Aug
10
2023
What Is the US Dollar Index?

What Is the US Dollar Index?

By | Growing Wealth, invest, Investing | Comments Off on What Is the US Dollar Index?

The U.S. dollar index, also called the USDX, tracks the value of the dollar compared with six major world currencies — specifically those of the United States’ most significant trading partners.

The USDX fluctuates based on the exchange rates that the dollar maintains with those currencies. Investors and traders use the USDX as a quick way to track the relative value of the dollar and to manage potential currency risks in their portfolio.

There are also several futures and options strategies trading on the New York Board of Trade that allow sophisticated investors to bet that the USDX will go up or down. For investors who want to hedge their currency risks, or just speculate, they can invest in the U.S. dollar index through mutual funds, exchange-traded funds (ETFs), or options.

How the US Dollar Index Is Calculated

Currently, the U.S. dollar index is calculated using the exchange rates of six currencies: the Euro (EUR), the Japanese yen (JPY), the Canadian dollar (CAD), the British pound (GBP), the Swedish krona (SEK), and the Swiss franc (CHF). Given that 19 countries in the European Union use the euro, EUR is the most significant component of the index, representing 57.6% of the basket.

By contrast the yen comprises 13.6% of the index, followed by the British pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%), and finally the Swiss franc (3.6%).

The U.S. dollar has long been considered the world’s reserve currency, and the index tracks where five of those six currencies stood in relation to the U.S. dollar in 1973 (the euro was added to the index in 1999). At its inception, the U.S. dollar index was set at 100. When the index is over 100, then the dollar is considered strong, and it may be considered weak depending on how far below 100 it falls.

The strength or weakness of a dollar impacts many aspects of the economy. A weak dollar increases the prices that companies pay for globally traded commodities, which contributes to inflation by raising the prices consumers pay for everyday items. A strong dollar makes the goods produced in the U.S. more expensive to overseas consumers, and can hurt exports over time.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The History of the US Dollar Index

When World War II ended in 1945, the United States found itself in a position of unusual strength. Like many countries, the U.S. had suffered enormous casualties, yet its industries, cities, and overall economy had survived the war more or less intact. So it was that in July of 1944, over 700 delegates from 44 countries met in Bretton Woods, NH, to create a roadmap for a more efficient foreign exchange system that would help establish a resilient post-war global economy.

The Bretton Woods Agreement that emerged from this historic conference created a system whereby gold became the basis for the U.S. dollar, and other currencies were pegged to the value of the dollar. The International Monetary Fund and the World Bank were also established as a result of Bretton Woods.

The new global currency system included a promise from the participating countries that their central banks would establish fixed exchange rates between their own currencies and the U.S. dollar. Each agreed that if their currency weakened, they would order their central bank to buy up the currency until its value stabilized relative to the dollar. And if their currency grew too strong compared with the dollar, their central bank would issue more currency until the value dropped and its relationship with the dollar stabilized.

The terms of the Bretton Woods Agreement were so far-reaching that it took until 1958 to be fully implemented. Still, the decision to keep the dollar pegged to gold proved challenging for the U.S. In 1971, when the gold owned by the U.S. government could no longer cover the number of dollars in circulation, President Richard M. Nixon was forced to reduce the dollar’s value relative to gold. The Bretton Woods System collapsed in 1973.

With the end of the Bretton Woods System, countries and their central banks took a wide range of approaches to how they valued their currency. After 1973, each country’s currency had its own value, adjusted through trade, government interventions, and the policies of central banks. To track the value of the dollar against this backdrop of currency valuations, the U.S. dollar index came into being.

When it launched, it had a base of 100, representing the dollar’s value versus the currencies of its major trading partners. Since then, the index has fluctuated relative to that base. Over the last five years, for example, the U.S. dollar index reached a high of 102.39 on December 1, 2016, and a low of 89.13 on January 1, 2018. The value of the index is considered a fair indication of the dollar’s position in global markets. And investors can also use it to trade.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How to Trade the US Dollar Index

Investors who want to bet on the rise or fall of the dollar’s value, or who simply want to hedge it as part of a broader strategy, can trade the U.S. dollar index the same way they trade an equity index like the S&P 500. The U.S. dollar index is popular among foreign exchange (FX) traders who don’t have the time or resources to monitor the movements between the dollar and the other currencies in the index.

Anyone who tracks global trade will notice that two major currencies are missing from the index: Neither the Chinese yuan (CNY) or the Mexican peso (MXN) are in the USDX. Historically the USDX has only been adjusted once since its inception — in 1999 when the euro was added, and certain of the currencies the euro had replaced were then removed from the index. Still, it’s likely that at some point the USDX could be adjusted a second time to include CNY and MXN, given their status as significant trading partners with the United States.

Investing with SoFi

Most investors know that a bond index or equity index is typically comprised of many constituent companies; similarly, the U.S. dollar index is comprised of six global currencies. It tracks the value of the dollar relative to those currencies, and fluctuates based on the exchange rates that the dollar maintains with those currencies. You can use the USDX as a way to track the relative value of the dollar, to manage potential currency risks in a portfolio, and to trade.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

Photo credit: iStock/FG Trade

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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Aug
09
2023
How to Gift a Stock

How to Gift a Stock

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on How to Gift a Stock

Gifting stock is a simple process, as long as your intended recipient has a brokerage account, too. You’ll just need their basic personal and account information. One reason to transfer shares of a stock, instead of selling them and gifting the proceeds, is that you’ll avoid realizing the capital gains and owing related taxes.

Key Points

•   There are several ways to gift stocks, such as setting up a custodial account for kids, setting up a DRIP, virtual transfers, and physically handing over stock certificates.

•   Gifting stocks can benefit the giver as well as the receiver, as the giver can take a tax deduction while avoiding capital gains tax.

•   The annual gift tax exclusion for 2023 is $17,000 per year, per person.

•   Gifting stocks to charities can benefit both the giver and the charity as the giver doesn’t have to pay capital gains taxes and the charity is tax-exempt.

•   Gifts can also be made via investing apps and stock gift cards.

8 Ways to Gift Stocks

There are several ways that stocks can be gifted.

1. Set Up a Custodial Account for Kids

Parents can set up a custodial brokerage account for their kids and transfer stocks, mutual funds, and other assets into it. They can also buy assets directly for the account. When the child reaches a certain age they take ownership of it.

This can be a great way to get kids interested in their finances and educate them about investing or particular industries. Teaching kids about short and long term investments by giving them a stock that will grow over time is a great learning opportunity. However, keep in mind that there is a so-called “kiddie tax” imposed by the IRS if a child’s interest and dividend income is more than $2,200.

2. Set up a DRiP

Dividend Reinvestment Plans, or DRiPs, are another option for gifting stocks. These are plans that automatically reinvest dividends from stocks, which allows the stock to grow with compound interest.

3. Gifting to a Spouse

When gifting stocks to a spouse, there are generally no tax implications as long as both people are U.S. citizens. A spouse can either gift a present interest or a future interest in shares, meaning the recipient spouse gets the shares immediately or at a specified date in the future.

According to the IRS , If the recipient spouse is not a U.S. citizen, there is an annual gift tax exclusion of $159,000. Any amount above that would be taxed.

4. Virtual Transfers and Stock Certificates

Anyone can transfer shares of stock to someone else if the receiver has a brokerage account. This type of gifting can be done with basic personal and account information. One can either transfer shares they already own, or buy them in their account and then transfer them. Some brokers also have the option to gift stocks periodically.

Individuals can also buy a stock certificate and gift that to the recipient, but this is expensive and requires more effort for both the giver and receiver. To transfer a physical stock certificate, the owner needs to sign it in the presence of a guarantor, such as their bank or a stock broker.

5. Gifting Stock to Charity

Another option is to give the gift of stocks to a charity, as long as the charity is set up to receive them. This can benefit both the giver and the charity, because the giver doesn’t have to pay capital gains taxes, and as a tax-exempt entity, the charity doesn’t either. The giver may also be able to deduct the amount the stock was worth from their taxes.

For givers who don’t know which charity to give to, one option is a donor-advised fund . While the giver can take a tax deduction on their gift in the calendar year in which they give it, the fund will distribute the gift to the charities over multiple years.

6. Passing Down Wealth

Gifting stocks to family members can be a better way to transfer wealth than selling them and paying taxes. For 2021, up to $15,000 per year, per person, can be transferred through gifting of cash, stocks, or a combination. This means a couple can gift $30,000 to one individual, free of the gift tax.

If a person wants to transfer stocks upon their death, they have a few options, including:

•  Make it part of their will.

•  Go through a beneficiary designation in a trust.

•  Create an inherited IRA.

•  Arrange a transfer on death designation in a brokerage account.

It’s important to look into each option and one’s individual circumstances to figure out the taxes and cost basis for this option.

7. Gifting Through an App

Another option is to find an investing app that has stock gifting features.

8. Gift Cards

It may be surprising to hear, but stocks can be given via gift cards. These may be physical or digital gift cards.

Get up to $1,000 in stock when you fund a new Active Invest account.*

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*Probability of Member receiving $1,000 is a probability of 0.028%.

The Benefits of Gifting Stocks

There are several upsides to giving (and receiving) stocks:

•  If you’re giving the gift of stocks to kids, it can begin their investing education and provide them with an asset that will grow over time.

•  For anyone receiving stock, there’s potential that the value of the gift will grow over time. (Though it must be said, the value could also diminish over time.)

•  If the giver already owns stock in the company, they may benefit on their taxes by transferring some or all of that stock to someone else. If a stock has appreciated in value, the owner would normally owe capital gains if they sell it. However, if they gift it, they don’t have to pay the taxes. Those gains do get transferred to the receiver—but depending on their tax bracket, they won’t owe any taxes when they sell. In that case, both the giver and receiver would avoid paying the capital gains.

Recommended: How to Buy Fractional Shares

Things to Consider When Giving a Stock Gift

Gifting stocks is relatively straightforward, but there are some things to keep in mind. In addition to the $15,000 per year gifting limit and the capital gains tax implications of gifting, timing of gifts is important, and gifting may not always be the best choice.

For instance, when gifting to heirs, it may be better to wait and allow them to inherit stocks rather than gifting them during life. This may reduce or eliminate the capital gains they owe.

Also, there is a lifetime gift exclusion for federal estate taxes, which was $11.58 million in 2020, which can be used to shelter giving that goes over $15,000. However, this is not a great tax option, due to the ways gifts and inherited stocks are taxed.

Generally a better way to give a substantial amount of money to someone is to establish a trust fund.

Tax Implications of Gifting Stocks

There are some tax ramifications of giving stock as a gift.

Capital Gains Tax

There are a few things to be aware of with the capital gains taxes. If the stock is gifted at a lower value than it was originally purchased at, and sold at a loss, the cost basis for the recipient is based on the fair market value of the stock on the date they received it.

However, if the price of the stock increases above the price that the giver originally paid, the capital gains are based on the value of the stock when the giver bought it. In a third scenario, if the stock is sold on the date of the gift at a higher than fair market value, but at a lower value than the giver’s cost basis, no gain or loss needs to be recorded by the recipient.

•  Tax implications for giving: When gifting stocks, the giver can avoid paying capital gains tax. can sometimes be a way for the giver and the receiver to avoid paying capital gains taxes.

•  Tax implications for receiving: The recipient won’t pay taxes upon receiving the stock. When they sell it, they may be exempt from capital gains taxes if they’re in a lower tax bracket (consider, for example, a minor or retired individual). Otherwise, if they sell at a profit, they should expect to pay capital gains tax. If the annual gifting limit is exceeded, there may be taxes associated with that and the giver will need to file an estate and gift tax return.

Recommended: What Are Capital Gains Taxes?

The Takeaway

Gifting stocks is a unique idea that may have benefits for both the giver and the receiver. As you plan for your future, you may decide to build up a portfolio of stocks that you intend to give to your children, parents, or others as you grow older.

You can easily start investing online with SoFi Invest®. The app lets you quickly buy and sell stocks right from your phone. You can also research and track specific stocks, and see all of your investing information in one simple dashboard.

Find out how to get started with SoFi Invest.

Photo credit: iStock/akinbostanci

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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Aug
09
2023
piggy bank and egg on seesaw

The Difference Between an Investment Portfolio and a Savings Account

By | Budgeting & Goals, invest, Investing | No Comments

A key part of wrangling your personal finances can be building personal wealth and preparing for the future, whether that means buying your own home in a couple of years or being able to retire before you turn 60.

There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then you’re in the right place.

Here, you’ll learn:

•   How is saving different from investing?

•   Is investing a kind of saving?

•   What kinds of bank accounts should I have?

•   What is an investment portfolio?

What’s the Difference Between Saving and Investing?

Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.

When to Save

Think of savings as a nice safe place to park your cash and earn some interest.

You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).

When to Invest

With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.

For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.

Ways to Get Started Saving and Investing

So, what are some smart ways to start your savings and investment plan?

•   First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.

•   One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available.

•   When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.

•   Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.

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Do Investments Count as Savings?

While there are similarities between saving and investing, there are also very important distinctions.

•   When you save, you are putting your money in a secure place. A bank account, with Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance, is a great example of this. You will be insured for up to $250,000 per account holder, per ownership category, per insured institution. And in many cases, you will be earning some interest.

•   With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you could withdraw funds at a moment where the economy is in a downturn and you experience a loss.

Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.

What Are the Different Bank Accounts I Should Own?

While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.

There are two rules of thumb when it comes to savings and checking accounts.

•   On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords.

•   On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.

You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.

Having Multiple Bank Accounts

It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.

There are many good reasons to open a checking account. It can be the hub for your personal finances, acting like bus stations for your money. Money rushes in from your paycheck and it hangs around for a short time before being sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.

Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low fees, too.

An emergency fund can be tucked away in a savings account, and any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.

A money-market account could be good for an emergency fund that has grown to several thousands of dollars, or for a windfall you didn’t expect. It’s an interest-bearing account, and while it historically carried higher interest rates than savings accounts, some savings accounts rival money-market account rates.

Unlike savings accounts, money-market accounts often have minimum deposit requirements — as much as $10,000. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is you can often make up to six transfers or withdrawals each month. And typically, money market accounts are insured by the FDIC for up to $250,000.

💡 Quick Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

What Is an Investment Portfolio?

The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money when an investment is thriving. It’s riskier, but also has the potential for long-term gains.

An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix is a way to diversify investments and mitigate some market risk.

When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.

What Is a Savings Portfolio?

A savings portfolio can mean a couple of different things:

•   A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.

•   There are also savings portfolios which are investment vehicles for saving for college.

How Should I Start a Savings and Investment Plan?

A good way to start your savings and investment strategy is to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee. In some cases, fees may be discounted or waived if you meet certain deposit or contribution levels.

In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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Aug
08
2023
What Are Junk Bonds?

What Are Junk Bonds?

By | Growing Wealth, invest, Investing | Comments Off on What Are Junk Bonds?

Junk bonds are a type of corporate bond that carry a higher degree of risk and generally have lower credit ratings. The bond issuers are more likely to default, making junk bonds speculative investments.

So why would investors buy a junk bond? For one simple reason: They have the potential to produce bigger returns compared to other bond options.

Junk bonds aren’t necessarily right for every investor, because they are so risky. Understanding how junk bonds work can help you decide if they belong in your investment portfolio.

How Do Junk Bonds Work?

Bonds are a form of debt. When a corporation or government entity issues a bond, they’re doing so for the purposes of raising capital. Investors buy the bonds, providing the capital, and in return, they expect to get paid that money back along with interest.

There’s an implied agreement between the investor and the bond issuer that the latter will make interest payments on time, but in addition, bonds can be secured or unsecured. Treasury bonds, for example, are unsecured bonds that are backed by the full faith and credit of the U.S. government.

Junk bonds, also referred to as high-yield bonds, represent a category of bonds that fall below investment-grade. In simple terms, this means there’s a greater risk that the bond issuer could default or fail to follow through on their promise to repay investors. Whether a bond is considered to be investment-grade or not depends on its credit ratings.

Credit Ratings and Junk Bonds

Bond credit ratings are issued by a number of organizations. These agencies determine which bonds are considered to be investment-grade and which are non-investment grade or speculative-grade.

In the United States, the majority of bond credit ratings are issued by three agencies, on an ABCD scale:

•   Moody’s Investors Services

•   Standard & Poor’s Global Ratings

•   Fitch Ratings

Bonds with a rating of BBB or higher (Baa on the Moody’s scale) are categorized as investment-grade. This means that in the eyes of the rating agency, default risk is low or in other words, investors are reasonably likely to get their money back from the bond issuer.

When bonds fall below the BBB rating range (Ba for Moody’s), they’re considered to be junk bonds. The further the rating drops, the riskier and more speculative the bond becomes. Here’s how junk bond credit ratings compare.

Moody’s

 S&P Ratings

 Fitch Ratings
High Risk Ba or B BB or B BB or B
Highest Risk Caa, Ca or C CCC, CC or C CCC
In Default C D DDD, DD or D




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Why Do Investors Like Junk Bonds?

The riskier an investment is, the more potential it has to deliver higher returns. That lies at the heart of why some investors might prefer junk bonds over investment-grade bonds. Junk bonds can have varying maturities like other types of bonds. Typically, these are longer term bonds, with maturities lasting in the five- to 10-year range.

Investing in junk bonds could yield returns on the same level as stocks but with less volatility. That’s because you’re getting the promise of a fixed interest payment, rather than depending on which way the market swings on any given day to determine returns. If the bond issuer undergoes a financial turnaround and its credit rating improves, that can reduce the level of risk associated with its bonds.

Junk bonds can be attractive to investors in low interest rate environments as well. That’s because unlike other bonds, they’re less sensitive to interest-rate movements. Bond issuers may be highly motivated to raise capital so they can offer higher rates to attract investors. Investor risk may also be reduced when the economy is growing, since that can be conducive to improvements in the financial health of bond issuers.

Recommended: How Do Corporate Bonds Work?

Examples of Junk Bonds

Companies that issue junk bonds tend to be newer companies or established ones that may be struggling financially following bankruptcy. For instance, one company that has junk bond ratings in 2023 is Coinbase (NASDAQ:COIN), a cryptocurrency exchange. Because of the speculative and high-risk nature of crypto trading, the company has a junk bond rating. In early 2023, Coinbase’s junk bonds were downgraded even further by Moody’s and Standard & Poor’s Global Ratings.

Advantages and Disadvantages of Junk Bonds

Investing in junk bonds has both pros and cons, just like other investments.

On the advantages side, investors have potential to earn higher yields from junk bonds than other types of bonds. There’s less volatility to contend with compared to stocks, and fixed interest payments could provide a steady source of income. Depending on the credit rating of the bond issuer, it’s possible that a junk bond could actually be less risky compared to a stock.

On the other hand, junk bond investing is speculative, so an investor has to be willing to accept the possibility of losses — specifically, default risk and the likelihood of the bond issuer missing an interest payment. In the worst-case scenario, the company could go bankrupt, meaning an investor may not get their initial investment back, much less the interest. One also has to consider the time component, since junk bonds are not designed to be held for the shorter term.

Junk Bond Advantages Junk Bond Disadvantages
Investors could earn interest rates above what investment-grade bonds are paying. Default risk is typically higher with junk bonds vs. investment-grade bonds.
Compared to stocks, junk bonds are less susceptible to volatility and may be less risky overall. If the bond issuer goes bankrupt, the investment could end up being a total loss.
Fixed interest payments may provide a consistent stream of income for investors. They’re not suited to short-term investing given the duration of junk bonds and pricing fluctuations.

How to Invest in Junk Bonds

If you’re considering investing in junk bonds, opening a brokerage account is a good place to start. If you already have an investment account, you can move on to purchasing junk bonds. There are a few different ways you can do this:

•   Purchase individual junk bonds, if your brokerage offers them.

•   Buy a junk bond mutual fund.

•   Invest in a junk bond exchange-traded fund (ETF).

Buying individual junk bonds can be risky, as it concentrates investment dollars in a single security. Higher minimum investments may limit the number of junk bonds an investor is able to purchase.

Investing in junk bond funds or ETFs instead may make it easier to spread out your investment dollars while spreading out risk. Junk bond funds and ETFs can offer exposure to a basket of junk securities which can help with diversification and risk management.

When comparing junk bond funds or ETFs, consider the underlying credit ratings for each security that’s represented. This can tell you whether the fund mostly holds high risk, higher risk or in default bond offerings. Also consider the expense ratios involved and the maturity terms so you’re choosing a fund that fits both your budget and timeline for investing.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Are Junk Bonds a Good Investment?

Should you buy junk bonds? The answer depends largely on your personal risk tolerance. Junk bonds may be a good investment for investors who are comfortable taking more risk for a shot at higher returns. On the other hand, you may choose to steer clear of them if you’re looking for fixed-income investments that are on the safer side.

What’s important to consider before investing is the entire makeup of your portfolio as a whole and your financial goals. If you’re interested in junk bonds, think about how much of your portfolio you’re comfortable dedicating to them and how that could affect your overall risk profile.

The Takeaway

Investing in bonds can add a fixed-income element to an investor’s portfolio, which may be helpful for diversification. Alongside stocks, bonds may help you devise a more well-rounded investment strategy as you work toward your financial goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

Photo credit: iStock/fizkes

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Aug
08
2023
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What Is Asset Management?

By | Financial Independence, invest, Investing, Terminology | Comments Off on What Is Asset Management?

Asset managers help manage their clients’ money. They typically manage an individual’s or institution’s investment portfolio, with the objective of building or maintaining wealth. Asset managers usually work to deliver investment returns that help clients achieve their financial goals while aiming to mitigate risk.

These professionals are typically fiduciaries, an industry designation which means they must put their clients’ best interests ahead of their own.

Understanding how asset management works, the pros and cons, and the costs involved, can help you decide whether this service is right for you.

What Is Asset Management: The Basics

Asset management is a financial service offered by licensed individuals or companies. The aim of asset management is to build or maintain a client’s wealth, typically through portfolio management. Although asset management is commonly available to high-net-worth individuals, some financial advisors may serve a wider population.

Asset managers choose what investments to buy, sell, or avoid. And they make recommendations based on what they think will help their client’s portfolio grow safely. Asset managers are trained to consider their investment choices in light of a client’s long-term goals or plan and manage potential investment risk factors as well as tax consequences.

In addition to trading traditional and alternative securities, such as stocks, bonds, real estate, and private equity, some asset managers may also offer services not usually available to private investors, such as first access to initial public offerings (IPOs).

They may also offer their clients other services like bundled insurance policies or estate planning, legacy planning, giving strategies, and more.

To make managing and monitoring their accounts easier, clients may consolidate all of their accounts — including checking, savings, money market, and investment accounts — into one asset management account. These accounts provide one monthly statement to help clients keep track of their financial activities and may provide other benefits such as automatic periodic investment.

Asset management accounts are relatively new: The government first allowed them less than 25 years ago. In 1999, the Gramm-Leach-Bliley Act overrode the Glass-Steagall Act of 1933, which banned firms from offering banking and securities services at the same time. The Gramm-Leach-Bliley Act permitted financial services firms to offer brokerage and banking services, and asset management accounts were born.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Is an Asset Manager?

“Asset manager” is a term in the financial industry that refers to professionals or companies that manage clients’ wealth. Asset managers may also be referred to as investment advisors, financial advisors, or wealth managers.

Generally speaking, what distinguishes an asset manager from, say, a stock broker or brokerage house is that they are legally Registered Investment Advisors (RIAs). An RIA differs from a broker, and potentially from some financial advisors, in that she or he is a fiduciary, and an asset management company is considered a fiduciary firm. That means they can execute investment trades on their clients’ behalf, and they are legally obligated to put their clients’ interests first.

An asset manager must take a two-pronged approach to managing their clients’ assets. They have to consider ways to grow the portfolio and continue to build the client’s wealth. At the same time, they have to manage risk in order to limit potential losses.

Obviously, this is the aim of many investors as well. But most investors aren’t trained in the technicalities of choosing investments, maintaining (or adjusting) a portfolio’s asset allocation, and analyzing how certain strategies may or may not support their goals. For this reason, working with a professional asset manager makes sense for a number of people.

Hiring an asset manager means trusting a professional to execute your financial mandate. These mandates may include instructions on your goals and priorities, what benchmarks may be used to measure success, and what types of investments should be prioritized or avoided. For example, an environmental organization might avoid stocks or funds that include petroleum companies, or an individual concerned about corporate responsibility might target funds that prioritize good corporate governance.

How Much Does an Asset Manager Cost?

Investors should pay special attention to how an asset manager gets paid, as their compensation structures can be complicated.

Before hiring an asset manager, an investor should feel comfortable asking for a copy of their fee structure. Individual Advisory Representatives (IAR), which most asset managers are, are required by the Securities and Exchange Commission (SEC) to file a Form ADV that includes information such as the manager’s investment style and assets they manage, among other things.

Here’s how asset managers may be paid.

Fee based on a percentage of assets

Many asset managers charge an annual fee based on a percentage of the value of an account. These fees may vary depending on the size of the portfolio. For example, larger portfolios may be charged lower fees than smaller portfolios. Or, some asset managers may offer tiered-fee systems that assign different costs to different asset levels. For example, managers may charge one fee for portfolios up to $250,000 and a slightly smaller fee for $250,000 to $1 million, and so on.

Commission-based fees

Asset managers may also earn commissions on other products or services they offer, such as insurance policies. Or they may do a combined fee structure. It’s a good idea to ask an asset manager if they accept commissions for any products they might sell, even if they also charge an annual fee.

Flat fees

Other asset management firms are fee-only, meaning they don’t collect commissions on specific products, and only make money from the management fees they charge their clients. A fee structure like this may make investors feel more confident that their asset manager is choosing investments and products that are appropriate for them and their goals, rather than choosing products because they carry higher commissions.


💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Importance of Asset Managers

Of course all investors are seeking the best ways to manage their portfolios. They hope to employ the right strategies that may help achieve their goals, build wealth, and avoid risk when possible. In some cases, individuals can accomplish these aims on their own, but in other cases it’s beneficial to have an asset manager who is trained in these skills.

An asset manager can:

•   Help identify investments that align with an investor’s financial goals

•   Build a portfolio and set up an asset allocation that suits an investor’s risk tolerance and risk capacity

•   Manage the portfolio over time, adjusting to their clients’ changing priorities

•   Be responsive to market conditions

•   Adhere to fiduciary standards and responsibilities in putting their clients’ best interests ahead of their own.

Given the multitude of uncertainties investors can face over a lifetime, it may be wise for some investors to consider working with an asset manager.

The Takeaway

Though asset managers are known by many names (including wealth advisor, financial advisor, RIA), they are typically professionals or firms that work with individuals or institutions to manage their money. An asset manager is entrusted with choosing the investments that can help their clients build wealth, while at the same time mitigating risk factors that might lead to losses.

Typically, an asset manager is an RIA — or registered investment advisor — which not only means they’ve met certain industry standards, but they are also considered a fiduciary: They are legally obliged to put their clients’ best interests above their own.

So should you work with an asset manager? Although many asset managers work with high-net-worth individuals (or larger organizations such as corporations and universities), it’s possible to get guidance and portfolio management skills at a range of asset levels. But whether you work with an asset manager or not, you can still start saving and investing to help reach your goals and build financial security.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

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

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

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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