This calculator is a free to use tool designed to help you dive deeper into the world of financial literacy. The panel above provides advanced functionality, helping you visualize your investment plans.

It also significantly accelerates the process of calculating, allowing you to see a detailed breakdown of your strategy within just a few clicks. Continue reading this section to discover more!

What can be achieved with this calculator?

This tool aims to assist you in evaluating different investing scenarios based on your assumptions on how it might perform in the future. The list below contains some explanations as to what can be achieved.

1. Split your investment strategy into multiple stages

Life is rarely a linear experience, and that is precisely why this calculator allows you to split your investment strategy into multiple stages.

Are you still a student with limited earnings, yet planning to enter a high-paying field within a couple of years? Do you expect to be promoted and get a raise? Or maybe you are launching a new business, and expecting it to become profitable in the future? Say no more! This tool allows you to account for all of these scenarios thanks to its multi-stage functionality. Just fill the previous stage, and add as many as you need!

2. Adjust for inflation

In our modern, global, and incredibly intertwined economy, the value of money changes constantly. This affects your portfolio. A thousand dollars today will most likely get you much further, than it will 30 years down the line.

This is why it is extremely helpful to analyze your investment from that point of view as well. Inflation adjustment allows you to get a more natural grasp of what your investment would leave you with at the end, and how much will you actually be able to get in exchange for it.

While choosing a predicted inflation rate for a certain stage, please remember to do so for the currency your investment will be made in, especially if you are investing in a different currency than the one which your country or region uses. Only when you withdraw your investment will you be converting it into your local currency, at that day's specific exchange rate.

3. Account for Capital Gains Tax

Apart from so called "tax-havens", most countries and/or regions will require you to pay a Capital Gains Tax once you sell your investment (e.g. stocks) at a nominal profit in relation to your contributions.

The exact cut taken off of your profit can vary depending on the exact country and region that you are located in. Some nations impose a country-wide rate, some have a rate based on your income, and some, like the USA get a little more complex with their system.

A brief overview of the Capital Gains Tax system of the United States

The United States' system of Capital Gains Tax can generally be split into two main components:

• Federally imposed tax (applies to every US citizen)
• State-level tax (specific to people from within that state and highly variable between regions)

The Federal-level tax can be further split into two another categories: long-term and short-term. Which your portfolio ends up in is generally decided by evaluating how long have you held the individual, taxed element.

The boundary between these two categories had been set at 1 year by the US lawmakers. It could generally be seen as the split between a short-term "trade" and a longer "investment".

Then, your specific Federal rate will depend on your "filing status" (single / married / married filling separate / head of household). Once you fall into one of these brackets, your exact rate will be chosen based on your income.

Your state might also require a couple of additional percent on top of the Federal Tax. States like Texas, Florida, Alaska or Wyoming impose no additional taxes. However, regions like California, New York, Minnesota or New Jersey might require a payment of as much as 10 to 15%.

Why is compound interest so powerful?

The results of your compounding investment might feel underwhelming at first, especially if you are starting relatively small. Do not let that trick you though. The true beauty of compound interest is that, at each compounding event, your interest rate is applied on the entirety of your portfolio's value. This includes all of the previously gained interest.

This means that at each event of compounding, your gains will be greater than at the previous one, assuming you did not withdraw anything from your portfolio in the meantime.

You could compare this process to a rocket being launched into space. At first, it struggles to gain velocity and appears to be moving slowly. The acceleration is still there though, and once you leave earth, it starts hitting serious speeds. The most distant manmade object, the Voyager 1 spacecraft, is currently 93 million miles away from earth, despite having been launched in the 1970's. That is well within a human lifetime!

Another good, visual example would be a stream of water carving out a route for itself within an environment. At first, the volume of water flowing is tiny, and hence, the streambed grows very slowly. As rocks erode further though, more water can flow, hence accelerating the process. A very small stream can grow to become a grand river. This is the nature's way of using a compounding growth.

As a word of summary, the power of compound interest is it's accelerating nature. What seems tiny in the beginning can turn into impressive results, provided it is given enough time. The gains will likely not be impressive when you start out, but they will become more significant each time your investment compounds.

The significance of starting your investing journey early

Once you understand the fascinating nature of compounding, you begin to see why starting early is so powerful. Your twenties are rarely a time of stability and receiving a huge income. You might not yet own a lot of assets, but at that age, you own what proves to be the most valuable thing, over and over again. That thing is time.

Compound Interest Investments made at a young age, even if your contributions are tiny, are the most significant. They will have decades to compound, and over that time, even insignificant sums can realistically turn into something really impressive.

That said, the earlier you start, the better for your portfolio. It does not mean that a young age is the only viable time to begin. Any time given to compounding is better than none. Even if you are currently at a later stage of life, gains can still be achieved. At that age, you are also very likely to be able to invest more. This will rarely be able to fully offset a longer compounding period, but can still be a very viable option.

Consistency is key in investing

In order to utilize the full potential of compounding returns, it is important to set yourself a clear goal and to stay consistent with it. Every new contribution starts to compound, which enhances your overall returns.

By developing a habit of regular investing, you are effectively utilizing the potential of compounding returns. As we have already discussed before, the strength of this type of investment lies in its accelerating nature. Consistency in contributing means you have now installed a turbocharger on top of your already efficient machine.

How much should I invest on a regular basis?

There is no single, exact and perfect value of regular contributions. Every individual finds themselves in different circumstances, and these change all the time. A good general idea would be to take a look at your current budget and evaluate how much of what you are left with would you be willing to redirect towards your investments.

Identifying excess expenses on behalf of investing

If money you are left with after paying your bills is not satisfactory to you, or if you find yourself living paycheck to paycheck, the most simple first step would be to dedicate a while to analyze your regular spendings. There is no guarantee that your particular circumstances would allow for any significant reduction thereof, but in the modern, highly online economy, it is not unheard of to be able to pinpoint unnecesary expenses.

There are various possibilities of what could be considered one:

• Subscription services

  In recent years, we have witnessed a very rapid growth of a subscription-based model of services. An increasing amount of businesses from various sectors are now turning towards this exact way of functioning and providing their product to customers, on a regular basis.

  This can sometimes lead to customers still being subscribed to services they do not use anymore, or those which they use too rarely to justify continuing the expense.

  Apart from these unused services, while conducting a review of your subscriptions, you could decide that some are simply unnecesary to you, and that you see no point in continuing to pay for them.

  Cancelling some excess subscription services could help you unlock some money each month, which you can then decide to use as a regular contribution to your investments.

• Food delivery

  While certainly a great convenience, food and grocery delivery services often charge a significant fee on top of the original price of products which you are ordering. It is a good idea to evaluate your monthly spending on such applications.

  If you decide that the total is beyond what is acceptable to you, it is best to limit your usage of these services. A good place to start would be trying to pack your own lunch, and picking your own groceries in between of your daily obligations.

  Stopping at a grocery store on the way back from work or school can get you surprisingly far in comparison to ordering grocery delivery on a regular basis.

• Transportation costs

  This one is usually not something you can alter and correct immediately, although it is a part of your expenses that can influence your budget quite significantly.

  Most of us need cars to function in our everyday lives. They allow us to get to and back from work, to bring groceries or furniture home, to visit family, and also to travel. The use cases of these machines are extremly broad, and functioning without them might be near impossible in many regions of the world.

  The costs of operating such a machine though can quickly become overwhelming. Cars need fuel, maintenance, and insurance to run flawlessly and legally on our roads.

  The bigger a vehicle is, and the more powerful of an engine it has, the more fuel will it consume, and usually, the more expensive will its insurance get.

  For that reason, the next time you are choosing your new commute companion, try evaluating how big of a vehicle do you actually need. If you live in a city and work in an office environment, a haul-capable truck might not be absolutely necessary.

Checking through your expenses thoroughly, while focusing on the forementioned components, could help you find some additional money to invest. These are not the only possible things though, you could potentially find other areas where you currently spend more than you would like to.

These are just some ideas to get you thinking, not a piece of financial advice. Only ever act on your finances based on your own evaluation and research. If you find it overwhelming, it might be a good idea to contact a licensed professional to provide you with a tailored assistance in budgeting and investing.

Compound Interest vs Compound Returns

While Compound Interest and Compound Return investments differ slightly in terms of associated risks and potential gains, they are fundamentally based on the same mathematical principle.

The term "Compound Interest" is usually used to describe gains on investments with a static, preset rate of return. This includes various products offered by banks or investment firms, such as savings or retirement accounts.

The provider of such a service then invests your money (often in the stock market), and offers you a steady rate of return for a given period of time. This rate is usually lower than what the institution expects to gain from the investment. The difference between your rate and the bank's expected returns constitutes the profit margin of the institution assumed in return for them taking over a bigger part of the risk involved.

Compounding Returns on the other hand are generally considered to describe situations in which returns still compound on the same basis, although the rate is not hard-set.

Instead of an interest rate, an average rate of return (over some period of time) is used in the same calculations. This is a common metric in the Stock Market, especially in regards to Market Indices and ETFs tracking them.

Note: Past performance does not guarantee future results.

Investing vs. Trading (vs. Gambling)

Before you enter the world of creating an investment portfolio to work on your behalf, it is important to understand the differences between various patterns you can choose to engage with and the risks associated with each of them.

What does it mean to be "trading" in the world of finance?

Trading is a behaviour of investors which is speculative, yet based on data and extensive research conducted by the investor or their licensed financial advisor.

This strategy aims to analyze specific companies or certain sectors of a market. Ideally, huge amounts of data regarding the potential investment are gathered and evaluated. In the case of this being a given company's stock, all sorts of business prospects and opportunities are analyzed.

Based on the results of such an evaluation, a trader might decide that they consider it probable enough for the stock of that given company to raise in value within a given timeframe for them to take a risk.

A trader then places their money in their chosen asset, with plans to sell it within a relatively short time-frame. This involves a significant risk, as there is absolutely no guarantee of positive returns. It is still within the realm of possibility that the chosen company could plummet before a trader gets the opportunity to withdraw. It could launch a very disappointing product or service in the meantime, or even go bankrupt completely.

The thin line between Trading and Gambling

Trading and Gambling might get confused quite often, as they both tend to focus on a shorter time frame, and involve risk. There is a key difference between them though.

While both of these behaviours introduce a significant risk of losing money, Trading attempts to offset it to some extent by grounding decisions on professional expertise and thorough analysis. Gambling on the other hand either makes no attempt at evaluating relevant data and market situation, or does so in a faulty way.

The fallacy of evaluation in gambling can stem either from a complete lack of analysis, or it being conducted by a person without sufficient expertise.

Due to the sheer volume of data and expertise required for trading, many beginners who choose to attempt to conduct this, might effectively end up gambling. For this reason, it is highly advisable to contact a licensed professional before engaging in Trading.

How does investing aim to minimize risk?

Investing is a different strategy of approaching assets that vary in value over time. While traders focus on trying to predict short-term price fluctuations, and capitalizing on them accordingly, investors are attempting to minimize their effects by stretching the time-frame of exposure to the market.

What traders see as an opportunity, investors percieve as noise within a certain trend, which is to be filtered out. Daily fluctuations tend to average out towards a certain trend over a period of time. This trend can be positive, neutral, or negative.

As you increase the duration of your investments, the less of a significance these short-term price differences posess. While trends can change, it is unlikely for them to do so in a remotely close volume to daily or weekly fluctuations. This is one of the reasons why many consider investing a safer alternative to trading.

Time in the market is not the only technique utilized in order to manage the risk involved in investing. Some assets are still more volatile than others. In terms of the stock market, some companies are more prone to certain events than others. What is also worth noting is that startups are generally based on yet unproven ideas. Due to this, they generally are more risky of an investment than an established corporation.

Diversifying your investment portfolio

While big, established, and publicly traded companies are more likely to remain relatively stable within their trends, they are still not guaranteed to do so. New, revolutionary competitors can arise, failed products can be launched, and demand can shift. It is always important to remember that past performance does not guarantee future results.

This aspect also induces a risk, although strategies have been developed to try and offset it. One of the most prominent involves spreading the risk into multiple, preferably disconnected assets.

The general idea is that a single corporation is more likely to fail than multiple at once. A set of companies from within a single industry are more likely to face issues at once than a set of businesses operating in different sectors of the economy. Finally, one country is more likely to struggle economically than multiple at once.

This is the main idea behind asset diversification. The broader your wealth is allocated, the less likely it is for it all to plummet at once. The change of value of diversified assets tends to be more subtle and calm than it is with focused allocations.

Market indexes and associated ETFs

Since we have already established that spreading investments out is an idea that generally tends to reduce associated risks, we might as well take a look at the market tools that are there to help investors manage this process effectively.

Market indexes are a helpful statistical measure, which tracks the performance of a select set of stocks. Depending on the specific index, the assets within will be more or less diversified. Analyzing them can bring you valuable insight in the performance of a certain sector, or the economy of a given country as a whole. You may also decide to use them as a template for your own portfolio, allowing you to enjoy some structured diversification.

Since a market index is a statistical tool, it can not be bought directly. This is where the role of Exchange-Traded Funds (ETFs) begins. Understanding these entities can be made simpler using a straightforward analogy. An ETF can be understood as a publicly-traded company, whose role it is to hold accordingly weighted stocks, in strict adherence to a given market index. When you buy shares of an ETF, you indirectly own a slice of all the companies it holds.

These funds can function in one of two ways:

1. Accumulative Exchange Traded Funds
2. Dividend-paying Exchange Traded Funds

Accumulative ETFs are usually chosen by investors who are focused on the long term prospects. Such funds do not pay out any dividends yielded from their held stocks to their shareholders. Instead, the fund automatically reinvests the received dividends, without any shareholder intervention. In many legal systems of the world, this prevents triggering a "tax-event", which would put the investor under a legal obligation of paying a Capital Gains Tax had the dividend been paid out in cash.

Dividend-paying ETFs on the other hand are a popular choice of individuals focused more on creating a source of passive income. Shareholders of such funds recieve dividends, which are usually paid-out quarterly, in cash, and in accordance to the value of their share.

The main drawback of the second setup is that, in many regions of the world, a taxable event will be triggered each time a cash dividend is paid out. This can set the dividend-receiving investor back a bit each year in comparison to someone holding an accumulative ETF following the same index.

National market indexes

Many investors find it convinient to analyze economical prospects on national levels. This approach makes it more manageable to set your portfolio in a way that allows for a good level of diversification, while operating within regions you believe in most.

Some of the popular American market indices include:

• Standard and Poor's 500 (S&P 500)

  Arguably one of the most popular of indexes. It tracks the performance of 500 greatest giants within the US economy. These include worldwide corporations and industry leading enterprises such as:

  • Apple
  • Microsoft
  • Meta
  • Nvidia
  • Tesla
  • Coca-Cola
  • Amazon
  • Google

  and many, many others.

  This index is exposed to more than just a single industry, instead spreading its reach between various influential sectors like technology, finance, healthcare, communications, utilities, and others.

  Its broad exposure, as well as the powerful American economy which it stems from, are what makes this index a highly regarded metric. It is considered to be a well diversified basket filled with impressively strong and established assets.

  Commonly chosen ETFs: Vanguard S&P 500, iShares CORE S&P 500 ETF, Invesco S&P 500

• NASDAQ 100

  This market index is composed of 100 of the most significant non-financial enterprises listed on the NASDAQ stock exchange. Its composition makes it a tech-leaning option, often chosen by investors with a strong belief in this sector's continued growth.

  It contains influential corporations based in the USA, as well as some which are incorporated elsewhere. The latter include entities such as the Canadian Shopify, the Dutch NXP Semiconductors, or the British-Swedish AstraZeneca.

  The NASDAQ 100's tech allignment often allows it to slightly outperform broader indexes, although not without a cost. A heavier exposure to tech means that whenever the sector struggles, the index is prone to a more significant devaluation, thus being more risky.

  Commonly chosen ETFs: Invesco EQQQ Nasdaq-100, iShares NASDAQ 100

• Dow Jones Industrial Average (DJIA)

  Established in the late 19th century, DJIA holds a place on the podium of the most historic American market indices still in operation today. It includes influential companies, many of which provide the technical backbones of the modern day economy.

  Despite being composed of enterprises such as Apple, American Express, Visa, Chevron, Verizon, or Walmart, the index is not as diversified as the previous two in terms of sheer numbers. It consists of 30 stocks in total, which falls significantly short of the S&P's 500, or the NASDAQ's 100.

  On the other hand though, DJIA generally tracks a set of deeply established businesses. Many of them produce and deliver resources and essential parts of other corporations' products, while others, like Walmart or Home Depot provide the general public with everyday items of utmost significance.

  Commonly chosen ETFs: DOW, iShares Dow Jones Industrial Average

Other developed economies' indexes

Various successful and globally influential corporations originate from the economies of other, developed nations. These regions also utilize the same tools to group their enterprises into indexes.

Spreading your portfolio across multiple economies enhances its level of diversification, thus increasing the associated level of robustness against localized market fluctuations.

Some of the most established include:

• Deutscher Aktienindex (DAX)

  Germany is a country known for its industrial, manufacturing and chemical sectors. It is the origin of many businesses producing quality everyday essentials, as well as highly advanced and engineered machines.

  The DAX is mostly made of proven german enterprises with a global reach, such as:

  • BMW
  • Adidas
  • Continental
  • Deutsche Telekom
  • Siemens
  • Airbus
  • Rheinmetall

  The components are fairly distributed amongst various sectors, although they shift closer towards industry, and further away from tech in comparison to the indexes found in the USA.

  Various investors choose to broaden their portfolios in accordance with this market index. It allows them to gain some broader diversification and exposure to the EU market, while doing so through a set of companies commonly percieved as robust. It is important to keep in mind that the DAX is composed of 40 assets, which alone might not be widely considered as diversified enough.

  Some limitations to the German economy are often said to include its heavy reliance on exports, as well as a fairly slow rate of growth compared to some other regions of the world.

• Nikkei 225 (JP225)

  Nikkei 225 is a market index following the 225 highly capitalised and liquid publicly traded companies in Japan. The current strengths of the Japanese economy bear some resemblance to what we have discussed in the previous section about Germany and its DAX.

  The strengths of Japanese enterprises, as is in the case of Germany, tend to focus around industries, manufacturing, and the auto industry. There are also many successful businesses operating in different sectors, such as chemical industries, or finance.

  Within the JP225, multiple companies with a global reach can be found. These include famous positions, such as:

  • Toyota
  • Mitsubishi
  • Yamaha
  • Canon
  • Nikon
  • Sony
  • Nintendo

  This index is often a choice of individuals looking for a relatively stable venture aimed at diversifying into the markets of Asia. Japanese corporations offer a strong, local presence, as well as a significant global reach.

  Despite its strong foothold, the Japanese economy faces some drawbacks, which are important to include in investing considerations. Some of the commonly mentioned ones include a rapidly aging population, as well as a rise of the Chinese economy nearby, which introduces many fierce competitors to Japanese businesses.

• Financial Times Stock Exchange 100 (FTSE 100)

  This index is made of 100 of the highest capitalized and most established companies listed on the London Stock Exchange. It is the most popular of British indices, serving as a benchmark of the economy of the United Kingdom as a whole.

  FTSE 100 is not heavily tech oriented, instead focusing on sectors like energy, finance, and consumer staples. These reflect what the British economy is traditionally known and regarded for. It is also what makes this index a good option to follow while diversifying, if your portfolio leans heavily on technology.

  Among the FTSE 100’s largest constituents are:

  • Aviva
  • Barclays
  • BP (formerly British Petroleum)
  • Unilever
  • Prudential PLC
  • HSBC
  • Tesco

  The number of companies of which this market index is built, makes it regarded as a fairly diversified asset. Both the selection of businesses, and the sectors within which they operate are considered to be robust and globally established.

  However, as is the case with many European states, the British economy is criticized for its relatively slow growth, which is reflected in a rather sluggish increase in the value of the FTSE 100.

  What is also important to note is that, although it is a British index, a significant part of corporations within tend tp earn a significant portion of their revenue abroad and overseas. For many investors, this global exposure is both a strength and a limitation: it makes the FTSE 100 less reflective of the UK’s domestic economy, but gives it resilience as a globally diversified index.

Developing & Emerging market indices (for the curious)

These indexes are usually not what most investors would decide to follow in the beginning. Due to their emerging nature, they often can lack in stability when compared to the forementioned, developed indices.

However, there are various successful businesses emerging from within these markets. Many of them are becoming the dominant players of an industry within their respective regions. Some are even managing to push beyond their local scope, becoming increasingly influential and competitive worldwide.

Some notable indices to look out for:

• Shanghai Composite Index (SHCOMP / SSE Composite)

  This index is commonly utilized as the main metric of the People's Republic of China market. It consists of a very broad spectrum of companies, including several thousands at all times.

  It is generally considered less of a blue-chip index, as it also includes many smaller and more volatile companies. Another interesting parameter of the SHCOMP is its dual currency nature. Stocks traded both in the Chinese Yuan, as well as those traded in different currencies are present within.

  While tracking this index can be more risky than it would be with more established metrics, the Chinese economy is currently experiencing a period of rapid growth. Some businesses from China are being able to outpace even their fiercest western competitors.

• Warszawski Indeks Giełdowy (WIG)

  The Stock Warsaw Exchange Index (WIG) serves as a primary benchmark of the Polish economy. The Warsaw Stock Exchange is the biggest institution of its kind within the region generally understood as Central and Eastern Europe (CEE).

  Many Polish enterprises have managed to significantly increase their competitiveness locally within the past few decades, while one, the CD-Projekt video game studio, is already widely recognized globally.

  As is common with developing market indices though, there are some limits to the Polish WIG. While the country's economy is currently beating its European neighbors in terms of growth, many investors remain cautious. Some limitations include significant state involvement in top enterprises, and concerns about how Poland’s evolving role in the EU budget may affect long-term outlooks.

• Korea Composite Stock Price Index (KOSPI)

  KOSPI is the main market index of the Republic of Korea. It is made of all common stocks on the Korean Exchange. This index is currently made of a substantial number of businesses, between 800 and 900 individual positions.

  Its focus tends to lean towards sectors such as electronics, steel, chemicals, ship-building, and the auto industry. These are areas in which the Korean economy usually excelled historically, and maintains to do so to this day.

  The index is often seen as a gateway to investing in the South Korean economy, which is known for its innovation and export-driven growth. However, it also comes with some risks. Some of them include South Korea being heavily reliant on international trade, which in turn makes it vulnerable to global demand shifts and geopolitical tensions in the region.

There are many more interesting and emerging economies with their own market indices. The 3 mentioned above are just there to give you a general idea about how they differ from more established metrics, as well as to provide some insight into what some other investors might be doing in order to diversify and capitalize on growth in these places.

Safe investing - what to look out for before you start

Due to the fact that investments inevitably require you to conduct financial transactions, they can be very prone to fraudulent activity of scammers. This is why it is incredibly important to do proper research into a platform / institution of choice before commiting.

Validating the legitimacy of a broker

The first step to take in the process of checking a broker's validity should be to verify if they are registered with a legitimate financial regulator of a trustworthy state. Remember not to just take the platform's word for it, instead, check their claims at the actual page of the regulating institution.

It is important to do so because fraudulent actors may publish false claims of being regulated by a certain organization, without ever receiving proper authorization, or even operating from the region they are claiming to.

Most countries of the world, especially those highly developed, tend to operate their own financial regulators. Below is a list of some of the most popular ones which your chosen platform or institution might be registered with:

United States of America

The American system is a bit more on the complex side, as it includes two separate layers of regulating institutions. One is a governmental organ overseeing a broader part of the financial market, and the other one is a non-profit with a narrower focus, which is regulating brokerages.

1. U.S. Securities and Exchange Commission (SEC)

   This is the main Federal regulatory organ responsible for protecting investors and ensuring integrity of the Stock Market. They hold a broad set of legal powers, including creating and enforcing legislation, as well as conducting enforcement proceedings, which include cases against fraudulent actors and scammers, as well as those trying to manipulate the market.

2. Financial Industry Regulatory Authority (FINRA)

FINRA is not a government body but a self-regulatory organization that works under SEC oversight. All U.S. brokerage firms and their representatives must be registered with FINRA.

This corporation currently oversees over 3000 brokerage firms. It focuses specifically on brokers and trading practices, monitors firms for compliance, and provides access to brokercheck, a free web service, which allows you to research the background and experience of financial advisers and firms registered with it.

United Kingdom

The London Stock Exchange is historically one of the global centers of worldwide trade. Due to that reason, UK is the country of choice for many brokerages to register in. Before choosing to work with any, it is important to verify their validity.

This institution is the main financial regulator of the United Kingdom. It operates independently of the government, although it is accountable to the UK's parliament. Its operations are financed through fees paid by members of the financial services industry.

FCA oversees financial markets, firms, and individuals (financial advisors) to ensure fair competition and consumer protection. Their roles include:

• Authorizing and supervising brokers, investment firms, and banks
• Enforcing rules against fraud and misconduct
• Making sure advertising and product descriptions are not misleading.

A firm being registered with the Financial Conduct Authority gives you measurable security thanks to their strict rules and protections.

• Segregation of client funds - your money must be kept separately from the broker's funds.
• Financial Services Compensation Scheme (FSCS) - this protects up to £85,000 of client's money if the firm goes under.

If your brokerage is claiming to be registered with the FCA, use their Firm Checker tool to check this statement's validity.

European Union (EU)

The European Union is a globally a rather unique project. At its core it is both a political and an economical union of 27 nations of the European continent.

This means that all member states have agreed on working as a single economy. Some legislation is now passed on the common level, while some is still up to each member state.

A shared economy in conjunction with retained national sovereignity has its implications in how the stock market is oversawn. While there is a common institution named ESMA established to create according legislation, its rulings are up for national regulators to implement, and do not cover every relevant aspect of the matter.

In order to fully understand the structure of European stock market regulation, it is important to first introduce the idea of "passporting". The explanation behind it is relatively simple, all it means is that being properly registered with any single European national regulator allows you to serve customers in all remaining EU member states.

Despite this trust and cooperation between various states, different nations' regulators enforce different levels of investor security. Some countries are more strict, while some are more loose or dont enforce as many precautions.

In terms of strictness, European national regulators can be broadly groupped into 3 distinct tiers:

Tier 1. Strictest Regulators / Strongest Protections

• Federal Financial Supervisory Authority (BaFin) - Germany

  BaFin is an independent federal institution of Germany headquatered in Bonn and Frankfurt. It is under supervision of the Federal Ministry of Finance. It currently oversees roughly 2700 banks, 800 institutions operating in financial services, as well as over 700 insurance providers.

  It offers an Investor Compensation Scheme through the EdW (Entschädigungseinrichtung der Wertpapierhandelsunternehmen), which covers 90% of investor claims up to €20,000.

  This German Financial Authority is widely recognized as being among the strictest on the continent. It is consumer-focused, and imposes hefty fines on financial firms for any misconduct.

• Financial Markets Authority (AMF) - France

  The AMF (Autorité des marchés financiers) of the Republic of France is the country's securities commission. It is an independent public institution tasked with safeguarding investments in financial instruments, as well as maintaining the order of Financial Markets.

  A compensation safeguard is also in place in form of the FGDR (Fonds de Garantie des Dépôts et de Résolution). It covers both deposits and certain investment claims. For investments, it protects up to €70,000 if your broker fails to return your assets. Separately, bank deposits are covered up to €100,000 per person, per bank.

  As is the case with any protective measure of this sort, it does not mean that you will be refunded in case of your chosen asset losing value.

  The AMF is commonly regarded as a very proactive institution, which often bans risky investment products (e.g. binary options). Registered firms are under frequent supervision, thus helping to protect the market from fraudulent players.

Tier 2. Balanced Regulators / Solid Protections

• Italian Companies and Exchange Commission (CONSOB) - Italy

  CONSOB (Commissione Nazionale per le Società e la Borsa) is the national authority of Italy responsible for regulation of the Borsa Italiana - the Italian Stock Exchange. It also supervises brokers and investment firms registered in the country.

  Funds invested through firms registered with this regulator are covered through the FGN (Fondo Nazionale di Garanzia) up to €20,000 per investor.

  This Italian regulator is seen as solid, it frequently tracks and bans fraudulent firms and outright scams. The rules, standards and penalties it enforces though, are generally not as strict as is the case with its German or French equivalents.

• Financial Supervision Authority (KNF) - Poland

  The Komisja Nadzoru Finansowego (KNF) is the main national authority responsible for supervision of the country's financial institutions and firms. It enforces its rules onto banks, insurance companies, pension funds, and the capital markets in Poland.

  KNF oversees the KDPW Investor Compensation Scheme, which provides compensation in the case of a registered financial institution going bankrupt. Up to €3,000 of investors' claims are covered in 100%, while any surplus over the original €3,000, up to €22,000, is covered in 90%.

  The Polish regulator is known for its rather conservative stance, meaning it generally prioritizes stability and minimization of risk over aggressive market growth. It tends to be cautious in authorizing new financial products or firms, closely monitors compliance, and actively maintains blacklists of fraudulent and high-risk operators.

  While KNF is effective at protecting domestic investors, it does not enforce rules and penalties as strict as the top EU regulatory authorities. The sole enforcement strength is considered mid-tier compared to top EU regulators like BaFin or AMF.

• National Securities Market Commission (CNMV) - Spain

  CNMV is the government agency of Spain responsible for the financial regulation of the capital market in Spain. It is an independent agency which falls under the jurisdiction of the state's Ministry of Economy.

  This institution's investment security scheme named FOGAIN (Fondo General de Garantía de Inversiones) is widely known as one of the most comprehensive systems of such kind in Europe. It covers up to €100,000 per investor, thus significantly minimizing the risks associated with a broker's potential bankruptcy.

  The Spanish National Securities Market Commission is considered proactive at issuing scam alerts. This, in conjunction with the strong safety net of FOGAIN, makes the Spanish regulator a trustworthy agency. Again though, the very rules and penalties it enforces are not as strict as is the case with agencies described in the section number one.

Tier 3. Lighter-Touch Regulation / More Due Diligence Required

Before we dive deeper into the individual regulators and countries within this tier, a disclamation shall be made. These authorities are fully legitimate, and they are subject to the European system of passporting, which allows organizations registered with them to operate everywhere in the EU.

These countries are member states of the European Union, and their Finance Regulation Authorities have to meet certain criteria of the European Securites and Markets Authority (ESMA).

Their place in "Tier 3" is caused by their traditional leaning towards the "business-friendly" side. This often means faster approval times, lower costs of setup and operation, as well as less frequent controls. Many mostly-online brokers decide to register there, precisely due to the lower barrier of entry.

This means that an investor shall be aware of their additional responsibility of evaluating a financial firm. Even if they are legitimately registered with one of these regulators, take some extra time to evaluate their metrics before you decide to invest through their platforms.

Below are some additional details about particular regulators:

• Cyprus Securities and Exchange Commission (CySEC) - Cyprus

  CySEC (Επιτροπή Κεφαλαιαγοράς) is the national regulatory body of the Republic of Cyprus. Since the country is a member state of the European Union, the principle of passporting applies.

  Due to this, CySEC is also obligated to comply with the European MiFID directive, which is the backbone of the union's securities markets, investment intermediaries, as well as trading venues.

  This regulator gained a popular opinion of being a bit on the loose side after the country joined the EU in 2004. Prior to this, Cyprus had commonly been associated with being a "tax-haven".

  In conjunction with the EU membership came a common European MiFID framework, which gave Cyprus-registered firms full access to numerous new markets, most with much stricter regulation. This caused disagreements and accusements directed at Cyprus, claiming that the country's rules are too loose, hence making full transparency more difficult to upkeep.

  The Binary Options Controversy

  In 2012, CySEC passed a regulation which classified binary options as financial instruments, becoming the first national institution to ever have done so. Various EU partners criticized this move, as most national regulatory bodies in the Union ban them due a very high associated risk.

  Binary options are a type of an exotic financial option, which is based on a very high risk principle. Depending on the outcome, the result can either be a fixed monetary outcome, or nothing at all. This system makes this form of money allocation highly risky and prone to fraud.

  Most European jurisdictions classified this option as gambling early on, resulting in national bans. Cyprus introduced its permament ban only in 2019, after having been the go-to jurisdiction for firms offering such objects in the EU for many years.

  Investor Protections Today

  As of today, Cypriot regulatory standards have largely already met the European requirements. Checks are conducted, and fines are imposed. Fraudulent actors do generally get flagged, and warnings are issued.

  Standard European compensation schemes are in place under the Investor Compensation Scheme (ICF), which covers up to €20,000 per client in the event of a broker's failure.

  However, due to CySEC's past tendency of remaining more on the loose side, as well as authorizing risky options, a bit of additional care is generally a good idea. Even if some broker's asset is successfully registered with CySEC, make sure you understand it before investing your money.

• Malta Financial Services Authority (MFSA) - Malta

MFSA is the national regulator of Malta responsible for regulating and monitoring the financial sector of the country. Since this Mediterranean island-nation is an EU member-state, broader rules regulated by the Union's institutes apply.

As is the case with any EU member-state regulator, the passporting principle applies. This means that a broker or other financial institution successfully registered inside Malta can operate in all of the remaining nations.

Similarly to Cyprus, the Maltese regulatory institutions have faced criticism across the European Union. Many other countries voiced their concerns regarding improper regulation and scandals surrounding the MFSA.

High-profile failures in Anti-Money Laundering (AML) Supervision

The critical area of concern regarding the Malta's national regulator is connected to various cases of failure in properly supervising the actions of the banks under its watch. This had led to numerous scandals affecting the institution's trustworthiness in eyes of its European partners.

In 2018, two separate incidents had taken place:

1. The Pilatus Bank Controversy

   In the early months of 2018, a money laundering scheme involving the Pilatus Bank had been exposed by a Maltese journalist and anti-corruption activist, the now-deceased Daphne Caruana Galizia.

   It involved illegaly handling funds owned by the government of the Islamic Republic of Iran and its other entities, despite having been placed under sanctions. The bank was accused of processing transactions and facilitating illicit financial flows, which stood in direct violations of these laws.

   The bank's operations were later suspended by the European Central Bank, which led to 80 million Euro in assets having been frozen. This left many legitimate clients without access to their funds for a significant time.

   This situation was seen as a direct result of the MFSA's failure in effectively conducting its regulatory roles, hence undermining the institution's trustworthiness internationally.

2. The Satabank Case

   Later in the same year, another major scandal had struck the Maltese financial sector. This time, it involved Satabank. Cases of misconduct in anti-money laundering (AML) controls were exposed, with regulators identifying serious risks of illicit financial flows moving through the bank.

   As a result, the MFSA, working alongside Malta’s Financial Intelligence Analysis Unit (FIAU), ordered Satabank to suspend its operations. This decision led to a freezing of thousands of accounts, leaving many legitimate clients without any ability to access their deposits for an extended period of time.

   Much like the Pilatus Bank incident, the situation highlighted the regulator’s inability to adequately enforce its standards and fueled further criticism of the MFSA across the European Union.

Governance controversies within MFSA leadership

In addition to regulatory failures, the MFSA also faced governance concerns during this period. Senior leadership decisions were criticized for questionable spending practices and management style, which raised doubts about the institution’s priorities and accountability.

In combination with the broader political turmoil in Malta at the time, international trust in the MFSA’s reliability as a regulator weakened further. One major event during this period was the assassination of investigative journalist Daphne Caruana Galizia, who had exposed financial misconduct.

Long-lasting effects on international reputation

Multiple cases of faulty reactions against banks' misconduct and fraud, as well as alleged criminal cases connected with the institution's core have left a scar on the MFSA's reputation.

These issues have been noticed by the Financial Action Task Force (FATF), which placed the Maltese regulator on its "greylist" in 2021. This signifies that, in eyes of the institution, MFSA was not doing enough to combat financial crime.

While Malta had been removed from this list in 2022, after having conducted significant reforms, ever finding itself on the list in the first place dealt a heavy blow to its reputation. Malta is still struggling to rebuild it.

Current Investor Protections and overall financial security in Malta

Malta adheres to European standards on investment protection schemes. Up to €20,000 is to be compensated shall a broker registered there go bankrupt or fail otherwise.

While Malta offers the same base legal protections as other EU states, its recent history of scandals means an extra layer of personal due diligence is essential. Always verify the broker’s record and financial stability before committing funds.

Australia

This country is a major financial hub of Asia-Pacific region, with its major cities of Melbourne and Sydney hosting the largest exchanges. It is a well-developed country with wide interest in investing among the general population.

In order for financial firms to work legally in Australia, they shall be registered with the country's regulator. Always make sure to verify a proper registration before choosing to invest with a broker.

This entity is an independent commission of the Australian Government, which is designated to regulate the national corporate sector. Its main role is based around the enforcement of laws protecting Australian investors, consumers and creditors.

The organizations tasks are generally considered as broad, involving elements of providing financial education to the general public. The ASIC's responsibilities include the following:

• Corporate oversight
• Financial services
• The stock market
• Consumer protection
• Insurance
• Promotion of financial literacy

Investor protection and compensation in Australia

Australia manages its compensation and protection systems slightly differently from previously covered regions. It generally facilitates a multi-layered approach, involving powerful safeguards on every stage of the way, with special focus on preventative measures.

1. First line of defence: Client Money Rules

The most forefront regulation in place in Australia is the principle of segregation of funds. What this means is that any broker registered with ASIC is required to keep its clients funds and assets separately from its own.

In the event of a firm's insolvency, creditors are not allowed to claim money allocated in the trust account dedicated specifically for clients' assets. This ensures a protection of funds, which should be returned to you in case of such a thing ever taking place.

2. Dispute resolution through the Australian Financial Complaints Authority (AFCA)

AFCA is the primary way through which investors resolve their issues with financial firms in Australia. It is a free, ombudsman service which is responsible for managing disputes between consumers and institutions like brokers, banks or advisors.

If an individual feels wronged by a financial firm registered in Australia, they can voice their concerns to AFCA. The institution will then process it and issue a decision, which is binding if misconduct is declared. A firm can be ordered to take action such as correcting an error, or paying you compensation for a loss you were found to have suffered.

3. Financial safety nets: Compensation Schemes

These schemes are dedicated for the last resort scenarios, such as a firm going completely insolvent and being unable or refusing to pay its clients and/or regulate its AFCA arrears. There are generally 2 layers of Australia's financial safety net:

1. Stock Market Investments: The National Guarantee Fund (NGF)

   The NGF is a fund specifically established to protect investors from losses caused by an insolvency of a participating stockbroker firm on the Australian Securities Exchange (ASX).

   Its an older entity designed specifically for the traditional stock market. Due to that, it does not cover all types of financial firms, like many over-the-counter (OTC) CFD or forex brokers.

2. Unpaid Complaints: The Compensation Scheme of Last Resort (CSLR)

   This scheme is a relatively new structure in Australia, having only been established in April 2024. It is made to compensate eligible consumers who have received a winning determination from AFCA, but the financial firm has become insolvent and is unable to pay.

   It can cover specific financial products and services, with the limit thereof having been capped at AUD 150,000 per claim.

Important Note: All investor compensation schemes mentioned above are designed to protect you against your broker's failure or misconduct (e.g., bankruptcy, fraud). They do not cover market losses resulting from your investment decisions.

Warning signs - common red flags to look out for

While checking your local regulator's register to validate the legality of your chosen platform, broker, or financial advisor is a powerful line of defence, it is still good practice to learn to spot red flags early.

This way, when confronted with unrealistic and overly optimistic claims, you will have a greater chance of registering their suspicious nature. It can help you avoid being misled into engaging with a fraudulent or overly risky scheme.

The main points to look out for can generally be split into 3 distinct categories. Checking your chosen platform against them could potentially save you a lot of trouble in both the long and the short term:

1. Overly Optimistic Guarantees and Pressure Tactics

This section covers the methods scammers use to communicate. Their main goal is to create a feeling of urgency, and to disarm or limit your critical thinking. Some major ways of how that is done include:

• Guarantees of Unrealistic Returns

  Legitimate investing always involves risk. Be immediately suspicious of any claims like "risk-free profit" or "guaranteed returns." This is a classic tactic of fraudulent operations, like Ponzi schemes, which use money from new investors to pay fake "profits" to earlier ones to create a false sense of legitimacy and social trust. If an offer sounds too good to be true, it almost certainly is.

• High-Pressure Sales Tactics

  Scammers tend to create a false sense of urgency in hopes of triggering a fear of missing out (FOMO) in you, as well as preventing you from thinking their offer through sufficiently. Watch out for phrasing like "you have to act now", "this is a limited time offer", or "the opportunity will be gone tomorrow". A legitimate offering will give you time to think.

• Unsolicited Contact

  Beware of unexpected offers coming your way through direct forms of contact. Cold phone calls, direct messages in popular applications (Whatsapp, Instagram, Messenger, Tik-Tok, Telegram), or spammy, uncalled for emails.

  Legitimate investment firms rarely contact their potential clients this way. This red flag is especially important to know these days, as unsolicited contact like that could induce massive fees and penalties on firms due to numerous modern privacy legislations.

2. The Broker's Website and Identity

Proper and thorough presentation is a thing which legitimate financial firms spend a lot of time and money on. Shady organizations are rarely able to reach a similar level of display and clarity of information. Below are some of the major points to look out for:

• Unprofessional Website and Copy

  A serious financial institution invests heavily into an error free online presence, without compromising on information or readability. Spelling mistakes, poor grammar, and low or incomplete design may signal that you are dealing with a scam.

  Modern technology allows fraudulent actors to mitigate some of these errors with the use of Large Language Models (LLM's), a type of text-generative Artificial Intelligence (AI). These tools can correct grammar or spelling, as well as write entire texts.

  Scams can struggle with balance though, a legitimate institution will do its best for its content to be error free, yet easily readible and human-sounding at the same time. Fraudulent actors on the other hand tend to either not correct their copy whatsoever, or run it through AI without any human editing, making their texts sound overly technical and not sufficiently human.

  Keep in mind that this is often not conclusive anymore, modern-day technology allows fraudulent actors to create increasingly legitimately-looking user interfaces and texts.

• Vague or Missing Information

  Legitimate firms display their office's physical addresses and contact information openly and visibly. The CEO, as well as top managers will usually be identifiable and mentioned using their full names. A legal broker will also ensure their registrations are present, and they will be verifiable with the actual regulatory institutions.

  Fraudulent pages on the other hand will display limited or false information. Beware of generic contact forms without actual details, as well as lack of office addresses.

  Modern technology allows for a deeper insight, if an address is listed, see it on Google's Street View. Many scams run out of locations completely unsuitable for serious business operations, while many simply give false addresses, which can turn out to be fields, residential areas, warehouses, or simply non-existent places.

  Beware of false claims of registration. Some scams can claim to be registered with non-existent regulators, or entities pretending to be one. They may also falsely display logos of actual national financial overseers. Always investigate if they are actually legally allowed to operate.

• Cloned Websites

  Not every scam will even bother to design their own presence and fake identity. Some decide to simply capitalize on legitimate institution's branding and social trust by copying their pages and assigning very similiar domain names.

  Before inputting your data or proceeding with a transaction, always make sure the domain name matches exactly the domain you are supposed to be at. Even a single character or a different country code can make the entire difference between a scam and a legitimate page.

3. Payments and Withdrawals

This is the final category, at which the fraudulent nature of a platform often becomes undeniable. It is also the most essential to the scam's operation, a sort of an end goal, as this is where the people behind it make their money.

That said, due to a lack of proper business infrastructure, fraudulent financial organizations will often resort to sketchy payment and withdrawal methods. Here are some of the main practices be wary of:

• Unusual Payment Methods

  Legitimate brokers use standard, safe, and easily traceable deposit methods like bank transfers and credit or debit card payments. Be extremely cautious if you are being pressured into depositing money using cryptocurrency, gift cards, or wire transfers to a personal name.

  Scammers often resort to these payment methods as they are very difficult to track, and provide next to no ways of reclaiming your money. Blockchain is specifically designed to keep transactions anonymous, with no oversight. This way, scammers stay under the radar, and take your funds for good.

• Problems Withdrawing Your Money

  This is the final and ultimate red flag of a scam. It is a common tactic of fraudulent actors to let you withdraw small amounts at first, in order to build trust and lure you into more substantial deposits.

  When you try to withdraw a larger amount though, it will be blocked under some made up excuse. Some of these can include things like:

  • "You need to pay a tax or fee before you can withdraw." (Taxes are paid to the government, not the broker).
  • "You need to invest more money to reach a withdrawal threshold."
  • "Your account is under a surprise security review."

Summary of the article

Investing into compounding assets is often an influential decision, allowing you to mitigate the loss of value inflicted to your money by inflation, as well having your assets apprecieate in their adjusted value over time. This way, your money is working for you instead of slowly being burnt away.

Managing your money in an effective way is a skill which can be learnt. Regardless of what your goals are, dedicating some time to becoming more financially literate is one of the best investments many people have ever made. Due to the nature of compounding, time is said to be one of the most important factors. The younger you start, the longer of a period you have for it to happen over.

That said, it is extremely important to always do thorough, independent research before investing any money. Make sure you understand what you are doing, and who you are doing it with. Understand associated risks, and do not invest more than you can afford to loose.

Note from the author

Thank You for reading the entirety of this article. I sincerely hope that you found it insightful, interesting and simply useful. I also hope that you enjoyed using the calculator located at the top of this page.

Please remember that everything you find on Solvful.net is a part of my personal, hobby project. I develop this for fun, and I am not a financial advisor or any type of a licensed specialist. This content is not to be considered advice, financial or otherwise.

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