The stock market is seeing a serious resurgence of popular meme stocks like GameStop and AMC, reminiscent of the bullish trends that rocked the market (and pop culture) in 2021. Once again, these companies’ share prices are soaring due to social media hype rather than traditional indicators such as growth and earnings. 

Tuesday marked another day of significant gains for several of these meme stocks, continuing the momentum from GameStop’s staggering 72% surge the day before. This trend may fluctuate, but it shows that the unmistakable influence of online communities in shaping market dynamics is here to stay. 

What are “meme stocks”?

Meme stocks are stocks that see very fast price fluctuations based on social media hype, instead of traditional financial metrics. They get their momentum through widespread online attention — like viral memes and discussions on platforms like Reddit — rather than through traditional market analysis. 

The GameStop and AMC meme stock frenzy of early 2021 marked a significant moment in financial history, shedding light on the influence of retail investors and the reality of market speculation. Here are 3 insights to take from this remarkable (and continuing) phenomenon, which show its lasting influence:

1. “Regular folks” can still influence the stock market dramatically  

The recent meme stock rally demonstrated  the rising influence of retail investors, particularly those on platforms like Reddit’s WallStreetBets. These regular folks, armed with information and passion, rallied behind stocks like GameStop and AMC, challenging conventional market wisdom and showcasing the power of collective action. Their coordinated efforts disrupted traditional market dynamics and showed how everyday investors can seriously impact stock prices.

2. Short but not sweet

Central to the 2021 saga (and the recent surge) was the concept of a “short squeeze,” where heavily shorted stocks experienced fast price surges due to a sudden rush of buying pressure. 

What does it mean to “short” a stock?

Shorting a stock means borrowing shares from a broker and immediately selling them, anticipating that the stock’s price will decline. The goal is to buy back those shares at a lower price, give them back to the broker, and profit from the difference in price. Shorting can be risky, though (i.e., when the stock prices rises instead of falling, losses can mount).

Hedge funds and institutional investors had bet against these stocks, assuming their prices would decline. But that’s where retail investors swooped in: Their coordinated buying, coupled with limited availability of shares for short sellers to cover their positions, led to a dramatic surge in prices. This forced short sellers to buy back shares at inflated prices to limit their losses, further driving up the stock prices…and the loop kept continuing.

3. Regulatory questions and what this all means in the long-run

The GameStop and AMC rally prompted some serious scrutiny from regulators. Questions arose about the role of social media in driving market volatility and the potential for coordinated manipulation. The event sparked debates about market fairness, broker practices, and the need for much greater transparency and investor protection measures. Regulators, including the SEC, faced pressure to address these concerns and rethink existing regulations to adapt to the fast-changing landscape of online trading communities and digital platforms.

While the immediate frenzy surrounding GameStop and AMC may have subsided, the latest action has shown that the movement is still very much beneath the surface. Even more importantly: it proves that in the digital age, investing is for everyone. 

Ready to start your investing journey? Download the MoneyLion app to set up an investing account in minutes and learn valuable tips from industry influencers. 

But let’s be real — the world of investing is a bit of a jungle. There are so many options, financial services, and companies to choose from that it can make your head spin. Plus, those wild swings in the stock market don’t exactly boost your confidence.

One of the biggest decisions you’ll face as a newbie investor is whether to let a pro handle your money with a managed account or take the do-it-yourself (DIY) route. Each approach has its perks and downsides, depending on what you’re looking for. Read on to learn more about both options. 

What are managed accounts?

Managed accounts are any investment accounts that are primarily overseen by a professional manager such as a financial advisor or robo advisors. With the investor’s input, the adviser/ robo-advisor will help to construct an appropriate asset allocation based on the investor’s goals, needs, risk tolerance, and age. They will also identify the proper investments and maintain these portfolios over time by managing risk, rebalancing and more.

PRO TIP! MoneyLion offers fully managed portfolios that do not require management fees or minimums.

What are self-directed accounts?

Self-directed accounts let you dive into the nitty gritty of investing. You can buy and sell individual stocks, bonds, and other investments all on your own, usually online. No hand-holding here — you’re calling the shots. But remember, with great power comes great responsibility. If you’re rocking a self-directed account, you must know your stuff, do your research, and be aware of the risks.

How to manage your investments

As you decide how to handle your investments, there are a few key questions to ask yourself.

First, what’s your investment know-how? If you’re just starting, you’ll have to make some basic choices, like how much of your stash should go into stocks, bonds, or other investments. If you roll with a self-directed account, you’ve got the freedom to fine-tune this mix to your liking. But, here’s the kicker — it also means you need to be savvy about investing.

Now, managed investment accounts offer a helpful alternative. They’re overseen by professionals who spread your investments across various stocks or assets. This approach diversifies your portfolio, reducing the risk tied to any single company’s performance. It’s a smart move if you prefer a more hands-off approach or lack extensive investment experience.

How much investment background do you already have? 

When you’re starting, you’ve got to make some straightforward choices. Like, how much of your investment pile should go into stocks, bonds, or other types of investments?

If you go for a self-directed account, you’ve got more wiggle room to fine tune this mix to your liking. But that also means you need to have a good handle on investing smarts.

If you’re just dipping your toes into the investing pool, managed accounts could be a good pick. They’ll help you figure out the right mix from the start.

How complex are your financial goals? 

The more complex your goals and objectives, including spending needs, big upcoming purchases, tax requirements, and so on, the more likely it is you can benefit from proper guidance, advice, and other financial services. Even if you have relatively straightforward needs, having help to determine the right portfolio based on your risk tolerance and return objectives can be helpful. In some cases, using a managed account could be a set-it-and-forget-it approach that keeps you on track through different market environments, reducing the urge to make dramatic portfolio adjustments at the wrong times.

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How much time do you want to spend on investment activities? 

While active accounts and trading platforms may provide research and analytical tools to help you make investment decisions, you will ultimately be responsible for managing your portfolio. This naturally requires a great deal of time and effort, not to mention the willingness and interest in tackling complexity.  This is why managed accounts could be a great solution if you don’t have the time.

Managed accounts with a pro by your side

Starting your investing journey doesn’t have to feel like climbing a mountain. If you’re at the early stages of investing, managed accounts can be your best pals in getting started and grasping the basics. Some managed investment accounts have a professional by your side to oversee the account.  

The magic of managed accounts lies in having portfolios fully managed by industry experts.They will use your risk tolerance and investment preference to build the best portfolios tailored to your financial goals within your budget. 

FAQ

How much does an in-person financial adviser typically charge?

Most people think they need to sit down with a professional financial adviser to get sound advice. In-person financial advisers can help pinpoint your goals and develop an investment plan. But their services are not free and may not make sense for everyone’s budget. Financial advisers are usually paid in one or more of the following ways. 

Flat fee

Some financial advisers may charge you a one-off flat fee to assist with creating a financial plan. The adviser will evaluate your cash flow, debt obligations, savings, financial goals, investments, budgeting, and more. Financial adviser fees vary greatly but it’s common to see advisers charge thousands of dollars per year for their services. 

Commission

Some advisers receive a commission when you buy the investment products they recommend. This commission can range anywhere from 3% to 6% of the total investment.

Hourly rate

Instead of a flat fee, some advisers will charge an hourly rate for offering advice and drawing up a financial plan. This can be anywhere from $100 to $400 per hour. Depending on how much personalized expertise you need, your total cost can reach thousands of dollars.

AUM fee

Many advisers charge an assets under management (AUM) fee. This is an annual fee based on a percentage of the total value of your investments. Generally, people with higher net worths end up with a lower percentage. Most AUM fees range from 0.25% to 1% a year. Usually, this fee includes ongoing portfolio management and may include help with financial planning.

Free resources for financial advice

Consumers have many options for finding free financial advice. These are some of the resources you can explore.

Tap into your existing bank or credit union

Some banks and credit unions offer free educational resources around personal finance, investing ideas, and other finance topics. Many financial institutions have a library of online courses, blog posts, and videos. Some banks and credit unions also provide free one-on-one personalized sessions. Get in touch with your bank or credit union to discover the services they offer. 

Government financial services 

The U.S. Securities and Exchange Commission offers free financial education through its website. If you’re a government employee or military personnel, you may be able to access additional resources through your employer.

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COVID pro-bono financial advisers

The COVID-19 pandemic created financial obstacles for many consumers. A host of financial resources, many of which are low-cost, emerged as a result of the pandemic. Here are our favorites:

XY Planning Network 

XY Planning Network helps you find a financial adviser on your terms. You can search advisers by specialties, location, and more. 

The National Association of Personal Finance Advisors

The National Association of Personal Finance Advisors is a great place to search for financial advisers. Its website also offers plenty of free financial advice and consumer resources.

Financial Planning Association

The Financial Planning Association is offering financial advice to individuals and families on a pro-bono basis. It has plenty of advisers in its database ready to offer guidance and personalized help during this time. 

Foundation for Financial Planning

The Foundation for Financial Planning is pairing up Americans with financial advisers on a pro-bono basis. The organization also offers emergency grants and maintains an online resource center with free financial advice. 

Credit counseling services 

If you’re struggling with credit card debt, credit counseling services may be able to negotiate and settle your debt on your behalf and even help you create a debt repayment plan. They also offer personalized, free financial advice to help you get out of debt and stay out of debt. 

These services are typically only available to people with credit card debt and may come with certain restrictions. In some cases, you may have settled marks appear on your credit report. 

Robo-adviser 

Robo-advisers combine the best human financial adviser expertise with technology. Robo-advisers offer financial advice and personalized recommendations based on data and mathematical formulas. The fees associated with robo-advisers can range dramatically. Some may charge as little as $1 per month or as much as 1% of your total investments a year. 

Building Your Financial Education

Financial advisers can serve their clients and offer personalized recommendations. They can walk you through the journey, but advisers aren’t within everyone’s budget. You may have to pay a financial adviser thousands of dollars each year to help you navigate your finances. Some people benefit from free financial resources that give them a good education on the subject. This path isn’t for everyone, but it is possible to save thousands of dollars in fees if you look for free or affordable financial education.

FAQ

Before we get into the details, bear in mind MoneyLion can help you find personal loan offers based on the background and info you provide. You can get matched with offers for up to $50,000 from top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you. This might be a better option than withdrawing money from your 401(k) early.

What is a 401(k) early withdrawal penalty?

According to Nasdaq, a record number of Americans took 401(k) hardship withdrawals in 2023, so if you find yourself in this position, know that you aren’t alone. The 401(k) early withdrawal penalty is designed to discourage people from tapping into their retirement savings before a certain age, commonly referred to as the early withdrawal age, which is typically 59½. Before reaching this age, any withdrawal from your 401(k) account for nonretirement-related expenses can lead to additional fees — the penalty imposed by the IRS.

How is the early 401(k) withdrawal penalty calculated?

The penalty amount is typically 10% of the withdrawn amount, in addition to regular income tax. This means if you withdraw funds from your 401(k) before turning 59½, you’ll owe regular income tax on the amount, as contributions to a traditional 401(k) are usually pre-tax. Additionally, you’ll incur a 10% penalty on the withdrawn amount.

For example, if you withdraw $10,000 from your 401(k) before turning 59½, you could face a penalty of $1,000 (10% of $10,000) on top of any income tax that applies based on your tax bracket. The penalty acts as a significant disincentive, encouraging the use of 401(k) funds solely for retirement. This ensures savings grow over time for a more secure financial future.

How to avoid 401(k) early withdrawal penalties

To avoid the 401(k) early withdrawal penalties, you’ll need to understand the exemptions the IRS provides for the 10% early distribution tax penalty. The exemptions allow you to make early withdrawals without incurring the additional 10% penalty, although you may still need to pay regular income tax on the withdrawn amount. Here’s a list of common exemptions that may apply:

Reaching age 59½

Once you reach age 59½, you can make withdrawals from your 401(k) without facing the 10% early distribution penalty.

Separation from service

Leaving your job or retiring from the sponsoring company at age 55 or older (sometimes age 50, depending on the plan), allows penalty-free withdrawals from your 401(k).

Permanent disability

If you become permanently disabled, you may qualify for an exemption from the early distribution penalty.

Death

If the account holder dies, the 10% early distribution penalty generally doesn’t apply to beneficiaries who inherit the 401(k) account.

Substantially equal periodic payments (SEPP)

You can take SEPPs from your 401(k) to avoid the penalty, following strict IRS guidelines and calculations. This approach requires a commitment to continue payments for a specified period.

Medical expenses

Penalty-free withdrawals are possible for unreimbursed medial expenses exceeding 7.5% (or 10% in some cases) of your adjusted gross income.

Qualified domestic relations order (QDRO)

In the case of a court-ordered divorce or separation, a QDRO allows for the transfer of a portion of the 401(k) to a former spouse without incurring the early distribution penalty.

Higher education expenses

Penalty-free withdrawals may be allowed for qualified higher education expenses for you, your spouse, your children or grandchildren.

First-time home purchase

If you’re a first-time homebuyer, you may be eligible for penalty-free withdrawals to cover certain costs related to purchasing a home.

IRS levy

If the IRS places a levy on your 401(k) account, you may not be subject to the early distribution penalty.

Alternatives to 401(k) early withdrawals

The temptation to access your 401(k) early might be strong, yet tax penalties and potential long-term impacts often outweigh the benefits. These funds are meant to secure your retirement. Premature withdrawals could derail your financial plans. Here are some options to consider:

Hardship withdrawals

A hardship withdrawal is a type of early distribution allowed by some 401(k) plans under certain circumstances. These circumstances often involve urgent financial needs, such as covering medical bills, avoiding eviction or foreclosure, paying funeral costs, or repairing major damage to your primary home.

How it works: You must demonstrate that you meet the criteria for a hardship withdrawal according to your plan’s guidelines. While you won’t escape regular income taxes on the withdrawn amount, the 10% early withdrawal penalty may be waived for qualified hardship withdrawals.

Rollovers

A rollover can be an effective strategy if you have a new employer-sponsored retirement plan or an IRA. This allows you to move funds from a previous employer’s 401(k) without penalties.

How it works: You transfer the funds directly from your old 401(k) to the new plan or IRA. As long as the rollover is completed within 60 days, you won’t face tax penalties. If you miss the 60-day window, the distribution could be subject to both income tax and the early withdrawal penalty.

Loans 

Some 401(k) plans allow participants to take out loans from their account balances. These loans must be repaid according to the plan’s terms and usually have a relatively low-interest rate.

How it works: You borrow money from your 401(k) account and must repay it, with interest, over a specified period, often five years. It’s crucial to understand the terms of the loan, including the repayment schedule and potential consequences if you can’t repay it.

Options not linked to your 401(K)

You can consider options beyond those directly tied to your retirement account that can provide you with access to funds without impacting your retirement savings. Here are a few:

Personal loans from banks or credit unions

Many banks and credit unions offer personal loans with relatively low-interest rates, especially if you have good credit. The loans can be used for various purposes, including covering unexpected expenses or consolidating higher-interest debts.

How it works: You apply for a personal loan, and if approved, you receive the funds as a lump sum. You repay the loan, along with interest, over a predetermined period.

Home equity loans or lines of credit

If you own a home, a home equity loan or home equity line of credit (HELOC) may provide a viable option. The loans use the equity in your home as collateral, typically offering lower interest rates compared to unsecured personal loans.

How it works: With a home equity loan, you receive a lump sum, while a HELOC provides a line of credit you can draw from as needed. Repayment terms vary, and you should be aware that your home is at risk if you fail to repay the loan.

Credit card balance transfers

If you’re dealing with high-interest credit card debt, consider transferring the balance to a credit card with a low or 0% introductory annual percentage rate (APR) on balance transfers. This can help you consolidate your debt and reduce interest costs, but be mindful of any balance transfer fees.

How it works: You apply for a balance transfer credit card, and if approved, you transfer existing credit card balances to the new card. During the introductory period, you’ll often have a lower interest rate or no interest at all.

Loans from friends or family

If you have a support network willing to help, borrowing from friends or family could be an option. Be sure to treat the loan professionally, with clear terms, a repayment plan and a written agreement to avoid straining personal relationships.

How it works: You discuss the loan with the friend or family member you are borrowing from, establish the terms and create a repayment plan. Even in informal arrangements, having clear documentation is essential.

Secure today and protect tomorrow 

Understanding the 401(k) early withdrawal penalty is crucial. Exploring alternative financial solutions can address current issues without jeopardizing your retirement. Once you know how things work, you can decide what’s best for you and your future.

You have options, like special early withdrawals for tough situations, moving your money to a new account or getting a low-interest loan from a bank or lender. These options can help you manage your money better. By using these tools wisely, you can solve your money troubles while still making sure your retirement savings stay strong.

FAQ

In many cases, UTMAs are a smart strategy to start saving for your child now. Is it right for you? Read on to find the UTMA rules and steps for transferring to a UTMA. 

What is a UTMA account? 

A UTMA account refers to a savings account established under the rules of the Uniform Transfers to Minors Act (UTMA). They are custodial savings accounts for minors. 

The account is set up by an adult on behalf of a minor and managed by the adult or designated custodian until the child reaches the age of majority, which is usually between 18 and 21. It can be as old as 25, depending on where you live. 

UTMA accounts are similar to UGMA accounts, which are created under the Uniform Gifts to Minors Act, but UTMA accounts allow a broader range of assets, including real estate, securities, bank deposits, and insurance policies. Can you convert a UTMA to an individual account? Not until the child reaches the age of majority. 

How does a UTMA work? 

UTMA is a law that defines the proper transfer of assets from an adult to a minor. The UTMA rules define a tax-advantaged way to give assets to minors without requiring a trust. A UTMA account is a custodial account. 

When you set up a UTMA account, you can either act as the custodian or appoint another custodian for the account until the child reaches the age of majority. The assets in the UTMA account then belong to the minor, even though they cannot access the assets until the age of majority. 

Once the minor reaches the age of majority, they have the option to convert a UTMA to an individual account. In the meantime, the custodian is responsible for investing or managing the assets on the minor’s behalf. 

Keep in mind that there are some less-than-obvious disadvantages to a UTMA related to the relatively young age that the minor gets access to the funds. For example, in Massachusetts, the age of majority for a UTMA is 21. At the age of 14, the minor may petition the courts for access to some of the funds. 

Suppose there is $100,000 in the UTMA, and your child, grandchild, niece, or nephew. There is nothing you can do to stop them from gaining access to those funds. And your child may be at an age when they are not making the best financial choices for themselves. While you may have envisioned the UTMA as the downpayment to their first home or the seed to their retirement fund, they could burn through those funds before their 22nd birthday. 

What can UTMA funds be used for?

The funds in the UTMA account are a gift to the minor, so they can be used for any expenses related to the minor, including education, sports, or living expenses. In this way, a UTMA functions like a 529 plan intended for educational purposes. 

Unlike a 529 plan, the funds in a UTMA account can also be put towards any type of expense, not just educational ones. Also, there are no penalties for withdrawing funds from a UTMA account, as long as the expenses are directly related to the minor. However, you’ll need to keep close records of the expenses from UTMA and document their direct benefit to the child. 

Profits on interest-bearing UTMA accounts are usually reported on the child’s tax return. Even so, some families choose to report the profits on the parents’ tax return at their parental tax rate.

UTMA transfer rules

UTMA transfers enable minors to receive gifts and assets directly in their name instead of through a trust.  This simplifies the transfer process, avoids the costs and complexities associated with setting up a trust, and provides a straightforward way for minors to manage and have control over the assets once they reach the age of majority

Here is what you need to know if you are thinking about setting up a UTMA account. 

UTMA contribution limits 

Currently, any single individual can contribute up to $17,000 per child per UTMA account without paying gift tax. The limit is $30,000 for married couples. Gifts above $17,000 per adult per year will usually require that you fill out a gift tax form and submit it to the IRS, although it is unlikely you would owe tax on that money unless you’ve given more than $12.92 million in your lifetime. 

UTMA withdrawals and tax rules

UTMA accounts have no withdrawal limits. However, the funds belong to the minor from the moment of transfer, so the funds can only be used for the direct benefit of the minor. Can parents take money out of UTMA accounts? Yes, but only for purposes related to the minor. 

UTMA accounts aren’t tax-exempt, so you’ll need to file taxes each year on income on the UTMA. Earnings need to be reported either on the child’s tax return at a lower tax rate or on the parents’ tax return at their rate. Consult your accountant about your situation. 

Types of assets

You can transfer nearly any type of asset to a UTMA account for a child. Assets include real estate, intellectual property, works of art, stocks, bonds, mutual funds, annuities, insurance policies, cash, and other assets. One of the main advantages of a UTMA account is that family heirlooms, property, stocks, fine art, valuable jewelry, and other assets can be easily transferred to a UTMA account.

Closing a UTMA account 

Once the child reaches the age of majority, they can transfer or use the funds and close the UTMA account. However, after setting up the UTMA account, parents don’t have the option of closing a UTMA account. How do you close out a UTMA account? You can’t until the child reaches the age of majority when they can do whatever they want with the funds. 

Irrevocability

Transfers to a UTMA account are irrevocable. From the moment the transfer is finalized, the assets held in a UTMA account belong to the minor whose name is on the account. 

If the parents need to use those funds at any point in the future, they will not be available to them. When the minor reaches the age of majority, they can legally do whatever they want with those funds. 

Financial aid

A UTMA account may affect a minor’s eligibility for need-based college financial aid. While this factor may not be a deciding factor in whether or not you start a UTMA account for your child, it can affect the financial assistance prospects in your child’s future. 

Steps for transferring UTMA to a child

Transferring a UTMA account to a child is simple. You can do so with most financial or investment institutions. You can also consult a tax or business lawyer to help you set up the legal structure, although most financial institutions can do this for you. 

Step 1: Set up a brokerage account

If you plan to invest cash or securities into a UTMA account for your child, start by opening a UTMA account at your bank or a local investment firm. The custodial UTMA account will be in your child’s name and governed by the rules of UTMA with you, or the adult you appoint, named as custodian. You can also set up a brokerage account via mobile apps like Acorns Early or UNest. 

Step 2: Add assets

Once the UTMA account is set up, you can choose to add assets daily, weekly, monthly, or annually or less often. You could add precious jewelry, art, property, bonds, stocks, investment accounts, cash, or other assets. 

Step 3: Use the funds

The funds stay in the account until the child reaches the age of majority unless you choose to withdraw the funds on behalf of your child or to support the child’s financial needs. The funds can be put towards nearly everything, including education, sports, and living expenses. If you have significant education or sports expenses for your child, for example, you could use the UTMA funds for that. 

You can also choose to save the UTMA funds for future life events, like a first car, first apartment, or wedding. Once they get access to the funds, the child may also choose to convert the UTMA to an individual account.

UTMA Account Pros and Cons

UTMA accounts can be a tax-advantaged way to transfer all types of assets to your child. How to transfer a UTMA account to your child is simple. They allow you to give any asset to the child. It’s also a way to save funds for education and sports expenses before your child goes to college. 

However, it also means they will have full access to the funds at the state-specified age of majority and may petition to gain access to some funds at an even younger age. Once they gain access to the funds, you have no control over how they use the funds. 

Other structures, including a trust, or a 529 may be better depending on your goals. Deciding on the intentions for the gift to the child can help weigh the pros and cons of each account. Speak with your financial advisor or tax lawyer to determine whether a UTMA account’s advantages outweigh the disadvantages in your case. 

FAQ

The labor market and the investing landscape are inherently connected. For some, It can be difficult to make knowledgeable investment decisions if you don’t understand the ways in which jobs connect to the overall economy and productivity growth, which is why we’ve compiled this guide outlining how the labor market impacts investors. 

Whether you’re just starting out in the world of investing or you have some experience under your belt but you’re looking for a refresh, read on to dive into the ways the job market affects investors. 

Why the job market matters to investors

The job market is one of the many critical factors investors closely monitor and analyze to make decisions. They do this because employment is significantly tied to the overall performance of the economy. And the economy, in turn, tends to be tied to investment markets. 

It helps to think about it in this way: When labor markets are strong, wage growth and strong employment tend to play a factor. This can help foster a situation where consumers have more money on hand and become more likely to spend it. They will turn to various businesses, which will experience an uptick in revenue levels as a result. 

In other words, labor markets can influence consumer spending and business profitability. When the job market is strong and unemployment is low, customers may be more likely to spend now and also more likely to feel optimistic about the future. This can prompt the economy to perform well. 

Many analysts point to strong labor markets as one of the primary reasons the U.S. was able to avoid a recession in 2023 — despite numerous alarm bells.

Investment markets are intrinsically tied to economic performance. In the case of stocks, investors are buying ownership shares of a corporation, which in some cases can be directly tied to consumer spending. 

Stocks such as Amazon.com Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL) are just two examples of investments that are heavily tied to consumer spending. Even stocks in industries that have little direct contact with the everyday consumer can be affected if overall spending in an economy drops too low. 

But the relationship isn’t always as simple as strong labor markets having a one-direction, correlating impact on an economy and its investments. There are cases where stocks and the economy can be hurt by low unemployment. We’ll dive into that below. 

Top 7 ways labor markets impact investments

Labor markets, the economy, and investors are all tied together. To avoid confusion, let’s break down how labor markets impact investors. 

1. Employment and consumer spending

We’ve touched upon this in the above section, but it’s worth noting how the level of employment in labor markets can influence consumer spending. When more people are employed and have steady incomes, they are more likely to spend on goods and services, helping boost corporate profits and stock market performance. 

To understand how labor markets are performing, investors may monitor several pieces of employment data, including wage growth and regular reports on nonfarm payroll from the U.S. Bureau of Labor Statistics. In short, investors aim to understand the health of the labor market and its potential impact on consumer spending.

2. Corporate earnings

Stronger labor markets tend to put more money into the hands of everyday consumers. The reason is that either more people are employed because more job openings are available or wage growth is on the uptick because of increased competition for employees. In either scenario, higher consumer purchasing power can occur, which drives demand for goods and services. 

A potential downside is that upward pressure on wages can increase costs for companies because they will have to foot a bigger payroll. If wages increase too rapidly, profit margins can be squeezed, potentially affecting a company’s earnings and, consequently, its stock price.

There’s a delicate balance between wages and corporate revenue. You’ll want to consider this carefully as you evaluate different stocks and investment opportunities. 

3. Inflation and interest rates

Central banks, such as the Federal Reserve, closely monitor the labor market as part of their decision-making process for setting interest rates. A tight labor market with low unemployment can lead to concerns about inflation. Inflation generally refers to the increase in prices of goods and services in an economy over a period of time. If inflation levels become too high, prices for everyday items can become expensive too quickly. 

When this happens, central banks may raise interest rates to cool economic activity. Higher interest rates make it more expensive for businesses and consumers to borrow money. This can have a dampening effect on investments and overall stock market returns.

4. Investor sentiment and confidence

Labor market conditions can influence investor sentiment and overall market confidence. Positive labor market data, such as strong job creation and declining unemployment rates, can boost investor optimism and lead to increased investment activity. Negative labor market trends, such as rising unemployment, could create uncertainty and lead to market volatility.

This can create a scenario where investor sentiment and market performance eat into each other and perpetuate a cycle, for better or for worse. 

If you want valuable information that can help you make informed decisions in stock investing, check out our tear sheets. View historical stock pricing, see the company overview, and find relevant stock news through that page. 

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5. Industry performance

Some sectors may be more prone to labor market fluctuations than others. Sectors that rely heavily on consumer spending, like retail and hospitality, are more affected by shifts in employment and consumer sentiment. 

Sectors less dependent on consumer spending, such as healthcare or infrastructure investments, may not be as heavily affected if employment levels drop. They can still be affected indirectly by labor markets, which influence how the Fed sets interest rates and broader economic conditions.

6. Long-term economic growth

A healthy labor market is often indicative of a strong economy with potential for long-term economic and productivity growth. When consumers have money in their pockets and feel positive about their future finances, investors are quick to notice. They may become more inclined to invest in companies and industries that are likely to benefit from sustained economic expansion. 

A growing economy can also provide a favorable environment for companies to expand their operations and increase profitability, potentially leading to higher stock prices over the long haul. Of course, there is no blanket rule that says all stocks will increase in price when the economy expands. Specific stocks may or may not be correlated directly with economic growth, and it’s important to do your own research and stock analysis before investing. 

7. Global market interactions

In today’s interconnected world, few economies stand on their own. International trade and cross-border investments mean that changes in labor markets in one country can impact supply chains, demand for exports, and overall economic conditions in other countries. 

If U.S. consumer spending drops significantly, it can negatively influence demand for imported goods and global trade. If investors are more exposed to such areas, they likely would feel the punch, which is why some investors might carefully consider labor markets in the broader context of the global economy. 

The job market is a key economic indicator

The job market matters to investors because it is a key indicator of economic health and consumer behavior. Investors analyze employment figures to gauge the strength of an economy and identify potential investment opportunities. 

A strong job market can suggest a thriving economy with higher consumer spending, while a weak job market could raise concerns. But it’s not always so simple.

Understanding the relationship between the job market and investing can be essential for investors to make informed decisions to help optimize their portfolios. It’s no easy feat. Investors could spend years studying and training to understand the intricacies of how labor markets will impact a particular stock or investment vehicle. Others pay substantial portfolio management fees and rely on expert knowledge to guide their finances. 

MoneyLion focuses on making smart investing accessible to all, which is why we’ve launched fully managed portfolios and auto investing — all with no management fees or minimums. Learn more here.

FAQ 

Smart investors will want to keep enough cash reserves to meet short-term needs while investing for the future. Find out how to get the right balance of liquidity needs for your goals here.

Introduction to financial liquidity 

Financial liquidity is a measure of an asset’s ability to be quickly converted into cash without a significant decrease in its value. For an asset to have high liquidity, there must be buyers and a market to sell it. An asset is considered illiquid if you are forced to sell the asset for a lower value or incur significant fees.  

For example, if you have a rare family heirloom appraised at $100,000 and you have no buyers, that is a highly illiquid asset. But stocks from Amazon.com Inc. (NASDAQ: AMZN) or Intel Corp. (NASDAQ: INTC), which trade millions of shares daily, are highly liquid assets.

Liquidity can be measured in terms of market liquidity and accounting liquidity. Market liquidity, as the name implies, measures how much movement there is in the asset’s market. A greater number of daily or weekly transactions for a specific asset indicates higher market liquidity. 

Accounting liquidity refers to how easily an individual or organization can meet financial obligations with their liquid assets. Accounting liquidity is the ability to pay off debts as they become due. 

Both types of liquidity can affect you. In the example above, the rare heirloom would not have market liquidity, which could affect your accounting liquidity if you need that cash to pay other debts.  

What are my liquidity needs?

Liquidity is measured through different types of systems that have formulas to measure a company’s ability to meet its short-term obligations. The simplest measurement of liquidity is the ratio of current assets that can be converted to cash within one year against current liabilities. The higher the ratio, the greater the liquidity. 

​​Current Ratio = Current Assets / Current Liabilities

If you have assets worth $50,000 and liabilities in the form of student loans and credit card debt worth $25,000, your current ratio is 2. Any ratio above 1 is considered good liquidity. 

In order to determine your liquidity needs, consider how important the benefits of financial liquidity are and how important each factor below is to you. You’ll want to weigh access to funds, debt, risk, and credit available to decide your financial liquidity needs. 

1. Access to funds

Having cash available means that funds are available for short-term needs and investments. You’ll also want to maintain some cash reserves in case of emergency. Financial experts offer varying opinions on how much cash to keep in reserve, but many suggest three to six months’ salary. 

You can keep these funds in a high-yield savings account to maximize earnings and reduce the lost value from inflation. You may also choose to keep more cash on reserve if you’re saving for a short-term goal like a mortgage down payment or a vacation. 

2. Reduced debt

Having cash available allows you to pay off debt when necessary, avoiding high-interest payments and keeping your balance sheets healthy. This can also help you avoid additional debt, as you will have cash available to cover expenses. If you don’t have any debt, you may need less cash in reserve.

Individuals will want to have enough cash in reserve to cover mortgage or rent payments, utilities, and other regular monthly expenses. Covering debt is especially important for small businesses where delayed customer payments can cause liquidity issues. Whether you’re an individual or a business, be sure to keep enough cash in reserves to cover upcoming debts for a minimum of the next one to three months. 

3. Risk Management

Having cash available can help you manage the balance sheet by providing a cushion against unexpected losses. Whether that’s a client that falls through or a car that breaks down, it’s better to be prepared for unexpected expenses and losses. If you don’t have enough cash reserves or highly liquid assets, you’ll be forced to sell other assets for less than their market value to meet cash needs.  

4. Increased Investment Opportunities

Having cash available allows you to take advantage of investment opportunities when they arise. If you have low liquidity, you may not be able to take advantage of short-term opportunities. But sitting on a large amount of cash reserves means you’re missing the growth opportunities in a mutual fund or other relatively liquid assets where your money could be earning more for you. 

5. Increased Credit Availability

With some lenders, having more liquidity may enable you to secure better loan terms. Demonstrating cash reserves or savings may be seen as a guarantee against the loan, allowing you to more easily get a higher loan value or lower interest rates. 

How to invest if you have high liquidity needs

Do you have a shorter-term goal? For example, are you in the process of paying off your student loans or saving for a house in the next couple of years? If so, your liquidity needs may be high, which requires having cash on hand to pay these expenses. 

If you have high liquidity needs, saving and investing using highly liquid investments is the best strategy. It also may make sense to invest more conservatively, which could help avoid a situation where a drop in the market causes you to not have enough cash or, possibly worse, to have to sell investments when the market is down.

While your liquidity needs are high it might make sense to only invest — usually using dollar-cost averaging — whatever funds are intended for long-term goals like retirement. 

Consider the highly liquid investment types below

Cash

You can save cash in saving accounts, certificates of deposit (CDs), or money market accounts. Money market accounts are interest-bearing savings products you can get at banks and credit unions. You can usually get a debit card and checks linked to the account, although there is a limit on the number of transfers or debits per month. 

A CD is an account used to save money for a set period of time with a specific interest rate. The time period on a CD ranges from a few months to five years or more. Once a CD is opened, you cannot withdraw the funds until the time period has passed, or you’ll have to pay a significant penalty. 

In addition to a standard savings account, consider a high-yield savings account that offers higher interest rates and bonuses for large deposits. Savings accounts are similar to money market accounts, except that you won’t get a debit card or checks with the account. 

Stocks

Stocks are a form of security in which the holder has proportionate ownership in the issuing corporation. Stocks are sold predominantly on stock exchanges. Stocks are generally highly liquid investments. What does liquidity mean in stocks? The greater the daily trade volume, the more liquid a stock is. A stock with 70 million daily trades has greater liquidity than a stock with only 100,000 daily trades, but most stocks on major exchanges are considered highly liquid investments. 

Bonds 

A bond is a fixed-interest loan instrument. Usually, a bond is held by an investor with a company or the government. Bonds with low transaction costs are considered highly liquid investments while other bonds may have lower liquidity. You can sell bonds listed on major exchanges quickly for cash via a broker, making them highly liquid. 

Exchange-traded funds (ETFs)

Exchange-traded funds are a type of pooled-asset security that includes many individual stocks and bonds. ETFs are traded on major exchanges and are usually considered highly liquid investments. 

How to invest if you have low liquidity needs

If you are focused on retirement many decades away, or if you don’t have any near-term large purchases planned, you may have lower liquidity needs and can afford to invest in more illiquid assets. This will help you diversify your portfolio and possibly protect against the performance of the markets in times of economic downturn.

Retirement accounts

Retirement accounts are set up as early as possible with a focus on building long-term wealth for retirement. Retirement accounts like individual retirement accounts (IRAs) and 401(k)s will have fees or penalties for early withdrawal before the age of 60. You could face both taxes and up to 10% early withdrawal penalties, making them illiquid before 60. 

Real estate

Real estate is considered a relatively illiquid asset. Depending on the local market, it could be several months or more to get the full asset value. In some markets or with especially valuable properties, getting the full appraised value could take a year or more. 

In many long-term wealth-building strategies, real estate is a wise investment because the long-term value often outpaces market performance. The value increases if the real estate property is income-generating in the short term through rental income. 

Hedge funds

Hedge funds are pooled investment accounts that trade in more liquid assets like stocks and bonds. With a hedge fund, you’re often restricted in how often you can withdraw funds, making them an illiquid investment that can lead to long-term investment returns. 

Finance Liquidity Final Tips

How do you know whether you’re meeting your liquidity needs? If you have enough in savings accounts, CDs, or money market accounts to meet three to six months of expenses, then you’re probably meeting your liquidity needs. Investing a portion — up to one year’s expense — in liquid assets like stocks, bonds, and ETFs will ensure strong liquidity while protecting your long-term investments. 

As you build liquidity needs, don’t forget to focus on long-term investing goals through retirement accounts, real estate, and even hedge funds. 

FAQ

• Major market indices fell in 2022. The S&P 500, Dow and Nasdaq lost 19.4%, 8.8% and 33.1%, respectively across the year. This was driven by factors including historic inflation rates, the Fed, the war in Ukraine, and more. Many of these trends will likely continue throughout the new year.
• The Fed raised interest rates by 50 bps in December.  This was the seventh rate hike in a row, driven by the Fed’s commitment to bringing inflation down. The Federal Reserve signaled that interest rates may increase further in 2023 and could remain restrictive for longer. The Fed funds rate has risen from 0% last March to 4.25% today.
• Inflation expectations fell to their lowest level since 2021. Inflation expectations for the next year, as reported by the University of Michigan Survey of Consumers, declined to 4.4%. This marks the lowest expected inflation since June of 2021. Consumer sentiment also increased, a welcome sign of the strength of the economy as many worry about a possible recession.
• Markets have been volatile as interest rate policy has evolved. Throughout 2022, inflation and its effects have dominated the economic landscape. High inflation has destabilized businesses and eroded consumer purchasing power, leading to increased economic uncertainty. Rising interest rates have slowed economic growth and hurt the housing market. Still, markets are positive when viewed from a longer-term perspective, including since before the pandemic crash of 2020. If inflation can be tamed, it’s possible that businesses and consumers will feel less pressure over the next year or two.

While markets have proven to be resistant to many negative shocks such as technology layoffs, supply chain disruptions, and the war in Ukraine, economic concerns continue to dictate market movements. Inflation has begun to slow in recent months, but policy makers are still wary of inflation becoming ingrained in the economy. As a result, the Fed has remained committed to bringing inflation under control and keeping interest rates high. As we begin 2023, the path of inflation and interest rates will likely continue to dictate market movements.

Chart: All asset classes were negative in 2022 except for commodities. The “balanced portfolio” is a hypothetical 60/40 portfolio consisting of 60% S&P 500 and 40% Bloomberg Aggregate Index. For illustrative purposes only. Investments cannot be made directly in an index. Data provided by Clearnomics.

But just because you invest in stocks doesn’t mean you’ll become wealthy. In fact, investing in the stock market is a complex business that comes with significant risks. 

So, can you lose money in stocks? The short answer is absolutely, but let’s explore in great detail how this is a possibility. 

How do people lose money in the stock market?

Before we unpack how people lose money in the stock market, let’s first understand the basic principle of investing. In general, investing entails the speculation that an asset will increase in value over time. In this example, the asset is the stock of a company. 

However, there is absolutely no guarantee that the stock will actually increase. For example, imagine you decide to buy 100 shares of stock ABC at a purchase price of $85 per share. Your initial investment would be $8,500 as a result of multiplying 100 shares by $85.  

You purchased this stock under the belief that the value of the stock would increase to $125 over the next two years. However, fast forward 24 months later and the price per share declined to $35 per share, which is a loss of $50 per share.

So, you initially invested $8,500 to purchase 100 shares, but at the new market price, your asset is only worth $3,500. If you were to sell your shares at a price of $35 per share, you would experience a loss of $5,000. 

If you don’t sell, the price per share could either continue to decline or rise in value over time. But nonetheless, even if the price did in fact rise, it would need to rise significantly to offset the initial decline. 

Can you go into debt with stocks?

It’s important to note that you cannot go into debt as a result of investing in stocks unless you borrow money against your portfolio. Various brokerages provide their clients with leverage, which is also known as margin. This essentially multiplies the amount of money that the investor is able to invest. 

For example, if you have $10,000 in your brokerage and your brokerage provides you with two-to-one leverage, you’d have $20,000 that you can invest. However, the additional $10,000 that was provided by your brokerage is borrowed money. 

If you lose that money, you will need to pay it back somehow in addition to any interest that the brokerage charges. Investing with leverage can multiply your purchasing power, but it can also multiply your risk exposure. Generally speaking, only professional investors or traders should consider investing with borrowed money. 

If a stock goes negative, do you owe money?

If you do not use borrowed money, you will never owe money with your stock investments. Stocks can only drop to $0.00 per share, meaning you can lose 100% of your investment but not more than that, seeing as the stock cannot be of negative value. 

Cash vs margin account

There are two main types of brokerage accounts. The first type of account is known as a cash account. There is no question that cash accounts provide the investor with more safety. 

The money in this type of account is the money you’ve deposited and nothing more but also nothing less. You can lose 100% of your investment, but you will not go into debt when you trade or invest the money in a cash account. 

The second type of account is a margin account. There is not a one-size-fits-all margin account either. Some brokerages offer a two-to-one margin account, whereas other brokerages offer three-to-one, four-to-one and even five-to-one margin accounts. 

The first number is the multiplying number. You can multiply your purchasing power by borrowing multiplied intervals of the cash value of your portfolio. 

Again, it’s essential to understand that borrowing money that you can invest in the stock market exacerbates your risk exposure. But even with the increased risk, margin accounts are popular as they also multiply your gains when you make a good trade or investment. 

Tips to minimize risks when investing in stocks

Investing in the stock market is risky, and you should certainly do your research before making any investments. With that said, there are ways to minimize your risk, which is often referred to as risk management. 

Don’t invest more than you can afford to lose

The first rule should be to never invest more than you can afford to lose. Investing is very emotional as no one wants to see their assets decline in value and no one wants to lose money. 

But the emotions can become even more overwhelming when you’re investing money that you actually need so that you can pay your bills. While losing money is never the desired outcome, only invest what you can afford to lose. 

Always be sure to diversify

Another way to reduce your risk exposure is to diversify your investments. If you plan to invest $10,000 into stocks, divide that total investment amount by four or five. Then, invest those four or five subsets into separate stocks. 

In doing so, you won’t find yourself allocating more than 25% of your total investment towards any single stock. If one stock declines in value, you will still have three or four other stocks that could rise in value. Investing in ETFs is another great way to add diversification to your portfolio. 

ETFs stands for exchange-traded funds. They essentially aggregate many different companies into one investment vehicle. For example, you can purchase the SPY ETF, which is a portion of all 500 companies in the S&P 500. 

Understand the different types of accounts

Make sure you know what type of account you should use before you open anything. As mentioned above, there are cash accounts and margin accounts. If you want to reduce your risk, stick to a cash account rather than a margin account. 

Beyond that, you need to decide which assets you’ll invest in. Do you want to trade individual stocks, currencies or options? Options trading comes with increased risks, but some people consider the increased risk to be worth it considering the benefits options trading can yield. 

Play the long game

Timing the market entails figuring out exactly when the perfect time is to purchase stocks. This is incredibly complex and challenging to figure out. People lose a lot of money trying to time the market, but instead of timing the market, you should spend time in the market. 

Play the long game. Buy stocks from companies that you envision existing and dominating their class for the next five, 10 or even 20 years. This value-based investing mentality is Warren Buffett’s claim to fame. 

Know your exit strategy 

Another critical variable you need to be aware of is your exit point. This is the point at which you will no longer engage in a stock if it rises or falls to a specific value. 

Holding onto losses may further add to your overall loss. Choosing not to sell when a stock rises in value may leave a lot of money on the table if, in fact, the stock pulls back. 

Before you purchase a stock, you should predefine what your sale price will be if the stock rises or falls in value. For example, if you buy a stock for $100 per share, you may choose to sell your shares if the price reaches either $90 per share or $125 per share. 

Make sure you stick to whatever plan you make no matter how challenging it may be in the moment. No one wants to lose money in stocks, but cutting your losses early is often the best thing you can do to minimize your risk exposure. 

Tips to minimize risks in margin accounts

If you’re willing to take on the extra risk of using a margin account, be smart about it. There are ways to minimize the risk of your margin account.  

Leave some cash in your account 

Always leave cash in your account, and never invest 100% of what you borrowed or your entire portfolio value. Leaving cash in the account will help you avoid having a margin call on your account, which may cause you to sell stocks at a bad time just to satisfy your brokerage obligations. 

Pay interest regularly

Brokerages charge interest when you borrow their money, and interest can become very expensive. Make consistent interest payments to avoid the possibility that debt piles up. Keep in mind that, for a margin-based trade or investment to be worthwhile, the return you see in the stock needs to exceed the cost of borrowing money from the brokerage. 

Understand your limits

As mentioned above, you need to know your exit point. This cannot be stressed enough. Having an exit plan when circumstances go poorly will keep your account alive. As such, do not become stubborn or greedy with your investments. 

Remember that it is perfectly okay to admit you are wrong and then choose to sell your shares. You’ll never be 100% right all the time, but to be successful in the world of investing, you’ll need to generate more money when you’re right to offset the money you lose when you’re wrong. 

Invest as a way of reaching your financial goals 

Losing money in stocks is never the goal. People invest in the stock market to watch their money and investments grow over time. 

Undoubtedly, the stock market has helped people create wealth and additional income. Historically, investing has provided a return above and beyond the yearly inflation rate. Investing comes with risks, but that doesn’t mean you shouldn’t try it. 

You just need to do your homework and research before deciding which stocks to purchase. A few great investments may be all you need to reach your financial goals.

FAQ

What does Dun and Bradstreet do?

If you work in the business world or deal with the financials of a business, it’s safe to say you’ve heard of Dun and Bradstreet, D&B, or even a Dnb report. D&B provides businesses with proprietary software, data, and analytics to help businesses achieve their marketing and sales goals. Over 90% of Fortune 500 companies rely on Dun and Bradstreet for data that helps their business remain competitive. D&B also helps with risk assessment.

Knowing your business risks can help save money, time, and resources while ensuring that you garner your success or remain successful. Having access to your Dnb report as well as other business reports can help you recognize the strengths of your business, as well as areas of opportunity. 

What is Dun and Bradstreet used for?

Some companies, such as government agencies, must work with Dun and Bradstreet, while others can choose to use their services. You might be wondering why you would need to use their services. When you decide to begin services, you will receive a DUNS (data universal numbering system) number, which is a significant benefit on its own. This number is associated with all the essential information about your business; the DUNS number will discuss this later. In addition to establishing a DUNS number, D&B also collects necessary data and analytics about your business and others and consumer data.

The data analytics Dun and Bradstreet acquires can provide insightful information to make informed decisions about your business, next steps, and even other companies. For example, imagine you are considering partnering with a business; the benefits of D&B allow you to review their business analytics to help determine if the partnership benefits both of you. Keep in mind that having Duns and Bradstreet access means that other businesses can also review your information.  

What is a D&B Number?

As mentioned before, when you receive D&B services, you are assigned a D&B number, also known as a DUNS number. This number system has been around since 1963, but it was only a seven-digit number back then. The DUNS number is now a nine-digit number unique to your business; this is different from an EIN. This number is specific to Dun and Bradstreet and identifies your business credit file, your business demographic information, and the financial health indicators of your business.

Financial health indicators include information such as risks, ratings, and scores. One great feature is that while you can access your information, you can also access the information of other businesses using their DUNS number. 

History of Dun and Bradstreet

Dun and Bradstreet has been around for quite some time, as far back as 1841, with the Mercantile Agency. In 1859, Benjamin Douglass incorporated the company under a new name. R.G Dun and Company was incorporated when Robert Graham Dun purchased the company. In 1849, while this was happening in New York City with Dun, John M Bradstreet formed the Bradstreet Company in Ohio. They later moved to New York in 1855. 

In 1933, Dun and Co, R.G Dun and Company changed their name, and in 1931Bradstreet merged. The merger brought along another name change to R.G Dun-Bradstreet. In 1963, the DUNS number system was introduced. Fast forward to 2001, R.G Dun-Bradstreet officially changed its name to D&B. Dun and Bradstreet, or D&B, is now a well-known player in the business world having clients in multiple industries worldwide. In July 2020 Dun and Bradstreet launched their IPO (initial public offering) to become a publicly traded company. 

It’s all in the details 

Dun and Bradstreet have been around for a long time, making a name for themselves as the go-to for small business information. They are connected with the necessary details to help businesses make better-informed business decisions, risk assessments, and marketing choices. These details help allow businesses to be successful. Dun and Bradstreet can confidently say that their strategies work because about 90% of Fortune 500 businesses are their clients. So if you are a small business or looking to acquire a small business, it might be worth considering Dun and Bradstreet to help your success. 

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