Financial Topics Archives

Mar

2025

Private Credit vs. Private Equity: What’s the Difference?

By Rebecca Lake | Family Finances, invest, Investing | Comments Off

Private credit and private equity investments offer investors opportunities to build their portfolios in substantially different ways. With private credit, investors make loans to businesses and earn returns through interest. Private equity represents an ownership stake in a private company or a public company that is not traded on a stock exchange.

Each one serves a different purpose, which can be important for investors to understand.

Key Points

• Private credit and private equity are alternative investments that offer different ways to build portfolios.

• Private credit involves making loans to businesses and earning returns through interest, while private equity represents ownership stakes in private or delisted public companies.

• Private credit investors include institutional investors, high-net-worth individuals, and family offices, while private equity investments are often made by private banks or high-net-worth individuals.

• Private credit generates returns through interest, while private equity aims to generate returns through the sale of a company or going public.

• Private credit carries liquidity risk, while private equity investments can be affected by the company’s performance and potential bankruptcy.

What Does Private Credit and Private Equity Mean?

Private equity and private credit are two types of alternative investments to the stocks, bonds, and mutual funds that often make up investor portfolios. Alternative investments in general, and private equity or credit in particular, can be attractive to investors because they can offer higher return potential.

However, investors may also face more risk.

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Private Credit Definition

Private credit is an investment in businesses. Specifically, an investor or group of investors extends loans to private companies and delisted public companies that need capital. Investors collect interest on the loan as it’s repaid. Other terms used to describe private credit include direct lending, alternative lending, private debt, or non-bank lending.

Who invests in private credit? The list can include:

• Institutional investors

• High-net-worth individuals

• Family offices or private banks

Retail investors may pursue private credit opportunities but they tend to represent a fairly small segment of the market overall. Private credit investment is expected to exceed $3.5 trillion globally by 2028.

Private Equity Definition

Private equity is an investment in a private or delisted public company in exchange for an ownership share. This type of investment generates returns when the company is sold, or in the case of a private company, goes public.

Similar to private credit, private equity investments are often the domain of private banks, or high-net-worth individuals. Private equity firms can act as a bridge between investors and companies that are seeking capital. Minimum investments may be much higher than the typical mutual fund buy-in, with investors required to bring $1 million or more to the table.

Private equity is often a long-term investment as you wait for the company to reach a point where it makes sense financially to sell or go public. One difference to note between private equity and venture capital lies in the types of companies investors target. Private equity is usually focused on established businesses while venture capital more often funds startups.

What Are the Differences Between Private Credit and Private Equity?

Private credit and private equity both allow for investment in businesses, but they don’t work the same way. Here’s a closer look at how they compare.

Investment Returns

Private credit generates returns for investors via interest, whereas private equity’s goal is to generate returns for investors after selling a company (or stake in a company) after the company has grown and appreciated, though that’s not always the case.

With private credit, returns may be more predictable as investors may be able to make a rough calculation of their potential returns. Private equity returns are less predictable, as it may be difficult to gauge how much the company will eventually sell for. But there’s always room for private equity returns to outstrip private credit if the company’s performance exceeds expectations. However, it’s important to remember that higher returns are not guaranteed.

Risk

Investing in private credit carries liquidity risk, in that investors may be waiting several years to recover their original principal. That risk can compound for investors who tie up large amounts of capital in one or two sectors of the market. Likewise, changing economic conditions could diminish returns.

If the economy slows and a company isn’t able to maintain the same level of revenue, that could make it difficult for it to meet its financial obligations. In a worst-case scenario, the company could go bankrupt. Private credit investors would then have to wait for the bankruptcy proceedings to be completed to find out how much of their original investment they’ll recover. And of course, any future interest they were expecting would be out the window.

With private equity investments, perhaps the biggest risk to investors is also that the company closes shop or goes bankrupt before it can be sold but for a different reason. In a bankruptcy filing, the company’s creditors (including private credit investors) would have the first claim on assets. If nothing remains after creditors have been repaid, private equity investors may walk away with nothing.

The nature of the company itself can add to your risk if there’s a lack of transparency around operations or financials. Privately-owned companies aren’t subject to the same federal regulation or scrutiny as publicly-traded ones so it’s important to do thorough research on any business you’re thinking of backing.

Ownership

A private credit investment doesn’t offer any kind of ownership to investors. You’re not buying part of the company; you’re simply funding it with your own money.

Private equity, on the other hand, does extend ownership to investors. The size of your ownership stake can depend on the size of your investment.

Investor Considerations When Choosing Between Private Credit and Private Equity

If you’re interested in private equity or private credit, there are some things you may want to weigh before dividing in. Here are some of the most important considerations for adding either of these investments to your portfolio.

• Can you invest? As mentioned, private credit and equity are often limited to accredited investors. If you don’t meet the accredited investor standard, which is defined by income and net worth, these investments may not be open to you.

• How much can you invest? If you are an accredited investor, the next thing to consider is how much of your portfolio you’re comfortable allocating to private credit or equity.

• What’s your preferred holding period? When evaluating private credit and private equity, think about how long it will take you to realize returns and recover your initial investment.

• Is predictability or the potential for higher returns more important? As mentioned, private credit returns are typically easy to estimate if you know the interest rate you’re earning. However, returns may be lower than what you could get with private equity, assuming the company performs well.

Here’s one more question to ask: how can I invest in private equity?

These investments may not be available in a standard brokerage account. If you’re looking for private credit opportunities you may need to go to a private bank that offers them. When private equity is the preferred option, a private equity firm is usually the connecting piece for those investments.

When comparing either one, remember to consider the minimum initial investment required as well as any fees you might pay.

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The Takeaway

Private credit and private equity can diversify a portfolio and help you build wealth, though not in the same way. Comparing the pros and cons, assessing your personal tolerance for risk and ability to invest in either can help you decide if alternative investments might be right for you.

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FAQ

Why do investors like private credit?

Private credit can offer some unique advantages to investors, starting with predictable returns and steady income. The market for private credit continues to grow, meaning there are more opportunities for investors to add these types of investments to their portfolios. Compared to private equity, private credit carries a lower degree of risk.

How much money do you need for private equity?

The minimum investment required for private equity can vary, but it’s not uncommon for investors to need $100,000 or more to get started. In some instances, private equity investment minimums may surpass $1 million, $5 million, or even $10 million.

Can anyone invest in private credit or private equity?

Typically, no. Private credit and private equity investments most often involve accredited investors or legal entities, such as a family office. It’s possible to find private credit and private equity investments for retail investors, however, you may need to meet the SEC’s definition of accredited to be eligible.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/shapecharge

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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Mar

2025

NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

By Rebecca Lake | Growing Wealth, invest, Investing, SMB | Comments Off

Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

Key Points

• Net Present Value (NPV) measures the difference between the present value of cash inflows and outflows over time.

• Calculating NPV helps determine the profitability of investments or projects by considering future cash flows and a discount rate.

• The NPV formula incorporates the time value of money, emphasizing that money now is worth more than the same amount in the future.

• A positive NPV indicates that the earnings from an investment are expected to exceed the cost.

• NPV is used in capital budgeting to assess the return on project investments before committing funds.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

• List future cash flows for each year you expect to receive them.

• Calculate the present value for each cash flow.

• Add all present values for future cash flows together.

• Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)^N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

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How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

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FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

About the author

Rebecca Lake

Photo credit: iStock/Sanja Radin

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Mar

2025

Mutual Funds vs Stocks: Differences and How to Choose

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.

Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.

Key Points

• Mutual funds offer a diversified portfolio in a single investment, whereas stocks are shares in individual companies.

• Mutual funds can be actively or passively managed, with some tracking market indexes.

• Stocks provide direct ownership in a company, offering potential for higher returns and greater risk.

• Mutual funds are managed by professionals, making them a good option for those who prefer not to manage their investments.

• The choice between mutual funds and stocks depends on individual financial goals, risk tolerance, and investment strategy.

What’s the Difference Between Mutual Funds and Stocks?

The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.

Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.

Different Types of Mutual Funds

Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).

Some types of mutual funds include:

• Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.

• Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.

• Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.

• Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.

• Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.

What Are Stocks?

Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.

Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:

• Value stocks: Companies that are trading lower than their potential value, based on fundamentals.

• Growth stocks: Companies with a track record of steady growth.

• Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.

Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.

Pros and Cons of Mutual Funds

Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.

Pros	Cons
Diversification is simplified	Some funds may underperform
Easy access to the markets	Higher minimum investments
May be cheaper than stocks	Not all funds are low-cost

Pros of Mutual Funds:

• Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.

• Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.

• Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.

Cons of Mutual Funds:

• Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.

• Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.

• Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.

Pros and Cons of Individual Stocks

Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.

Pros	Cons
High return potential	Higher risk
Greater flexibility	More difficult to diversify
Low costs	More time-consuming

Pros of Individual Stocks:

• Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.

• You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.

• Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.

Cons of Individual Stocks:

• Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.

• Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.

• Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You canbuy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Choosing Between Mutual Funds and Stocks

There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.

Here’s a simple breakdown of how to compare the two when deciding where to invest.

Consider mutual funds if you…	Consider stocks if you…
Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market.	Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment.	Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses.	Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.

The Takeaway

Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Which is riskier, stocks or mutual funds?

Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.

Which investment is best for beginners, mutual funds or stocks?

Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.

Are mutual funds worth it?

Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.

About the author

Rebecca Lake

Photo credit: iStock/Eva-Katalin

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Mar

2025

What Are Blue Chip Stocks?

By Austin Kilham | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Blue chip stocks are generally issued by large, well-established companies that have a history of reliable growth. These companies are often financially sound, they’re typically considered lower risk; many blue chip stocks also pay dividends.

In other words, blue chip stocks are the big, stable ocean liners of the equity markets. Dazzling outperformance is not what blue chip investors are after. Rather, you may want to consider these large-cap stocks in the slow-but-steady corner of your equity allocation, as part of your diversification strategy.

Key Points

• Blue chip stocks tend to be bigger, more stable companies, often with a long history and slow but steady growth.

• Because blue chip companies are typically past their rapid growth phase, many can afford to distribute some of their profits to shareholders via dividends.

• The advantage of investing in blue chips is that they have a low risk profile, and may provide stability in a portfolio — potentially with more growth than fixed-income securities.

• For some investors, the disadvantage of blue chips is that these companies tend to be in the low-and-slow category of returns.

What Is a Blue Chip Stock?

First, let’s answer the obvious questions: Why blue chips? The origin of the term “blue chip stocks” is believed to originate with the game of poker, where traditionally the blue chips have the highest value.

While there is no fixed definition for blue chips, generally speaking blue chip stocks are known for being large, stable, and reliable. Blue chip companies can also share some other characteristics.

Common Traits of a Blue Chip Stocks

• They’re well-known. Blue-chip stocks can be found in almost any sector, from consumer goods to big pharma. Companies like Morgan Stanley, Disney, Oracle, Coca-Cola, and Pfizer are considered blue chip stocks.

• They’re industry leaders. Most blue chip stocks are not newcomers. Rather they’ve demonstrated a history of innovation as well as financial stability, which makes them well-established industry leaders, and a potential anchor for a defensive investing strategy.

• They’re big. Many blue chip companies have a market cap of $10 billion or more, and many are larger. Market capitalization is a measure of a company’s value, and it’s calculated by multiplying the share price by the number of shares outstanding.

• They’re well established. Most blue chip stocks are not newcomers. Rather they’ve demonstrated a history of financial stability, which can make them an important part of a defensive investment strategy.

• They have a long track record. Owing to their longer histories, many blue chip stocks have overcome market challenges, but that does not make them “safe” investments. But they may be considered lower risk than, say, growth stocks.

• They meet certain standards. You’ll often find blue chip stocks listed on the Dow Jones Industrial Average, S&P 500 Dividend Aristocrats, or the Bridgeway Blue Chip 35 Index. Some of these indexes can have stringent rules that only the most financially stable companies could meet.

• They pay dividends. Blue chip stocks typically pay out dividends, or a share of the company’s profits, to shareholders.

Taken together, these qualities can make blue chips an important part of a defensive investment strategy.

Investors may want to consider them when they’re researching stocks to buy through an online brokerage or a traditional one.

10 of the Biggest Blue Chip Stocks

Here is a selection of 10 U.S. blue chip companies from Morningstar’s Best Companies to Own list. They are the largest by market cap, as of February 21, 2025.

These companies have been around for decades, and because of their consistent performance history, they’re considered blue chip stocks today. You may want to consider them when you’re thinking about portfolio diversification.

• Anheuser-Busch InBev (BUD)

• Pfizer (PFE)

• Nike (NKE)

• Taiwan Semiconductor Manufacturing (TSM)

• Roche Holding (RHHBY)

• Alphabet (GOOGL)

• Danaher (DHR)

• Caterpillar (CAT)

• Merck (MRK)

• Nestle (NSRGY)

Pros and Cons of Investing in Blue Chip Stocks

Like any investment, blue chip stocks have their potential benefits and drawbacks. Before investing in blue chip stocks, you may want to weigh the positives and negatives of these types of stocks on your overall investment strategy.

Benefits of Blue Chip Investments

Blue chip stocks can offer investors certain benefits:

• They’re here for the long term. Many of these companies are global in reach, with immense resources and real staying power. Thus, blue chip stocks may be more stable than smaller companies in their sectors — but with the ability to innovate and maintain their status.

• They can be lower risk. Blue chip stocks are often considered lower risk stocks because of their size and market history in the market. As noted above, many of them also pay dividends, which benefits investors.

• They’re highly liquid. Because these companies trade frequently, but are typically not volatile, investors can generally be confident in these stocks’ value when selling.

• They’re easy to follow. The companies behind many blue chip stocks tend to be well known, which means announcements and news around them is likely to make the front page of the financial section.

Potential Drawbacks of Blue Chip Stocks

There’s no such thing as a “sure thing,” especially in investing, and the drawbacks of blue chip stocks prove this point. Here are a few cons to keep in mind when considering blue chips for your portfolio.

• They may fall harder. The old adage “the bigger they are, the harder they fall” may apply here. Just because a blue chip stock has a solid history does not ensure a profitable future, and legacy brands can fall behind nimble newcomers.

• Limited growth. Though these companies typically have longevity on their side, they are often past their prime growth years. This is why blue chip companies also have a reputation for less volatile and lower risk.

• They may be expensive. Blue chip stocks tend to be well-known brands and can be a desirable part of people’s investment strategies. For that reason, you’re unlikely to get a deal on them.

Investing in Individual Blue Chip Stocks

Like a well-balanced meal, investing in blue chip stocks can be one part of a healthy portfolio. Those looking to make blue chip stocks a part of their balanced investment strategy may first consider investing in individual stocks.

If the price per share is too steep for an investor’s budget, investors can consider fractional share investing, which allows the purchase of a fraction of a stock instead of the whole share, starting at just $5. Restrictions do apply for fractional shares.

Choosing to invest in an individual stock might be a good way to get a feel for the market, or it might be a way to take a more active investment strategy. Either way, a brokerage can handle an investor’s single blue chip stock purchase.

Blue Chip Funds: An Alternative to Individual Stocks

If no individual stock strikes your fancy, but you still want to get into the blue chip game, you might consider investing in index funds or ETFs that focus on blue chip stocks.

Various index funds and ETFs typically hold a diversified basket of stocks, often in line with a stock market index that tracks a segment of the market. Choosing an index fund or ETF that tracks large-cap stocks, the S&P 500, or the Dow Jones Industrial average can be one way to invest in a wide range of blue chip companies and add diversification.

The Takeaway

A company’s stock may earn a blue chip designation when they have a strong performance history, consistent returns, excellent financials, and over time they’ve become industry leaders.

For investors who are ready to start investing, blue chip stocks can be a solid choice, offering reliable performance — but not one that’s likely to deliver a lot of growth. As such, blue chips are often viewed as being conservative (i.e., lower risk). Being conservative can be an important part of an investment strategy, and investors may want to include other investments as well.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Where did the term “blue chip” come from?

The term “blue chips” may have come from poker, where blue chips are traditionally worth more than other chips.

What are some examples of well-known blue chip companies?

There are blue chip companies in every industry. Some well-known blue chips include companies like Wells Fargo, Anheuser Busch, Nike, Caterpillar, and Pfizer.

What are the potential downsides of blue chip investments?

While blue chips are considered steady and reliable, they aren’t immune to market volatility, and can be vulnerable to more nimble competitors. Blue chips also tend to be expensive, and more conservative than, say, growth stocks — something to bear in mind when constructing a balanced portfolio.

How do I invest in blue chip stocks?

Blue chip stocks are generally available to investors directly through a brokerage account, as well as through mutual funds and ETFs, which offer a basket of stocks. It’s also possible to purchase fractional shares of blue chip stocks.

There are limitations with fractional shares to consider before investing. During market hours fractional share orders are transmitted immediately in the order received. There may be system delays from receipt of your order until execution and market conditions may adversely impact execution prices. Outside of market hours orders are received on a not held basis and will be aggregated for each security then executed in the morning trade window of the next business day at market open. Share will be delivered at an average price received for executing the securities through a single batched order. Fractional shares may not be transferred to another firm. Fractional shares will be sold when a transfer or closure request is initiated. Please consider that selling securities is a taxable event.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q125-082

Mar

2025

Most Affordable Renters Insurance for Apartments

By Rebecca Lake | Budgeting & Goals, Insurance | Comments Off

Renters insurance can cover your personal belongings against things like fire damage or theft when renting a home. In exchange for that protection, you pay a premium to the insurance company.

Finding affordable renters insurance might be a priority if you’re living on a tight budget. Numerous companies offer affordable renters insurance for apartments that can provide you with the coverage you need for less money.

What Is Renters Insurance and How Does It Work?

What is renters insurance? Simply put, renters insurance is a type of coverage that’s designed for people who rent, rather than own, their homes. If you live in an apartment, the rental property owner may have separate insurance for the structure itself. Renters insurance, meanwhile, offers protection to you as a tenant.

This type of insurance is also referred to as tenant insurance. You’re typically not obligated to purchase a renters policy unless your landlord requires renters insurance as part of your lease agreement. If you live with roommates, each of you can individually decide if you want to have this coverage.

Personal insurance planning is important for protecting yourself financially. Having renters insurance is a good idea if you’re concerned about your personal possessions being damaged or stolen, or about other situations that could result in financial losses.

Recommended: What Does Renters Insurance Cover?

Find Affordable Renters Insurance.

Compare quotes from the top renters insurance companies you know and trust to find your best price.

What’s Included in Renters Insurance Coverage?

If you’re paying for renters insurance, it’s important to know what’s covered and what’s not. What renters insurance covers varies depending on the insurer and your level of coverage. Generally, renters insurance is designed to offer three layers of protection:

• Personal property

• Liability

• Additional expenses

The personal property coverage in a renters insurance policy is designed to protect your belongings against certain dangers. That can include things like wind damage, smoke or fire damage, vandalism, theft, explosions, and water damage relating to septic backups. You may need to purchase separate coverage for flood and earthquake damage.

Personal liability coverage protects you against lawsuits related to any injuries sustained on your property. So if you host a party at your apartment, for example, and someone trips and injures their ankle, your liability protection could pay for their medical bills.

Additional living expenses coverage can pay your costs if your apartment is damaged and becomes unlivable. Your policy can reimburse you for hotel expenses, meals, or temporary housing until you can move back in.

Renters insurance can cover you at home and away. If you take personal belongings on a trip, for example, and they’re damaged by a covered danger, you can get reimbursed for them through your policy.

How Much Does Renters Insurance Cost?

If you’re searching for affordable renters insurance for apartments, it’s important to understand the costs involved. But just how much is renters insurance?

There are two costs to consider: premiums and deductibles. Your renters insurance premium is the amount you pay to the insurance company, typically monthly, just for having coverage. Your premiums are based on the amount of coverage you have.

According to the Insurance Information Institute, the average renter pays $174 per year for renters insurance premiums. That works out to $14.50 per month. Costs can vary widely by state, with renters paying the most for coverage in Louisiana, averaging $409 per year, and the least in New Hampshire, North Dakota, and Maine, where premiums average $144 annually.

If you need to file a claim for damages, you’ll also pay a renters insurance deductible. That’s the amount you pay before the insurance company will pay anything toward your covered damages. In that sense, renters insurance is no different from auto insurance, health insurance, or homeowners insurance.

There are different types of deductibles, in terms of how much they cost. Opting for a higher deductible typically results in a lower monthly premium.

For example, you might find a renters insurance policy that charges a $500 deductible while another has a $1,000 deductible. The deductible you choose should be easily affordable on your budget if you need to file a claim.

Most Affordable Renters Insurance Policies

Some renters insurance policies are more budget-friendly than others. When evaluating affordability, it’s important to consider the premiums and deductibles, as well as the coverage you’re getting in return.

To help you in your search, we requested quotes from eight major insurers to find the most affordable renters policy. Companies were selected based on brand reputation, policy options, and ease of application.

Quotes are based on a townhome located in central Virginia with fire alarms, no pets or children, and no bicycles or valuable jewelry. All quotes assume a $500 deductible and the minimum coverage amounts recommended by the insurer. Quotes are accurate as of August 6, 2024.

	Monthly Premium	Coverage Details
Allstate	$18	$30,000 in personal property coverage; $100,000 in personal liability coverage; $1,000 in medical payments coverage
Assurant	$20.67	$30,000 in personal property coverage; $100,000 in personal liability coverage; $1,000 in medical payments coverage
Geico	$14.42	$30,000 in personal property coverage; $100,000 in personal liability coverage; $3,000 for loss of use and medical payments to others
Lemonade	$12.08	$30,0000 in personal property coverage; $100,000 in personal liability coverage; $19,000 for loss of use and medical payments to others
Liberty Mutual	$13.75	$25,000 in personal property coverage; $100,000 in personal liability coverage; $1,000 in medical payments coverage
Progressive	$18.34 upfront, then 10 payments of $11.17	$30,000 in personal property coverage; $100,000 in personal liability coverage; $1,000 in medical payments coverage
State Farm	$12.58	$30,000 in personal property coverage; $100,000 in personal liability coverage; $1,000 in medical payments coverage
Travelers	$16.58	$30,000 in personal property coverage; $100,000 in personal liability coverage; $10,000 in loss of use and medical payments coverage

As you can see, none of these policies cost more than $30 per month. There is some variation in the coverage amounts for personal property, medical payments, and loss of use, but $100,000 is usually the baseline for personal liability coverage.

Remember that these are baseline quotes generated using a hypothetical scenario. Your actual quotes will depend on where you live, who lives with you, if you have pets, the type of home you live in, and the individual coverage amounts you choose. Your insurance company may also consider your credit score when calculating your premiums. Adding optional coverage can raise your premium costs.

How Do You Find Affordable Renters Insurance?

Finding affordable renters insurance for apartments means doing some comparison shopping. You generally have two options for purchasing renters insurance: traditional insurers and online insurance companies.

Purchasing renters insurance through a traditional insurance company can work in your favor if you’re able to bundle it with other insurance. For example, you might be able to bundle it with your auto insurance policy in order to get a discount. If you’re insured through a company locally, you might appreciate being able to stop by their office with questions or to make a policy change.

Getting renters insurance coverage through an online insurance company can also yield some benefits. It may be easier to apply for renters insurance and purchase a policy online. And the amount you pay for coverage might be less than with a traditional insurer.

When comparing your options for affordable renters insurance, ask yourself these questions:

• How much coverage do I need?

• What kind of premiums and deductibles will fit my budget?

• How easy would it be to file a claim if necessary?

• What kind of customer support is available?

• Are there any discounts or other incentives that could save me money?

• What is the insurer’s overall reputation?

Reading online reviews of renters insurance companies can give you a better idea of what people do and don’t like about them. You can also get free quotes online to estimate your total costs before purchasing a policy.

The Takeaway

If you’re renting an apartment and something unexpected happens, having the right renters insurance coverage in place can give you peace of mind. Policies typically have three parts: property coverage in case of damage or theft, liability coverage in case someone is injured on your property, and loss of use in case you need to find housing elsewhere while repairs are made to your rental. The national average premium for renters insurance is $174 annually.

Looking to protect your belongings? SoFi has partnered with Lemonade to offer renters insurance. Policies are easy to understand and apply for, with instant quotes available. Prices start at just $5 per month.

Explore renters insurance options offered through SoFi via Experian.

About the author

Rebecca Lake

Photo credit: iStock/fizkes

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPRO-Q324-007

Private Credit vs. Private Equity: What’s the Difference?

What Does Private Credit and Private Equity Mean?

Alternative investments, now for the rest of us.

Explore trading funds that include commodities, private credit, real estate, venture capital, and more.

Private Credit Definition

Private Equity Definition

What Are the Differences Between Private Credit and Private Equity?

Investment Returns

Risk

Ownership

Investor Considerations When Choosing Between Private Credit and Private Equity

The Takeaway

FAQ

Why do investors like private credit?

How much money do you need for private equity?

Can anyone invest in private credit or private equity?

Net Present Value: How to Calculate NPV

What Is Net Present Value (NPV)?

How to Calculate NPV

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What Does NPV Show You?

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Comparing NPV

NPV vs Present Value

NPV vs IRR

NPV vs ROI

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Benefits and Drawbacks of NPV

Benefits of NPV

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How Investors Can Use NPV

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FAQ

Is a higher NPV better?

What is the basic NPV investment rule?

Is NPV the same as profit?

Is a NPV of 0 acceptable?

When should NPV not be used?

Is Excel NPV accurate?

Mutual Funds vs Stocks: Differences and How to Choose

What’s the Difference Between Mutual Funds and Stocks?

Different Types of Mutual Funds

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Pros of Mutual Funds:

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Cons of Individual Stocks:

Choosing Between Mutual Funds and Stocks

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FAQ

Which is riskier, stocks or mutual funds?

Which investment is best for beginners, mutual funds or stocks?

Are mutual funds worth it?

What Are Blue Chip Stocks?

What Is a Blue Chip Stock?

Common Traits of a Blue Chip Stocks

10 of the Biggest Blue Chip Stocks

Pros and Cons of Investing in Blue Chip Stocks

Benefits of Blue Chip Investments

Potential Drawbacks of Blue Chip Stocks

Investing in Individual Blue Chip Stocks

Blue Chip Funds: An Alternative to Individual Stocks

The Takeaway

FAQ

Where did the term “blue chip” come from?

What are some examples of well-known blue chip companies?

What are the potential downsides of blue chip investments?

How do I invest in blue chip stocks?

Most Affordable Renters Insurance for Apartments

What Is Renters Insurance and How Does It Work?

Find Affordable Renters Insurance.

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