Nov
22
2023

Ex-Dividend Dates Explained

By | Growing Wealth, invest, Investing | Comments Off on Ex-Dividend Dates Explained

Ex-dividend dates are the date on which an investor needs to be registered as a shareholder in order to receive the dividend. It falls after the company declares the dividend, and one day before the “record date,” or “date of record.”

Dividends — payments that companies make to shareholders when stocks perform well — can make a stock more enticing to investors, increasing their profit and making them feel valued. But an investor can’t necessarily just buy a stock one day and collect dividends on it the next. Investors need to know and plan for the ex-dividend date of any company they invest in, or may plan to invest in.

Key Points

•   Ex-dividend dates are the dates on which an investor must be a shareholder to receive a dividend payout.

•   Dividends are payments made by companies to shareholders as a share of profits.

•   Dividend payments can be in the form of cash or additional stock, and are usually paid on a quarterly basis.

•   The ex-dividend date is important for investors to ensure they are eligible to receive dividends.

•   Investors may consider the ex-dividend date when deciding to buy or sell stocks to optimize dividend payments.

Dividends Explained

To fully understand the ex-dividend date, it helps to be able to broadly answer the question: what is a dividend?

Dividends are the company’s way of allowing its investors to share in its profits, without having to sell their stakes. A dividend can come in the form of cash or additional stock, but in the U.S., they’re usually paid as cash. As a result, dividends are taxed as income, according to the investor’s tax bracket. The returns from long-term stock returns are taxed, when sold, as capital gains. (That’s just one reason it’s helpful to know the current capital gains tax rate.)

How Often Are Dividends Paid?

Most companies with dividend-paying stocks offer their dividend payments on a quarterly basis. Many investors, especially retired investors, see dividends as an income source. It allows them to collect regular payments without having to sell their investments.

Unlike the interest payments from a bond, dividend payments can vary from quarter to quarter. A company might boost its dividend because it’s doing well, or simply because it can’t find a better use for its profits. On the flip side, a company might cut its dividend because it’s struggling, or because it’s found a great opportunity to invest in new business.

In the past, and during periods of crisis (financial, or otherwise), some companies that had offered dividends for years and even decades either slashed or eliminated their dividends because of the bad message it would send if they paid cash to investors while eliminating hundreds or thousands of jobs. It was one more reminder that dividends are not a sure thing.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Does Ex-Dividend Date Mean for Trading?

Here’s how dividends work with ex-dividend dates: If an investor buys a stock on its ex-dividend date or after, they won’t get the next dividend payment. That’s why it’s important to investors that they get their purchase orders in before the ex-dividend date, in order to receive the dividend.

This date has other important implications, beyond just who receives dividend payments. The ex-dividend date is also when companies determine who receives proxy statements, financial reports, and other information. While the latter two may be publicly available, proxy statements can be very important when a company is in the throes of a significant transition.

For interested investors, there is a formula that calculates the dividend payout ratio of a stock — which can be helpful in comparing one company to another. The key questions to ask about a potential dividend are “when” and “how much.” That’s why the ex-dividend date makes a difference.

For example, let’s say an investor wants to buy shares of a company that, after a strong quarter, declares a dividend of $1 per share. The record date of the dividend is December 19. That means the ex-dividend date would likely be a business day before, on December 18. An investor who buys the stock on December 17 would receive the $1 dividend. If they were to wait until December 18, they wouldn’t be entitled to the $1 dividend.

It’s also important to note that the market adjusts for this fact. The math would dictate that the stock is actually worth $1 less per share after the ex-dividend date than it was the day before, because that $1 per share has been taken out of the company in the form of dividend payment. As a result, the price of a dividend-paying stock typically drops by roughly as much — though that’s not always a guarantee.

Benefits of Tracking the Ex-Dividend Date

There are a number of reasons investors may want to look at a stock’s ex-dividend date when considering buying or selling it.

1.    They may want to sell just ahead of the ex-dividend date to get the best price without having to pay income taxes on the dividend payment.

2.    They may want to buy a stock just ahead of its ex-dividend date, in order to participate in the dividend payments as soon as possible.

3.    They may want to hold onto the stock just until the ex-dividend date to get the last dividend payment.

4.    They may want to wait until after the ex-dividend date to buy that stock after it drops — assuming that it does — after its dividend payment.

Not Every Ex-Dividend Date Is the Same

Every investment is unique, and so is every ex-dividend date. Research into the company and its stock can help an investor form educated expectations about how dividend payments impact its performance.

But there are always special circumstances. If a company offers a dividend that’s equal to 25% or more of the stock price, then the ex-dividend date can be delayed until one business day after the dividend is paid.

There are also occasions when a company decides to pay a dividend not in cash, but in its own stock. That may be in additional shares or possibly even in a new subsidiary that it is spinning off from the core business. In these unusual circumstances, the procedures will vary, and that includes the setting of the ex-dividend date.

What Does Ex-Dividend Date Mean for Taxes?

Dividends are taxed as long-term capital gains in many cases.

In retirement, dividend income can be especially welcome. Some investors might even plan for living off dividend income after retirement. And though most retirees don’t spend their days trading the market, buying ahead of a stock’s ex-dividend date may make sense for income-focused investors.


💡 Quick Tip: An investment account that’s not for retirement is usually considered a taxable account. But the money you earn (i.e. your gains) is only taxed when you sell those securities. Learn more.

The Takeaway

Ex-dividend dates are the dates on which an investor must officially be or remain a shareholder in order to receive a dividend payout. That can have some obvious implications into an investor’s overall strategy, and help guide their investing decisions.

Exactly when and how a stock pays its dividend can make a big difference to an investor’s plans, and taxes, at every stage of their lives. That’s why investors who are considering buying or selling a stock that pays dividends should know what is the ex-dividend date for that stock.

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).


¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0523060

Read more
Nov
22
2023
colored chart

Capital Appreciation on Investments

By | Growing Wealth, invest, Investing | Comments Off on Capital Appreciation on Investments

The term capital appreciation refers to an investment’s value rising over time. Theoretically, capital, meaning money or funds, appreciates, or goes up (as opposed to depreciates) after an investor initially purchases it, and that rise in value is what’s referred to as capital appreciation.

Of course, capital can also depreciate, but investors aren’t usually looking for negative returns. This is an important concept for investors to grasp, too, as capital appreciation is likely the main goal of most investors’ overall strategies.

Key Points

•   Capital appreciation refers to the increase in an investment’s value over time.

•   Calculating capital appreciation involves comparing the current market price of an asset to its original purchase price.

•   Factors such as company performance, economic conditions, and monetary policy can influence capital appreciation.

•   Assets like stocks, real estate, mutual funds, ETFs, and commodities are commonly associated with capital appreciation.

•   Capital appreciation is an important component of long-term wealth-building strategies, along with income from dividends and interest.

What Is Capital Appreciation?

As noted, capital appreciation refers to a rise in the price of an investment. Essentially, it is how much the value of an asset has increased since an investor purchased it. Analysts calculate capital appreciation by comparing the asset’s current market price and the original purchase price, also called the cost basis.

Example of Capital Appreciation

Capital appreciation can be understood by analyzing an example from stock market investing.

If an investor purchases 100 shares of Company A for $10 a share, they are buying $1,000 worth of stock. If the price of this investment increases to $12 per share, the initial 100 share investment is now worth $1,200. In this example, the capital appreciation would be $200, or a 20% increase above the initial investment.


💡 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 Causes Capital Appreciation?

The value of assets can rise and fall for various reasons. These include factors specific to individual investments and those affecting the economy and financial world as a whole.

Asset Fundamentals

In the most traditional sense, the price of an asset will increase because of a rise in the fundamental value of the underlying investment. When investors see that a company is doing well and expect it to keep doing well, they will invest in the company’s stock. This activity pushes the stock price up, resulting in capital appreciation if an investor holds shares in the company.

For a real estate asset, the value of a property could go up after a homeowner or landlord renovates a structure. This capital improvement increases the property’s market value.

Macroeconomic Factors

When the economy is booming, it can buoy all kinds of financial assets. In a strong economy, people typically have good jobs and can afford to spend money. This helps many companies’ bottom lines, which causes investors to put money into shares of the company. The opposite of this scenario is also true. When the economy endures a downturn, asset prices may fall.

Recommended: Understanding Economic Indicators

Monetary Policy

Central banks like the Federal Reserve play a significant role in how the financial markets operate. Because of this, the monetary policy set by central banks can play a prominent role in capital appreciation.

For example, when a central bank cuts interest rates, corporations can usually borrow money at a lower cost. Businesses often use this injection of cheap money to invest in and grow their business, which may cause investors to pour into the stock market and push share prices higher. Additionally, companies may take advantage of lower interest loans to borrow money to buy shares of their stock, known as a stock buyback. These moves may push share prices higher, further leading to capital appreciation.

Another monetary policy tool is quantitative easing (QE), which refers to a method of central bank intervention where central banks purchase long-term securities to increase the supply of money and encourage investment and lending. Like a low interest rate policy, this method can lead to rising asset prices because more money is being added to the economy — money that flows into assets, bidding their prices higher.

Speculation

Another potential cause of capital appreciation is speculation. Speculation occurs when many investors perceive the value of a particular asset as being higher than it is and start buying the asset in anticipation of a higher price. This activity may lead to the price of an asset being pushed higher. After a frenzy, the price of the asset eventually drops as investors sell in a panic when they realize there’s no fundamental reason to keep holding the asset. This type of speculation is fueled by investors’ emotions, rather than financial fundamentals.

Assets Designed for Capital Appreciation

There are several categories of assets that are designed for returns through price appreciation. Investors generally hold these investments for the long term hoping that prices will rise. This isn’t an exhaustive list, but it provides a good overview.

Stocks

Stocks are a type of financial security that represents equity ownership in a corporation. They can be thought of as little pieces of a publicly-traded company that investors can purchase on an exchange, with hopes that the price of the shares will go up.

Real Estate

Real estate is a piece of land and anything attached to that land. Many people build wealth through homeownership and capital appreciation, buying a house at a specific price with an expectation that it will appreciate in value by the time they are ready to sell.

Residential real estate is just one area of real estate investment. Investors may also look to put money into commercial, industrial, and agricultural real estate activities. Investors can invest in various real estate investment trusts (REITs) to get exposure to returns on real estate.

Mutual Funds

A mutual fund consists of a pool of money from many investors. The fund might invest in various assets, including stocks, bonds, commodities, or anything else. In the context of a mutual fund, capital appreciation occurs when the value of the assets in the fund rises.

ETFs

Similar to mutual funds, exchange-traded funds (ETFs) are investment vehicles that contain a group of different stocks, bonds, or commodities. ETFs can track stocks in one particular industry, e.g., gold mining stocks, or track all the stocks in an entire index such as the S&P 500. As the name suggests, ETFs are bought and sold on exchanges just like stocks.

Commodities

Commodities are an investment that has a tangible economic value. This means that the market values these raw materials because of their different use cases. For example, commodities like oil and wheat are desired because they can power automobiles and be used for food, respectively. Commodities markets can be highly volatile, but many investors take advantage of the volatility to see the capital appreciation on both a short-term and long-term time horizon.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Capital Appreciation Bonds

Capital appreciation bonds are municipal securities backed by local government agencies. With these bonds, investors hope to receive a significant return in the future by investing a small amount upfront.

Like all bonds, capital appreciation bonds yield interest, which is a primary reason that investors buy them. But instead of paying out interest annually, the interest gets compounded regularly until maturity. This gives the investor one lump sum payout at the end of the bond’s lifetime.

Unlike other assets that experience capital appreciation, the price of the capital appreciation bond does not rise. Instead, capital appreciation refers to the compounded interest paid out to the bondholder at maturity.

Capital Appreciation vs Capital Gains

Though the terms are sometimes used interchangeably, there is a difference between capital appreciation and capital gains.

Capital appreciation occurs when the value of an investment rises above the purchase price while the investor owns the asset. In contrast, capital gains are the profit made once an investment is sold. Appreciation is, in effect, an “unrealized” gain. It becomes “realized” once the investment is sold for a profit.

Capital appreciation alone does not have tax implications; an investor doesn’t have to pay taxes on the price growth of an investment when they own it. But when an investor sells an investment and realizes a profit, they must pay capital gains taxes on the windfall.

▶️
Video: What Are Unrealized Gains?
Learn the basics in under 2 minutes.
Watch Now

Capital Appreciation vs Income

Capital appreciation is one piece of the puzzle in an investment strategy. Another critical component to build wealth is investing in assets that pay out dividends, interest, and other income sources.

A dividend is a portion of a company’s earnings paid out to the shareholders. For every share of stock an investor owns, they get paid a portion of the company’s profits.

Interest income is typically earned by investing in bonds, otherwise known as fixed-income investments. The interest payment is determined by the bond’s yield or interest rate. Investors can also be paid interest by putting money into savings accounts or certificates of deposit (CDs).

For real estate investors, rents paid by tenants can also act as a regular income payout.

Investing in assets that pay out regular income can supplement capital appreciation. The combination of capital appreciation with income returns is the total return of an investment.

Risks Associated With This Type of Investment

Assets intended for capital appreciation tend to be riskier than those intended for capital preservation, like many types of bonds.

Investing in stocks for capital appreciation alone is also known as growth investing. This strategy is typically focused on investing in young or small companies that are expected to increase at an above-average rate compared to the overall market.

The returns with a growth investing strategy can be high, but the risk involved is also high. Because they don’t have a long track record, these small and young companies can struggle to grow their business and lead to bankruptcy.

The Takeaway

Capital appreciation refers to the rise in value, or price, of an investment in an investor’s portfolio. It’s paramount to the whole concept of investing, as most investors invest in an effort to generate returns, or appreciation, on their money.

Capital appreciation is one part of a long-term wealth-building strategy. Along with income from dividends, interest, and rent, capital appreciation is part of the total return of an investment that investors need to consider.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What is the difference between capital growth and capital appreciation?

The difference between the terms capital growth and capital appreciation is merely semantics. Both terms refer to an increase in value of an investment over time, and effectively mean the same thing.

How much tax do you pay on capital appreciation?

Investors do not pay taxes on capital appreciation, as an investment gaining value does not trigger a taxable event. They do pay taxes on capital gains, which are realized when an investor sells an asset.

What is the difference between dividend and capital appreciation?

A dividend is a payout to shareholders from a company’s profits. Capital appreciation is the rise in market value of an investment or asset, so they are two completely different things.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0523023

Read more
Nov
10
2023
What Is a Margin Loan? Definition & Examples

Margin Loans: Definition, Examples, Pros & Cons

By | Growing Wealth, invest, Investing | Comments Off on Margin Loans: Definition, Examples, Pros & Cons

Margin loans are a type of loan that an investor takes out from a brokerage to buy investments. An investor typically borrows from a brokerage if they don’t have the cash balance in their trading account to cover the cost of a trade or investment – so, they use credit from their brokerage to cover the costs.

While there are risks associated with using margin and margin loans, they can also increase an investor’s purchasing power and bolster potential returns.

What Is a Margin Loan?

A margin loan is a loan from your brokerage to pay for securities that you can’t cover with cash. Similar to any other loan, you must apply for the account and be approved before you can borrow funds; and your brokerage will charge interest on any funds you borrow.

Having a margin account by definition enables you to take out a margin loan (the two are synonymous in many ways). Having the flexibility to buy securities on margin gives many traders the ability to take positions they might not have been able to afford otherwise. In fact, margin loans are a cornerstone to putting together effective day trading strategies, for advanced investors.


💡 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.

Understanding Margin Loans

Understanding margin trading can be tricky, but for the average investor, all you really need to know is that a margin loan is essentially a short-term financing solution. If you want to buy securities, but don’t have the cash in your account, your brokerage may allow you to buy those securities using credit. It’s similar to a line of credit, in that way.

So, that’s what margin debt is: The result of a margin loan, in which a trader borrows money to buy securities.

How Margin Loans Work

While we’ve mostly been discussing margin loans in terms of trading and investing, they could be used for any purpose. But almost always, a margin loan is used to buy securities.

As for the process of how they actually work: A margin loan is more or less like any other loan. To get one, you’ll need to apply and qualify for margin on your brokerage account (typically called a “margin account”).

Margin Accounts and How They Work

Like other forms of lending, margin loans have strict criteria. In addition, these accounts are governed by industry regulations as well as the policies of individual institutions, so be sure to understand how your desired margin account works. Each brokerage has different rules and eligibility requirements, and FINRA, for example, also requires you to deposit a minimum of $2,000 or 100% of the security’s purchase price, whichever is less. This is the “minimum margin.” Some firms may require you to deposit more than $2,000.

If you’re approved for a margin account, you’re able to trade using a margin loan — up to a certain amount. According to Regulation T of the Federal Reserve Board, you may borrow up to 50% of the purchase price of securities that can be purchased on margin.

This is known as the “initial margin.” Some firms require you to deposit more than 50 percent of the purchase price. (Also be aware that not all securities can be purchased on margin. Only those deemed “marginable” can be traded on margin.)

If you have $5,000 in your brokerage account, and you want to buy stock X, which is valued at $50 per share, with a 50% margin you could buy 50% more than your cash balance: 200 shares instead of 100. But half of those (100 shares) would’ve been purchased on margin — so, you’d need to settle up your account at some point, if or when you decide to sell your shares (hopefully for a profit).

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10.50%* and start margin trading.

*For full margin details, see terms.

How Margin Interest Works

The other important thing to remember about margin loans is that they are, like pretty much all loans, subject to interest charges. Your brokerage is going to charge you for the money you borrow.

Margin interest is a big topic unto itself, but the key takeaway is to know that you’ll be on the hook for paying your brokerage back for the money you borrow, plus interest charges.

You’re probably thinking: “Can I avoid paying margin interest?” The answer is that it depends on how fast you can pay your margin balance back. Most brokerages will charge interest by the day and add the charges to your account monthly. So, if you have cash or can sell securities and pay your balance off before interest accrues, it’s possible.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Margin Loan Pros and Cons

Marginal loans can be highly useful for traders and investors. But like almost any financial instrument, margin loans have their pros and cons.

The biggest upside of margin is that it can open up a new swath of investing choices for traders. That means increasing their buying power, and allowing them to buy securities that may have otherwise been too expensive. This can increase potential profitability, too.

Conversely, traders who aren’t careful can’t quickly find themselves in debt if one of their trades backfires.

There are also interest charges to consider, as discussed. And if things really go sideways, some traders may experience a “margin call,” which is when your brokerage sells your assets without warning to settle up or get your account balance back within its requirements.

Here’s a quick rundown:

Margin Loans: Pros & Cons

Pros

 Cons
Increased trading capacity Traders can accumulate debt
Traders can buy pricier securities Interest charges
Increased potential gains Potential margin calls

Typical Margin Loan Rates

Margin loan rates, or, the interest rate charged by a brokerage for using margin, vary. Brokerages make the information available to traders and investors, so finding what types of margin loan rates you’re subjected to usually just requires a little research (or a call to your broker).

As mentioned, a brokerage will probably charge different interest rates depending on your overall margin balance, and how much you’ve borrowed. Lower balances are typically charged higher interest rates.

Here are some hypothetical examples: Let’s say Brokerage ABC’s margin interest rates vary between 4% and 8%, depending on the trader’s balance. Traders using up to $24,999 in margin will be subject to the highest interest rate (8%), whereas traders with more than $1 million in margin debit are subject to the 4% rate.

Brokerage B, however, has a different scale, with traders in margin debt up to $24,999 subject to 8.5% interest, and those with balances between $500,000 and $999,999 subject to 6.5%.

So, while brokerages do vary in what they charge for margin loan rates, they tend to be similar. To know your exact rate, contact your brokerage, or look up the current rate schedule on the company’s website.

The Takeaway

Margin loans are similar to any other type of loan, but are typically used for the purpose of buying stocks or other securities. Once you’ve applied for and been approved for a margin account, which is akin to adding a line of credit to your existing brokerage account, you’ll have the flexibility to buy more investments than if you were relying only on cash.

That said, you’re on the hook for repaying the money you’ve borrowed, with interest. If you’ve made a profitable investment, this shouldn’t be a problem. But if you invest in stock X on margin, say, and the price drops, you would still owe the full amount you’d borrowed to buy the stock, plus interest.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

Can you withdraw a margin loan?

Yes, it’s possible to withdraw a margin loan, although the specifics will depend on an individual brokerage, as will any applicable interest charges.

Are margin loans a good idea?

Margin loans can be useful for many investors and traders, and whether or not they’re a good idea will depend on the specific individual considering taking one out. They do have risks, but upsides, too.

How do I pay back my margin loan?

The simplest ways to pay back margin loans are to either deposit cash into your brokerage account to get the balance back to zero, or to sell holdings that will result in a positive or neutral balance.

How much collateral is required for a margin loan?

The collateral required to take out a margin loan depends on a specific brokerage, but it’s not uncommon for brokerages to require somewhere between 30%, 40%, or 50%.

What happens if you can’t pay back a margin loan?

If you can’t pay back a margin loan, the brokerage will likely reach out to see what can be done, or lock you out of your account. Further, it could end up liquidating securities in your portfolio in order to cover the debt.

Photo credit: iStock/Sergey Nazarov

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN1023012

Read more
Nov
07
2023
eggs in a nest mobile

Pros & Cons of Consolidating Your 401(k)

By | Growing Wealth, Investing | No Comments

The nature of work is no longer what it used to be. Gone are the days of working for just one employer for an entire career. Now, it’s more common to move between lots of jobs.

According to a recent study by the Bureau of Labor Statistics, the average person will have more than 12 jobs during the course of their career. That’s a lot of jobs – and potentially, a lot of 401(k) accounts.

That’s because instead of the pensions that many workers in previous generations had, the average worker today is likely to have self-funded retirement accounts like 401(k)s through each new employer.

This means that as employees move between jobs, many will be left with a hodgepodge of old 401(k)s and other retirement accounts.

Is it best to leave them as they are, or to consolidate 401(k) accounts? And if so, how do you consolidate them?

Read on to learn how to consolidate 401(k) accounts, along with the pros and cons of the most popular consolidation options.

What You Need to Know About 401(k) Plans

A 401(k) is a workplace-sponsored retirement plan. If you sign up for a 401(k), contributions are deducted from your paycheck to go into your 401(k) account. Often 401(k) plans are offered to employees as a workplace benefit, like vacation days and healthcare coverage.

Some companies offer a 401(k) match. This is where a company contributes money to an employee’s 401(k) to match the amount of money the employee has contributed, up to a certain amount. A company match program can make a 401(k) a lucrative way to save money for retirement.

In addition, 401(k) plans are considered an advantageous way to save retirement money because they have certain tax advantages. For instance, 401(k) accounts are referred to as “tax-deferred” because income taxes are deferred until later, when you take the money out in retirement.

The taxation of retirement accounts is an important consideration in long-term financial planning. Taxation also acts as a guide for knowing what retirement account types can be combined, and which types cannot be combined with other retirement account types.

Because all 401(k) accounts share the same tax status (tax-deferred), they can be combined. Traditional IRAs are also tax-deferred and can be combined with a 401(k) account. This process is called a rollover.

A Roth IRA is another popular retirement account type. A Roth IRA cannot be rolled over or combined with a 401(k) or a traditional IRA account, however, because it has a different tax status. With a Roth IRA, you pay the taxes upfront (meaning you make the contributions with after-tax dollars) and your qualified withdrawals are not taxed

Should I Combine My 401(k) Accounts?

You might be at the point during your career where you’ve got at least one 401(k) account from a previous job that you’re no longer contributing to. If you are wondering whether to consolidate your 401(k) accounts, here are a few of your options:

1.    Transfering the 401(k) account(s) into your active 401(k), meaning the one you have with your current employer).

2.    Rolling the 401(k) account(s) into a Traditional IRA at an institution of your choosing.

3.    Doing nothing, and leaving the account(s) as is.

Everyone’s financial situation is different, so evaluate the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:

Option 1: Rolling Over into Your Active 401(k)

Your first option with a 401(k) with a former employer is to transfer the money into your active 401(k) account with your current employer.

Pros:

1. A single place for your tax-deferred money

By transferring old 401(k) accounts into an existing 401(k), you are consolidating those tax-deferred accounts in one place. You may find managing just one account an ideal scenario.

2. Consolidating your investment strategy

Consolidation may make it easier to keep track of your money and manage a cohesive investment strategy. It can be challenging to manage a bunch of different retirement accounts.

Cons:

1. Limited investing options

Sometimes 401(k) plans have limited investing options. If this is the case with your current active 401(k), consolidating your other 401(k)s into the plan may limit your investing choices overall. Look at the investment option information provided by your plan to help make an informed decision.

2. Additional fees

Some 401(k) accounts have additional fees on both the accounts and investments themselves. Check to see if fees are assessed at a flat rate, or if they are assessed as a percentage of the amount invested. This may influence your decision to transfer your other 401(k)s into your active 401(k).

How to do it:

How to consolidate 401(k) accounts starts with contacting the institution that holds your old 401(k) and requesting a rollover to your active 401(k). The customer service representative should likely be able to help you on the phone or direct you to the paperwork online. It can be smart to clarify that this is a rollover to another tax-deferred account.

Ideally, the company is able to transfer the funds electronically to your active 401(k). If they are not able to do this, they may request an address to send a check. Get the address of the financial institution where your 401(k) is located and have it ready before making the call.

Option 2: Rolling into an IRA

Rolling old 401(k) accounts into a Traditional IRA of your choosing is a popular choice that allows you maximum control over the investments within the account.

Pros:

1. You choose the institution

You get to choose where to open your individual retirement account. By selecting the institution, you can choose a place that fits your needs. You will have control over your investment choices and whether to use an institution that charges for certain services.

This may be especially important if the institution that holds your current 401(k) charges account maintenance fees or only offers high-cost investment products.

2. You’ll control it

You open a Traditional IRA on your own and without an employer—therefore, a Traditional IRA is yours. Some people may find it helpful to think of a Traditional IRA as a “home base” for their tax-deferred money. As you move through your career, you can roll old 401(k) accounts into a Traditional IRA that’s not going anywhere—it’s your home base.

3. More investment options

As compared to some 401(K) plans, a Traditional IRA opened at an institution of your choosing may have more options for investing.

Some 401(k) plans may require that participants choose from a pre-selected list of options. If you open a Traditional IRA at a brokerage firm or other financial institution, you’ll have the benefit of a broker’s wisdom and experience should you wish to use a broker. Asking the right questions is key to making sure a broker is the right fit for you.

Cons:

1. You may still have multiple accounts to maintain

Even if you open a Traditional IRA, you may still want to contribute to your active 401(k). Therefore, you will need to maintain at least two retirement accounts. (And perhaps three, if you have a Roth IRA, which cannot be combined because it has a different tax status.)

(Still, having two accounts—an active 401(k) and a Traditional IRA—might be better for you than having many multiple 401(k) accounts scattered around at different financial institutions.)

2. It may complicate a “backdoor” Roth IRA

A backdoor Roth IRA is a way to contribute to a Roth IRA when your income is too high to contribute to one directly.

Though you’ll want to check with a tax professional, it is generally understood that a backdoor Roth IRA might be complicated if your Traditional IRAs contain a mix of pre and post-tax money that you put in.

If you want to pursue a backdoor Roth IRA, you may want to roll your old 401(k) assets into your current 401(k), or leave the account as it is. The greater the balance in your Traditional IRA, the greater the tax liability for the backdoor Roth IRA contributions since you can only contribute money that’s already been taxed to a Roth IRA.

How to do it:

If you do not already have one, you may want to open an IRA account at a financial institution of your choosing. This could be at a bank or other financial institution.

Once your Rollover IRA is active you can roll funds from your 401(k) into the Rollover IRA. The process is generally similar to that of rolling assets into an active 401(k) as noted above.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Option 3: Doing Nothing

Lastly, you may opt to leave your 401(k) accounts exactly as they are. Here are some pros and cons of this strategy.

Pros:

1. You are happy with the financial institution and/or investments

If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401(k) as it is.

Cons:

1. Difficult to manage

It could be hard to manage a cohesive investing strategy across multiple accounts. This may be the case for someone that has multiple accounts at different institutions.

2. Cannot add money to an old employer-sponsored 401(k)

It is not possible to contribute new money to an old 401(k) account that was previously tied to an employer. New money must go into a current 401(k) or some other self-directed retirement account, such as a Solo 401(k), Roth IRA, or Traditional IRA.

If you do not currently have access to an employer-sponsored 401(k), you may want to seek out another retirement account for which you can make contributions.

3. Possible maintenance fees

Old 401(k) accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees.

For example, a person could roll old 401(k) accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401(k) or a Traditional IRA.

4. Limited investing options

Because a person does not get to choose the bank that holds their employer-sponsored 401(k), they don’t get to determine the plan’s investing options, either. Therefore, it’s up to you to decide whether the available investment options in your old 401(k) are sufficient.

The Takeaway

People may benefit from consolidating their 401(k) accounts into their current 401(k) or into a Traditional IRA, if for no other reason than to consolidate their money under one roof.

It can be hard to manage a bunch of different accounts at different institutions, and may only get harder as individuals progress through their careers and end up with even more 401(k) accounts.

In general, a Traditional IRA can provide more flexibility and investing options than a 401(k). It means that you’ll be managing two accounts, yes, but it might be worth it to keep a Traditional IRA as a home base to roll all old 401(k) accounts into over time.

When you open an IRA, you’ll want to find a bank or financial institution that meets your needs. Many investors prefer institutions where they will not be charged with unnecessary fees and have access to low-cost investing options.

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.

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.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

SOIN1023005

Read more
Oct
13
2023
cannabis investing marijuana

Cannabis Investing 101

By | Growing Wealth, Investing | Comments Off on Cannabis Investing 101

Investing in the cannabis industry is becoming a bigger area of interest for many investors, as marijuana becomes increasingly legal in different states around the U.S. As more states legalize cannabis use for recreational purposes, investors may be attracted to its growth potential – and the potential to drive returns for their portfolios.

But investing in cannabis carries some significant risks. It’s still a federally illegal substance, for one, and it’s unclear if there’s a path to national legalization. There’s a lot to take into consideration for investors.

Overview of Cannabis Legalisation

As of mid-2023, 23 states in the U.S., as well as the District of Columbia, Guam, and the Northern Mariana Islands, have legalized cannabis for recreational use. Many others have legal medical marijuana laws.

It’s likely that more states will legalize marijuana for recreational or medical use in the years ahead, too. Federal legalization is also a possibility, but for now, it’s uncertain. Given that over the past ten or so years recreational legalization has grown from zero to roughly half of states, though, investors see investing in cannabis as an opportunity.

Outside the U.S., Mexico legalized recreational marijuana in 2021, becoming the largest market for cannabis in the world. It followed Canada, which in 2018 made the same move.


💡 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.

How to Invest in Cannabis Stocks

The main ways investors can get exposure to marijuana businesses in their portfolios is by first, owning the individual stocks of cannabis-related companies. The other option is through cannabis-themed exchange-traded funds, or ETFs.

Cannabis Stocks

Historically, cannabis companies tended to remain private companies. But in Canada, medical use of marijuana has been legal since 2001, making the Toronto Stock Exchange and TSX Venture Exchange the listing venues for many cannabis-related businesses. Investors in the U.S. are able to trade Canadian stocks via American Depository Receipts (ADRs).

Then in 2018, medical marijuana company Tilray became the first cannabis company to directly list in the U.S., having its initial public offering (IPO) on the Nasdaq Stock Exchange. Since then, many other cannabis companies have gone public, including Cronos Group Inc., Canopy Growth Corporation, and Aurora Cannabis. There are also publicly-traded companies that offer cannabis or cannabis-related products or that are otherwise active in the cannabis space, such as Anheuser-Busch InBev, Altria Group, Molson Coors, and Scotts Miracle-Gro.

While a listing on a major exchange does not imply that an investment is good or bad, stocks that are listed on an exchange are held to higher regulatory and reporting standards. Those that don’t qualify to be listed on an exchange typically trade over-the-counter (OTC).

No matter where an investor purchases a stock – on an exchange or OTC – it’s wise to be cautious.

Get in on the IPO action at IPO prices.

SoFi Active Investing members can participate in IPO(s) before they trade on an exchange.

Different Types of Cannabis Companies

When investors think of cannabis stocks, they may think of marijuana growers. But this is not the only type of business available for investors to consider.

•   Investors may be interested in biotech companies that are developing prescription drugs using the compounds found in marijuana (cannabinoids).

•   There are companies that provide products and services to the cannabis industry itself, such as distribution, packaging, energy and lighting systems (for greenhouse growth), banking, and hydroponics – a plant-growing method that involves no soil.

•   Another way to look at investing in marijuana businesses is via companies that do the majority of their business in other markets, but have growing cannabis-related arms.

Marijuana ETFs

An ETF is a basket of securities, such as stocks or bonds, that’s packaged into a single share that investors can find listed on stock exchanges. Many ETFs mirror the moves of an underlying index, like the S&P 500 Index or Nasdaq 100 gauge.

In general, ETFs have been lauded for their ability to help investors get exposure to a broad array of investments at a low cost. Similarly, a cannabis ETF could potentially allow an investor to diversify their stocks holdings, while avoiding pricey management or transaction fees and the research required when picking individual stocks.

Cannabis ETFs generally have higher expense ratios than those of the most popular, non-cannabis, low-cost ETFs. This is largely due to the fact that investing in individual marijuana stocks remains expensive, and the active management involved in curating stocks to include in the ETF.

Cannabis ETFs may also hold fewer stocks than more traditional ETF. This is typical of so-called thematic ETFs, ones that allow investors to wager on more niche trends. While such funds allow for more targeted bets, investors are also exposed to fewer names, making it more likely that a big move in one company will impact the price of the ETF as a whole.

Potential Risks of Cannabis Investing

Marijuana stocks have tended to be more volatile than the overall market. In addition, pot stocks have also been a target for short sellers – investors who bet shares of a company will fall. Investors who aren’t comfortable with such stock volatility may want to forgo investing in cannabis stocks.

Legal & Regulatory Risks

Because marijuana is still prohibited on the federal level in the U.S., there can be a legal risk to investing in pot-related companies. For instance, cannabis-related businesses in the U.S. are shut out from the banking system in many respects.

In addition, even if the U.S. were to pass federal legalization, that doesn’t mean growers and retailers will be able to sell their products immediately under a streamlined regulatory structure. Some states may put in place new regulation that makes pot sales and usage onerous.

After Canada legalized marijuana in 2018, many people thought that the move would lead to quick sales and profits. But in reality, the opening and licensing of cannabis stores took place slowly. Plus, illegal pot sales continued to thrive and compete with the legal marketplace.

In the first year after legalization, the stock value of Canada’s six largest marijuana companies plummeted by more than 50% on average.

New Industry and Market

Because the legal marijuana industry is relatively young, so are many of the companies within it. Many of these companies have untested business models.

From a stock investment standpoint, many of the stocks that are currently for sale in the OTC market qualify as microcap stocks and penny stocks. Many of these companies have yet to post positive earnings and bear no track record. Microcaps typically experience a high rate of failure and are often highly volatile.

Separately, unexpected developments and news reports may hit a new industry like cannabis. For instance, in 2019, many pot stocks took a dive amid concerns that vaping was tied to a serious respiratory disease.

Fraud

In addition to the general market risk that comes with investing in a new industry, fraud often attaches itself to new, exciting, and less-regulated industries.

In a 2018 investor bulletin, the Securities and Exchange Commission (SEC) alerted investors that their office regularly receives complaints about marijuana-related investments. “Scam artists often exploit ‘hot’ industries to trick investors,” the regulator said.

The SEC said investors should particularly be wary of risks related to investment fraud and market manipulation. Investment fraud includes unlicensed, unregistered sellers; guaranteed returns; and unsolicited offers. Meanwhile, market manipulation can involve suspended trading in shares, changes to a company name or type of business, and false press releases.


💡 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 Takeaway

Hunting for the next big marijuana investment may seem like an exciting endeavor. But investors should keep in mind that the cannabis industry may continue to encounter obstacles even if legalization on a broader scale occurs in the near future.

And outside the regulatory challenges, cannabis-related businesses tend to be newer, untested, and not yet profitable, posing greater risks for investors. The marijuana market may turn out to be an area of growth for stocks, but investors should weigh the considerable risks associated with it, too.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.


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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN0723028

Read more
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2025 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender