Investing Archives | Page 2 of 191

Dec

2024

Investing in Index Funds in a Roth IRA

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An index fund is a type of mutual fund or exchange-traded fund that aims to track the performance of a specific stock index. A Roth IRA is a type of tax-advantaged investment account. Index funds are one type of investment you could hold inside a retirement plan like a Roth IRA.

Here’s a closer look at investing in index funds through a Roth IRA.

Key Points

• A Roth IRA is a tax-advantaged retirement account, while index funds are investments that can be held within such accounts.

• Investing in index funds within a Roth IRA allows for tax-free growth and withdrawals.

• Index funds provide diversification and offer the potential for long-term growth, which could make them an efficient choice for retirement savings.

• When selecting an index fund, consider factors like risk tolerance, investment goals, expense ratios, and historical performance.

• It’s important to regularly review your Roth IRA and the investments in it and make any necessary adjustments to meet your financial objectives and comply with contribution limits.

Understanding Your Investing Options in a Roth IRAs

A Roth IRA is an individual retirement account that allows you to set aside after-tax dollars for retirement. Because you’ve already paid taxes on the money you contribute to the Roth IRA, you can withdraw it tax-free in retirement, which is an attractive feature to some investors.

Roth IRAs can offer a number of different investment options, including:

• Index funds

• Target-date funds

• Exchange-traded funds (ETFs)

• Real estate investment trust (REIT) funds

• Bonds

Index funds, target-date funds, and REITs can feature a mix of different investments. So, you might invest in a target-date fund that has a 70% allocation to stocks, and a 30% allocation to bonds, for instance. When comparing different funds it’s important to consider the expense ratio you might pay to own it and its past performance.

Some brokerage companies that offer IRAs may also offer other investments, such as individual stocks, commodities, or even cryptocurrency. Evaluating your personal risk tolerance, investment timeline, and goals can help you decide how to invest your money if you’re opening a retirement account online like a Roth IRA.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What Are Index Funds?

An index fund is a type of mutual fund or ETF that aims to track the performance of a specific stock index. A stock index measures a specific segment of the market. For example, the S&P 500 index tracks the 500 largest companies listed on public stock exchanges in the U.S.

Index funds typically work by investing in the same securities that are included in the index they’re trying to match. So, for example, if an index fund is using the S&P 500 as its benchmark, then its holdings would reflect the companies that are included in that index.

Index funds are a type of passively managed fund, since assets turn over less frequently. In terms of performance, index funds are not necessarily designed to beat the market but they can be more cost-friendly for investors as they often have lower expense ratios.

Long-term Benefits

Index funds offer the opportunity for long-term appreciation. Because they track the stock market, which historically has an annual return of about 7% (as measured by the S&P and adjusted for inflation), index funds may be able to get a similar rate of return over time, minus any fund fees.

Why Invest in Index Funds Through a Roth IRA?

As noted above, you can hold a range of investments in a Roth IRA, including index funds. Investing in index funds may help diversify your portfolio. Here are some of the other possible factors to consider.

Tax-free Growth and Withdrawals

Because you’ve already paid taxes on the money you contribute to a Roth IRA, you can withdraw it tax-free in retirement, as long as you are age 59 ½ and meet the five-year rule, which dictates that your account has to be open for at least five years before you start withdrawing funds. Tax free withdrawals in retirement might appeal to you if you expect to be in a higher tax bracket at that time.

Any earnings you have from index funds or other investments grow tax-free in a Roth IRA and they can be withdrawn tax-free in retirement.

Supporting Retirement Goals

Because they offer the potential for long-term growth, index funds can be part of a retirement savings strategy. An investor can choose the funds that best fit their risk tolerance and investment goals. The fees are also lower for index funds than some other types of investments, which means you can keep more of your earnings over the long term.

How to Invest in Index Funds in a Roth IRA

If you’ve decided to invest in index funds through your Roth IRA, the process for getting started is relatively simple:

1. Decide which index fund or funds you’d like to invest in (see more on that below).

2. Log into your Roth IRA account.

3. Find the fund you’d like to purchase and select “Buy.” You may be able to specify a specific dollar amount you want to spend or choose the number of shares you want to buy.

4. Review your order to make sure it is correct, then finalize it.

Tips on Choosing the Right Index Funds

While index funds operate with a similar goal of matching the performance of an underlying benchmark like the S&P 500, they don’t all work the same. There can be significant differences when it comes to things like the expense ratio, the fund’s underlying assets, its risk profile, and its overall performance.

When choosing an index fund to invest in, consider the following factors:

• Risk tolerance. How much risk are you willing to take with your investments? Knowing if you’re a conservative, moderate, or aggressive investor is important to choosing index funds that make the most sense for you. Our risk tolerance quiz can help you figure out which category you fall into.

• Your goals. What specifically, are you hoping to get out of your investment? Are you saving for the long term and aiming for it to grow over time? Are you putting away money for retirement? Determining exactly what you want to do with your investment will help you decide what type of index funds to invest in.

• Broad vs. specialized fund. Broad funds attempt to mimic the performance of a stock market as a whole, while a specialized fund like a small cap index fund, for example, targets companies with a smaller market capitalization. A specialized fund can be riskier because you’re invested in one type of asset, while a broad fund can provide some diversification, although like any investment, there are still risks involved.

• Performance history. A fund’s performance history can help you see how the fund has handled different market conditions. Look to see how it has consistently performed relative to the benchmark it tracks. You can also compare its performance to other index funds in the same category.

• Expense ratios. These ratios represent the annual cost of managing an index fund. They’re expressed as a percentage of your total investment. Keep in mind that a small difference in expense ratios can add up over time. With a smaller expense ratio, less of your investment goes to management costs.

Managing Your Index Funds

Even though index funds are passively managed, it’s a good idea to review them from time to time.

First, check their performance to see if they are mirroring the index they follow, minus the expense ratio. If their performance is not keeping up, you may want to consider another fund.

Also, keep an eye on fees. If you see that the fees for your index funds are growing over time, you may want to change your investment.

Managing Your Roth IRA

Similarly, with a Roth IRA, it’s wise to review your account and the investments inside it at least once a year. Monitor how well your assets are performing and see if they are on track to help you reach your goals.

You may find that you need to do some portfolio rebalancing. Based on how your assets have performed, you might have a different asset allocation than you originally started out with, as some things may have performed better than others. For instance, maybe stocks outperformed bonds. Review your asset allocation carefully and make any adjustments needed to help stay true to your risk tolerance and investment goals.

Finally, contribute to your Roth IRA each year if you can, but be sure not to over-contribute. The IRS sets the maximum limit for annual Roth IRA contributions. For 2024, the maximum limit is $7,000, or $8,000 if you’re age 50 or older. You have until the tax filing deadline to make contributions for that tax year. For 2025, the maximum limits are the same: $7,000 or $8,000 if you’re 50 or older.

It’s important to note that the limits are cumulative. If you have more than one Roth IRA, or a Roth IRA and a traditional IRA, your total contributions to all accounts cannot be greater than the limit allowed by the IRS. Unlike traditional IRA contributions, Roth IRA contributions are not tax-deductible.

Also, be aware that you’ll need to have earned income for the year to contribute to a Roth IRA, but there are limits. The IRS sets a cap on who can make a full contribution, based on their filing status and modified adjusted gross income (MAGI).

Here are the income thresholds for the 2024 and 2025 tax years:

Filing Status	You Can Make a Full Contribution for 2024 If Your MAGI is…	You Can Make a Full Contribution for 2025 If Your MAGI is…
Single or Head of Household	Less than $146,000	Less than $150,000
Married Filing Jointly	Less than $230,000	Less than $236,000
Married Filing Separately and Did Not Live With Your Spouse During the Year	Less than $146,000	Less than $150,000
Qualifying Widow(er)	Less than $230,000	Less than $236,000

Contribution amounts are reduced as your income increases, eventually phasing out completely. The 2024 phaseout limits are $146,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $230,000.

If you’re married and file separate returns but lived with your spouse during the year, you’d only be able to make a reduced contribution for 2024 if your MAGI is less than $10,000.

The 2025 phaseout limits are $150,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $236,000. And if you’re married and filed separate returns and lived with your spouse during the year, you can make a reduced contribution only if your MAGI is less than $10,000.

Recommended: Roth IRA Calculator

The Takeaway

A Roth IRA is a tax-advantaged account that can help you save for retirement. There are a number of different investment options to choose from when you have a Roth IRA, including target-date funds and index funds.

If you decide to invest in index funds, research different funds to find the best ones for you, and be sure to look at their performance and expense ratio, among other factors. Also, consider your risk tolerance and goals when choosing index funds to make sure that they are aligned to help you reach your financial goals.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Can I lose money investing in index funds?

It is possible to lose money investing in index funds. All investments involve risk and can lose money. However, broad index funds, such as those that use the S&P 500 as a benchmark, are diversified and hold many different types of stocks. Even if some of those stocks lose value, they may not all lose value at the same time.

Is it better to invest in index funds or individual stocks for a Roth IRA?

Which investment is best depends on an investor’s financial situation, goals, and risk tolerance. There is no one-size-fits-all answer. But in general, individual stocks can be more volatile with more potential for risk (they may also have more potential for higher returns). Broad index funds that provide significant diversification may help minimize risk and maximize returns over the long term.

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

You may also be interested in:

What Is a Roth IRA and How Does It Work?

The Pros and Cons of a Roth IRA

Do You Pay Capital Gains on Roth IRAs and IRAs?

Photo credit: iStock/Ridofranz

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.

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

S&P 500 IndexThe S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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.

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.

SOIN0822020

Dec

2024

A Comprehensive Guide to Treasury Bills (T-Bills)

By Ashley Kilroy | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off

U.S. government-backed securities like Treasury bills (T-bills) provide a way to invest with minimal risk. These debt instruments are one of several different types of Treasury securities including Treasury notes (T-notes) and Treasury bonds (T-bonds).

Unlike other treasuries, however, T-bills don’t pay interest. Rather, investors buy T-bills at a discount to par (the face value).

Investors looking for a low-risk investment with a short time horizon and a modest return may find T-bills an attractive investment. T-bills have minimal default risk and maturities of a year or less. But Treasury bill rates are typically lower than those of some other investments.

Key Points

• T-bills are short-term investments that offer a guaranteed rate of return.

• Investors don’t receive coupon, or interest, payments. The return is the discount rate.

• T-bills have a near-zero risk of default.

• Investors can buy T-bills directly from TreasuryDirect.gov, or on the secondary market using a brokerage account.

What Is a Treasury Bill (T-Bill)?

Treasury bills are debt instruments issued by the U.S. government. They are short-term securities and are issued with maturity dates ranging from 4 weeks to one year. It may be possible to buy T-bills on the secondary market with maturities as short as a few days.

How Treasury Bills Work

Essentially, when an individual buys a T-bill, they are lending money to the U.S. government. In general, T-bills are considered very low risk, since they are backed by the full faith and credit of the U.S. government, which has never defaulted on its debts.

T-bills are sold at a discount to their par, or face value. They are essentially zero-coupon bonds. They don’t pay interest, unlike other types of Treasuries (and coupon bonds); rather the difference between the discount price and the face value is like an interest payment.

T-Bill Purchase Example

While all securities have a face value, also known as the par value, typically investors purchase Treasury bills at a discount to par. Then, when the T-bill matures, investors receive the full face value amount. So, if they purchased a treasury bill for less than it was worth, they would receive a greater amount when it matures.

Example

Suppose an investor purchases a 52-week T-bill for $4,500 with a par value of $5,000, a 5% discount. Since the government promises to repay the full value of the T-bill when it expires, the investors will receive $5,000 at maturity, and realize a profit or yield of $500.

In the example above, the discount rate of the T-bill is 5% — and that is also the yield. But examples aside, the actual 52-week Treasury bill rate, as of Feb. 1, 2024, is 4.46%.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

T-Bill Maturities

Understanding the maturity date of a T-bill is important. This is the length of time you’ll hold the bill before you redeem it for the full face value. Maturity dates affect the discount rate, with longer maturities generally offering a higher discount/return, but interest rates will influence the discount.

The government issues T-bills at regular auctions, in four-, eight-, 13-, 17-, 26-, and 52-week terms, in increments ranging from $100 to $10 million. The minimum T-bill purchase from TreasuryDirect.gov is $100.

Some investors may create ladders (similar to bond ladders), which allow them to roll their T-bills at maturity into more T-bills. Although T-bill rates are fixed, and because their maturities are so short, they don’t have much sensitivity to interest rate fluctuations.

💡 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 Purchase T-Bills

You can purchase T-bills at regular government auctions on TreasuryDirect, or on the secondary market, from your brokerage account.

Buying From Treasury Direct

Noncompetitive bids: With a noncompetitive bill, the investor accepts the discount prices that were established at the Treasuries auction, which are an average of the bids submitted.

Since the investor will receive the full value of the T-bill when the term expires, some investors often favor this simple technique of investing in T-bills.

Competitive bid: With a competitive bid, all investors propose the discount rate they are prepared to pay for a given T-bill. The lowest discount rate offers are selected first. If investors don’t propose enough low bids to complete the entire order, the auction will move onto the next lowest bid and so on until the entire order is filled.

Buying and Selling on the Secondary Market

Another option is to purchase or sell T-bills on the secondary market, using a standard brokerage account.

Investors can also trade exchange-traded funds (ETFs) or mutual funds that may include T-bills that were released in the past.

Redemption and Interest Earnings on T-Bills

As noted above, although T-bills are debt instruments and an investor’s loan is repaid “with interest,” T-Bills don’t have a coupon payment the way some bonds do. Rather, investors buy T-bills at a discount, and the difference between the lower purchase price and the higher face value is effectively the interest payment when the T-bill matures.

When a T-bill matures, investors can redeem it for cash at Treasury.gov.

T-bill purchases and redemptions are now fully digital. Paper T-bills are no longer available.

Tax Implications for T-Bill Investors

Gains from all Treasuries, including T-bills, are taxed at the federal level; i.e. they are taxed as income on your federal income tax return.

Treasury gains are exempt from state and local income tax.

Comparing T-Bills to Treasury Notes and Bonds

The U.S. government offers a number of debt instruments, including Treasury Bills, Notes, and Bonds. The difference between them is their maturity dates, which can also affect interest rates and discount rates.

Treasury Notes

Investors can purchase Treasury notes (or T-notes) in quantities of $1,000 and with terms ranging from two to 10 years. Treasury notes pay interest, known as coupon payments, bi-annually.

Treasury Bonds

Out of all Treasury securities, Treasury bonds have the most extended maturity terms: up to 30 years. Like T-notes, Treasury bonds pay interest every six months. And when the bond matures the entire value of the bond is repaid.

Recommended: How to Buy Bonds: A Guide for Beginners

Considerations When Investing in T-Bills

Like any other investments, it’s important to understand how T-bills work, the pros and cons, and how they can fit into your portfolio.

What Influences T-Bill Prices in the Market?

Although any T-bill you buy offers a guaranteed yield at maturity, because T-bills are short-term debt the discount rates (and therefore the yield) can fluctuate depending on a number of factors, including market conditions, interest rates, and inflation.

The Role of Maturity Dates and Market Risk

Generally, the longer the maturity date of the bill, the higher the returns. But if interest rates are predicted to rise over time, that could make existing T-bills less desirable, which could affect their price on the secondary market. It’s possible, then, that an investor could sell a T-bill for lower than what they paid for it.

Federal Reserve Policies and Inflation Concerns

It’s also important to consider the role of the Federal Reserve Bank, which sets the federal funds target rate, for overnight lending between banks. When the fed funds rate is lower, banks have more money to lend, but when it’s higher there’s less money circulating.

Thus the fed funds rate has an impact on the cost of lending across the board, which impacts inflation, purchasing power — and T-bill rates and prices as well. As described, T-bill rates are fixed, so as interest rates rise, the price of T-bills drops because they become less desirable.

By the same token, when the Fed lowers interest rates that tends to favor T-bills. Investors buy up the higher-yield bills, driving up prices on the secondary market.

How Can Investors Decide on Maturity Terms?

Bear in mind that because the maturity terms of T-bills are relatively short — they’re issued with six terms (four, six, 13, 17, 26 and 52 weeks) — it’s possible to redeem the T-bills you buy relatively quickly.

T-bill rates vary according to their maturity, so that will influence which term will work for you.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Advantages and Disadvantages of T-Bills

Advantages of T-Bills

• They are a low-risk investment. Since they are backed in the full faith of the U.S. government, there is a slim to none chance of default.

• They have a low barrier to entry. In other words, investors who don’t have a lot of money to invest can invest a small amount of money while earning a return, starting at $100.

• They can help diversify a portfolio. Diversifying a portfolio helps investors minimize risk exposure by spreading funds across various investment opportunities of varying risks and potential returns.

Disadvantages of T-Bills

• Low yield. T-bills provide a lower yield compared to other higher-yield bonds or investments such as stocks. So, for investors looking for higher yields, Treasury bills might not be the way to go.

• Inflation risk exposure. T-bills are exposed to risks such as inflation. If the inflation rate is 4% and a T-bill has a discount rate of 2%, for example, it wouldn’t make sense to invest in T-bills—the inflation exceeds the return an investor would receive, and they would lose money on the investment.

Using Treasury Bills to Diversify

Investing all of one’s money into one asset class leaves an investor exposed to a higher rate of risk of loss. To mitigate risk, investors may turn to diversification as an investing strategy.

With diversification, investors place their money in an assortment of investments — from stocks and bonds to real estate and alternative investments — rather than placing all of their money in one investment. With more sophisticated diversification, investors can diversify within each asset class and sector to truly ensure all investments are spread out.

For example, to reduce the risk of economic uncertainty that tends to impact stocks, investors may choose to invest in the U.S. Treasury securities, such as mutual funds that carry T-bills, to offset these stocks’ potentially negative performance. Since the U.S. Treasuries tend to perform well in such environments, they may help minimize an investor’s loss from stocks not performing.

The Takeaway

Treasury bills are one investment opportunity in which an investor is basically lending money to the government for the short term. While the return on T-bills may be lower than the typical return on other investments, the risk is also much lower, as the US government backs these bills.

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.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

You may also be interested in:

How to Buy Treasury Bills, Bonds, and Notes

What Is a Treasury Security? Treasury Bonds, Bills, and Notes

A Guide to U.S. Treasury Ladders

Photo credit: iStock/Marco VDM

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.

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

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.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Dec

2024

Business Cycle Investing

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

Investors often pay attention to the ups and downs of economic activity — fluctuations known as the business cycle — and readjust their investments accordingly. With this business cycle investing strategy, investors typically adjust their exposure to various sectors with stocks or bonds in their portfolios. Some industries outperform during economic expansions, while others do better during contractions.

Business cycle investing is not an exact science, and past performance isn’t indicative of future returns. But historically, specific industries have prospered during each stage of the business cycle. Here’s a rundown of the different business cycle stages and which industries have been more favorable to invest in during each phase.

Key Points

• Business cycle investing involves adjusting investments based on economic fluctuations, with different industries performing better during various stages of the cycle.

• The business cycle includes expansion, peak, contraction, and trough phases, each affecting investment strategies differently.

• During expansions, consumer-oriented sectors and industries benefiting from business investment tend to thrive.

• Recessions see industries like healthcare, consumer staples, and utilities performing well due to consistent demand.

• Business cycle investing requires understanding economic indicators and market trends, but it can be challenging due to unpredictability.

What Is a Business Cycle?

A business cycle refers to the periodic expansion and contraction of a nation’s economy. Also known as an economic cycle, it tracks the different stages of growth and decline in a country’s gross domestic product (GDP), or economic activity.

Worker productivity, population growth, and technological innovations are all factors that can contribute to whether an economy is going through a period of boom or bust. Such elements play a role in how many goods and services a nation’s businesses produce and how much its consumers purchase.

Other factors, such as wars, pandemics, natural disasters, and political instability, can also influence the economy. These can cause a recession to happen sooner or otherwise shift the economic environment of a nation or the world.

In the U.S., the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announces whether the economy is in a recession or a new iteration of the business cycle. Policymakers attempt to manage the business cycle by adjusting fiscal and monetary policies, such as taxes, stimulus packages, or interest rates.

Some people refer to business cycles and market cycles interchangeably. However, the business cycle measures the entire economy, while market cycles refer to the ups and downs of the stock market. Although the two can be correlated, they aren’t the same.

How Does the Business Cycle Work?

The business cycle works by alternating between periods of economic growth and decline. During the expansion phase, economic activity grows, and the economy is relatively healthy. A period of economic expansion is typically characterized by low unemployment, rising wages, and increasing consumer and business confidence.

Eventually, the economy will reach its peak and start to contract. This is typically characterized by slowing economic growth, rising unemployment, and declining consumer and business confidence. As businesses see a decline in demand, they may lay off workers or reduce production, leading to a downward spiral of declining economic activity.

The trough phase is the lowest point in the business cycle. Economic activity is at its weakest, and unemployment is at its highest. This phase is also known as the recession bottom. From here, the economy begins to recover, and the business cycle starts over again.

How Reliable Is the Business Cycle?

The business cycle is a reliable pattern of economic activity observed over time, but it is not always predictable. Business cycles tend to follow a similar pattern, with periods of expansion followed by periods of contraction, but each phase’s timing, length, and severity can vary significantly.

Stages of the Business Life Cycle

There are four stages of the business cycle, which fall into two phases: a growth phase of expansion and a declining phase of contraction. A business cycle can last anywhere from one year to 10 or more years. Since 1945, there have been 12 business cycles.

Stage 1: Recession

The recession phase is the lowest point in the business cycle. Also known as the contraction phase, a weak economy and high unemployment define this period.

GDP, profits, sales, and economic activity decline during this stage. Credit is tight for both consumers and businesses due to the policies set during the last business cycle. It’s a vicious cycle of falling production, incomes, employment, and GDP.

The intensity of a recession is measured by looking at the three Ds:

• Depth: The measure of peak-to-trough decline in sales, income, employment, and output. The trough is the lowest point the GDP reaches during a cycle. Before World War II, recessions used to be much deeper than they are now.

• Diffusion: How far the recession spreads across industries, regions, and activities.

• Duration: The amount of time between the peak and the trough.

A severe recession is called a depression. Depressions have deeper troughs and last longer than recessions. The only depression that has happened thus far was the Great Depression, which lasted 3.5 years, beginning in 1929.

Recessions generally lead to shifts in monetary policy and government spending that lead to a recovery phase.

Stage 2: Early Cycle

Following a recession, the economy enters an expansion phase, where there tends to be a sharp recovery as growth begins to accelerate. The stock market tends to rise the most during this stage, which generally lasts about one year. Because of loose monetary policy by the central bank, interest rates are low, so businesses and consumers can borrow more money for growth and investment. GDP begins to increase.

Just as a recession is a vicious cycle, recovery is a virtuous cycle of rising income, employment, GDP, and production. And similar to the three D’s, a recovery period, which includes Stages 2-4, is measured using three P’s: how pronounced, pervasive, and persistent the expansion is.

Stage 3: Mid-Cycle

The mid-cycle phase is generally the longest phase of the business cycle, with moderate growth throughout. On average, the mid-cycle phase lasts three years. Monetary policies shift toward a neutral state: interest rates are higher, credit is strong, and companies are profitable.

Stage 4: Late Cycle

At this stage, economic activity reaches its highest point, and while growth continues, its pace decelerates. Monetary policies become tight due to rising inflation and low unemployment, making it harder for people to borrow money. The GDP rate begins to plateau or slow.

Companies may be engaging in reckless expansions, and investors are overconfident, which increases the price of assets beyond their actual value. Late cycles last a year and a half on average.

What Industries Do Well During Each Stage?

Historically different industries have prospered during each stage of the business cycle, depending on whether they are cyclical or non-cyclical stocks.

When money is tight and people are concerned about the economy, they cut back on certain purchases, such as vacations and pricey clothes. Also, when people anticipate a recession, they tend to sell stocks and move into less-risky assets, causing the market to decline.

Industries do better or worse depending on supply and demand, and the need for specific products shifts throughout the business cycle. In general, the following sectors perform well during each stage of the business cycle:

Recession

During the recession phase, the lowest point in the business cycle, economic activity is at its weakest, and unemployment is at its highest. Many industries may struggle during this phase, especially those dependent on consumer spending or business investment.

However, certain industries are able to weather the storm during a recession because they offer products and services that people need no matter how the economy is performing. These industries include healthcare, consumer staples, and utilities.

Recommended: How to Invest During a Recession

Early Cycle

During the early cycle expansion phase, when economic activity is growing and the economy is healthy, many industries tend to do well. These can include consumer-oriented sectors, such as retail and leisure, as well as industries that benefit from increased business investment, such as construction and manufacturing. Other sectors that benefit from increased borrowing due to low interest rates include financial services, real estate, and household durables.

Mid-Cycle

During the mid-cycle phase, when the economy is operating near full capacity, some industries may start to see slowing growth or declining profits. These can include industries sensitive to changes in consumer demand or highly competitive, such as technology and media. However, some industries perform well during the mid-cycle, like information technology and energy, because companies in these areas deploy capital that helps them grow.

Late Cycle

During the late cycle, economic activity slows down and the labor market shows signs of weakness. Additionally, the economy may face inflationary pressures due to the previous period of economic growth and low unemployment. While this inflationary pressure and economic slowdown negatively impact many industries, utilities and energy companies may do well during this period. Additionally, investors could research stocks that do well during volatility.

Who Should Invest With the Business Cycle?

Business cycle investing involves trying to anticipate changes in the business cycle and buying or selling assets based on the expected performance of those assets during different phases of the business cycle. For example, an investor following a business cycle investing strategy might buy stocks when the economy is expanding and sell them before the peak in anticipation of a downturn.

However, this active online investing strategy is not suited for everyone. Investing and rebalancing a portfolio with the business cycle is difficult because timing the market is easier said than none. Business cycle investing is best for investors who have the time to stay up to date with the latest economic indicators and stock market news while also having the risk tolerance to time the market.

In contrast, some investors prefer a long-term buy and hold strategy, in which they don’t try to time the market and make few changes to their portfolio. For many investors, that may actually be a wiser strategy, though it’ll depend on the individual investor’s preferences, strategy, and goals.

Pros and Cons of Business Cycle Investing

Business cycle investing involves trying to anticipate and profit from changes in the business cycle. The goal is to buy assets likely to do well during certain business cycle phases and sell them before the next phase begins.

However, investors should note that the business cycle is not always predictable, and there are no guarantees that a business cycle investing strategy will be successful. Thus, it’s good to consider the pros and cons of business cycle investing.

Pros

The advantages of using a business cycle investing approach include the following:

• The ability to potentially profit from changes in the business cycle: By anticipating and acting on changes in the business cycle, investors may profit from the upswing of a recovery or the downtrend of a recession.

• A framework for decision-making: The business cycle provides a framework for analyzing economic trends and making investment decisions. This can help investors make more informed decisions about buying or selling assets.

• Diversification: Business cycle investing can help investors diversify their portfolio by adding assets likely to do well in different phases of the business cycle.

Cons

The disadvantages of using a business cycle investing approach include the following:

• Difficulty in predicting the business cycle: The business cycle is not always predictable, and it can be difficult to anticipate changes in the economic environment. This can make it challenging for investors to implement a business cycle investing strategy successfully.

• Market volatility: Business cycle investing can involve buying and selling assets at different points in the business cycle, exposing investors to stock volatility.

• Opportunity cost: By focusing on the business cycle, investors may fail to take advantage of opportunities to invest in assets that are not correlated to the business cycle but may still provide strong returns.

The Takeaway

No business cycle is identical, but history shows there can be a rough pattern to which industries do better as the economy expands and contracts. Investors can take cues from which stage of the business cycle the economy is in order to allocate money to different sectors.

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

What is an investment cycle exactly?

An investment cycle is a pattern of investment activity that occurs over time, usually in conjunction with the business cycle. It is typically characterized by periods of rising prices followed by periods of declining prices. The length and severity of the investment cycle can vary, and various factors, including economic conditions, market trends, and investor sentiment, can influence it.

How long are investment cycles?

The length of investment cycles can vary significantly, depending on economic activity and investor sentiment. Some investment cycles may last only a few months, while others may last several years or more.

What are the 4 stages of investment cycles?

The four stages of an investment cycle are expansion, peak, contraction, and trough.

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Dec

2024

Understanding Low-Float Stocks

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Stock Float: Quick Recap
What Are Low-Float Stocks?
Floating Stock Example Calculation
Understanding Shares Outstanding
Benefits of Trading Low-Float Stocks
Importance of Low-Float Stocks
6 Reasons for Low-Floating Shares
Evaluating Low-Float Stocks
How to Trade Low-Float Stocks
FAQ

Low-float stocks are companies with a relatively small number of shares available for public trading. It doesn’t mean the company has very few shares in total.

A company’s float, or floating shares, are those available after subtracting closely held and restricted shares from all outstanding shares. In some cases, a company has a lower float, meaning there are relatively few shares for the public to trade.

low-float stocks are considered more volatile and have higher spreads. But a company’s float can change owing to various conditions.

Key Points

• Low-float stocks refer to shares with limited availability for public trading, resulting in increased volatility and potential price swings based on market demand changes.

• The float of a stock is calculated by subtracting closely held and restricted shares from the total number of outstanding shares, revealing the shares accessible for trading.

• Various factors contribute to a company’s low float, including control by insiders, family ownership, stock buybacks, and stock-based compensation, each affecting liquidity and volatility.

• Day traders often favor low-float stocks due to their potential for significant short-term gains, but the high volatility also presents substantial risks that require careful evaluation.

• Monitoring news catalysts and technical indicators is essential for trading low-float stocks, as these factors can lead to dramatic price movements and influence trading strategies.

Stock Float: Quick Recap

The float of a stock measures the number of shares of a particular stock. It indicates the number of shares of stock available for trading. The measure doesn’t include closely held shares, those owned by controlling investors, employees, or company owners.

Calculating floating stock requires looking at a company’s balance sheet and taking the total number of shares of a company and subtracting any restricted and closely held shares.

Stock indexes, such as the S&P 500, often use floating stock as the basis for figuring out the market cap (the total value of outstanding shares in dollars) of a company.

Recommended: Investing 101 Guide

What Are Low-Float Stocks?

A company’s float is the total number of shares outstanding, minus closely held and restricted shares.

Some larger corporations have very high floats in the billions, and investors typically consider a float of 10 to 20 million shares as a low-float. But there are companies with floats of less than one million, and you can find even lower-float stock trading on over-the-counter exchanges (OTC).

Companies with a low-float frequently have a large portion of their equity held by controlling investors such as directors and employees, which leaves only a small percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.

Because low-float stocks have fewer shares available, investors may have difficulty finding a buyer or seller for them. This may make the stocks more volatile, which appeals to day traders. The bid/ask spread of low-float stocks tends to be high as well.

💡 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.

Floating Stock Example Calculation

If a trader looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”

Looking at fictional Company A, the company’s balance sheet shows outstanding shares and floating stock shares:

• 50 million shares outstanding

• 45 million float shares

This is a high-float stock, with 90% of the stock available for trade. By contrast, Company B has:

• 2 million shares outstanding

• 475,000 float shares

This is a 23.75% float, and could serve as a signal for day traders to look at other factors to determine whether they want to invest in the stock.

Understanding Shares Outstanding

Another stock market term that helps explain low-float stocks is shares outstanding. Shares outstanding refers to the total number of shares issued by a company, including those that can’t be traded.

The float is the number of shares that’s the percentage of the shares outstanding available for public trade. This is known as the float percentage. Companies might have numerous shares outstanding, but only a small percentage of floating stock.

The amount of floating stock a company has typically changes over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a stock split or reverse split, this will also increase or decrease floating shares.

Benefits of Trading Low-Float Stocks

Essentially, low-float stocks primarily benefit day traders who are interested in earning large profits in a short time.

By their nature, low-float stocks are volatile. There are relatively few low-float stocks in the marketplace, and their prices tend to go up and down easily and quickly. Moreover, every trade of a low-float stock issue can have a larger impact on the value of the stock than it would on a security with a higher float.

For example, when good news hits a security with a limited supply, it doesn’t take much for it to have a huge impact on the share price. A low-float stock can see big gains when demand skyrockets. Conversely, if bad news comes to the same security, its price can nosedive rapidly.

The dramatic volatility in investing in low-float companies, can lead to a greater level of risk. But an experienced and highly skilled day trader might be delighted to take on this volatility challenge in exchange for potential continuous gains in a short trading session.

Importance of Low-Float Stocks

If you’re interested in investing in a particular company, it’s important to understand its stock float. You don’t want to overlook this detail while performing your due diligence on an issuing company.

The size of a stock float can change over time, which would affect the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.

6 Reasons for Low-Floating Shares

Low-float stocks tend to have higher spreads and higher volatility than a comparable higher-float stock. You may find it hard to enter or exit positions in stocks that have a low float. What are some specific instances that could account for low-floating shares?

1. Special Purpose Acquisition Companies (SPACs)

Certain shares may be trading at a low float because the company that’s issuing the stock is part of a special purpose acquisition company (SPAC). A SPAC is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO).

Typically, experienced business executives in the same industry as the SPAC’s target acquisition become the founders of a SPAC. A SPAC could take as long as a number of years to complete. And, even when the new company does go public, there may be fewer shares available for public purchase because they’re held by founders of the SPAC or other officers and insiders close to the deal.

2. The Company Is Family Operated

Another reason for low-float shares could be that the company is family owned. In these cases, a family likely would own a significant share of the company’s shares and would influence important decisions, like electing a chairman and CEO. In particular, if a family-operated company is small to midsize, there may be few shares left for the public to buy.

In fact, family-owned or operated businesses are all around us — including well-known names like BMW, Samsung, and Wal-Mart Stores. About 35% of all companies in the S&P 500 index are family controlled, and 118 of the top family-owned companies in the world are based in the U.S., according to the 2023 Global Family Business Index.

3. Stock Buybacks

If a company buys back some of its shares, that may affect its float by reducing the number of shares available for trading; there’s even a name for it: float shrink.

Regular share buybacks, along with dividend payments, are two ways that a company may reward shareholders. Another reason for a share buyback could be for a company to gain better control of its strategic initiatives without needing to consult its shareholders.

4. Company Has Donated Shares to Its Charitable Foundation

If a company founder has donated a large percentage of its shares to an associated charitable foundation, this could result in a lower float, if the foundation has held onto the shares which are then excluded from the overall float count.

5. Initial Public Offerings (IPOs)

In another scenario, a company might be involved in an initial public offering (IPO), in which its shares are considered privately held until the IPO is complete. Once the new shares are made publicly available for trade, a stock could be considered low float because a high percentage of shares are still restricted for a period of time.

6. Stock-Based Compensation

Some companies have initiatives that reward their employees with company stock; either as part of an incentive program or combined with their regular pay. A company also could have an equity compensation program in place as a way of rewarding employees, executives, and directors of a company with equity in the business.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Evaluating Low-Float Stocks

Not every low-float stock represents a good buy, but it is a popular strategy for day traders. To evaluate a low-float stock, day traders often look at several other factors.

High Relative Volume

The relative volume shows a stock’s current volume in comparison to earlier periods in a company’s history. This is important to investors because it can affect a stock’s liquidity. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell.

They may also find themselves unable to take advantage of news catalysts with a significant buy or sell the move. If a stock’s price changes, but there isn’t a lot of trading volume, it may not be a good pick.

News Catalysts

Positive or negative news about a company frequently makes a low-float stock increase or decrease in a short amount of time.

Day traders keep a close eye on the stock market and corporate news to see which stocks likely would make moves. A news event can cause a low-float stock to move anywhere from 50% to 200% in a single day, as they are in low supply.

Float Percentage

This is the percentage of the total shares of stock available for trading. Each trader has their preferences, but most look for a percentage between 10% and 25%.

How to Trade Low-Float Stocks

When trading a low-float stock, a trader might buy and sell the same stock multiple times in a single day. Then, move on to a different low-float stock the next day in an extreme form of market timing.

Many traders will plan out their profit targets and support and resistance ahead of time and stop losses to reduce risk. As with any trade, traders can look at technical indicators like candlestick charts and moving averages to see whether a stock looks bullish or bearish.

A good strategy pays attention to technical analysis and rather than simply buying or selling based on rumors or news.

Finding low-float Stocks

Finding and evaluating stocks to trade requires some knowledge and experience. Several platforms offer the ability to trade low-float stocks. Some of these platforms allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for stocks with a float of less than 50 million and a relatively high volume.

Penny stocks less than $5 are very popular with day traders. Traders can also look to watchlists for ideas about which low-float stocks to trade.

• Reuters’ Free Scanner: Free to register. Users can find low-float stocks by scanning with the filter “float.”

• Trade Ideas: This site has multiple low-float stocks lists for the U.S. market. It highlights stocks that are moving so that traders can capitalize on opportunities.

• Stock Screeners: There are many other stock-screening tools you can use to find low-float stocks — such as Benzinga Pro, which lets you “search and filter stocks by any attribute.”

Some Risks to Know

Every investment comes with risks, but low-float stocks present some particular challenges. Day trading is inherently very risky and can result in significant losses (as well as gains). So, other types of investments are often a better fit for those with a low appetite for risk.

Low-float stocks can have high volatility; their price can change within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, this volatility could wipe out a large portion of their portfolio. Low-float stocks could also present substantial profit opportunities; traders might see gains of 50% to 200% in a single day.

Looking at both the news and technical indicators is crucial for trading success. Trading low-float stocks requires a daily look at market news, as the stocks that look like a promising trade one day may not be ideal the next.

The Takeaway

The term “low-float,” as it pertains to stocks, refers to the amount of shares available to trade in the public market after the appropriate number of shares are allocated to founders, officers of the company, and other inside investors.

It’s important for investors to be aware of the amount of a company’s low-floating stock, as it can reflect the stock’s liquidity. If a stock has relatively few available issues, it might be harder for traders to sell it.

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

FAQ

Is a low-float stock good?

When a company’s stock is considered low float, there are fewer shares available for public trading. That can increase volatility for some investors, while others (like day traders) may be able to leverage changes in the share price.

How important is a stock’s float?

Understanding why a company may have a higher or lower float is an important factor for investors to take into consideration, because it can reveal (or be tied to) other aspects of the company’s management or status.

Are low-float stocks good for day trading?

Low-float stocks can garner huge profits for day traders when a particular industry, sector, or company is in high demand. But when demand shifts, low-float stocks can be risky.

What’s the difference between high- and low-float stocks?

You can find a company’s float by taking the total number of shares outstanding and subtracting the number of shares that are closely held or restricted. If the remainder is a high percentage of the outstanding shares, that’s considered a high-float stock — which can indicate the stock has a certain amount of liquidity.

If the remainder is a small percentage of the outstanding shares, that indicates a low-float stock, which generally has a higher spread, lower liquidity, and may be more volatile.

About the author

Ashley Kilroy

You may also be interested in:

The Essentials of Stock Float and Its Impact on Investing

What Is Volume in Stock Trading?

Understanding Stock Dilution

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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

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

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Dec

2024

How To Know When to Buy a Stock

By Ashley Kilroy | Growing Wealth, invest, Investing | No Comments

Table of Contents

The Best Time of Day to Buy Stocks
The Best Day of the Week to Buy Stocks
The Best Month to Buy Stocks
When Should You Buy Stocks
When Is the Worst Time to Buy Stocks?

Since investors don’t have (functional) crystal balls, figuring out how to know when to buy a stock, in an effort to time the market and generate the biggest return, is difficult. While you shouldn’t necessarily try to time the market, if you are trading and incorporating some knowledge and tactics around when to buy a stock as a part of your larger financial plan, you’ll want to do what you can to fine-tune your strategy.

Trading stocks, of course, is fairly risky, and investors will want to keep that in mind. But with some practice and knowledge, you may be able to figure out the best time to buy stocks, and other variables, to help you try to boost your portfolio.

Key Points

• Timing the stock market is difficult, but understanding when to trade stocks can help your portfolio.

• The best time of day to buy stocks is usually in the morning, shortly after the market opens.

• Mondays and Fridays tend to be good days to trade stocks, while the middle of the week is less volatile.

• Historically, April, October, and November have been the best months to buy stocks, while September has shown the worst performance.

• Knowing when to hold or sell stocks depends on personal strategies, research, and confidence in the stock’s potential for growth.

The Best Times to Buy Stocks

As noted, it’s generally not a good idea to try and time the market. But that’s not to say that there are larger market forces at work that result in certain trends. With that in mind, there can be good times of the day, days of the week, and even months to buy stocks that could generate bigger returns – though nothing is guaranteed.

The Best Time of Day to Buy Stocks

First and foremost, remember when the stock market is open and when trading is occurring. The New York Stock Exchange and Nasdaq, two of the largest and most active stock exchanges, are open 9:30 a.m. to 4:30 p.m. ET, Monday through Friday.

With that, the best time of the day, in terms of price action, is usually in the morning, in the hours immediately after the market opens up until around 11:30 a.m. ET, or so. That’s generally when most trading happens, leading to the biggest price fluctuations and chances for investors to take advantage.

The Best Day of the Week to Buy Stocks

If investors are aiming to trade during times of relative volatility, then they’ll want to utilize a trading strategy that aims to crowd their activity near the beginning and end of the week. Monday is probably the best day to trade stocks, since there is likely considerable volatility pent up over the weekend.

That said, Friday can also be a good day to trade, as investors make moves to prepare their portfolios for a couple of days off. The middle of the week tends to be the least volatile.

The Best Month to Buy Stocks

best month to buy stocks

When thinking about the best months to buy stocks, examining historic performance can be helpful. Data showing average monthly returns for the S&P 500 between 1950 and 2023 shows that broadly, November, July, April, and October tend to be the best months to buy. Conversely, September and February have tended to see weaker performances than the other months.

Again, these “best times to buy stocks” in terms of times, days, and months aren’t guarantees of anything, but are merely based on historical performance. That can be good to keep in mind.

When Should You Buy Stocks

factors to consider when buying stock

There’s a difference between “can” and “should” – and investors trying to discern when they should buy stocks should really consider their personal preferences, risk tolerance, and investment strategies. The right time to buy a stock is when an investor has done their research and feels confident that a stock price will rise in the short or long term, and that they’re willing to hold onto it until it does.

It helps to be informed when considering whether to buy stocks, and one way to do that is to learn about the company itself. Interested investors can find many company’s financial reports and earnings reports from government databases or private company research reports.

While ultimately it may be a good idea to buy stocks across different industries in order to diversify, it sometimes helps to start with a business or industry one is familiar with. Knowing about the company can help put the earnings reports into context.

Understanding the value of stocks is often, if not always tied to understanding the business those stocks represent a share in. Is the company a good investment? Does it have sound financials and growth potential? Here are helpful questions to consider when contemplating buying a stock:

What is the price range at which you’re willing to buy? If an investor has a company in mind, setting a price range at which they would want to buy stock in that company may help inform their decision. One can do this through analysts’ reports and consensus price targets, which average all analyst opinions.

Does the stock appear undervalued? There are different ways to determine value. The most common valuation metric is a price-earnings ratio (or P/E), which takes the price per share and divides it by earnings per share. The lower the number, the less the value. Generally for U.S. companies, a P/E below 15 is considered a good value and a P/E over 20 is considered a bad value. You can also compare the company’s P/E to others in the industry.

Another way to look at value is a discounted cash flow (DCF) analysis, which takes projected cash values and discounts them back to the present. This ultimately gives an investor a theoretical price target; if the actual price is below the target, then in theory, it’s undervalued and a good buy.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

When Is the Worst Time to Buy Stocks?

Just as there are the purported best times to buy stocks, there are also the worst times to buy stocks, too. Given that investors may be looking for relatively volatile times in the market to buy stocks, relatively calm periods during the trading day may be the worst times to buy. Those hours would be during the middle of the day, perhaps from 11:30 a.m. ET until 3 p.m. ET.

In terms of days of the week? Tuesdays, Wednesdays, and Thursdays may be worse than Mondays or Fridays, barring any market-moving news or other volatility-inducing events. Finally, September, February, and May tend to be the weakest-performing months for the stock market, dating back nearly a century.

How Do You Know When to Hold Stocks?

Knowing when to hold a stock often comes down to one’s investment strategy. With a passive investment approach, investors invest in various stocks with the intention of holding them for an indefinite amount of time. This is also known as a buy and hold investment strategy.

With this type of investing, investors attempt to match a market index such as the S&P 500 and the Dow Jones Industrial Average. So, they select stocks in that market index coinciding with the same percentages in that index.

One benefit of the buy and hold strategy is that the tax rate on long-term capital gains (from stocks that an investor has owned for more than one year) are much lower than that of short-term capital gains.

For many, if not most investors, if you’re going to buy a stock, it may be a good strategy to hold onto it for a while. When an investor buys an undervalued stock, it could take a few years for it to reach its “correct” valuation. And of course, there’s always a risk it will never reach what the investor has determined is the correct valuation.

Not everyone holds onto their stocks for a long time, but there are risks to day trading that may inspire some to become buy-and-holders.

How Do You Know When to Sell a Stock?

Just like how a decision to hold a stock largely depends on an individual investor’s specific strategy, so does the choice as to whether or not to sell.

Some investors rely on a rule of thumb that states that the stock market reaches a high point in May or June and then goes down over the summer until September or October. While that can sometimes be observed in overall market behavior — partially because traders (just like lots of people) go on vacation in the summer and partially because it’s a bit of a self-fulfilling prophecy — it doesn’t mean an individual stock will definitely go down over the summer.

Taking this advice, however, — and other, similar types of advice – should be taken with a grain of salt. Again, the choice of whether to sell a stock is up to you, and the research you’ve put into making the decision.

Recommended: When to Sell Stock

The Takeaway

Knowing when to buy, sell, and hold stocks can be less confusing when an investor does the research into company health, overall market conditions, and their own financial needs as relates to personal short-term and long-term goals.

One of the easiest ways to buy and sell stocks or manage any investment portfolio is to open an online taxable brokerage account. This is often appealing to investors who want to take more of an active investing approach and buy and sell stocks. Investors would typically pay fees based on the account and the number of trades they make.

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 it best to buy stocks when they are down?

The best time to buy a stock is when an investor has done their research and due diligence, and decided that the investment fits their overall strategy. With that in mind, buying a stock when it is down may be a good idea – and better than buying a stock when it is high. But there are always risks to take into consideration.

Should I buy stocks at night?

Investors can engage in after-hours trading, but there are unique risks to doing so, and orders won’t execute until the market opens. Interested investors may want to try after-hours trading to get a feel for it before fully incorporating it into their strategy.

What are the worst months for the stock market?

Based on past performance, the worst months for the stock market tend to be in the early fall and summer. September is usually the worst, but October, June, and August can be bad as well.

About the author

Ashley Kilroy

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SOIN1023007

Understanding Your Investing Options in a Roth IRAs

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What Are Index Funds?

Long-term Benefits

Why Invest in Index Funds Through a Roth IRA?

Tax-free Growth and Withdrawals

Supporting Retirement Goals

How to Invest in Index Funds in a Roth IRA

Tips on Choosing the Right Index Funds

Managing Your Index Funds

Managing Your Roth IRA

The Takeaway

FAQ

Can I lose money investing in index funds?

Is it better to invest in index funds or individual stocks for a Roth IRA?

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What Is a Treasury Bill (T-Bill)?

How Treasury Bills Work

T-Bill Purchase Example

T-Bill Maturities

How to Purchase T-Bills

Buying From Treasury Direct

Buying and Selling on the Secondary Market

Redemption and Interest Earnings on T-Bills

Tax Implications for T-Bill Investors

Comparing T-Bills to Treasury Notes and Bonds

Treasury Notes

Treasury Bonds

Considerations When Investing in T-Bills

What Influences T-Bill Prices in the Market?

The Role of Maturity Dates and Market Risk

Federal Reserve Policies and Inflation Concerns

How Can Investors Decide on Maturity Terms?

Advantages and Disadvantages of T-Bills

Advantages of T-Bills

Disadvantages of T-Bills

Using Treasury Bills to Diversify

The Takeaway

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What Is a Business Cycle?

How Does the Business Cycle Work?

How Reliable Is the Business Cycle?

Stages of the Business Life Cycle

Stage 1: Recession

Stage 2: Early Cycle

Stage 3: Mid-Cycle

Stage 4: Late Cycle

What Industries Do Well During Each Stage?

Recession

Early Cycle

Mid-Cycle

Late Cycle

Who Should Invest With the Business Cycle?

Pros and Cons of Business Cycle Investing

Pros

Cons

The Takeaway

FAQ

What is an investment cycle exactly?

How long are investment cycles?

What are the 4 stages of investment cycles?

Stock Float: Quick Recap

What Are Low-Float Stocks?

Floating Stock Example Calculation

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Understanding Shares Outstanding

Benefits of Trading Low-Float Stocks

Importance of Low-Float Stocks

6 Reasons for Low-Floating Shares

1. Special Purpose Acquisition Companies (SPACs)

2. The Company Is Family Operated

3. Stock Buybacks

4. Company Has Donated Shares to Its Charitable Foundation

5. Initial Public Offerings (IPOs)

6. Stock-Based Compensation

Evaluating Low-Float Stocks

High Relative Volume

News Catalysts

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