Investing Archives | Page 155 of 193 | SoFi

Apr

10

2023

woman on laptop on couch

Participating Preferred Stock, Explained

By Becca Stanek | Growing Wealth, invest, Investing | Comments Off

You may have heard mention of preferred shareholders or preferred stocks in investment circles. And you may have wondered: How do I get preferred stocks? Preferred stocks are available to individual investors. That being said, there is a type of preferred stocks that may be out of reach to most, and that’s participating preferred stocks.

Here’s a look at what participating preferred stock is, as well as when one might have the option to own participating preferred stock and what the benefits of participating preferred stock are.

What Is Preferred Stock?

Preferred stock shares characteristics of both common stocks and bonds. Preferred stocks allow investors to own shares in a given company and also receive a set schedule of dividends (much like bond interest payments).

Because the payout is predictable and expected, there isn’t the same potential for price fluctuations as with common stocks — and thus there’s less potential for volatility. But, the shares may rise in value over time.

Recommended: Preferred Stock vs. Common Stock

How Preferred Stocks Work

Shares of preferred stock tend to pay a fixed rate of dividend. Preferred stocks have dividend preference; they’re paid to shareholders before dividends are paid out to common shareholders.

These dividends may or may not be cumulative. If they are, all unpaid preferred stock dividends must be paid out prior to common stock shareholders receiving a dividend.

For example, if a company has not made dividend payments to cumulative preferred stock shareholders for the previous two years, they must make two years’ worth of back payments and the current year’s dividend payments to preferred shareholders before common stock shareholders are paid any dividend at all.

Because of the fixed nature of the dividend, the investments themselves tend to behave more like how a bond works. When an investment pays a fixed and predictable rate of interest, they tend to trade in a smaller and more predictable bandwidth. Compare that to stocks, whose future income stream and total return on investment are less predictable, which lends itself to plenty of price disagreement in the short-term.

Preferred stockholders do not typically enjoy voting rights at shareholder meetings. But, preferred stock shareholders are paid out before common shareholders in a liquidity event.

Participating Preferred Stocks

Participating preferred stock takes on all of the above features, but they may receive some bonus benefits, such as an additional dividend payment. This additional payment may be triggered when certain conditions are met, often involving the common stock. For example, an additional dividend may be paid out in the event that the dividend paid to common shareholders exceeds a certain level.

Upon liquidation, participating preferred shareholders may receive additional benefits, usually in excess of what was initially stated. For example, they may have the right to get back the value of the stock’s purchasing price. Or, participating preferred shareholders may have access to some pro-rata cut of the liquidation proceeds that would otherwise go to common stock shareholders.

Non-participating preferred stocks do not get additional consideration for dividends or benefits during a liquidation event.

For those with access, participating preferred stock is an enticing investment. That said, the average individual investor may not have the chance to invest in participating preferred stock. This type of stock is typically offered as an incentive for private equity investors or venture capital firms to invest in private companies.

The Takeaway

Preferred stock offers some benefits that common stock does not — such as a regular dividend schedule and the potential to increase in value without threat of volatility. Participating preferred stock offers investors even more potential benefits, including additional dividends and the opportunity to participate in liquidity events. However, participating preferred stocks are generally an option only for private equity investors or venture capitalists.

Though an investor might not have the chance to get involved with this particular investment opportunity, there are other ways to trade stocks online and invest in the market. SoFi Invest® offers both active investing and automated investing options to suit every type of investor.

Take a step toward reaching your financial goals with SoFi Invest.

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.

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.

SOIN0323024U

Apr

06

2023

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Swing Trading Explained

By Inyoung Hwang | Growing Wealth, invest, Investing, Terminology | Comments Off

What Is Swing Trading?

Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside, and typically occur within a range from a couple of days to a couple of weeks. While day traders typically stay invested in a position for minutes or hours, swing traders invest for several days or weeks. Still, swing trading is a more short-term strategy than investors who buy and hold onto stock for many months or years. But it’s important to bear in mind the potential risks, costs, and tax implications of this strategy.

Generally, a swing trader uses a mix of technical and fundamental analysis tools to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds, and other market instruments that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

Cost and Tax Implications

A swing trading strategy is somewhere in between a day-trading strategy and trend-trading strategy. They have some methods in common but may also differ in some ways — so it’s important to know exactly which you plan to utilize, especially because these shorter-term strategies have different cost and tax factors to consider.

Frequent trades typically generate higher trading fees than buy-and-hold strategies, as well as higher taxes. Unless you qualify as a full-time trader, your short-term gains can be taxed as income, rather than the more favorable capital gains rate (which kicks in when you hold a security for at least a year).

How Swing Trading Works

Swing trading can be a fairly involved process, utilizing all sorts of analysis and tools to try and gauge where the market is heading. But for simplicity’s sake, you may want to think of it as a method to capture short-to-medium term movements on share prices.

Investors are, in effect, trying to capture the “swing” in prices up or down. It avoids some day trading risks, but allows investors to take a more active hand in the markets than a buy-and-hold strategy.

With that in mind, swing trading basically works like this: An investor buys some stock, anticipating that its price will appreciate over a three-week period. The stock’s value does go up, and after three weeks, the investor sells their shares, generating a profit.

Conversely, an investor may want to take a short position on a stock, betting that the price will fall.

Either way there are no guarantees, and swing trading can be risky if the stocks the investor holds move in the opposite direction.

Day Trading vs Swing Trading

Like day traders, swing traders are highly interested in the volatility of the market, and hope to capitalize on the movements of different securities.

Along with day traders and trend traders, swing traders are active investors who tend to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks–a process that can seem complicated, but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information for the future.

The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals — the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment — they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

Pros and Cons of Swing Trading
Pros	Cons
Less time intensive	Expenses & taxes
Income potential	Time
May help to avoid market dips	Efficacy

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing — which may actually be the more suitable strategy for some investors.

The idea behind set-it-and-forget-it, buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time, or have a positive average annual return. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

1. Time and Effort

Further, long-term investing may require less time and effort. Dips in the market can provide the opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. Whereas day traders must keep a minute-by-minute watch on the market throughout the trading days, swing trading does not require that the investor’s eyes be glued to the screen.

Nonetheless, swing trading requires a more consistent time commitment than buy-and-hold strategies.

2. Income

Compared to long-term investing, swing trading may create more opportunity for an investor to actively generate income.

Most long-term investors intend to keep their money invested — including profits — for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income, and they tend to be more comfortable with the risks this strategy typically entails.

3. Avoidance of Dips

Finally, it may be possible for swing traders to avoid some downside. Long-term investors remain invested through all market scenarios, which includes downturns or bear markets. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips. That said, markets are highly unpredictable, so it’s also possible to get caught in a sudden downturn.

Cons of Swing Trading

Though there is certainly the potential to generate a profit via swing trading, there’s also a substantial risk of losing money — and even going into debt.

As with any investment strategy, risk and reward are intrinsically related. For as much potential as there is to earn a rate of return, there is potential to lose money.

Therefore it is smart to be completely aware of — and comfortable with the risks, no matter which investing strategy you decide to use.

1. Expenses & Taxes

A good rule of thumb: Don’t trade (or invest) money that you can’t afford to lose.

Additionally, it can be quite expensive to swing trade, as noted above. Although brokerage or stock broker commissions won’t be quite as high as they would be for day traders, they can be substantial.

Also, because the gains on swing trades are typically short-term (less than a year), swing investors have to keep an eye on their tax bill as well.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not, and doing so at a margin that outpaces any losses.

2. Time

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day. What can start as a hobby can easily morph into another job, so keep the time commitment in mind.

3. Efficacy

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched. Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult, if not impossible, to do.

Swing Trading Example

Here’s a relatively simple example of a swing trade in action.

An investor finds a stock or other security that they think will go up in value in the coming days or weeks. Let’s say they’ve done a fair bit of analysis on the stock that’s led them to conclude that a price increase is likely.

Going Long

The investor opens up a position by purchasing 100 shares of the stock at a price of $10 per share. Obviously, the investor is assuming some risk that the price will go down, not up, and that they could lose money.

But after two weeks, the stock’s value has gone up $2, and they decide to close their position and sell the 100 shares. They’ve capitalized on the “swing” in value, and turned a $200 profit.

Of course, the trade may not pan out in the way the investor had hoped. For example:

• The stock could rise by $0.50 instead of $2, which might not offer the investor the profit she or he was looking for.

• The stock could lose value, and the investor is faced with the choice of selling at a loss or holding onto the stock to see if it regains its value (which entails more risk exposure).

Going Short

Swing traders can also take advantage of price drops and short a stock that they think is overvalued. They borrow 100 shares of stock from their brokerage and sell the shares for $10 per share for a total of $1,000 (plus any applicable brokerage fees).

If their prediction is correct, and the price falls to $9 per share, the investor can buy back 100 shares at $9 per share for $900, return the borrowed shares, and pocket the leftover $100 as profit ($1,000 – $900 = $100).

If they’re wrong, the investor misses the mark, and the price rises to $11 per share. Now the investor has to buy back 100 shares for $11 per share for a total of $1,100, for a loss of $100 ($1,000 – $1,100 = -$100).

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules.

Channel Trading

One such strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence, or “MACD.” The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.

Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock. Trading around earnings season may also present an opportunity to capitalize on a swing in value.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment. Traders can use multiple swing trading methods simultaneously or independently from one another.

Swing Trading vs Day Trading

Traders or investors may be weighing whether they should learn swing trading versus day trading. Although the two may have some similarities, day trading is much more fast-paced, with trades occurring within minutes or hours to take advantage of very fast movements in the market.

Swing trading, conversely, gives investors a bit more time to take everything in, think about their next moves, and make a decision. It’s a middle-ground between day trading and a longer-term investing strategy. It allows investors to get into some active investing strategies, but doesn’t require them to monitor the markets minute by minute to make sure they don’t lose money.

Swing Trading vs Long-Term Investing

Long-term investing is likely the strategy that involves the least amount of risk. Investors are basically betting that the market, over the long term, will be higher several years from now, which is typically true, barring any large-scale downturns. But it doesn’t give investors the opportunity to really trade based on market fluctuations.

Swing trading does, albeit not as much as day trading. If you want to get a taste for trading, and put some analysis tools and different strategies to work, then it may be worth it to learn swing trading.

Is Swing Trading Right for You?

Whether swing trading is a good or wise investing strategy for any individual will come down to the individual’s goals and preferences. It’s good to think about a few key things: How much you’re willing to risk by investing, how much time you have to invest, and how much risk you’re actually able to handle on a psychological or emotional level — your risk tolerance.

If your risk tolerance is relatively low, swing trading may not be right for you, and you may want to stick with a longer-term strategy. Similarly, if you don’t have much to invest, you may be better off buying and holding, effectively lowering how much you’re putting at risk.

Active Investing With SoFi

Swing traders invest for days or weeks, and then exit their positions in an effort to generate a quick profit from a security’s short-term price movements. That differentiates them from day traders or long-term investors, who may be working on different timelines to likewise reap market rewards.

Swing trading has its pros and cons, too, but can be a way for investors to try out trading strategies at a slower pace than a day trader.

There are also different methods and strategies that swing traders can use. There is no one surefire method, but it might be best to find a strategy and stick with it if they want to give swing trading an honest try. Be aware, though, that it carries some serious risks — like all stock trading.

The SoFi Invest® stock trading app offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks and ETFs. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. Please see terms and conditions here.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is swing trading actually profitable?

Swing trading can be profitable, but there is no guarantee that it will be. Like day trading or any other type of investing, swing trading involves risk, though it can generate a profit for some traders.

Is swing trading good for beginners?

Many financial professionals would likely steer beginning investors to a buy-and-hold strategy, given the risks associated with swing or day trading. However, investors looking to feel out day trading may opt for swing trading first, as they’ll likely use similar tools or strategies, albeit at a slower pace.

How much do swing traders make?

It’s possible that the average swing trader doesn’t make any money at all, and instead, loses money. That said, some swing traders can make thousands of dollars. It depends on their skill level, experience, market conditions, and a bit of luck.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0323012

Apr

06

2023

Presentation Of Chart With Pieces Of Doughnut

How to Buy Stocks: Step-by-Step Guide

By Amanda Holden | Growing Wealth, invest, Investing, Terminology | Comments Off

Many first-time investors might wonder, “how do I buy shares of an investment?” Between opening an account, researching an investment, and placing a trade, buying those first shares can feel tricky. But with some practice, it’s possible to learn the ropes in no time.

Owning a piece of the stock market can be an exciting endeavor. After all, with the purchase of stock shares, an investor does technically become part owner of a business, which is why stocks are also referred to as equities.

How to Buy Stocks in 5 Steps

Here are step-by-step instructions for becoming an investor, including what to know about how to buy shares in a company.

Step One: Research and Think About What You Want to Buy

In the journey that is learning how to buy shares, what better place to start than with a little research? Before making any investment decisions, like opening and funding accounts, it can make sense first to sit down, pour a cup of hot coffee, and dig into the options. Mapping out a plan for what shares to buy is a great initial step.

To begin, investors may want to decide whether they’re interested in buying shares of individual stocks or shares of a fund, such as an exchange-traded fund (ETF).

Individual Stocks

A stock represents a share of ownership in a publicly traded company. Many companies offer both common and preferred stock, although most new investors are interested in common stocks. Common stock provides its shareholders with voting rights and access to dividend payments.

Stocks can provide a return on investment in two ways. The first is through price appreciation, which is the value of a stock increasing over time. The second is through dividend payments to shareholders, if applicable.

Although this is an oversimplification, the idea is that as the whole company grows, so does investors’ piece of the pie. Ideally, shareholders are able to reap the benefit of a company’s wealth building over time. However, it’s very difficult to predict which stocks will be successful (because it’s hard to predict which businesses will be profitable in the future).

It’s common for companies not to match investor expectations. Due to the unpredictability of the future, individual stock returns can be particularly volatile. But, buying individual stocks also provides a chance at higher rewards — if investors are able to pick shares that are exceptional performers. It’s why it is often said that individual stocks are “high risk, high reward.”

Funds

A fund, whether an ETF or a mutual fund, can be thought of as a bundle of investments. Often, these investments are stocks, but they could also be bonds, real estate holdings, or some combination of all. For example, it’s possible to buy a mutual fund or ETF that holds the stocks of the 500 “leading” companies in the U.S. (or even thousands of stocks across the globe).

An important thing to understand here is that investing in a fund is an investment in that fund’s underlying holdings. If a fund is invested in 500 stocks, for example, the fund is absolutely an investment in the stock market.

An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered less risky than owning an individual stock. That’s because it’s much more likely that a single company fails than the entire economy.

That said, owning an equity ETF or mutual fund is still certainly considered to be risky, as investors are still very much involved in the capricious stock market. Investors must be prepared for the occasional ride of stock market volatility, including the likelihood of ups and downs in value.

That said, broad, diversified mutual funds and ETFs can provide an easy way to gain exposure to the stock market (and other markets, as well). In investing, diversification means buying lots of different investments as protection in the event that one fails. With the purchase of just one share of some funds, it may be possible to invest across the entire U.S. or even the world in a diversified way. Depending on where investors choose to open their accounts, they may have access to ETFs or mutual funds or both.

Step Two: Determine What Type of Account to Open

One big decision is whether to open an account that is specific for retirement, or a general investing account.

Sometimes, general investing accounts are called brokerage accounts. A brokerage account is simply a place where people can buy and sell investments. But again, this term may be used as a catchall for general investment accounts. Investment and brokerage accounts can be used for any (legal) purpose, and there are no limitations for use (unlike with retirement accounts).

Retirement accounts can potentially also be opened as brokerage accounts — if opened at a brokerage bank. But, in a way, retirement accounts stand separate from regular brokerage or investment accounts. The reason for this? Retirement accounts receive special tax treatment.

This unique tax treatment is why money saved and invested for the long-term is kept separate from money that isn’t. It’s also why so many rules determined by the IRS surround the use of retirement accounts, such as contribution limits and income limits.

To keep it simple, investors may want to open a non-retirement brokerage or investment account, especially if they’re already covered by a retirement plan through work. For a retirement account, investors could open a Roth IRA, Traditional IRA, or a SEP IRA, or Solo 401(k), if they’re self-employed. If investors opt to go the retirement route, they may want to check with a certified tax professional to ensure they qualify.

Step Three: Decide Where to Open an Account

When it comes to deciding where to open an account, new investors have plenty of options.

Before diving into them all, it’s helpful to remember that minimizing fees is the name of the game. Why? When calculating potential returns on investment, account holders may want to subtract any investing-related fees from potential investment earnings. Big fees can mean that investments have to work that much harder just to break even.

Here are some options an investor might consider:

• A low-cost brokerage: One option is to open an account at a low-cost brokerage. Depending on the firm, there may be account and trading fees (although the lowest cost brokerages have largely eliminated these in order to be competitive with the new financial tech companies).

• An online trading platform: Another popular option is to use an online trading platform, such as SoFi Invest®. SoFi Invest offers investment accounts with no minimums. Investors can buy shares of stocks and ETFs right from an app. It’s also possible to buy fractional shares, which are partial shares of a stock.

• A full-service brokerage firm: The third option for buying shares is to use a full-service brokerage firm. These firms tend to offer expanded services, such as a designated advisor, broker, or wealth manager. Naturally, these services tend to come with associated costs, which means it might not be right for an investor who wants to buy just their first few shares.

Once an investor has made a decision, the share-buying process can be relatively seamless. Most accounts can be opened entirely online.

During the application process, investors will need to provide information like their Social Security number, dates of birth, and address. Additionally, it may be required for investors to answer some questions about their current financial situation.

Step Four: Fund Your Account With Cash

A good next step in buying shares is to fund the account with cash. Depending on the institution, investors may be able to set up a link with an existing checking or savings account while they fill out the account application. It can be helpful to be prepared with the account and routing number for the bank that will feed funds into the new investment account.

If the financial institution does not offer this option upfront, there’s no need to worry. Generally, an investor can simply log back into their account and look for instructions on how to fund the account. For example, there may be a section called “transfer from another account” that allows users to hook up an external bank account via an electronic link.

Setting up an electronic transfer with a current bank account will likely be the fastest way to fund the account. If an investor is unable to set up an EFT or other automatic link to their checking account, it may be possible to mail a physical check directly to the investment institution.

Another funding option is to sign up for an automated monthly transfer. In this way, money is invested regularly (without the need to remember to do so).

It may take a few days for the cash to arrive in its new location.

Step Five: Place a Trade

That time has come! It’s now time to place a trade. When first learning how to buy shares, this part may feel unfamiliar (but it will only get easier with practice.)

Before diving in, many new investors prefer to identify the ticker symbol of the shares they’d like to buy. A ticker is the shorthand symbol used to identify an investment. Tickers are a combination of letters, usually in upper case.

Assuming an investor is logged into the new account (and it’s already funded with cash), it’s possible to navigate to the area of the dashboard that says either buy, sell, or trade. Once there, the investment platform gives users a screen that allows them to place an order. Here, investors can indicate what they would like to buy and specify how many shares.

If buying a stock or an ETF, investors also need to indicate the order type. Both stocks and ETFs trade on an exchange, like the New York Stock Exchange or the NASDAQ. On these exchanges, prices fluctuate throughout the day. Mutual funds do not trade on an open exchange and their value is calculated once per day.

There are many different types of orders. During that first share purchase, new investors may want to stick to the basics: either a market order or a limit order.

• A market order focuses on speed. Said another way, the order will go through as soon as possible. The order can fill quickly, but it may not be instantaneous. Therefore, the price could change slightly from the original quote. If an investor places a market order, they may want to have a slight cash cushion to protect from any erratic changes in price. If placing a market order while the market is closed, the order is typically filled at the market’s open, at whatever the prevailing price per share is at that time.

• A limit order, however, focuses on pricing precision. With a limit order, investors name the parameters for the order. For example, an investor could say that they only want to purchase a stock if it falls below $70 per share. Therefore, the order is placed if and only if the stock falls below $70 per share. This means it’s possible a limit order won’t get filled (if it doesn’t reach the investor’s pre-selected price parameters).

A limit order may be more appealing to a trader, while a long-term investor may gravitate toward a market order. The benefit of a market order is that it allows an investor to get started right away.

Another step is to review during this process is the actual share order. Once the trade is then executed, voila — the investor now officially owns the share (or shares).

The Takeaway

Going from “how do I buy shares?” to being a bona fide investment pro takes time. There’s lots to learn along this financial journey. But, if the end goal is building up one’s wealth, then the learning curve can be well worth the mental investment. All you have to do to start is decide what you want to buy and where you want to open an account. From there, you’ll simply follow the prompts to open an account and get it funded, so you can start placing trades.

As mentioned, one option you might consider to start your stock-purchasing journey is SoFi Invest. SoFi’s Active Investing platform lets investors choose from an array of stocks, ETFs, or fractional shares.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

SOIN0323029

Apr

05

2023

man sitting on bench

Investing as a HENRY (High Earner, Not Rich Yet)

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Coined in 2003, the term HENRY, or “High Earner Not Yet Rich,” refers to people who make an above-average salary but still don’t manage to accumulate much wealth. The term is said to apply to one of two groups of people: 1) millennials who make between $100,000 and $200,000 per year, or 2) families that make roughly $250,000 to $500,000 per year.

But no matter their personal situations, HENRYs share something: namely, they make high incomes but aren’t saving a sizable chunk of their earnings. Despite taking home higher-than-average salaries, HENRYs’ expenditures leave little money left each month for either savings or income-producing investments.

Because of this, HENRYs are sometimes referred to as the “working rich.” If they were to stop working, they wouldn’t continue to be high earners since they make money mainly from their jobs. This is in contrast to ultra-high net worth individuals, who frequently own significant income-producing assets (like real estate holdings, revenue-creating businesses, or dividend-yielding stocks).

There are a few ways that HENRYs could potentially pull themselves out of their situation, though. Here’s a look at how.

Relocating to a More Affordable Area

One important factor for HENRYs to consider is location. Where an investor lives can make a huge difference in their ability to accumulate wealth. The cost of living can vary dramatically from region to region — as can state taxes.

The state of California, for example, has a state income tax rate of up to 13.30%. Meanwhile, Utah has a flat income tax rate of 4.85%, while Texas residents pay zero state income tax.

Living costs can have an even bigger impact on expenses than taxes. The median price of a home in Hawaii is $829,000. In West Virginia, it’s only $289,400 .

According to data published by Equifax, HENRYs tend to live in metro areas with higher costs of living, which may make growing assets harder. Choosing to relocate to a more affordable area might be an appealing option for those who can work remotely or transfer locations at their current jobs. Savings from a reduced cost of living could add up significantly over time.

It is worth noting that the average annual salary in more affordable areas is often lower as well, so HENRYs may want to investigate whether their jobs can be done remotely or if their skills are in high demand in other towns, cities, and states.

While moving may not be easy or simple, it could be one way for a high earner not rich yet to cut income-consuming costs and begin setting aside more money for wealth-aimed investments or savings.

Examining Tax Deductions

On top of local living expenses, another expense burden that tends to weigh heavily on many individuals, especially HENRYs, is taxes. Employees who earn higher salaries tend to pay more in income taxes. This is especially true in states that have state tax brackets that tax individuals at higher rates if they earn more money, as opposed to states with flat tax rates.

One common way to reduce income tax burdens is by contributing to a traditional individual retirement account, such as a 401(k) or IRA. (Contributions to Roth IRAs aren’t deductible). Some HENRYs might already have a retirement account through their employers. In that case, they may opt to make the maximum contribution, especially if their employer will match it.

Certain amounts of donations to qualifying charitable organizations can also be tax-deductible. Of course, if a high earner not rich yet has little disposable income left at the end of each month, sizable cash or non-cash property donations might not be a viable option for some.

For HENRYs who own a home, energy-efficiency tax benefits could be something to look into as well. Installing solar panels and solar-powered water heaters are among the most common items that can qualify for this kind of tax deduction. Others that are less common include geothermal heat pumps, renewable-energy fuel cells, and wind turbines. Energy-efficiency tax deductions can apply to a primary residence. And, where applicable, they can be claimed on other properties an individual might own.

HENRYs who have children and live in a state that allows it might be able to deduct 529 savings plan (aka a college fund) contributions from their state income taxes. Opening a 529 plan can address both how to pay for a child’s college expenses and, potentially, reduce state income tax liability.

A high earner not rich yet with no children could still open a 529 plan for friends, nieces, nephews, or even for themselves if they plan on going to college in the future. While 529 contributions aren’t tax-deductible on the federal level, the funds can grow tax-free. Plus, many states allow for the deduction of funds deposited into these accounts from state income taxes.

Paying Down Debt

It’s common for HENRYs to carry heavy debt burdens. Most often, this comes from student loans, a mortgage, auto loans, and credit card debt.

One reliable way to pay down debt is to make higher-than-minimum payments on debts carrying the highest interest rates. In this way, individuals can pay less in interest than if the higher rate debts were to continue compounding. Credit cards typically have the highest interest rates of any debt that most people carry (payday loans and some other types of unconventional loans might have higher rates still, but let’s assume HENRYs aren’t relying on these services).

For many borrowers, student loan debts can quickly become a problem. Interest rates on student loans can vary — especially if borrowers have a mix of federal and private student loans. And, when large enough payments aren’t made toward the principal or on already capitalized student loan interest, borrowers might get stuck with a lot of their monthly payments going toward accruing interest. In turn, this may make it difficult to quickly pay off outstanding educational debts.

Becoming as debt-free as possible can help individuals not relinquish income to interest payments.

Diversifying Investments for the Future

Once the above items are taken care of, HENRYs could invest the extra income saved in ways that will help their money grow. Even investors in their 20s may want to research ways to start investing. Here’s a look at the types of investments HENRYs might consider.

Income-Producing Assets

Wealth, understood as an expanding total net worth, is the kind of thing HENRYs are aiming for but never seem to achieve — despite their high-earner incomes. Breaking this cycle could involve first cutting certain expenditures (i.e., cost of living or high-interest debt).

Then, individuals may opt to take some of their newly freed-up funds and invest in income-producing assets. Income-producing assets may span securities that bear interest or dividends — bonds, real estate investment trusts (REITs), and dividend-yielding stocks.

Recommended: Income vs. Net Worth: Main Differences

Dividend Reinvestment Programs (DRIPs)

HENRYs can take advantage of the power of compounding interest by utilizing what’s known as a dividend reinvestment program (DRIP). Enrolling eligible securities into a DRIP means that any dividends paid out will automatically be used to purchase shares of the same security.

With the DRIP approach to investing, the next dividend payment will be larger than the last. This is due to the fact that more shares will be held, and payments are made to shareholders in proportion to how many shares they own.

Exchange-Traded Funds

Given that some HENRYs might not have a lot of non-work time to actively manage their investments, passive investment vehicles like exchange-traded funds (ETFs) might be an additional investment option.

Many ETFs yield dividends, although those dividends tend to be somewhat smaller than those offered to individual shareholders of company stocks.

Real Estate

HENRYs often own their own home. As such, mortgage payments combined with interest can make up a substantial portion of their regular monthly expenses.

While some people opt to buy a home as an investment, hoping that the property will grow in value over the years, buying real-estate does not always guarantee a profitable return. Someone seeking to shirk their HENRY status could decide to switch or downsize to a less expensive apartment or home — assuming the cost of rent or a new mortgage is less than their current house payments. In some areas, rentals can be quite pricey, so it’s worth doing your homework to compare the pros and cons of renting vs. buying where you live.

When individuals can cut back on monthly housing expenses, it may then be possible to invest some of their freed-up income into additional assets. If an investor still wants to have exposure to property, they could choose to invest in REITs, which are known for having some of the highest dividend yields in the market.

Since REITs are required by law to pay a certain percentage of their income to investors in the form of dividends, it’s not surprising that they’re a favorite among investors seeking potential earnings. Naturally, as with any real estate investment, fluctuations in interest rates and demand may impact an REIT’s market performance.

Investing Now for the Future

When it comes time to start investing, there’s no need to wait until retirement is nigh. After all, the longer certain securities are owned, the more time they could potentially accrue value or that dividends could be paid out.

SoFi Invest® offers individuals the tools they need to start investing online, whether they’re a new investor, HENRY or experienced market watcher. Plus, with SoFi Invest, members can access complimentary financial planners, who can discuss the investor’s financial goals and help them map out various paths to a financial future.

Take a step toward reaching your financial goals with SoFi Invest.

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.

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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

SOIN0323028

Apr

05

2023

scale with bar graph

Pros & Cons of the 60/40 Portfolio

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

There are many different strategies when it comes to building an investment portfolio, but each involves investing in a certain percentage of various assets, and some also involve buying and selling assets at particular times. One of the most popular strategies recommended by financial advisors is called the 60/40 portfolio, which involves building a portfolio that contains 60% equities (stocks) and 40% bonds.

Like any investment strategy, this simple long-term approach has both upsides and downsides. Let’s look into the details of the 60/40 portfolio, its pros and cons, and who it’s best suited for.

What Is the 60/40 Portfolio?

An investment portfolio divided as 60% stocks and 40% bonds is commonly understood as a “60/40 portfolio.”

The 60/40 portfolio is designed to withstand volatility and grow over the long-term. The strategy is that when the economy is strong, stocks perform well, and when it’s weak, bonds perform well. By holding more stocks than bonds, investors can take advantage of growth over time. Meanwhile, the bonds mitigate the risk of losing a huge amount during downturns.

60/40 Portfolio Historical Returns

Over the past century, the 60/40 portfolio was very popular because of its reliable returns. Although it hasn’t always performed as well as an equity-only portfolio, it carries less risk and is less volatile. However, historical returns aren’t necessarily an indicator of how the 60/40 portfolio will perform in the future.

Since 1928, a 60/40 portfolio containing 10-year U.S. Treasuries and the S&P 500 has had an average annual return of 9%. With inflation factored in, that return decreases to 5.9%.

The 60/40 portfolio grew 7000% since the 1970s, with only a 30% maximum decline. Unfortunately, returns on the 60/40 portfolio are predicted to be lower in the coming decades than they’ve been in the past. This is due to a few factors:

• Inflation: As inflation increases, purchasing power decreases. Currently, a lot of bond yields aren’t even keeping up with the rate of inflation, and this may continue for a long time.

• Real GDP growth: Real GDP is the amount of national economic growth minus inflation. As the economy has matured in recent years, the GDP has been growing more slowly than in decades prior.

• Dividend yields: The amount that companies pay out through dividends is typically much lower now than it used to be.

• Valuation: Companies are valued much higher than they used to be, and large companies are growing more slowly. As such, investors can expect slower growth in stock earnings.

How to Build a 60/40 Portfolio

The simplest way to build a portfolio with 60% equities and 40% bonds would be to purchase the S&P 500 and U.S. Treasury Bonds. This portfolio would include mostly U.S. investments, though some investors might choose to diversify into international investments by purchasing foreign stocks and bonds.

Financial advisors putting together a 60/40 portfolio for investors generally include high-grade corporate bonds and U.S.government bonds, along with index funds, mutual funds, and blue-chip stocks. This combination avoids taking on too much risk — which is a possibility when purchasing an unknown stock and it fails — and typically yields steady growth over time.

Investors may also choose to invest in exchange-traded funds (ETFs), which are mutual funds that are traded on an open market exchange (like the New York Stock Exchange), just like stocks. By investing in funds, investors increase their exposure to different companies and industries, thereby diversifying their portfolio. There are many types of ETFs. Some of them are groups of stocks within a particular industry, while others are grouped by company size or other factors.

If an investor were looking to generate income from their investments, they might choose to buy dividend-paying stocks and real estate investment trusts (REITs).

In terms of bonds, there are also a number of options. Investors might choose to buy municipal bonds, which earn tax-free interest, or high-yield bonds, which earn more than other bonds but come with increased risk.

It’s recommended that investors rebalance their portfolio annually to ensure the percentages remain on track.

Pros of the 60/40 Portfolio

The 60/40 portfolio is a simple strategy that has several upsides:

• It can be very simple to set up, especially by purchasing the S&P 500 and U.S. Treasury Bonds.

• It’s a “set it and forget it” investment strategy, needing only yearly rebalancing.

• Holding bonds helps balance the risk of equity investments.

• It typically offers steady growth over time.

Cons of the 60/40 Portfolio

Of course, as with any investing strategy, the 60/40 portfolio strategy comes with some downsides. While the 60/40 portfolio used to be the standard choice for retirement, people are now living longer and need a portfolio that will continue growing steadily and quickly to keep up with inflation. Here are some other factors to consider:

• If investors buy individual stocks, they can be volatile.

• Mutual funds and ETFs can have high fees.

• Bonds tend to have low yields.

• The strategy doesn’t take into account personal investment goals and factors, such as age, income, and spending habits.

• Diversification is limited, as investors can also add alternative investments, such as real estate, to their portfolio.

• There is the potential for both stocks and bonds to decline at the same time.

• Over time, a 60/40 portfolio won’t grow as much as a portfolio with 100% equities. This is especially true over the long-term because of compounding interest earned with equities.

Who Might Use the 60/40 Portfolio Strategy?

Some investors can’t sleep if they’re afraid their stock portfolio is going to crater overnight. Using the 60/40 strategy can take some of that anxiety away.

The 60/40 strategy is also a viable choice for investors who don’t want to make a lot of decisions and just want simple rules to guide their investing. Beginner investors might decide to start out with a 60/40 portfolio and then shift their allocations as they learn more.

Additionally, those who are closer to retirement age may choose to shift from a stock-heavy portfolio to a 60/40 portfolio. This could help to reduce risk and ensure they have enough savings to fund their retirement.

Investors who have a high risk tolerance and are looking for a long-term growth strategy might not gravitate toward a 60/40 plan. Instead, they may choose to allocate a higher percentage of their portfolio to stocks.

Alternatives to the 60/40 Portfolio

In recent years, some major financial institutions have declared that the 60/40 portfolio is dead. They’ve instead been recommending that investors shift more toward equities, since bonds have not been returning significant yields and don’t provide enough diversification. Some suggest holding established stocks that pay dividends rather than bonds in order to get a balance of growth and stability. However, these recommendations are partly based on the fact that the current bull market is over, and they aren’t necessarily looking at the long-term market.

There are many other investment strategies to choose from, or investors might create their own rules for portfolio building. Here are a few common strategies to consider.

Permanent Portfolio

This portfolio allocates 25% each to stocks, bonds, gold, and cash.

The Rule of 110

This strategy uses an investor’s age to calculate their asset allocation. Investors subtract their age from 110 to determine their stock allocation. For example, a 40-year-old would put 70% into stocks and 30% into bonds.

Dollar-Cost Averaging

Using this strategy, investors put the same amount of money into any particular asset at different points over time. This way, sometimes they will buy high and other times they’ll buy low. Over time, the amount they spent on the asset averages out.

Alternative Investments

Investors may consider allocating a portion of their funds to alternative investments, such as gold, real estate, or cryptocurrencies. These investments may help increase portfolio diversification and could generate significant returns (although the risk of loss can also be significant).

The Takeaway

The 60/40 portfolio investing strategy — where a portfolio consists of 60% stocks and 40% bonds — is a popular one, but it’s not right for everyone. It carries less risk and is less volatile than a portfolio that contains only stocks, making it a traditionally safe choice for retirement accounts. However, experts worry that the current and expected future rate of return isn’t enough to keep up with inflation.

Still, for investors who want a simple “set it and forget it” investment strategy, the 60/40 portfolio can be appealing. Other investors may decide to investigate alternative strategies. Regardless of which direction investors go, the first step in building a portfolio is determining personal goals and then creating a plan based on expected income, time horizon, and other personal factors.

One easy way to get started building a portfolio is by using an online investing platform like SoFi Invest®. The investing platform makes it simple to buy and sell stocks and other assets right from your phone, and you can research and track your favorite stocks and set up personal investing goals.

Plus, SoFi offers both automated and active investing, so you can either select each stock you want to buy, or choose from pre-selected groups of stocks and ETFs. If you need help getting started, SoFi has a team of professional advisors available to answer your questions and assist you in creating a personalized financial plan to reach your goals.

Take a step toward reaching your financial goals with SoFi Invest.

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.

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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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