What is a 401(k)?

A traditional 401(k) is a retirement savings plan that allows you to make pre-tax contributions. This means the money you contribute is deducted from your paycheck before taxes, effectively reducing your taxable income for the year. However, when you retire and start withdrawing funds, those distributions are taxed as ordinary income. A traditional 401k has the benefit of reducing your taxable income and many employers will contribute to your 401k which is basically free money after a vesting period.

What is a Roth 401(k)?

The Roth 401(k), on the other hand, operates differently. Contributions to this account are made with after-tax income, so your paycheck won’t see any immediate reduction. However, the major advantage is that all withdrawals in retirement are tax-free, provided they meet the IRS qualifications. This means you won’t pay taxes on the growth of your investments, which can be a significant benefit over the long term.

401(k) vs. Roth 401(k): Key Differences

The primary difference between a traditional 401(k) and a Roth 401(k) revolves around when you pay taxes:

Which Option Is Best for You?

Choosing between a traditional 401(k) and a Roth 401(k) depends on various factors, including your current tax bracket, future tax expectations, and overall financial strategy. Here are some scenarios to consider:

1. Tax Bracket Now vs. Retirement:
   • If you expect to be in a lower tax bracket during retirement, a traditional 401(k) could be advantageous because you’ll defer taxes until you’re potentially paying at a lower rate.
   • If you anticipate being in a higher tax bracket during retirement, the Roth 401(k) might be preferable. Paying taxes now at a lower rate means you’ll enjoy tax-free income later when taxes could be higher.
2. Investment Growth:
   • With a Roth 401(k), all growth is tax-free, making it particularly beneficial if you expect your investments to grow significantly over time. In a traditional 401(k), you’ll owe taxes on the full withdrawal amount, including gains.
3. Contribution Limits:
   • Both 401(k) plans have the same contribution limit. In 2024, you can contribute up to $23,000 ($30,500 if you’re over 50). You can split your contributions between both types, but the total must not exceed this cap.

Additional Considerations

1. Eligibility for Roth IRAs:
   • If your income disqualifies you from contributing to a Roth IRA, a Roth 401(k) is still an option, as it has no income limits.
2. Required Minimum Distributions (RMDs):
   • Traditional 401(k) plans require you to start taking distributions at age 73. As of 2024, Roth 401(k)s no longer have RMDs, offering greater flexibility.
3. Withdrawal Flexibility:
   • While traditional 401(k)s and Roth 401(k)s have withdrawal restrictions, a Roth IRA offers more flexibility. Funds from a Roth 401(k) can be rolled over into a Roth IRA, giving you more control over when and how to access your retirement funds.

The Case for a Balanced Approach

For many, the best strategy may involve contributing to both types of accounts. By diversifying your tax exposure, you can enjoy more control over your tax situation in retirement. Having funds in both traditional and Roth accounts allows you to withdraw strategically, potentially lowering your taxable income and reducing expenses tied to income levels, like Medicare premiums.

Conclusion

The choice between a traditional 401(k) and a Roth 401(k) ultimately comes down to your current financial situation, future expectations, and retirement goals. If you want to lower your taxable income now and defer taxes to retirement, a traditional 401(k) could be the right choice. However, if you prefer to pay taxes upfront and enjoy tax-free withdrawals later, consider a Roth 401(k). Remember, contributing to both can offer a balanced approach to managing taxes throughout your retirement journey.

Choosing wisely between these two accounts can make a significant difference in how much of your money you actually get to keep in retirement. Make sure to assess your options, consider your long-term financial plans, and consult with a financial advisor if needed.

The post Dive into the Depths: 401(k) vs. Roth 401(k) appeared first on Investment U.

Interest Rates as a Political Issue

Interest rates often become a hot-button topic during election campaigns. Rate cuts tend to be more popular as they can positively impact voters’ wallets. Lower rates mean cheaper mortgages, lower student loan payments, and easier access to small business loans, which can stimulate personal spending and investment—key concerns for everyday voters.

Politicians, particularly those in the executive branch, are not shy about their views on the Fed’s interest rate policies, even though the central bank operates independently. In the past, former President Donald Trump has voiced his concerns about the Fed cutting rates, suggesting that such moves could be politically motivated during election cycles. For instance, Trump speculated that the Fed might cut rates to favor the incumbent party, even though these decisions are traditionally made in response to economic indicators like inflation and unemployment rather than political leanings.

The Fed’s Independence and Political Influence

Though the Fed prides itself on being independent from other branches of government, its decisions, especially during election years, are often viewed through a political lens. This is because any shift in monetary policy—such as a rate cut—can influence voter sentiment. A rate cut that reduces borrowing costs can be seen as a boost for the sitting administration, helping to improve consumer confidence and stimulate growth, which might sway public perception.

In an election year, the timing of rate cuts becomes particularly sensitive. For example, during past election cycles, there have been instances where the Fed’s decisions were perceived as favorable or unfavorable to one party. When interest rates are cut, and the economy experiences an immediate benefit (lower borrowing costs, more liquidity), it can create a positive economic environment that reflects well on the current administration, providing an “economic tailwind” for the sitting president or their political allies.

The Broader Impact of Rate Cuts During Elections

When the Fed cuts rates, it can also have a ripple effect on financial markets. Stock markets tend to react positively to lower rates because they reduce borrowing costs for companies, leading to higher potential earnings. During election years, this market optimism can bolster the incumbent administration’s case for strong economic stewardship.

However, critics often raise concerns about the political timing of these cuts. Some argue that rate cuts could be seen as attempts to manipulate the economy for electoral gain, although the Fed operates under a dual mandate to manage inflation and employment levels. This tension can cause uncertainty in the markets, especially when political figures question the Fed’s decisions.

The Role of the President in the Fed’s Decisions

While the president has little direct influence over the Fed’s day-to-day operations, there is an indirect impact. The president appoints members of the Fed’s Board of Governors, who then participate in critical decisions about interest rates. The Senate also plays a role in confirming these appointments. For instance, President Joe Biden has appointed several governors, while Trump previously appointed Jerome Powell as the chair of the Fed. Despite these appointments, the Fed maintains its independence in setting monetary policy.

In some cases, however, politicians from both parties may call for specific monetary actions during election years. For example, senators or representatives may publicly urge the Fed to cut rates, citing economic conditions like inflation or unemployment as justifications. During the 2024 election cycle, for example, some lawmakers called for drastic rate cuts to address growing concerns over inflation and slowing growth.

Conclusion

Election years amplify the scrutiny surrounding Fed decisions, particularly when it comes to interest rate cuts. While the Fed is guided by economic indicators and its dual mandate, the timing of these cuts often intersects with political narratives, influencing voter sentiment and shaping the economic landscape in ways that can affect election outcomes. As candidates and political figures weigh in on the Fed’s decisions, it’s essential to remember that the central bank’s primary goal remains long-term economic stability, not short-term political gain.

The post Will the Fed Interest Rate decision Affect the Election? appeared first on Investment U.

Historical Perspective: The September Slump

Since 1928, the S&P 500 has declined in September over 55% of the time, making it the only month with a more than 50% historical decline rate. This trend is not a mere coincidence; it’s a well-documented anomaly that persists despite the broader cyclical nature of the market.

In 2022, for example, the S&P 500 experienced its worst September since 1974, declining by over 9%. Even in more recent years, the index has posted losses in four consecutive Septembers, according to Deutsche Bank. This recurring pattern isn’t lost on traders and investors, who often adjust their strategies to account for the higher probability of a market decline as summer turns to fall.

Reasons Behind the September Effect

1. Traders Return From Summer, Bringing Volatility

One of the primary drivers of the September slump is the return of traders and portfolio managers from their summer vacations. Over the summer months, trading volumes are typically lighter, leading to relatively stable and less volatile market conditions. However, when traders return after Labor Day, activity in the market spikes.

The sudden surge in trading volume leads to increased volatility. For instance, the S&P 500’s average trading volume jumps from 15.2 billion shares during June-August to 17.2 billion shares in September. This surge in activity often triggers market corrections as portfolio managers reassess their positions and begin reallocating assets, which can lead to concentrated selling pressure. These adjustments frequently cause market dips, contributing to the September Effect.

2. Mutual Fund Fiscal Year-End Drives Selling

Another factor is the fiscal calendar of many mutual funds, which ends in September. As part of their year-end procedures, mutual fund managers often sell underperforming assets to clean up their portfolios before reporting results to investors. This process, known as “window dressing,” adds to the already high selling pressure in the market. When large mutual funds unload significant portions of their holdings, the broader market can experience downward momentum, further exacerbating the September slump.

This phenomenon is similar to tax-loss harvesting that individual investors engage in at the end of the calendar year, but it happens on a larger scale. The selling pressure from mutual funds amplifies market volatility, particularly in sectors where these funds are heavily invested.

3. Bond Market Activity Redirects Capital

The bond market also plays a role in the September Effect. September is typically a period when bond issuance’s spike, as many companies and governments issue new debt ahead of the fiscal year-end. As new bonds flood the market, they attract investors looking for more stable returns, especially in periods of rising interest rates.

When bonds become more attractive, capital flows out of equities and into fixed-income securities, reducing liquidity in the stock market. The recent trend of rising interest rates has made bonds particularly appealing, further diverting investment away from stocks. This shift in capital allocation can trigger additional selling in equity markets, deepening the September downturn.

What Makes September 2024 Unique?

While September is generally known for its poor market performance, 2024 presents some unique challenges and opportunities for investors. The Federal Reserve is expected to meet in mid-September, with many analysts predicting an interest rate cut. Typically, rate cuts are seen as a positive signal for the stock market, as lower rates reduce borrowing costs for companies and consumers.

However, the Fed’s actions will be closely tied to economic data, particularly the upcoming August jobs report. If the report shows weaker-than-expected employment numbers, it could signal that the economy is slowing down more than anticipated, prompting deeper rate cuts. While this could eventually be good news for stocks, it also raises concerns about the broader health of the economy, which could heighten volatility in the short term.

Moreover, with U.S. elections looming, political uncertainty adds another layer of risk. Historically, election years tend to see increased volatility, particularly in the months leading up to the vote. While the most intense volatility typically occurs in October, investors may start to feel the impact in September as election rhetoric ramps up.

Navigating September: Strategies for Investors

Given September’s history of under performance, investors should approach the month with caution. However, this doesn’t mean that all investors should flee the market. In fact, some strategies can turn September’s volatility into opportunity.

1. Focus on Dividend-Paying Stocks: In periods of market uncertainty, dividend-paying stocks, particularly those in defensive sectors like utilities and consumer staples, tend to perform better. As bond yields rise, dividend-paying stocks become more attractive to income-seeking investors.
2. Look for Opportunities in Healthcare and Aerospace: If the dollar weakens, sectors like healthcare, aerospace, and defense could benefit from increased exports. Companies in these sectors often see a boost when the U.S. dollar declines, as it makes their products and services more competitive in foreign markets.
3. Buy the Dip: Historically, buying during the September dip and holding through the year-end rally has been a profitable strategy. October often marks the beginning of a market rebound, leading to a strong November and December. Investors with a long-term outlook can use September’s weakness as an opportunity to buy quality stocks at a discount.

Conclusion

September may be a challenging month for stocks, but understanding the factors that contribute to its historical under performance can help investors make informed decisions. From increased volatility due to traders returning from summer, to mutual fund year-end selling and bond market activity, there are clear reasons why this month has earned its reputation as the worst for stocks.

However, with the right strategies, investors can not only protect their portfolios but also capitalize on the opportunities that arise during this period. Whether it’s shifting focus to defensive sectors, taking advantage of bond market movements, or buying the dip ahead of the year-end rally, September’s challenges can be turned into strategic advantages.

The post Why September is the Worst Month for Stocks? appeared first on Investment U.

The Conventional View: Why Rate Cuts Should Boost Stocks

In theory, a Fed rate cut should be a boon for stocks. Lower interest rates reduce borrowing costs for companies, allowing them to expand operations, invest in new projects, and increase profitability. Additionally, lower rates make bonds less attractive, as bond yields typically decrease, driving investors toward higher-yielding assets like stocks. This dynamic generally creates a favorable environment for equities.

Callie Cox, chief market strategist at Ritholtz Wealth Management, echoes this sentiment, noting that rate cuts can increase the attractiveness of stocks compared to bonds by driving bond yields lower. However, the reaction of stocks to rate cuts isn’t always straightforward.

Historical Data: The Mixed Reactions to Rate Cuts

To understand the true impact of Fed rate cuts on stocks, it’s essential to look at historical data. A review of past rate-cutting cycles since the early 1990s reveals that the stock market’s response to the first cut can vary significantly.

• 1995 Rate Cuts: The Fed’s first rate cut in July 1995 was followed by a strong rally in the S&P 500, which gained 20.13% over the next year. This period was characterized by a robust economy, and the rate cuts were seen as a celebration of sustained growth.
• 1998 Rate Cuts: In September 1998, the Fed cut rates amid financial market turmoil following the Russian debt crisis. Despite an initial dip, the S&P 500 rebounded, posting a 22.27% gain over the next year. Here, the rate cuts were perceived as a preemptive measure to prevent broader economic fallout, which ultimately bolstered investor confidence.
• 2001 Rate Cuts: The 2001 rate cuts occurred in the midst of the dot-com bust. Initially, the S&P 500 gained, but three months later, it was down by 10.7%, and by the end of the year, it had declined by 10.02%. These cuts were made in desperation to combat a slowing economy, leading to investor fears about an impending recession.
• 2007 Rate Cuts: The 2007 rate cuts came just before the financial crisis. After an initial uptick, the S&P 500 dropped significantly, losing 21.69% over the following year. The cuts were seen as a desperate move to stave off the economic downturn, which ultimately failed to reassure investors.
• 2019 Rate Cuts: The most recent rate cuts in 2019 saw a mixed response. Initially, the S&P 500 dipped, but it recovered to post a 9.76% gain over the following year. The 2019 cuts were part of a “mid-cycle adjustment,” and the market eventually responded positively, anticipating continued economic growth.

The Key Takeaway: Context Matters More Than the Cut

The varied historical responses to Fed rate cuts underscore a crucial point: the context in which the Fed cuts rates matters more than the cut itself. As Kevin Gordon, a strategist at Charles Schwab, notes, it’s not just whether the Fed is cutting rates that matters for stocks, but the reason behind the cuts.

If the Fed cuts rates in response to a robust economy (“celebration”), stocks often rally as investors anticipate continued growth. However, if the Fed cuts rates out of concern for a slowing economy or financial instability (“desperation”), stocks may struggle as investors worry about deeper economic problems.

Current Market Conditions: What to Expect?

As of September 2024, with the Fed poised to cut rates again, investors are left to speculate on how the market will react. Current economic indicators suggest a mixed picture. While some sectors of the economy show resilience, others, particularly the labor market, have shown signs of weakening. This uncertainty has led to increased market volatility.

Moreover, the S&P 500’s performance in the months leading up to the anticipated rate cut has been relatively strong, which could set the stage for a “buy the rumor, sell the news” scenario. Investors may have already priced in the rate cut, leading to a potential selloff once the cut is officially announced.

Conclusion: A Cautious Approach is Warranted

While history provides valuable insights into how stocks might react to Fed rate cuts, the unique circumstances surrounding each cut mean that past performance is not always indicative of future results. Investors should remain cautious, considering both the broader economic context and the reasons behind the Fed’s decision to cut rates.

As always, diversification and a focus on long-term investment goals are crucial strategies in navigating the uncertainty that accompanies Fed rate decisions. Whether the upcoming rate cut will lead to a rally or a downturn remains to be seen, but understanding the factors at play can help investors make more informed decisions.

The post What Happens to Stocks When the Fed Cuts Rates? An Analysis Through Historical Data appeared first on Investment U.

Before we get started, let me ask one simple question. Why do you want to invest? Well, if you’re like many people, it’s because you believe investing is the best way to become rich and live a “better” life. Maybe you’re hoping to provide a stress free future for your family, or set yourself up for a comfortable retirement. There are many reasons to invest, but before we continue, there are a few things you’ll need to know before you can invest wisely.

Remember, you’re not just looking to invest. You’re on a journey towards financial freedom. In order to get there, you’ll need to maximize your income, learn how to create a budget that works for you, pay off all your debt (except your home mortgage if you have one) and save up an emergency fund that will cover three to six months of expenses. To learn more about setting yourself up to invest wisely, read my list of the 10 Steps to Financial Freedom.

Ready to Start Investing?

Once you have your finances in order, you can begin to maximize your contributions to various retirement accounts, such as a 401k, 403b, or Roth IRA. Additionally, you might consider opening a standard brokerage account or an educational investment account, such as a 529 savings plan.

Alternatively, many savvy investors go the route of starting a business of their own. If you have the skills to effectively manage a company, this can become a very profitable investment. However, according to data from the U.S. Bureau of Labor Statistics, about 20% of U.S. small businesses fail within the first year. You’ll need to keep this in mind before making any hasty decisions.

Real estate can be yet another profitable investing angle. Buying and selling, quick-flips or full renovations, rental properties and note investing are just some of the ways to make money in real estate.

Collectables such as classic cars, sports cards or movie posters are more lucrative investments than you might think. Becoming well versed in a specific type of collectable is often the best approach if you are interested in going this route.

IU Investment Education

Our Goal: To help our members and readers live a rich life. We do this not only by providing you with amazing investment research…but also by helping so many of you learn, grow and profit in ways you never thought imaginable.

The unfortunate truth is that a vast majority of the population still knows little to nothing about investing. Even one of the most basic aspects of investing, the 401k is still severely underutilized. In fact, only 32% of Americans are currently investing in one. Which compared to the 59% of those with access to one, does not bode well for wealth creating investments in general.

You see, there are many reasons why people don’t invest. Mistrust in the marketplace or lack of income could be the reason. But more often than not, the reason is poor education or lack of financial knowledge.

It is our mission at Investment U to help our readers “Master their finances, tuition-free.” Check out some of the investment education resources below to help you on your way.

Investment Education Resources

Investing 101
Let’s start with the basics. Here we’ll go over some simple investing terms and definitions. We’ll also provide some investing tips and tricks to get you started.

Investment Opportunities
This is one of the most utilized sections of the Investment U website. Expand your investment education in areas like stocks, bonds, mutual funds, IPOs and more.

Retirement
Browse our retirement category and start learning about various plans and accounts. You’ll also learn more about where to retire, how much you’ll need to invest and how to save for a wealthy retirement.

Tools & Calculators
As you grow and expand your investment knowledge, you’ll need help calculating your investments. The following tools and calculators will help you along your way to financial freedom.

Investment U Conference

Are you someone looking to bolster your investment education in person? Look no further than our 23rd Annual Investment U Conference. This three day event features debates and Q&A sessions with some of the world’s top investing experts. Presentations revolve around topics such as cryptocurrencies, gold, disruptive stocks, technology and more.

Stay Tuned…Our 2022 Investment U Conference will take place in San Diego, CA. Make sure to sign up for our free e-letter below so you can be the first to join when registration opens!

More On Investment Education

We are in the process of finalizing our comprehensive investment glossary. This will include even more amazing investment education resources, definitions and tips to make you a smarter, more profitable investor. Until then familiarize yourself with the concepts we reviewed throughout this article. Additionally, check out these 62 Investment Terms Beginning Investors Should Know.

Why come to us, when we can come to you! Sign up for our free Investment U e-letter today and we’ll send the most recent investment education tips and opportunities right to your inbox. Your journey to financial freedom starts today.

The post Investment Education For Everyone appeared first on Investment U.

Financial investments may include the purchase of stocks, bonds, mutual funds, etfs, options, annuities, bank products and more. The purpose of these assets could be to provide future income, or simply greater future overall value. When the investor decides to sell their asset, they aim to produce a good ROI (Return on Investment).

Types of Investments (Financial)

There’s are many investment vehicles and asset classes for investors to choose from. Knowledge of the asset, risk level and tolerance are some things to consider before deciding to invest.

Growth Investments

Growth investments are best for those who intend to hold on to their asset for longer time periods. 

• Shares. These are equity investments that represent your interest in a company’s growth and success. As the company grows and makes money, so do you—be it through share price, dividend payments, or other means.
• Bonds. These are debt equities that represent a promissory note. The issuer agrees to pay you back your principal investment with a fixed rate of interest over a fixed term. This debt helps issuers finance new growth opportunities.
• Funds. Index funds, mutual funds and exchange-traded funds (ETFs) are all managed investments. You’re pooling your money with other investors and letting an expert leverage larger sums and expertise to generate ROI.
• REITs. Real estate investing without actually owning the real estate. REITs return 90% of their income to shareholders, which means strong compounding power through dividend reinvestment—or a passive revenue stream.
• Derivatives. Options and other derivatives allow investors to make money without holding assets. They’re a riskier form of investment with big upside for those who understand market tendencies and catalysts.
• Commodities. Everything from gold and silver to livestock and crops have intrinsic value. Investors in commodities capitalize on these values without owning the commodities themselves.
• Property. From rental houses to multifamily properties and commercial real estate, there’s wealth-generating power in property. Collecting rent passively, fix-and-flip sales, buy-and-hold appreciation and more are all forms of investing.
• Private equity. If you own a stake in a local business or fund a startup with an infusion of capital, you own private equity. This stake entitles you to a portion of the revenue or value of the asset.

There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.

Once you are familiar with the different types of assets you can begin to think about piecing together a mix that would fit with your personal circumstances and risk tolerance.

Growth investments

These are more suitable for long term investors that are willing and able to withstand market ups and downs. These are high risk investments that have the largest potential gains. A lot of tech stocks are considered growth investments.

Shares

Shares are considered a growth investment as they can help grow the value of your original investment over the medium to long term.

If you own shares, you may also receive income from dividends, which are effectively a portion of a company’s profit paid out to its shareholders.

Of course, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors, who are comfortable withstanding these ups and downs.

Also known as equities, shares have historically delivered higher returns than other assets, shares are considered one of the riskiest types of investment.

Property

Property is also considered as a growth investment because the price of houses and other properties can rise substantially over a medium to long term period.

However, just like shares, property can also fall in value and carries the risk of losses.

It is possible to invest directly by buying a property but also indirectly, through a property investment fund.

Defensive investments

These are more focused on consistently generating income, rather than growth, and are considered lower risk than growth investments.

Cash

Cash investments include everyday bank accounts, high interest savings accounts and term deposits.

They typically carry the lowest potential returns of all the investment types.

While they offer no chance of capital growth, they can deliver regular income and can play an important role in protecting wealth and reducing risk in an investment portfolio.

Fixed interest

The best known type of fixed interest investments are bonds, which are essentially when governments or companies borrow money from investors and pay them a rate of interest in return.

Bonds are also considered as a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property.

They can also be sold relatively quickly, like cash, although it’s important to note that they are not without the risk of capital losses.

Cryptocurrency

Cryptocurrency is another high risk investment, that many say will payoff in the long run. It’s founded on the idea that currency shouldn’t be centralized and controlled by anyone, be it individual, bank, or government. Anyone with internet access can get a piece of the pie. 

Conclusion

This was just a brief overview of different types of investments. Please use our search function or check out related articles to dive deeper into each one of these topics.

The post Investment Meaning – What is an Investment? appeared first on Investment U.

This article is republished from Manward Financial

Here we go again. Another bank collapses.

Failure.

It’s a look into the past… and an oh-so-scary look into the future.

Banks are failing. Bailout talks are increasing. And the president plans to engage in even more of the borrow-and-spend antics that got us here.

We’ll start with the president’s budget proposal, as it so aptly sets the scene.

It’s a scene of desperation, depression and lunacy – as if the front door of the silly ward has fallen off and the inmates are in the streets buying sprinkled ice cream cones.

Biden wants to take $5 trillion from the rich and give it to the poor. And he wants to cut the deficit by $3 trillion… but raise the national debt from $31 trillion to $51 trillion within a decade.

At current interest rates, it’d be a disaster. We might as well start the mountain of bankruptcy paperwork now.

That’s what the banks are thinking.

It’s hell in that world right now. With the rate to borrow for six months nearly 40% higher than the rate we get paid for a 30-year bond, the banking world is as upside-down as the yield curve.

And it shows.

You’ve surely heard the news.

Off Balance – Bankruptcies and Stock collapse

Shares of bank stocks plunged last week, led by now-failed Silicon Valley Bank. Its shares dipped more than 60% on Thursday after the company said it was forced to book a loss of $1.8 billion.

By Friday afternoon… it was gone.

While SVB is the dull tip of the spear, it’s got a host of banks piling in behind it.

Wall Street is punishing the sector for it. The popular KBW Nasdaq Bank Index (BKX) plunged more than 15% last week. Just from the four biggest U.S. banks, that equals more than $50 billion in lost market share.

And that’s not just pie-in-the-sky money. In the banking world, it’s the real deal. As valuations fall, banks are forced to balance their books.

Much of the pressure is coming from folks moving their money out of banks. They’re proving the old line (that we mutter oh so often) that money goes where money is treated best.

Money has never been treated well in a traditional bank. But in the zero-interest rate world we were living in, zero was zero no matter whence it came.

But now that Mr. Powell has exchanged his helicopter for a sharp-beaked hawk… things have changed.

Upside-Down – Why are the banks collapsing?

As we told our paying subscribers last week, it’s now possible to get 5% on your cash… so do it.

Click Here to become a member

As more investors put this idea into action, more cash will get sucked out of the traditional banking world. And as the withdrawals pile up, banks will be forced to sell the assets they’d used their customers’ money to buy.

Unfortunately, many of those assets aren’t worth as much as they paid for them.

Worse, with an inverted yield curve, banks can’t arbitrage the difference between short- and long-term debt.

The system is upside-down.

Why?

See the top of this essay. We spend more than we make… and in 2020, we printed $5 trillion that we didn’t have and, worse, didn’t need.

And the latest figures from D.C. tell us that, sadly, we ain’t seen nothing yet.

Uncle Sam is going to spend his way into prosperity.

But this time, he promises, it’ll actually work.

Ha!

Hold on. It’s about to get bumpy.

Bank failures rarely portend good times.

The post Exploring the Economic Impact of the Recent Bank Collapse appeared first on Investment U.

IPO Lockup Period Breakdown

An IPO lockup period is a period of time after a company has gone public in which major shareholders are prohibited from selling shares. In most cases, a lockup period will last anywhere from 90 to 180 days. Moreover, this stipulation typically applies to company insiders such as founders, owners, managers and employees. It can also include early-stage investors such as venture capitalists in some cases.

But why is this important? For starters, it prevents insiders from overloading the market with massive amounts of shares. This alone could cause the stock to plummet quickly.

When a company IPOs, it usually offers around 15-20% of its outstanding shares. The rest are owned by insiders. This is why you don’t want insiders flooding the market with tons of shares. It will cause the stock to drop.

Furthermore, an IPO lockup period is not mandated by the Securities and Exchange Commission (SEC). Or any regulatory body for that matter. It’s actually self-imposed by the company going public or required by an underwriter of the IPO. However, you can find information about a company’s lockup period in its SEC S-1 filing and any changes in subsequent filings.

In general, the goal is to keep the stock price going up after its debut. And once the lockup period ends, stock volume typically increases by 40% and the share price  drops by 1-3% on average, according to research by the Stern School of Business at New York University.

Pros and Cons of Lockup Periods

First and foremost, IPO lockup periods are a preventative measure. The main benefit is that it helps stabilize a stock price. Investors in the market will naturally buy and sell shares once the IPO goes live. And over the first few weeks and months, the stock price will balance out due to supply and demand.

A lockup period prevents selling pressure and promotes stability. But once the period ends, traders often short-sell the stock or use option contracts as a hedge against their long positions in the company.

As you can see, investors will sell off shares in anticipation of an IPO lockup period expiring. And in some cases, the sell-off is so dramatic that it can cause a short-squeeze. A short-squeeze happens when investors bet against a stock and the share price goes up instead. These short sellers are expecting the price to drop. Instead, the share price rises unexpectedly and causes the short sellers to exit their positions and cut their losses. This is something you must consider when investing in IPOs.

Investing in IPOs

The IPO process is so detailed that even the most experienced investors have to stay on top of their research. And it’s important that you do the same. For the latest IPO updates and stock analysis, consider signing up for one of the best investment newsletters. These investing guru’s will help you better understand the market and provide you with tips on how to enhance your portfolio.

Financial literacy can help you become a better investor. The more you know the better. And that is why many investors are turning to newsletters to keep their mind fresh. You now have a better understanding of an IPO lockup period. But don’t stop there. Continue learning more about the stock market and it will help you make better investment decisions in the long run.

The post What Is an IPO Lockup Period? appeared first on Investment U.