T, STMicroelectronics N.V. and Lockheed Martin.

The Bottom Line

Investing in the stock market by choosing individual stocks takes time and expertise, and research shows it doesn't even boast a track record of beating index funds over time. If you're not very experienced, there may be other strategies that you could use to build a diversified portfolio of stocks and bonds. But if you happen to make enough money to afford an expensive blue-chip stock, it will likely offer a stable source of extra income, at least in the form of dividends.

For guidance in building your portfolio, consider turning to a financial advisor. Financial advisors do have the time and expertise to choose individual stocks and closely manage a portfolio. SmartAsset's financial advisor matching tool can help you find an advisor who suits your needs. First you'll answer a series of questions about your financial situation and goals. Then the program will pair you with up to three advisors in your area based on your answers. You can then read the advisors' profiles and interview them to choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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What Is a Gold IRA?

You know how important it is to save for retirement (or at least we hope you do!). Whether you put your money into a 401(k), a traditional IRA or a Roth IRA, there are a number of options available to you. One of these options is a gold IRA. If you’re picturing a savings account filled with gold, you’re on the right track. Let’s take a look at what exactly a gold IRA is and how to get one.

What Is a Gold IRA?

With an traditional or Roth IRA (individual retirement account), you stash your savings in the form of stocks, bonds or mutual funds. With a gold IRA, however, you hold literal gold in the form of coins, bullion or bars. You can own other precious metals like silver, platinum and palladium in your gold IRA, as well.

You could also choose to invest in other gold-related options. These include stock in gold mining companies, precious metals mutual funds, precious metals commodity futures or Exchange Traded Funds (ETF).

When it comes to IRA contributions, disbursements and taxes, Gold IRAs follow the same rules and procedures as other IRAs.

How to Get a Gold IRA

Not all gold or other precious metals will qualify to go into an IRA. The metals will have to meet IRS fineness standards. If you have metals that you want to deposit but haven't been approved, they could be rejected. Some accepted forms are the gold and silver American Eagle and Canadian Maple Leaf coins, the Austrian Philharmonic coin, PAMP Suisse Gold bars, Sunshine Gold and Silver Bars and most platinum bars.

In order to have a gold IRA, you must have a custodian to provide and hold the account for you. This is because the gold will go into an IRS-approved depository and not a regular savings account (or a box under your bed!). You can head to your nearest bank, credit union, trust company or brokerage firm to find an approved custodian for your gold IRA. Of course, you’re going to want a qualified custodian you can trust with your gold, and not just any company.

It helps to look around before committing. Look for companies with a good history of holding gold IRAs. Custodians with a good track record can also help you create a relationship with precious metals dealers. Check out customer reviews to see how each company has performed when it comes to various customers’ needs. Don’t forget to weigh the costs each custodian might charge, since setting up a gold IRA will include various fees.

Checkbook IRA

To avoid going through the process of finding and using a custodian, you could open a checkbook IRA. This option isn’t for everyone, though, since you must have a limited liability corporation (LLC). Your LLC must have a checking account associated with it in order to make transactions.

Through a checkbook IRA, you will be able to hold your precious metals in a safety-deposit box. This means that you will have to monitor your gold IRA yourself, rather than relying on a custodian. Setting up and maintaining a checkbook IRA may cost more than going through a custodian, as well. The costs may reach up to $2,000. You’ll have to decide whether these costs are worth skipping the custodian.

Pros and Cons of a Gold IRA

In addition to the benefits of owning physical gold, a gold IRA also adds diversity to your retirement portfolio. Having gold investments provides some security should your stocks or funds go south. This is because gold reacts oppositely to inflation than stocks and bonds do, and does not depend on the stock market. The opposite will be true, too. When stocks and bonds are performing well, the price of gold might go down. However, it’s good to know that gold will always hold value. So either way your investments will remain balanced.

Besides the upfront costs to establish a gold IRA, there are some other drawbacks. For one, your precious metal coins or bars could be stolen from your depository or safety deposit box. However your precious metals are typically insured up to a certain amount when kept in a custodial depository. This is another reason it’s important to find the best and most trustworthy custodian for your gold IRA.

Another risk of having a gold IRA is the instability surrounding gold mines or companies. Other investors also dislike that gold IRAs don’t pay dividends or interest. Some advisors say that you would be better off with an account that pays dividends.

Bottom Line

A gold IRA could be an excellent way for you to diversify your retirement portfolio. It can protect your savings from plummeting in the event of a stock market crash or inflation. Keep in mind that you will need to do your research before getting a gold IRA. Make sure that a gold IRA is right for you and your retirement future. Then, you can focus on finding the best custodian to keep your gold investments safe and sound.

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What Is a Financial Crisis?

Almost 10 years past America's most recent financial crisis, you can still hear the term in the news. Whether it's in regards to recovering from one, or the impending onset of another, it's a phrase that elicits dread in many people. Despite the prevalence of the term, it's not always well-defined. In order to better understand what is a financial crisis, we did a dive into recent and historic examples.

What Is a Financial Crisis?

A financial crisis occurs when the value of financial institutions or assets drop rapidly. It often coincides with stock market crashes, banking panics and investor asset withdrawals. There’s often a recession directly after a financial crisis arises. This is due to the economic turmoil associated with the sharp drop in asset values. In other words, when banks or investments drop quickly in value - usually in a matter of days or weeks - it's the start of a financial crisis.

What Causes a Financial Crisis?

A variety of factors can cause a financial crisis. Some of the most common reasons include irrational investor behavior, sudden bank withdrawals, speculation that results in overpricing of certain assets, and bank debt default.

Irrational investor behavior simply means that investors overreact or underreact to certain investments. This so-called “irrational behavior” can cause a domino effect on the market. This happens when a large number of investors react the same way, either inflating poor stock choices or selling rapidly. Both factors can cause a crash.

Some factors, like sudden bank withdrawals, were more common in the past. After the stock market crash in 1929 there was widespread panic. People wanted hard currency rather than investments since those failed in the crash. Subsequently, they rushed to banks to withdraw assets. With so many people trying to take money out at the same time, banks literally ran out of cash.

For speculation of assets we can look at a number of examples, the most recent being the subprime mortgage crisis in 2007-2008. In the years prior to the bubble burst, investors speculated that real estate was a good place to earn returns. Since mortgage lending standards were low as well, many investors bought up properties with the hope to sell at a profit later – and didn’t consider the possibility of loss in value. It’s considered speculation when there’s hope to gain profits in the future without actual hard evidence.

Debt default is when an individual or an institution doesn’t meet the legal obligations or conditions of a loan. This can mean a home buyer not paying his or her mortgage, or a corporation not paying a bond that reached maturity. In the 2008 crisis, the investment banking firm Lehman Brothers declared bankruptcy because its debts outweighed its assets.

It’s important to realize that a financial crisis can include any or all of these factors, there isn’t a certain combination that happens each time. Economists still debate the origins and conditions for how and why crises arise. It can be any number of variables that ultimately results in the sharp asset value decline associated with a crisis. Federal regulations also come into play. The 2008 crisis was partly blamed on the Federal Reserve’s manipulation of interest rates and large subsidies and regulations in housing, banking and mortgages.

The History of Financial Crises

America’s first financial crisis began in 1790 with treasury secretary Alexander Hamilton at the helm. According to The Economist, Hamilton was determined to bring America’s banking systems on par with Britain’s. He established the First Bank of the United States (BUS). Two years later he set the national precedent for a government financial bailout when he was forced to funnel public money to bonds and lenders. The markets had crashed due to speculative buying and banks running out of the hard currency that backed its loans. This led to America’s first financial misstep.

In the time since that first crisis, there have been roughly 11 additional crises in America. Each crisis usually correlates with financial slumps directly after. While the most notorious is the Great Depression of 1929-1933, the most recent example is 2008’s subprime mortgage crash.

In 2007-2008, America’s financial system exposed its problems when the housing market crashed. The crash revealed bank irresponsible mortgage lending practices. After many lenders with poor credit history defaulted on their mortgages, the broader investments based on those mortgages known as collateralized debt obligations, or CDOs, also slumped in value. CDOs were exposed as not having real value. Despite having a high rating from such authorities as Standard & Poor and Moody’s, they were impossible to sell. This left banks in a catastrophically bad situation.

This brings us to the fourth-largest American investment bank, Lehman Brothers, who filed for bankruptcy in 2008. Ten other banks, including Merrill Lynch and AIG, came within the final yard line for bankruptcy as well. The banks only avoided collapse because of government rescue. The accumulation of the years of risks and inattentive oversight meant that banks failed to set aside necessary capital in the case of losses.

Luckily, America didn’t experience the catastrophic bank failure and unemployment associated with the market crash of the 1930’s. However, we still feel the effects of the 2008 crisis today.

The Takeaway

The government learned valuable lessons from the mistakes that led to 2008’s crash. However, that doesn’t mean we’re immune to a future crisis. While economists are getting better at predicting the factors that indicate a financial crisis, it’s still not a perfect science. In our increasingly globalized world, there are additional factors to consider outside of America’s scope.

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What Is the FDIC?

The last time you visited your bank or used an ATM, you might have seen a sign that says your deposits are insured by the Federal Deposit Insurance Corporation. This insurance is a big part of why people feel safe depositing their money a bank. Even through the Great Recession, consumers had some piece of mind because they knew their money would still be there if the economy struggled. So what exactly is the FDIC and how does it insure your money?

What Is the FDIC?

The Federal Deposit Insurance Corporation is an independent agency of the federal government. It insures the deposits that a customer makes in FDIC-insured banks. It gives people the confidence that their money is safe even when the economy or a bank is not doing well.

The FDIC began as a temporary agency in 1933. After the stock market crash of 1929, the banking system was struggling. Between 1929 and 1933, thousands of banks closed and lost billions in consumer deposits. With the start of the Federal Deposit Insurance Corporation, the government gave customers confidence that even if times were tough, consumers would be paid back for the money they had deposited in banks.

The FDIC was a temporary agency to help the country through the Great Depression. It was such a success that the government decided to make it permanent. Today the FDIC insures about 4,000 banks, which is more than half of the financial institutions in the banking system.

Originally, the Federal Deposit Insurance Corporation got its funding from the U.S. Treasury. Then it changed to a system where member banks pay premiums in order to receive coverage. The premiums go into an insurance account and the fund from that account cover all the banks in case of failure.

FDIC Insurance Limit

First of all, the FDIC only insures certain institutions. Banks have to pay premiums and meet certain regulations in order to gain this coverage. Once a bank gets covered the FDIC will cover deposits up a limit of $250,000 per person, per institution and per ownership category. Examples of an ownership category are single and joint accounts.

So let’s say you have $150,000 in a savings account that you are the sole owner of. If your bank fails, the FDIC will cover up to $250,000 from your account. That means all of your money is covered. If you had $150,000 in a savings account and $150,000 in a checking account (for a total of $300,000) the FDIC would only cover the first $250,000. You would still lose $50,000 but the majority of your money would be safe.

For joint accounts, each co-owner receives $250,000 of coverage. That means if you and your spouse have a joint account, the account is covered up to $500,000. If you're considering a joint account, here's some advice on when a joint account does and doesn't make sense.

What the FDIC Covers

As a rule, the FDIC covers all types of deposit accounts at FDIC-insured banks. This includes checking accounts, savings accounts, money market accounts and certificates of deposit. Most revocable and irrevocable trusts are covered.

It doesn’t matter if the above accounts have a single owner or joint owners. It also makes no difference if these accounts belong to a business or organization. In addition to the accounts already mentioned, the FDIC covers cashier's checks, money orders and other official items that a bank issues.

If you want to see how much of your money would be covered should your bank fail, the FDIC has a tool on its website to help you calculate this.

What the FDIC Doesn't Cover

As a rule, the FDIC will not cover your money if it isn’t in a deposit account. The biggest exclusion is investments. This includes money that you invest in stocks, bonds, mutual funds and annuities. Even if you invest in and trade stocks through an FDIC-insured bank, you can not receive insurance coverage on your losses. Any money that you invest through an individual retirement account (IRA) like a traditional IRA of Roth IRA, also isn't insured. However, the FDIC does cover any deposits that you have in your retirement accounts. If you had a CD in your Roth IRA, it would receive the same coverage as a CD outside of a retirement account.

Customer are not reimbursed for money lost through theft or natural disasters like floods and earthquakes. However, you may still receive reimbursement from your bank. Banks also pay for insurance, separately from the FDIC. This insurance is called a banker’s blanket bond and it covers things like robberies and accidental damage.

The FDIC also doesn’t cover U.S. Treasury bills, bonds, or notes. These are backed by the U.S. government.

What Happens to Your Money When a Bank Fails?

OK, so the Federal Deposit Insurance Corporation covers your money. That’s great, but what actually happens to your money if your bank fails? First of all, a bank fails because it becomes insolvent. That means it cannot pay its debts and obligations when they are due. If this happens to an FDIC-insured bank, the FDIC will usually look to sell the bank’s assets to another bank through a strategy called purchase and assumption. The FDIC will calculate the assets of the insolvent bank and sell those assets to another bank. Your accounts would simply transfer to the new bank, which would assume the responsibility of handling your money and accounts. The transfer during a purchase and assumption is usually very smooth for the customer.

If the FDIC cannot sell an insolvent bank’s assets, it will look to directly pay off the accounts. In that case you would receive a check from the FDIC for the balance of all your insured accounts. This normally happens within a few days of a bank’s closing. Once you have the check, you can transfer it to whichever institution or account you prefer. In the off chance that the FDIC requires more information or action from you in order to redeem your deposits, it will notify you by mail.

The Takeaway

The Federal Deposit Insurance Corporation started during the Great Depression to provide confidence to bank customers who were afraid of losing their money. Today the FDIC continues to insure deposit accounts up to $250,000. This includes checking accounts, savings accounts, money market accounts and certificates of deposit. It also includes individual, joint and business accounts. It does not cover any investment losses, even if the investment account is at an FDIC-insured bank.

If you are looking for a new bank to deposit your money, you should always make sure that the bank is insured by the FDIC. This will give you the confidence to deposit money without fear of losing all your money should things go south.

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Understanding Indexed Annuities

There's a reason that annuities are appealing financial products. They take the uncertainty out of retirement income by guaranteeing an annual sum. But do the costs outweigh the benefits? Let's take a closer look at indexed annuities and what experts say about them.

Indexed Annuity Basics

An annuity is an agreement between you and the institution that sells you the annuity (generally an insurance company). The terms of the agreement state the amount of money you'll receive each year. They also detail the costs and fees you'll pay to the insurance company.

Wondering what happens to the lump sum you give the insurance company? Well, if you buy an indexed annuity that money is invested and grows over the years you receive your annuity.

As a result, indexed annuities often go by the name "equity-indexed annuities" because they're indexed to equities. Equities, in case you need a refresher, are stocks that trade on the stock market.

Pros and Cons of Indexed Annuities

Insurance companies often pitch indexed annuities as a great opportunity to earn returns on the money you've saved for retirement. The insurance company will take your money and invest it in an index fund that tracks the S&P 500. But what are the pros and cons of this strategy?

For one thing, the returns you'll earn on an equity-indexed annuity aren't comparable to the returns you'd get if you invested the same lump sum in a low-fee index fund that also tracked the stock market. Why? Because insurance companies deduct fees and, in some cases, cap your earnings.

In a good year, the stock market will make gains. However, depending on the terms of your indexed annuity your money might not grow by the same percentage that the stock market adds. You could see only 80% of the stock market gains, depending on the participation rate of your indexed annuity. The participation rate is the percentage of stock market gains you'll earn. If your gains will match the gains of the index, your participation rate is 100%.

Some indexed annuity come with a rate cap. If you have an indexed annuity with a rate cap, you won't be able to earn yields above that cap, no matter how well the stock market performs in a given year.

On the flip side, indexed annuities, unlike a regular pot of money invested in an index fund, don't lose value during a market downturn. Your insurance company might set terms that say you won't earn any returns if the stock market falls, but the insurance company won't take money out of your annuity funds. Some insurance companies will pay out a yield of, say, 2% in the event of a downturn, which will help take the sting out of inflation.

Bottom Line

If your financial advisor recommends that you purchase an indexed annuity it's worth doing plenty of research before you make your decision. Does your advisor have a fiduciary duty to put your interests first? If not, he or she might be recommending the indexed annuity to get a kickback or commission, not because it's the best fit for your retirement. Like other annuities, indexed annuities offer a trade-off between security and cost. It's important to understand those trade-offs before you put your retirement savings on the line.

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The Pros and Cons of Annuities

Putting away money for retirement isn’t always easy. Once you figure out how much you need to save for retirement, then you need to actually save that money. Consistently putting money into savings is a difficult habit to build. There are also a number of retirement options. Maybe your employer offers a 401(k). Maybe you save money on your own through an individual retirement account (IRA). Here’s one more option to consider: annuities. Annuities are a way to supplement your retirement income but they aren’t right for everyone. Consider these pros and cons of annuities to see whether an annuity could work for you.

What Is an Annuity?

Annuities can be complex and confusing sometimes. Before we look at some pros and cons of annuities, here is a quick refresh on what exactly an annuity is.

An annuity is a contract between you and an insurance company. You pay for the annuity (through a lump sum or through payments over time) and the insurance company invests your money. The most common way to invest is through mutual funds. Then the insurance company will make regular payments to you (again through a lump sum or through payments over time). There are multiple types of annuities and the exact payment structure will vary based on the terms that you agree to with the insurance company.

There are two main types of annuities - fixed and variable. A fixed annuity guarantees a minimum rate of interest on your money and you receive a fixed number of payments from the insurance company. A variable annuity allows you to invest your money in different ways (e.g. in different mutual funds) and the payments you receive will depend on how much your investments make.

Pro 1: You Can Receive Regular Payments

The most basic feature of an annuity is that you receive regular payments from the insurance company. This is also the biggest pro of an annuity. Those payments provide supplemental income during your retirement and can help if you’re afraid that you haven’t saved enough to cover your regular expenses. Keep in mind that the value and number of your annuity payments will vary depending on the type of annuity and the terms of your contract.

Pro 2: Your Contributions Grow Tax-Deferred

The money that you contribute to an annuity is tax-deferred. That means you can contribute money before you pay taxes and you do not have to pay taxes on the money until you withdraw it (i.e. until start receiving payments). In the time between when you contribute the money and when you withdraw it, it’s possible that your money grew significantly. This type of growth is similar to how 401(k) contributions grow.

Pro 3: A Fixed Annuity Offers Guaranteed Returns

The insurance company will invest any money that you put into an annuity. There is always a certain level of risk involved when you invest money. However, any contract you sign for a fixed annuity should include certain guarantees to prevent you from losing money. Fixed annuities guarantee that you make a certain percentage of your principal investment. That percentage is usually quite low, but it does mean that you’ll earn more than the amount of your original investment.

Pro 4: A Variable Annuity Offers a Death Benefit

Variable annuities carry risk because they have the potential to actually lose you money. They also carry an extra benefit: a death benefit. A death benefit is a payment that the insurance company will make to your beneficiary if you die. For a basic variable annuity, the death benefit is usually equal to the amount that you contributed to the annuity. If you get an annuity contract worth $100,000 then the death benefit payout will be $100,000. It does not matter how your annuity’s investments perform.

Alternatively, you can find variable annuities with enhanced death benefits. With an enhanced benefit, the insurance company will record the value of your annuity’s investments on each anniversary of your annuity’s start date. If you die, the insurance company will pay a death benefit equal to the highest recorded value of your annuity. For example, let’s say you have an annuity contract worth $100,000. You aggressively invest your money and on the anniversary of your annuity’s start date, your investments are worth $125,000. Your death benefit would then be $125,000,  even if your investments to decline in value for the rest of your life.

Note that an annuity likely isn’t your best choice if you’re just looking for a death benefit. In that case you can help your beneficiaries defer funeral and burial costs with a life insurance policy.

Con 1: High Fees

Annuities can get very expensive. Any time you consider an annuity contract, you need to understand all the fees in that to be sure that you can pick the best annuity for your goals and situation.

Variable annuities have administrative fees as well as mortality and expense fees. Insurance companies charge these, which often run about 1.25% of your account value, to cover the costs and risks of insuring your money.

Surrender charges are common for both variable and fixed annuities. A surrender charge applies when you make more withdrawals than you should. Your insurance company could particularly limit withdrawals during the early years of your contract. Surrender fees are often high and can also apply for an extended amount of time.

Investment management fees will vary depending on how you invest with a variable annuity. These fees are similar to what you would pay if you invested in any mutual fund.

Some annuities will also have additional riders that come at a fee. A rider is an optional guarantee. A good example is the enhanced death benefit option that we mentioned above. Adding better death benefits to your contract will require a death benefit rider. Rider fees will vary by the individual rider but some are very expensive. A death benefit rider can cost up to 50% of the value of your account value.

Con 2: Annuity Growth Might Not Match Stock Market Growth

As a second part to the first con, it’s important to understand how the cost of an annuity is impacting your returns. The stock market will make gains in a good year. That could mean more money for your investments. At the same time, your investments will not grow by the same amount that the stock market grew. One reason for that difference in growth is fees. However, let’s say you invest in an indexed annuity.

With an indexed annuity, the insurance company will invest your money to mirror a specific index fund. But your insurer will likely cap your gains through something called a participation rate. If you have a participation rate of 80% then your investments will only grow by 80% of the amount that the index fund grew. You could still make great gains if the index fund performs well, but you could also be missing out on great gains. If your goal is to invest in the stock market, then you should consider investing in an index fund on your own (outside of an annuity). That might seem daunting if you don't have investing experience, so consider using a robo-advisor. A robo-advisor will manage your investments without the crazy fees.

Another thing to keep in mind is that you will likely pay lower taxes if you invest on your own. Contributions to a variable annuity are tax-deferred but any withdrawals you make will be taxed at your regular income tax rate, not the long-term capital gains tax rate. The capital gains tax rates are lower than the income tax rates in many places. So you’re more likely to save on taxes if you invest your after-tax dollars instead of investing in an annuity.

Con 3: Getting out of an Annuity May Be Impossible

This con is a concern for immediate annuities. Once you contribute the money to fund an immediate annuity, you cannot get that money back or pass it on to a beneficiary. It may be possible for you to move your money into another annuity plan, but doing so could also leave you subject to fees. On top of the fact that you can’t get your money back, your benefits will disappear when you die. You cannot pass that money to a beneficiary, even if you have a lot of funds left when you die

Con 4: An Annuity and a 401(k) May Be Redundant

Some employers provide the option of investing in annuities through a 401(k). This option is actually growing in popularity because people view it as a safe way to invest 401(k) money. The trouble is that you don’t really get the full benefits of an annuity is you have it through a 401(k).

One of the biggest benefits of an annuity is that your contributions are tax-deferred. But 401(k) contributions are also tax-deferred. So if you already get the tax benefits from investing in a 401(k), then you aren’t getting additional tax benefits by investing in an annuity. The same is true if you invest in a traditional IRA versus a 401(k).

If you’re thinking about investing in an annuity, consider making the maximum allowable contribution to any 401(k) or traditional IRA plans first.

Bottom Line

An annuity is a way to supplement your income in retirement. For some people, an annuity is a good option because it can provide regular payments, tax benefits and a potential death benefit. However, there are potential cons for you to keep in mind. The biggest con is simply the cost. Annuities can come with many different fees. Some fees will cost as much as 50% of the value of the annuity! So the bottom line is that you shouldn’t get an annuity (or any other investment option) until you know it is the right move for you.

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What Is Preferred Stock?

When most people think about buying "stock," they're thinking about common stock. But did you know that there's another class of stock called preferred stock? Well, now you do. When you buy preferred stock, you're investing in equities - but with some bond-like features. You lock in a dividend rate, much like you would with a bond or other fixed-income security. Let us explain.

Common vs. Preferred Stock

Most people will need to invest in the stock market if they're going to save enough for retirement. But not all stock is created equal. When you buy common stock, your dividends can vary. One big difference between common and preferred stock? Preferred stock generally comes with a fixed dividend rate. Dividends to preferred shareholders are paid before dividends to common shareholders. Another difference is that if the company that issued the shares is liquidated, preferred stockholders will have access to the company's assets before common stockholders. Owners of preferred stock are behind bondholders in line for company assets, but they're ahead of owners of common stock. Sounds good, right?

But there's a catch. With preferred stock, because you're pretty much locking in your rate of return at the time of purchase, you won't gain from company growth (in the form of higher dividends) like a common stockholder would. Your dividends could be deferred if the company can't afford to pay shareholders. Plus, you don't have voting rights as a preferred shareholder the way you would if you owned common stock. The good news is that the dividends from your preferred shares will receive the same favorable tax treatment that regular dividends receive.

Callable Preferred Stock

Many preferred shares are "callable." A callable preferred stock is one that gives the company issuing the stock the option to "call" (revoke) the stock from the shareholder. A call provision usually kicks in after five years. It means that the issuer has the right to buy back your shares at face value. That leaves owners of callable preferred stock vulnerable to the whims of the stock issuer, who may wish to call the stock just when the shareholder would want to hang on to it.

Preferred Stock vs. Bonds

Torn between the potential returns of stock and and the predictability of bonds? You may be drawn to preferred stock. That's because preferred stock combines traits of both stocks and bonds. You'll get paid at a fairly fixed rate (as with bonds), but that rate will be higher than the rates on Treasury bonds (as with stocks).

A word of caution: bonds have one serious advantage over preferred stocks that's worth mentioning. As with dividends on common stock, dividends on preferred stock aren't guaranteed. A company may stop paying dividends if it falls on tough times. This can't happen with a bond because a bond represents a contractual obligation between the company and the bondholder. So, if you need fixed income that's really fixed, you're probably better off with bonds than with preferred stock.

Non-callable bonds have another advantage over callable preferred stock, which is that the owner isn't subject to a "call" from the issuer. If you want to keep a non-callable bond until maturity or until you deem it's time to sell, you have the right to do so.

Risks of Preferred Stock

Preferred stock isn't risk-free. For one thing, if interest rates rise, the value of preferred stock falls, just as with bonds. That's because the opportunity cost of holding that preferred stock is higher once interest rates rise.

Another potential risk that comes with preferred stock is overexposure to certain industries. That's why some investors choose to buy preferred stock funds, which buy preferred shares from companies across several industries. But even preferred stock Exchange Traded Funds (ETFs) may be heavily invested in financial sector companies, since issuing preferred stock is most common in that industry. That means less diversification and more risk.

Preferred stock can be a relatively expensive investment. Because the returns are a) higher than with bonds and b) fixed, fund managers charge more for the privilege of investing in "preferreds." Investors in preferred stock also bear significant credit risk. The companies that issue preferred stock often do so for reasons that make them risky investments.

Dividends from preferred stock aren't tax-deductible for the issuer, so the strongest companies with the best credit usually don't issue preferred stock. Companies that do issue preferreds may do so because they've already taken on a lot of debt but still need to raise money. They may call those stocks when the company's credit rating improves, leaving the investor high and dry.

Bottom Line

Preferred stocks offer some serious enticements: steady returns, tax advantages and higher yields. If you want to get in on the action, shop around for brokerages that offer competitive fees. As with any investment, you want to make sure your money is growing, not lining the pockets of your broker.

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Understanding Stocks

If you want your money to experience significant growth over time through the power of compound interest, you may want to consider investing in the stock market. When it comes to buying stocks, though, it's important to understand what you're doing. That's why SmartAsset is bringing you this guide. Sit back, relax and prepare to get some clarity on what stocks are and what they can do.

Stocks: The Basics

Companies decide to issue stock because they want to raise money. Rather than issuing bonds, which are loans from bondholders to the company, a company might decide to "go public" by issuing stock. The money a company gets when an investor purchases shares doesn't have to be paid back. The company can decide whether and when to issue dividends to shareholders. Plus, issuing shares spreads risk to investors rather than keeping it all on the shoulders of the company owners. When you buy stock, you become a partial owner of the company that issued the shares. You have what's called shareholder's equity. Like home equity, shareholder's equity increases your net worth.

How to Buy Stock

To buy stocks, you can either go directly to the company whose stock you want to buy, or, and this is the more common approach, invest through a brokerage. If you buy through a company, you can buy a Dividend Reinvestment Plan (DRIP). This DRIP will take your initial investment and use it to buy company shares. As the shares pay dividends, those dividends will be put to work buying more shares.

If you buy through a brokerage, you have options. You can take the DIY approach and buy and sell shares in different companies of your choosing. Online brokerage firms make this easy, but you'll have to pay a fee, often on a per-trade basis. For an extra fee, the brokerage may offer financial planning assistance, but you'll still be responsible for making your own trades. When you buy your own shares, it's important to make sure you're diversifying your investments. That means investing in companies of different sizes and from different sectors of the economy as well as from the US and abroad.

If you're considering this approach, it's important to be aware that the average investor is very unlikely to "beat the market." Obsessively reading about companies and spending your days trading stocks is probably not goingwarr to turn you into Warren Buffett. Even Warren Buffett advises investors to buy and hold index funds. Which brings us to the other option available to folks looking to buy stocks.

This other option lets you forego the time and trouble of researching individual companies and trading their stocks. With this option, you can invest in a fund that holds shares in many companies at once. These could be mutual funds, which hold a variety of stocks based on the fund managers' decisions as to which companies are desirable investments. Or, they could be Exchange Traded Funds (ETFs) that are similar to mutual funds, but that trade on a stock exchange and offer competitive tax options. Finally, they could be index funds. Rather than trying to beat the market, index funds hold shares from a representative sample of companies and try to mirror the performance of the overall market. It's called an index fund because it aims to mimic (or "index") the market as closely as possible. They'll be named for the exchange they index, for example the S&P 500. Index funds involve less management, so generally charge lower fees. Plus, research shows they consistently outperform actively managed funds.

Of course, for those who want minimal involvement with their money, there are full-service brokers and money managers who will sit down with you, learn about your financial goals and risk tolerance and then make investments on your behalf. This is a relatively costly option, since these folks charge a pretty penny for their expertise. If you go this route, it's a good idea to shop around. Check stockbrokers' credentials and make sure there isn't a history of complaints against the broker. If possible, confirm that he or she is willing to sign a document declaring a fiduciary duty to you, the client. Having a "fiduciary duty" means your stockbroker won't steer you into higher-fee options that won't maximize the earning potential of your investments.

Bottom Line

If you're risk-averse, buying stock may be intimidating. But unless your salary is very high or you have a big inheritance coming your way, you're unlikely to save enough for retirement without investing in stocks. Bonds may feel safer, but they don't offer the same inflation-beating returns as stocks do. That's why it's important to find the balance between bonds and stocks that's appropriate for your goals - and the time you have before retirement.

If you're fortunate enough to have the option of investing pre-tax dollars in a 401(k) through work, look for low-fee places to put those dollars. Fees will eat into your investment gains over time, and who wants that? Ready to branch out from the 401(k)? Consider IRAs and Roth IRAs, which offer different tax advantages. Now that you've read our guide to understanding stocks, don't ignore stocks' potential to grow your money. Using your 401(k), IRA or Roth IRA to stash all your money in bond funds or money market funds will leave you with sluggish growth. Sluggish growth means more years of work and fewer rounds of golf in your golden years.

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What Is the Money Market?

The money market is a market in fixed-income securities. Like other fixed-income securities markets (the bond market, for example), the money market is a stable place to put your money but it's not a get-rich quick plan. We'll walk you through what it is and how it works. If you decide it's for you, you can choose a money market account for your emergency fund.

How the Money Market Works

Like bonds, money market securities are fixed-income securities that act as IOUs. The purchaser earns a modest amount of interest and the seller promises to return the principle (purchase price) of the money market security at a later date.

Money market securities are very liquid and they have short maturities. Examples include short-term certificates of deposit (CDs), US Treasury bills (T-bills), repurchase agreements (also known as "repos") and commercial paper (short-term unsecured loans issued by companies that need to raise money).

What Is a Money Market Account?

Money market accounts come from banks and credit unions. They're similar to savings accounts, but usually have a slightly higher rate of return. They also have limited check-writing, withdrawal and transfer allowances.

Like money in a savings account, money in a money market account is insured by the FDIC or the National Credit Union Administration. The catch, though, is that money market accounts often come with fees to offset their greater rate of return. If you maintain a high balance you can avoid these fees, but if you don't you will probably pay higher fees with a money market account than you would with a savings account.

When Money Market Accounts Make Sense

Because they're a safe place to stash your money, money market accounts can work well as a home for some emergency savings. Money market accounts pay fairly low interest rates these days, but they still may be higher than the interest rate you would get on a savings account at a bank. And in many cases, the larger the balance you are willing to keep in a money market account, the higher the interest rate you'll receive.

Compared to a savings account, a money market account can offer a higher rate of growth - though obviously not as high as what you could get from investing in stocks. Money market accounts generally have the same advantages and disadvantages as savings accounts. The advantage is the safety of the investment. The disadvantage is the lower rate of return.

A low rate of return is significant not just because it means less growth, but because it means more vulnerability to inflation. If the rate of return on your money is lower than the inflation rate you're actually losing money. You may be willing to pay that price for the money you keep in your emergency fund, but you probably shouldn't put all your money in such a low-growth account unless you're very close to needing that money for retirement.

What About a Money Market Mutual Fund?

A money market fund is a mutual fund that holds low-risk money market securities as the account asset. They're required by law to hold low-risk securities, but they can still lose money. Money market funds are often the default destination for investment accounts.

Say you write a check to your 401(k) provider or the brokerage that houses your tax investments. That money will often be parked in a money market fund until you make the time to sit down and put it into, say, a mix of stocks and bonds.

Putting all your savings in a money market fund and leaving them there typically isn't a good asset allocation strategy if you want that money to grow over time and fund your retirement. Some unlucky savers have made 401(k) contributions for 20+ years, only to discover that, because their contributions all went to a money market fund, their savings have hardly grown. Plus, money market funds (unlike money market accounts) can actually lose money in a market downturn.

Bottom Line

You can open a money market account quickly and easily online through a bank, and/or open a money market fund through a brokerage. You can write checks from a money market account (another advantage they have over savings accounts) and in some cases you can get a debit card tied to your money market account. Happy saving!

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What Makes a Seller's Market?

Whether you're trying to buy a home or sell a home, it helps to know whether you're facing a buyer's market or a seller's market. Armed with that knowledge, you can prepare for the negotiations that will take place during the buying or selling process.

A seller's market is a market in which demand outpaces supply. In a seller's market, more people want to buy homes than there are homes available. That means that sellers can command higher prices and maybe even exact more concessions from buyers - concessions like a delayed moving date and a bigger down payment.

Whether you're buying a home or selling a home your real estate agent or broker will probably tell you whether you're in a seller's market or a buyer's market. You might also be able to spot a seller's market if you're noticing that homes in your area are selling for ever-higher prices and inventory is low.

Another way to think about a seller's market is to imagine the opposite of a buyer's market. In a buyer's market there is plenty of inventory and less competition for each home. Buyers can afford to take their time and be choosy, while sellers might have to wait a while before closing on a sale. These conditions are reversed in a seller's market.

What Buyers Should Know About a Seller's Market

What do you do if you're a buyer in a seller's market? For one thing, try not to panic. If it's truly a seller's market and there aren't any listings you love, you might want to stay on the rent side of the rent-or-buy decision. But if you really need to buy a home, the fact that you're doing so in a seller's market isn't the end of the world.

To make it as a buyer in a seller's market it helps to be prepared. That means lining up your down payment funds, which could involve selling some stock, saving aggressively or finalizing the terms of a down payment gift from a relative. It's also important to secure mortgage pre-approval before you start going to open houses so you'll be in a position to make an offer that a seller can take seriously, and so that you'll know how much a lender is willing to offer you in a mortgage. And don't forget to line up a broker or real estate agent if you're using one, and to have a lawyer on call who can be ready to spring into action. If a seller accepts your offer you want to be able to go into contract as quickly as possible to head off other offers.

If you have all the above elements in place you'll be in a strong position to make an offer. That doesn't mean that you'll be a shoo-in for any home you want. In a seller's market, a seller might turn down your offer in the hope that another party will come along with a higher offer. And in a seller's market, you might also find that steep competition from other buyers is your biggest problem. Even if you have pre-approval and make a good offer you could find yourself outmaneuvered by all-cash buyers, for example.

What Sellers Should Know About a Seller's Market

Just as buyers should be aware of what makes a seller's market, sellers should also know what to expect from a seller's market. Just because you're selling your home in a seller's market doesn't mean you can set a sky-high price, refuse reasonable offers and demand all kinds of concessions.

As a seller in a seller's market you have the upper hand, sure, but it's still important to consult with your real estate agent and look at comparable listings when it comes time to set your asking price. And yes, in a seller's market you can probably expect to sell the home for more than the asking price - especially if your asking price is reasonable. But if you let the fact that you're in a seller's market go to your head, you might end up getting in the way of your own sale. In other words, don't get greedy and ask for too much.

If you're a seller off-loading a home in a seller's market you might also be a buyer in that same market. In other words, unless you're moving to another, less competitive real estate market, you'll need to buy a new home around the same time that you sell your current home. You'll be selling a home while buying a home, too. Exceptions are for people who are moving to a buyer's market, are transitioning to rental housing, or are selling an inherited property.

One potential pitfall of a seller's market is that you might have to scramble to find a new home if your home sale gets fast-tracked. Sure, you can hold out for a later closing and moving date, but it might be hard to resist the pressure (and financial incentives) to close more quickly. And you can include a contingency that stipulates that you must have found new housing before your home sale can go through, but again, your buyer might put pressure on you to take that contingency out.

If you want to take advantage of a hot seller's market and get a great price on your home - and quickly - it might be a good idea to rent for a few months between selling your current home and buying your new home. That way, you won't miss out on an opportunity to sell and you won't rush into a home purchase that isn't a great fit.

Bottom Line

Whether you're looking to buy or sell a home, it's helpful to know whether you're in a buyer's market or a seller's market. That knowledge can influence your asking price or your initial offer. It could also affect your negotiating strategy, and the speed of your closing. If you're a seller in a seller's market, don't push your luck and ask too much of potential buyers. And if you're a buyer in a seller's market, be prepared to act quickly.

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What Makes a Buyer's Market?

You've probably heard the phrases "buyer's market" and "seller's market" but do you know the difference between the two? In a buyer's market, there is plenty of housing inventory on the market and low competition for each listing. That means prices are lower and buyers can get better deals. Here's what you should know about buyer's markets.

The Buyer's Market, Explained

In a buyer's market, conditions are favorable to those who want to buy a home rather than those who are selling homes. That means prices are relatively low and there are lots of listings to choose from. When buyers have more choice, sellers can't set high prices or make too many demands of buyers. If they do, the buyer will simply move on to another listing.

Seller's markets, by contrast, are characterized by low inventory, high prices and steep competition for listings. In a seller's market, homes are more likely to sell above asking price, and buyers are more willing to make concessions like putting more money down or making all-cash offers. Homes sell more quickly in a seller's market than in a buyer's market.

How to Navigate a Buyer's Market

If you're a buyer, it's clear that a buyer's market is great for making the jump from renting to buying. Prices are lower in a buyer's market, which means first-time homebuyers don't have to save as much money for a down payment to put the standard 20% down or make the 3.5% down payment for an FHA loan.

But there are more benefits to a buyer's market than just lower prices and more options. In a buyer's market, those shopping for a home have greater leverage over sellers. So if you're a buyer and you want concessions in your home contract, you have a greater chance of getting them approved. You could push for an earlier (or later) move-in date or ask the seller to leave fixtures or pieces of furniture you love. But don't push your luck too far. You don't want to be rude or alienate the seller.

What if you're a seller in a buyer's market? Of course one option is to wait for the market to turn. You can wait to put your home on the market or take your home off the market until conditions are more favorable for sellers. But sometimes waiting to sell isn't an option and you have to brave selling your home in a buyer's market. In that case, you might be able to get a higher price for your home if you're willing to make non-monetary concessions to buyers, like flexibility on move-in dates or other buyer requests.

If you're selling your home in a buyer's market, be prepared for your sale process to drag on. In general, six months is the cut-off used to determine a buyer's market. In other words, if it's taking an average of six months for listed homes to sell then it's a buyer's market. This isn't a hard-and-fast rule, though.

If you're selling a home and buying a new home in the same buyer's market, take comfort from the fact that your home purchase will be less expensive. So although you will probably get less money in the sale than you would if you were selling in a seller's market, you'll pay less for your home purchase, too.

Bottom Line

Whether you're buying or selling a home it helps to have a sense of prevailing market conditions. That way, you'll know how hard to push in negotiations and what to expect when making or receiving offers on a home. Sometimes, life circumstances like a job change mean you have to sell in a buyer's market or buy in a seller's market. The more you know, the easier it will be to navigate that process.

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What Is a Bear Market?

Investors sometimes see the prices of their securities rise one day and fall the next. At times, however, it might seem as though there's a pattern as the value of certain securities moves consistently in one direction. Are you facing a bull or bear market? If you don't know the answer to that question, we'll break down the difference between these two trends.

Bear Markets vs. Bull Markets

We can't talk about bear markets without explaining how bull markets work. During bull markets, prices are either already rising or investors are feeling confident that they'll see an increase in the prices of stocks, bonds, commodities or a different group of securities.

But in bear markets, the prices of securities in a key market index (like the S&P 500) have been falling for a couple of months by at least 20%. This isn't a short-term drop like the one you'll see during a correction, a time period when there are declines in prices by 10% or more for a few weeks or so. A bear market is a long-term trend that leaves investors feeling "bearish" or pessimistic about the future outlook of financial markets.

Multiple factors can contribute to a bear market. If share prices are falling because they're higher than they should be or earnings from corporate investors are low, other investors may start selling their shares. There's more selling than buying as people attempt to mitigate their losses, believing that prices will keep declining.

Bear markets often occur during recessions and times when unemployment is high. Investors' mindsets also play a major role in whether there's a bull or bear market. When investors fear that economic conditions will only get worse, their actions can slow the economy down even further.

Secular Bear Markets

Bear markets can drag on for months at a time. When prices fall continuously for years, however, an economy is experiencing what's called a secular bear market. If the opposite happens and prices are rising for a while, there's a secular bull market.

Secular bull and bear markets can last for five to 25 years. They normally arise following a major event that affects an entire nation or a number of countries around the globe. Secular bear markets tend to be made up of short bull markets, but these upturns aren't powerful enough to halt the downward trend.

Secular bear markets and stock market crashes don't necessarily go together. Both bear markets and crashes are characterized by an increase in selling and a general sense of negativity and doom. But unlike bear markets, crashes are normally characterized by the plummeting of prices at an incredibly fast pace.

How Investors Operate During Bear Markets

In the midst of a bear market, there's a greater supply of securities than there are buyers because investors are generally interested in selling, not buying. Corporations can't profit since few people are purchasing shares. Investors contribute to a downward spiral by panicking in response to declining prices, leaving their money in their pockets and allowing prices to fall to lower levels.

These events don't happen all at once. Initially, a market appears to be doing well and most investors seem to think that better days are ahead. A select few, however, know that they need to begin selling while everyone else is busy buying shares.

Eventually, other investors choose to leave the market. As the desire to sell goes up, security prices become stagnant and then drop. Soon it becomes clear that the economy is in trouble and in the panic phase of the bear market, many folks rush to get rid of their assets.

When the panic stage is over, the market will be back on the upswing. But predicting when a bear market is beginning or coming to a close isn't easy, unless you're familiar with how markets work. Even then it can be tricky. Occasionally, a bear market rally can occur, during which prices rise temporarily by 10% to 20% before falling again.

The Bottom Line

Bear markets are usually signs of rough financial times. Prices in a particular sector are declining or a broad market index is tanking.

If you're looking for a way to protect yourself from this kind of trend, you could consider investing in so-called defensive stocks and securities, which aren't as vulnerable to the ebbs and flows of the market. For example, you could invest in a blue-chip stock that's likely to be profitable regardless of what the economy is going through. Or you could go for a bear fund that is advertised as being able to perform well despite the bear market.

It's important to remember, though, that all bear markets end at some point. So you'll have to decide whether it's better to exit the market to try to make a quick buck or stick around until conditions improve and a larger gain is possible. Some of the savviest investors advise holding onto your assets in a downturn, or even buying more stocks while they're going for cheap.

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