Investing Archives | Page 29 of 191

Oct

2024

What Are Index Funds, and How to Invest in Them

By Carla Tardi | Growing Wealth, invest, Investing | Comments Off

Index investing is a passive investment strategy in which you buy shares of an index fund that mirrors the composition and performance of a market index like the S&P 500.

Index investing is considered passive because index funds are formulated to follow the index and thus deliver market returns. There is no portfolio manager to oversee the fund or execute trades as there is with actively managed funds. Index funds can include mutual funds as well as exchange-traded funds (ETFs).

While index funds were once considered somewhat unsophisticated, a growing number of investors have come to embrace passive strategies in the last several years: In 2010, about 19% of total assets under management with U.S. investment firms were in passive funds. By 2023, passive strategies accounted for 48%.

Although index funds are considered passive, that doesn’t mean they are risk free; there are specific concerns for investors to bear in mind when considering index investing.

Key Points

• Index funds are mutual funds that try to replicate the benchmark index for a market segment or sector.

• Because index funds are passively managed and have low turnover, which helps keep costs lower than an actively managed fund.

• Indexes — and the index funds that track them — may be weighted by market cap, price, or fundamentals.

• Passive investing in index funds may help restrain investors’ emotional impulses and improve long-term returns.

• Index investing offers diversification and cost efficiency, but lacks downside protection and flexibility.

What Are Index Funds?

An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a market segment — like large-cap companies — or a sector like technology, by following the benchmark index for that sector.

Index funds typically hold a portfolio of securities — e.g., stocks, bonds, or other assets — that are identical or nearly identical to those in the relevant index. The idea is to try to replicate the chosen benchmark’s performance as closely as possible.

Unlike actively managed funds, which employ a portfolio manager that seeks to outperform the benchmark by actively trading securities within the fund, index funds aim to provide returns based solely on the performance of that particular market or sector.

There is an ongoing debate about the merits of pursuing active vs. passive strategies. In 2023, passive investments tended to outperform their active counterparts, according to industry data analyzed by Morningstar. That said, active strategies outperformed under certain conditions, and for specific markets.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and countless others represented by various market indexes like the Russell 2000 index of small-cap companies, the Nasdaq 100 index of tech companies, and so on.

How Do Index Funds Work?

When you buy shares of an index fund — typically a mutual fund or ETF — your money is effectively invested in the many stocks or bonds that make up the particular index. This helps add some diversification to your portfolio, potentially more so than if you were buying individual securities.

In addition, index funds tend to be lower cost than active funds, because passive funds don’t require a live portfolio management team.

Passive investing comes with certain risks, however, chiefly the risk of being tied to the ups and downs of a specific market. Without an active manager at the helm, an index fund can only deliver market returns.

Why Index Funds Typically Cost Less

Because index funds are designed to track the securities in a given market index, an index fund’s portfolio is typically updated only when the constituents in the index itself change. Thus, there is typically low turnover in these funds, which helps keep overall costs low.

By contrast, actively managed funds typically employ a more frequent trading strategy in a quest for outperformance, which can add to the cost of the fund. In addition, active funds have a live portfolio manager and thus tend to charge higher fees.

Understanding the impact of investment fees is important to long-term performance, as many investors know.

How an Index Is Weighted

Some indexes give more weight to companies with a bigger market capitalization; these are market-cap-weighted indexes. This means index funds that track a weighted index, like the S&P 500, likewise allocate a higher percentage to those bigger companies — and those companies influence the performance of the index.

Indexes can also be weighted by price (with higher priced companies making up a higher proportion of the index) or by company fundamentals. While the weighting structure of the index may not matter to individual investors at first, it ultimately influences the holdings of any related index funds or ETFs, and may be something to bear in mind when selecting an index fund.

Well-Known Big Market Indexes

There are thousands of indexes in the U.S. alone, each one designed to reflect how a certain aspect of the market is doing. Some of the biggest indexes include:

• S&P 500 Index — Standard & Poor’s 500 tracks the 500 largest companies in the U.S. by market capitalization.

• Dow Jones Industrial Average (DIJA) — The Dow tracks 30 blue-chip companies; this is a price-weighted index.

• Nasdaq Composite Index — The Nasdaq Composite tracks all of the tech companies listed in the Nasdaq stock exchange (one of the major U.S. exchanges); this is a price-weighted index.

• Wilshire 5000 Index — The Wilshire 5000 is a market-cap-weighted index, and it’s considered a total market index because it tracks all publicly traded companies with headquarters in the United States.

• Bloomberg Barclays Aggregate Bond Index — Nicknamed the “Agg,” this index tracks over $50 trillion in fixed-income securities, and is often considered an indicator of the economy’s health.

Top 10 Equity Index Funds

While the above list reflects some of the larger market indexes, these don’t dictate what the most popular index funds may be. Some index funds are more cost efficient or do a better job of tracking their benchmark than others.

Following are the top 10 low-cost U.S. equity index mutual funds and ETFs in 2024, according to Morningstar, Inc., the industry ratings and research company.

1. DFA US Large Company (DFUSX)

2. Fidelity 500 Index (FXAIX)

3. Fidelity Mid Cap Index (FSMDX)

4. Fidelity Total Market Index (FSKAX)

5. Fidelity ZERO Large Cap Index (FNILX)

6. iShares Core S&P 500 ETF (IVV)

7. iShares Core S&P Total US Stock Market ETF (ITOT)

8. iShares S&P 500 Index (WFSPX)

9. Schwab US Mid-Cap Index (SWMCX)

10. Schwab Total Stock Market Index (SWTSX)

How to Invest in Index Funds: Step by Step

Investing in index funds requires as much due diligence as investing in any single security. Here’s how to start.

Step 1: Determine Your Goals, Time Horizon, and Risk Tolerance

You may want to consider some of the basic tenets of investing as you select your index fund or funds. Will you be adding an index fund to an existing portfolio? Are you starting a taxable account? Is this for retirement?

Knowing your goals, your time frame, and how much risk you feel comfortable with will inform the funds you choose.

Step 2: Choose an Index Fund

The name of a particular index fund may catch your eye, but it’s essential to examine what’s inside an index fund’s portfolio before investing in it. Some index funds track a larger market, such as the S&P 500 or Russell 3000. Others track a more narrow or even niche sector of the market.

Determine what your short- and long-term goals are, and what markets you are interested in. You may want to start with a broad market index fund focused on equities or bonds. Or you may want to target certain sectors like technology, sustainability, or health care.

Step 3: Open a Brokerage Account

Open and fund a brokerage account or online brokerage account, and explore the index fund options available. Be sure to check potential fees and trading costs, as well as account minimums and cost per share. The price per share can vary widely.

Step 4: Buy Shares of an Index Fund

Once you’ve selected the fund(s) you want, execute the trade. Decide whether to create an automatic investment (e.g. every month) to support your goals.

Step 5: Consider Your Index Strategy

While it’s possible to simply add one index fund to your portfolio, it’s also possible to populate your entire portfolio using only index funds. Again, bear in mind the pros and cons of index strategies in light of your current and long-term goals for this investment, as well as your risk tolerance.

Potential Advantages of Index Investing

Index investing has a number of merits to consider. As noted above, index investing tends to be cost efficient, and may offer some portfolio diversification. In addition, investors may benefit from other aspects of passive strategies.

Easier to Manage

It might seem as if active investors could have a better chance at seeing significant returns versus index investors, but this isn’t necessarily the case. Day trading and timing the market can be difficult, and may result in big losses or underperformance. After all, few individual investors have the time to master the ins and outs of financial markets.

Index investing offers a lower-cost, lower-maintenance alternative. Because index funds simply track different benchmarks, individual investors don’t have to concern themselves with the success or failure of an active portfolio manager. Also, index investing doesn’t necessarily require a wealth manager or advisor — you can assemble a portfolio of index funds on your own.

Behavioral Guardrails

Investors who pursue active strategies may succumb to emotional impulses, like timing the market, which can impact their portfolio’s performance. Investing in index funds, which takes a more hands-off approach, may help restrain investor behavior — which may help portfolio returns over time.

According to the 30th annual Quantitative Analysis of Investor Behavior (QAIB) report by DALBAR, the market research firm, equity investors typically underperform the S&P 500 over time.

The QAIB report is based on data from Bloomberg Barclays indices, the Investment Company Institute (ICI), and Standard and Poor’s, as well as proprietary sources. The study examined mutual fund sales, redemptions, and exchanges each month, from Jan. 1, 1985 to December 31, 2023, in order to measure investor behavior, and then compared investor returns to a relevant set of indices.

In 2023, the average equity investor earned 5.50% less than the return of the S&P 500 for that year — a common pattern, as DALBAR research shows.

Potential Disadvantages of Index Investing

The potential upsides of passive strategies have to be weighed against the potential risks.

No Downside Protection

Index funds track the market they’re based on, whether that’s small-cap stocks or corporate bonds. So, if the market drops, so does the index fund that’s trying to replicate that market’s performance. There is no live manager who can try to offset losses; index investors have to ride out any volatility on their own.

No Choice About Investments

Individual investors themselves typically can’t change the securities in any mutual fund or ETF, whether passive or active. But whereas active strategies are based on trading securities within the fund, index funds rarely change up their portfolios — unless the index itself changes constituents (which does happen).

Index Investing: a Long-Term Strategy

Some investors may try to time the market: meaning, they try to buy high and sell low. Investing in index funds tends to work when you hold your money in the fund for a longer period of time; or if you rely on dollar-cost averaging.

Dollar-cost averaging is a method of investing the same amount consistently over time to take advantage of both high and low points in market prices. Generally speaking, this strategy tends to lower the average cost of your investments over time, which may support returns. But dollar-cost averaging can be inflexible, and limit an investor’s ability to respond to certain market conditions.

The Takeaway

Index investing is considered a passive strategy because index funds track a benchmark that reflects a certain part of the market: e.g. large-cap stocks or tech stocks or green bonds. Indexing is considered a low-cost way to gain broad market exposure. But index funds are not without risks, and it’s wise to consider index funds in light of your long-term goals.

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

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

FAQ

What happens when you invest in an index?

You can’t invest in an index, per se, but you can invest in a fund that tracks a specific market index. When you invest in an index fund, you’re investing in not one stock, but in numerous stocks (or other securities, like bonds) that match that benchmark. A large-cap index fund would track big U.S. companies; an emerging market index fund would track emerging markets.

How much do index funds cost?

Index funds tend to have a lower annual expense ratio than actively managed funds, often under 0.05%. That said, investment fees can vary widely, and it’s essential to check a fund’s all-in costs.

Are index funds safe?

Investing in the capital markets always entails risk — no investment is 100% safe. That said, investing in an index fund may involve less risk than owning a single stock, because the range of securities in the fund’s portfolio provide some diversification. That doesn’t mean you can’t lose money. Index funds are only as stable as their underlying index.

Is it smart to put all your money in an index fund?

It’s possible to use an index investing strategy for your entire portfolio. Whether this makes sense for you is determined by your goals and risk tolerance. Index investing offers some potential advantages in terms of cost efficiency and broader market exposure, but comes with the risk of being tied to market returns, with no ability to adjust the portfolio allocation.

Photo credit: iStock/PixelsEffect

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.

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

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.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
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.

SOIN-Q324-042

Oct

2024

What Are Stocks? Types, Benefits, Risks, Explained

By Inyoung Hwang | Growing Wealth, Investing, Terminology | No Comments

A stock represents a fraction of ownership in a company. Stockowners, also called shareholders, are entitled to a proportional cut of the company’s earnings and assets (and sometimes dividends).

That means that if you own stock in a company, as the company grows and expands you stand to earn a return on your investment as your shares gain value. But you also risk losing all or part of your investment if the company doesn’t prosper.

Key Points

• Stocks represent fractional ownership in a company, offering potential returns through appreciation and dividends.

• Stocks may be either common or preferred, with common stocks being the most common.

• Stock prices are typically determined by supply and demand, influenced by factors such as market conditions and company performance.

• Investing in stocks may help build wealth over time but also carries risks, including potential loss of investment.

• Diversifying a portfolio with various stocks and other assets can help mitigate investment risks.

What Are Stocks?

Stocks are shares of ownership in a company, and they are primarily bought and sold on publicly traded stock exchanges. That means you can open an online brokerage account and become a partial owner of whatever company you choose when you buy shares in that company.

How Do Stocks Work?

Stocks are a type of financial security, or asset, and they are traded on public exchanges. A stock is created when a company goes public, typically through an initial public offering (IPO), and issues shares that investors can buy and sell. Stocks are usually traded on exchanges, like the NYSE or Nasdaq.

Individual investors can open a brokerage account so they can buy and sell the stocks of their choosing on a given exchange. Exchanges list the purchase or bid price, as well as the selling or offer price.

The price of a stock is generally determined by supply and demand via an auction process, where buyers and sellers negotiate a price to make a trade. The buyer makes a bid price, while the seller has an ask price; when these two prices meet, a trade occurs.

The stock market consists of thousands or millions of trades daily, usually through online platforms and between investors and market makers. So, the auction process is not usually completed between investors directly. Rather, prices are determined through electronic trades, often conducted in fractions of a second.

When a stock’s prospects are high and it’s in high demand, the company’s share price could increase. In contrast, when investors sour on a company and want to sell en masse, the price of a stock will likely decline.

Types of Stocks

Stocks generally fit into two categories: common stock and preferred stock.

• Common stocks are the most common type of stock. Along with proportional ownership of the company, common stocks also give stockholders voting rights, allowing them to have voice when it comes to things like management elections or structural business changes. Most individual investors own common stock.

• Preferred stocks don’t come with voting rights, but they are given “preferred” status in that earnings are paid to preferred stockholders first. That makes this kind of stock a slightly less risky asset. If the company goes under and its assets are liquidated to repay investors, the preferred stockholders are less likely to lose everything, since they’ll be paid their share before common stockholders.
Most individual investors own common stock.

Benefits of Stocks

For investors, the primary benefit of owning stocks is that they present the opportunity to generate a return. While stocks do have risks, by and large, the stock market tends to rise over time, meaning that an investor owning a diversified stock portfolio could benefit from the market’s gains over time, too. Though there are no guarantees.

Further, stocks allow investors to diversify their portfolios to a good degree. Diversifying your portfolio — buying a variety of different stocks as well as other assets like bonds and cash equivalents — is one way to help mitigate the risks of investing.

Again, it’s important to understand that it is possible (and even likely) that you may lose money you have invested when a company’s stock or the market takes a downturn. It’s also important to remember that a certain amount of market fluctuation is absolutely normal — and, in fact, an indicator that the market is healthy and functioning.

Risks of Stocks

As discussed, owning or investing in stocks has its risks, too. Though buying stocks can sometimes result in a positive return, it’s also possible to see significant losses — or even to lose everything you’ve invested.

Stocks might lose value under the following circumstances (though there could be many others):

• The market as a whole experiences losses, due to wide-reaching occurrences like economic recessions, war, or political changes.

• The issuing company falters or goes under, in which case individual shares can drop in price and the company may forgo paying dividends. This is also known as “specific” or “unsystematic risk,” and may be slightly mitigated by having a diversified portfolio.

• A lackluster financial report, such as a quarterly earnings report showing declining sales, could lead to a stock’s value declining.

How to Buy Stocks

If you decide that investing in the stock market is the right move to help you reach your financial goals, you’ve got a variety of ways to get started. For most investors, there are two main account types through which they might buy stocks: tax-deferred retirement accounts and taxable brokerage accounts. There are also accounts that allow for automated investing.

Before you even sit down to choose your first stock (or learn to evaluate stocks in general), you’ll need to decide what kind of investment account you’ll use.

Tax-Deferred Accounts

These accounts are typically used for retirement-saving or planning purposes because they offer certain tax advantages to investors (along with some restrictions). Generally, investors contribute pre-tax money to these accounts — meaning contributions are tax deductible — and pay taxes when they withdraw funds in retirement.

• A 401(k): The 401(k) plan is commonly offered to W-2 employees as part of their benefits package. Contributions are taken directly from your paycheck, pre-tax, for this retirement account. In most cases, taxation is deferred until you take the funds out at retirement.

• IRAs: Individual retirement accounts, or IRAs, may be useful investment vehicles for the self-employed and others who don’t have access to an employer-sponsored retirement account. There are a number of different types of IRAs – two of the most common are the traditional and the Roth IRA, though typically only the traditional IRA is tax-deferred. Roth IRA account holders contribute after tax-dollars, which grow tax-free. Each type of IRA offers unique benefits and limitations.

Taxable Accounts

You can also open a brokerage account, which allows you to buy and sell assets pretty much at will. However, there are no tax deductions for investing through a brokerage account.

Also, the dividends you earn are subject to taxes in the year you earn them, and you may incur taxes when you sell an investment. Tax rates are usually lower for “long-term” assets, or those held for a year or longer; taxes on “short-term” capital gains (on securities held for less than a year) tend to be higher.

Different brokers assess different maintenance and trading fees, so it’s important to shop around for the most cost-effective option.

Automated Investment Options

If all that footwork sounds exhausting, that doesn’t necessarily mean investment isn’t right for you. You might consider an automated investing option (also known as a “robo-advisor”), which offer pre-built investment portfolios based on your goals and timelines. It’s similar to a pre-built house: there are some adjustments you can make, and different models to choose from, but your choices are limited.

That said, many investors choose automated options because the algorithm on the back-end takes care of most of the basic maintenance for your portfolio. Also, robo advisors can help you get started with a minimal amount of research and effort.

The programs may charge a small fee in exchange for creating, maintaining, and rebalancing a portfolio. Some may also allow you to choose specific stocks or themed ETFs, which can help you support companies or industries that share your values and vision.

Stock Terms to Get Familiar With

The stock market is chock full of unique jargon and terminology. As such, it can be helpful to learn some of the lingo so you better understand what’s going on, and what you’re doing.

Stocks and Shares

What is the difference between a stock vs. a share? A share of stock is the unit you purchase. “Stock” is a shorthand way of referring to the company that is selling its shares.

So: You might buy 100 shares of a company. If you owned 100 stocks, however, that means you own shares of 100 different companies.

Further, trading equities is the same as trading stocks. Equities or equity shares, is another way of talking about stocks as an asset class. You’re not likely to say you bought equity in a company. But your portfolio may have different asset classes that include equities, fixed income, commodities, and so on.

It’s also possible to own a fraction of a share of stock (called fractional shares), for those who can’t afford to buy a single share (which can happen with very large or popular companies).

Dividends

A dividend payment is a portion of a company’s earnings paid out to shareholders. For every share of stock an investor owns, they get paid an amount of the company’s profits. Companies can pay out dividends in cash, called a cash dividend, or additional stock, known as a stock dividend.

Growth stocks

Growth stocks are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price

Market capitalization

To figure out a company’s market cap, multiply the number of outstanding shares by the current price per share. A company with 10 million outstanding shares of stock selling at $30 per share, has a market cap of $300 million.

Spread

Spread is the difference between two financial measurements; in finance there are a variety of different spreads. When talking specifically about a stock spread, it is the difference between the bid price and the ask price — or the bid-ask spread.

The bid price is the highest price a buyer will pay to purchase one or more shares of a specific stock. The ask price is the lowest price at which a seller will agree to sell shares of that stock. The spread represents the difference between the bid price and the ask price.

Stock split

A company usually initiates a stock split when its stock price gets too high. A stock split lowers the price per share, but maintains the company’s market cap.

A 10-for-1 stock split of a stock selling for $1,000 per share, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100.

Value stock

Value stocks are shares of companies that have fallen out of favor and are valued less than their actual worth.

Volatility

Volatility in the stock market occurs when there are big swings in share prices, which is why volatility is often synonymous with risk for investors. While volatility usually describes significant declines in share prices, it can also describe price surges.

Thus, volatility in the equity market can also represent significant opportunities for investors. For instance, investors might take advantage of volatility to buy the dip, purchasing shares when prices are momentarily lower.

Should You Invest in Stocks?

When you consider the average return of the stock market over time, including boom and bust cycles, the stock market can offer investors the prospect of generating returns — but not a guarantee of such returns.

The difficulty with stocks is that they also come with a degree of risk; some are riskier than others. There are different ways to invest in stocks that can help mitigate some of that risk.

Ultimately, the choice to invest in stocks — and which specific stocks — will come down to the individual investor, their risk tolerance, and goals. It may be helpful to speak with a financial professional for guidance, too.

The Takeaway

Stocks, also known as “shares” or “equity investments,” are small pieces of ownership of a larger company. Stocks come in both common and preferred varieties, which offer stockholders different benefits and risks. Although relatively risky, stocks tend to offer better return-generating potential than other asset classes like bonds or long-term savings accounts.

Even taking major financial crises into consideration, the market’s overall trend over the last 100 years has been toward growth. But again, there are no guarantees, and you should always do your research before investing in a stock or other asset.

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

How do stocks make money?

Stocks can earn investors returns primarily through appreciation — meaning that they gain value, and investors sell them for more than they purchased them for — or by paying out dividends.

How are stock prices determined?

Stock prices are mostly determined by supply and demand among traders and investors. When a specific stock is in demand, values might rise — conversely, when many investors are selling a stock, its value might fall.

What is shareholder ownership?

Shareholder ownership is specifically based on your ownership of shares in the company. If you own 20% of a company’s shares, you don’t own 20% of the company — you own 20% of the shares.

SoFi Invest®

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

SOIN-Q324-046

Oct

2024

Call vs Put Option: The Differences

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Key Points

• Buying a call option gives an investor the right, but not the obligation, to buy shares of an underlying asset at a specific price and by a specific date, to potentially profit from a price increase.

• Buying a put option gives an investor the right, but not the obligation, to sell shares of an underlying asset at a specific price and by a specific date, to potentially profit from a price decrease.

• The buyer of a call or put option must pay the seller a premium for the options contract, assessed per share.

• The price at which an option can be exercised, as specified in the option contract, is called the strike price.

• Options trading involves risks, including potentially substantial losses.

While most investors are familiar with buying and selling shares of stock directly, investing in options is another way to put money behind stock price movements.

Options are a type of derivative contract that allows the investor to buy (or sell) a stock, or some other asset, at a certain price within a specific time period. The two basic types of options are known as “puts” and “calls.”

Options trading is a popular strategy for day traders, because it offers the potential to make profits within a shorter time frame, as opposed to owning shares of stock outright, and waiting for the price to move in the desired direction. Options trading can potentially generate returns, but it can also amplify losses, making it a risky strategy.

Overview: What Are Options?

In options trading, an option contract is a derivative instrument that’s based on an underlying asset: e.g., stocks, bonds, commodities, or other securities. Thus, the buyer of an options contract doesn’t purchase the asset directly, but a contract with an option to buy or sell that security. For example, with stocks, also called equity options, one contract represents 100 shares.

Options come in two flavors, as noted above: calls and puts. For the sake of simplicity, this article will refer primarily to stock or equity options.

Options Buyers vs. Options Sellers

An options buyer, also called the holder, has the right, but not the obligation, to buy or sell the underlying asset at the agreed-upon price (the strike price) by a specific date (the expiration). Buyers pay a premium for each option contract, which is assessed per share. If there is a $1 premium per share, at 100 shares, the total cost of the option is $100.

The potential upside for an options buyer could be unlimited, depending on their strategy. And since an options buyer is not obligated to exercise their option — meaning to actually buy or sell the underlying stock at the price agreed to in the option contract — the most they stand to lose is the premium paid for the option.

An options seller, also called the options writer, is on the other side of the trade. In this case, if the options holder exercises the contract, the option seller has an obligation to buy or sell the underlying asset at the strike price.

The potential upside for an options seller is the option’s premium. Their potential downside depends on whether they’re selling a put option or a call option. More on this below.

Trading options requires familiarity with options terminology, since these strategies can be complex and come with the potential risk of steep losses, depending on the strategy.

💡 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.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the
OCC Options Disclosure Document.

What Is a Call Option?

When purchased, a call option gives the options buyer the right, but not the obligation, to buy 100 shares of the underlying asset at the strike price, by the expiration of the contract.

Buying a call option can be appealing because it gives a buyer a way of profiting from a stock’s increase in price without having to pay what could be the current market price for 100 shares.

If the price of the underlying asset rises above the strike price, then the buyer may choose to exercise their option, paying less than what it’s worth on the market and potentially selling shares for a profit.

For a call option buyer, the profit is determined by the premium they pay and if, and by how much, the price of the security rises above the option’s strike price before it expires. The maximum potential upside is unlimited since, theoretically, the price of the underlying asset could continue to rise. The maximum potential downside is limited to the premium paid for the option.

Conversely, the seller, or writer, of the call option has the obligation to sell the underlying shares to the buyer, if the buyer exercises the option. The seller’s maximum potential gain is limited to the option’s premium. Their potential downside is unlimited, since they must sell shares at the option’s lower strike price, no matter how high the market price has risen.

Example of Buying a Call Option

If an investor buys an option with a strike price of $50 for a stock that’s currently worth $40, the option will be “out-of-the-money” until the stock rises to $50. If the premium is $1/share — meaning they only pay $1 up front — then the investor will only be risking $100, not $4,000.

If the stock is trading at $55 on or before the expiration date, it would make sense to “exercise” the option and buy the stock for $50, thus giving the investor shares with built-in profit thanks to the difference between the strike price of $50 and the value of $55. In this case the profit would be $4/ per share (or $400), minus the premium paid: a strike price of $50 gives the investor the right to buy 100 shares of a stock worth $55, with a premium of $1 per share.

On the other hand, if the stock has not risen enough in price, the investor can just let the option expire, having only lost the price of the premium, rather than being saddled with shares they can’t profit from.

Recommended: A Beginner’s Guide to Options Trading

What Is a Put Option?

A put option gives the investor buying the contract the right, but not the obligation, to sell the underlying security at the agreed-upon strike price, by the expiration date of the option.

If buying call options are a way to profit when the price of a stock or other underlying asset moves in the right direction, buying put options can be a way to profit from the fall of a stock’s price, without having to short the stock (i.e. borrow the shares and then buy them back at a lower price).

Purchasing a put option contract gives its buyer the right, but not the obligation, to sell shares at a certain price, at or by a specified time in the future. The key difference between buying a put vs. a call option is that the put option becomes increasingly valuable as the price of the underlying asset decreases. A put option buyer is hoping they can sell the underlying asset at a strike price that’s higher than the market price.

For the put option buyer, the maximum potential upside is the difference between the option’s higher strike price and the price at which the option is exercised (minus the premium), while the maximum potential downside is limited to the premium paid.

Again, the put option seller is on the other side of the trade, and is obligated to buy the shares from the put buyer, if the buyer decides to exercise the put option. The put option seller’s maximum upside is the option’s premium. Their potential downside extends to the difference between the option’s higher strike price and the lower market price at the time the option is exercised.

Example of Buying a Put Option

As an example, let’s say a stock is worth $50 today. If an investor thought the stock’s value could go down, they might buy a put option with a strike price of $40. Let’s say the premium for the option is $1, and they buy a contract that gives them the right to sell 100 shares at $40. The premium, then, is $100.

At the time the investor buys the put option, it’s out-of-the-money. If the price remains above $40 until it expires, the investor will not be able to exercise the option and they will lose the premium.

But if the stock has dropped from, say, $50 to $35, the option is in-the-money and if they were to exercise the option, they’d profit from being able to sell shares for $40 that are worth $35, pocketing $5 per share or $500, minus the $100 premium, leaving them with $400, minus any brokerage fees.

Risks of Options Trading

Option trading can be a useful way to manage risks in a volatile market and potentially profit from movements in stocks one doesn’t own. Again, an investor buying options only stands to lose the premium they pay for an options contract, though the cost of premiums can accrue if purchasing multiple options contracts over time.

However, an investor selling call options or put options, who is obligated to either buy or sell an option’s underlying assets per the terms of the options contract, could potentially see substantial losses. This is especially true if they don’t understand the potential downside to the trades they’re executing.

The Takeaway

Option trades may appeal to individual investors because they offer a way to potentially see a gain from movements in a stock price, without having to own the underlying shares. If an investor isn’t able to exercise the call or put option they purchased, they’ll lose the premium they paid for that contract. However, selling a call or put option can be high risk, potentially leading to significant losses.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button. Currently, investors can not sell options on SoFi Invest®.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

Explore user-friendly options trading with SoFi.

SoFi Invest®

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

SOIN-Q324-061

Oct

2024

How to Roll Over Your 401(k): Knowing Your Options

By MP Dunleavey | Budgeting & Goals, Building Your Career, Growing Wealth, invest, Investing, Life & Career | No Comments

It’s pretty easy to rollover your old 401(k) retirement savings to an individual retirement account (IRA), a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts. Given that a 401(k) rollover typically takes minimal time and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

Whether you’re starting a new job and need to roll over your 401(k), or are looking at what other options are available to you, here’s a rundown of what you need to know.

Key Points

• Rolling over a 401(k) to an IRA or new 401(k) is typically straightforward and your retirement funds will continue to have the opportunity to grow.

• Moving 401(k) funds to another 401(k) is often the simplest option and allows you to continue to have a higher contribution limit.

• Moving 401(k) funds to an IRA may provide more investment choices and control over those investments.

• Leaving a 401(k) with a former employer is an option but may involve additional fees and complications.

• Direct transfers are simpler and generally preferred over indirect transfers, which run the risk of incurring tax liabilities and penalties.

401(k) Rollover Options

For workers who have a 401(k) and are considering next steps for those retirement funds — such as rolling them to an IRA or another 401(k), here are some potential avenues.

1. Roll Over Money to a New 401(k) Plan

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

Direct Rollover

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Indirect Rollover

Another viable, but more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the expressed intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Pros and Cons of Rolling Over to a New 401(k)

With all of that in mind, rolling over your money into a new 401(k) has some pros and cons:

thumb_up

Pros:

• Often the simplest, easiest rollover option when available.

• Should not typically result in any tax liabilities or withholdings.

• Allows your investments to continue to grow (hopefully!), uninterrupted.

thumb_down

Cons:

• New employer may change certain aspects of your 401(k) plan.

• There may be higher associated fees or costs with your new plan.

• Indirect transfers may tie up some of your funds for tax purposes.

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.

2. Roll Over Your 401(k) to an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), you still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA.

The entire procedure essentially boils down to three steps:

1. Open a new IRA that will accept rollover funds.

2. Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3. Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Pros and Cons of Rolling Over to an IRA

This option also has its pros and cons, however.

thumb_up

Pros:

• IRAs may have more investment options available.

• You’ll have more control over how you allocate your investments.

• You could potentially reduce related expenses, depending on your specifications.

thumb_down

Cons:

• May require you to liquidate your holdings and reinvest them.

• Lower contribution limit compared to 401(k).

• May involve different or higher fees and additional costs.

• IRAs may provide less protection from creditor judgments.

• You’ll be subject to new distribution rules – namely, you’ll need to be 59 1/2 before withdrawing funds to avoid incurring penalties.

3. Leave Your 401(k) With Your Former Employer

Leaving your 401(k) be – or, with your former employer – is also an option.

If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

You’ll also want to dig into the details and determine how much control you’ll have over the account, and how much your former employer might.

You might also consider any additional fees you might end up paying if you leave your 401(k) where it is. Plus, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Pros and Cons of Leaving Your 401(k) Alone

thumb_up

Pros:

• It’s convenient – you don’t do anything at all, and your investments will remain where they are.

• You’ll have the same protections and fees that you previously had, and won’t need to get up to speed on the ins and outs of a new 401(k) plan.

thumb_down

Cons:

• If you have a new 401(k) at a new employer, you could end up with multiple accounts to juggle.

• You’ll no longer be able to contribute to the 401(k), and may not get regular updates about it.

4. Cash Out Your Old 401(k)

Cashing out, or liquidating your old 401(k) is another option. But there are some stipulations investors should be aware of.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k), depending on the specific type — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Pros and Cons of Cashing Out Your 401(k)

thumb_up

Pros:

• You’ll have immediate access to your funds to use as you like.

thumb_down

Cons:

• Early withdrawal penalties may apply, and there will likely be income tax liabilities.

• Liquidating your retirement account may hurt your chances of reaching your financial goals.

When Is a Good Time to Roll Over a 401(k)?

If there’s a good time to roll over your 401(k), it’s when you change jobs and have the chance to enroll in your new employer’s plan. But you can generally do a rollover any time.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out without your approval. Be sure to check the exact terms with your employer.

When you receive funds from a 401(k) or IRA account, such as with an indirect transfer, you’ll only have 60 days from the date you receive them to then roll them over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. In addition, only one rollover to or from the same IRA plan is allowed per year.

The Takeaway

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices. It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees for that account, and you will likely lose the ability to keep contributing to your account.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

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 grow your nest egg with a SoFi IRA.

FAQ

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account, then contact your old plan’s administrator, or your former HR department. They typically send funds to the new institution directly via an ACH transfer or a check.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

SoFi Invest®

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

SOIN-Q324-044

Oct

2024

How to Start Investing: A Beginner’s Guide

By Michael Flannelly | Growing Wealth, Investing | No Comments

Investing can be a great way to secure your financial future, but it can also feel like an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a bank account.

But it’s important to understand what you’re doing before you put your money into the nebulous financial markets. You’ll want to know the basics of investing, from the different types of investments to the various strategies you can use to try to build your wealth. With this knowledge, you should have a good idea of what sorts of investments are right for you, and how to get started.

Key Points

• Investing early can help you take advantage of compound returns, which may lead to financial growth over time.

• Having a diverse investment portfolio may help mitigate volatility and risk when certain companies or sectors aren’t performing well.

• Typically, your long-term financial goals, time horizon, and tolerance for risk help guide investment choices and portfolio asset allocations.

• Regular investments, even in small amounts, may help build wealth over time.

• Two common investment strategies for beginners include dollar-cost averaging and buy and hold.

• Investing involves significant risk, and investors should research their investments to be better prepared for potential losses.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps to get up and running — just remember to do your homework first!

1. Determine Your Investment Goals

You’ll want to do your best to establish your financial goals before you start investing. Since investments have such strong growth potential over time, many people use their portfolio’s gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals, because they’re not the same for everyone.

2. Choose an Investment Account

You will also need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, mutual funds, and other securities.

You can also utilize an employer-sponsored retirement plan, like a 401(k), or an individual retirement account (IRA) – such as a Roth IRA – to make your investments. One benefit of some retirement investment accounts is that they are tax-advantaged, meaning your investments can grow tax-free within the accounts. However, you may need to pay taxes when withdrawing money from the account.

💡 Need more help? Follow our guide on how to open a brokerage account.

3. Know Your Investment Options

There are numerous types of investment that you can explore and choose from. Here are some examples:

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly-traded company in units known as shares. Investing in stocks as a beginner — which may involve investing in and monitoring a small number of stable, low-risk companies — can be a good way to learn about the markets.

Investors might generate returns by investing in stocks through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may also pay dividends if it distributes part of its profits to its shareholders.

Note, however, that it’s possible that investors could lose their initial investment if a company’s share price hits zero. Investing in stocks carries some significant risks, and investors should be aware of those risks.

2. Bonds

Bonds are loans you make to a company or a government — federal or local — for a fixed period. In return for loaning them money, they promise to pay you, the investor, periodic interest and, eventually, your principal at the end of the period.

Bonds are typically backed by the full faith and credit of the government or large companies. They’re often considered less risky investments than stocks.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns.

Recommended: How to Buy Bonds: A Guide for Beginners

3. Mutual Funds and ETFs

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Exchange-traded funds (ETFs) are similar to mutual funds, but the main difference is that ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day.

Mutual funds and ETFs allow investors to diversify their holdings in one investment vehicle.

4. Real Estate

Real estate may be another type of investment, and many people initially invest in real estate by purchasing a home or a rental property.

If owning a home is out of reach for you, you can also invest in a real estate investment trust (REIT), or a company that operates in the real estate business. You can trade shares of a REIT on a stock exchange like you would a stock. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. If opting to invest in a REIT, there may be less responsibility and pressure on the shareholder when compared to purchasing an investment property.

4. Decide Your Investment Style

Each individual investor will have different goals and concerns as it relates to their portfolio. You may want to work with a financial professional to help you zero in on what type of investments and overall portfolio may give you the best shot at reaching your goals.

With that in mind, you’ll want to think about your style and investing habits, too. Consider your time frame, or time horizon – that is, how long you have to invest, and how long you might want to wait before selling your investments and reaping potential profits – assuming your investments accrued value.

Also think about your risk tolerance, or how much risk you’re willing to take with your portfolio. Riskier investments may generate larger returns over shorter periods of time, but they can also lead to significant losses. Again, this is something to think about when figuring out your specific investment style.

You’ll also want to think about how you allocate your investments, or the degree to which you diversify your portfolio. That means looking at the specific mix of investment types in your portfolio, and getting a sense of the risks and potential returns each brings to the fold.

Quick Tips for Investing Beginners

An investment strategy is a plan that outlines how you will invest your money. As noted, an ideal strategy should consider your financial goals, risk tolerance, and time horizon. Here are three recommended tips and strategies for beginner investors.

• Consider a buy-and-hold approach: Investors practicing buy and hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which may boost overall portfolio returns.

• Utilize dollar-cost averaging: Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price. A dollar-cost average strategy can help individuals access a lower average share price and help them avoid emotional investing.

• Stay stoic: Remember to keep your emotions in check when investing. You may feel panicked every time the market dips, the economy slows, or a friend tells you that you need to shift your portfolio — it may be wise to stick to your strategy, keep your goals in mind, and let the chips fall where they may. There are no guarantees in investing, but don’t let the whims of the market give you whiplash.

Remember the Risks

It bears repeating: Investing involves risk. There are all sorts of risks that investors assume when they put their money in the markets, and each individual investment may have different types of associated risks. Some investment types are significantly riskier than others, too.

The important thing for beginner investors to keep in mind is that there are no guarantees when investing, and that there’s a chance they could see negative returns, or lose all of their initial investment.

The Takeaway

For beginners, investing can seem complicated and intimidating — in many ways, it is. But if you take some simple initial steps to familiarize yourself with the markets, investing tools, and types of investments — and pair them with a sound strategy – you should set yourself up to be more confident and comfortable when you start investing.

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

How much money do you need to start investing?

It’s possible to start investing with very little money. Some brokerages allow investors to open accounts with as little as $5, in some cases, depending on what types of investments you’re interested in buying. In some cases, all you need is $5 to start investing, but generally, the more you have, the better.

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.

SoFi Invest®

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

SOIN-Q324-041

What Are Index Funds, and How to Invest in Them

What Are Index Funds?

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

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

How Do Index Funds Work?

Why Index Funds Typically Cost Less

How an Index Is Weighted

Well-Known Big Market Indexes

Top 10 Equity Index Funds

How to Invest in Index Funds: Step by Step

Step 1: Determine Your Goals, Time Horizon, and Risk Tolerance

Step 2: Choose an Index Fund

Step 3: Open a Brokerage Account

Step 4: Buy Shares of an Index Fund

Step 5: Consider Your Index Strategy

Potential Advantages of Index Investing

Easier to Manage

Behavioral Guardrails

Potential Disadvantages of Index Investing

No Downside Protection

No Choice About Investments

Index Investing: a Long-Term Strategy

The Takeaway

FAQ

What happens when you invest in an index?

How much do index funds cost?

Are index funds safe?

Is it smart to put all your money in an index fund?

What Are Stocks? Types, Benefits, Risks, Explained

What Are Stocks?

How Do Stocks Work?

Types of Stocks

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

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Benefits of Stocks

Risks of Stocks

How to Buy Stocks

Tax-Deferred Accounts

Taxable Accounts

Automated Investment Options

Stock Terms to Get Familiar With

Stocks and Shares

Dividends

Growth stocks

Market capitalization

Spread

Stock split

Value stock

Volatility

Should You Invest in Stocks?

The Takeaway

FAQ

How do stocks make money?

How are stock prices determined?

What is shareholder ownership?

Call vs Put Option: The Differences

Overview: What Are Options?

Options Buyers vs. Options Sellers

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

What Is a Call Option?

Example of Buying a Call Option

What Is a Put Option?

Example of Buying a Put Option

Risks of Options Trading

The Takeaway

How to Roll Over Your 401(k): Knowing Your Options

401(k) Rollover Options

1. Roll Over Money to a New 401(k) Plan

Direct Rollover

Indirect Rollover

Pros and Cons of Rolling Over to a New 401(k)

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

2. Roll Over Your 401(k) to an IRA

Pros and Cons of Rolling Over to an IRA

3. Leave Your 401(k) With Your Former Employer

Pros and Cons of Leaving Your 401(k) Alone

4. Cash Out Your Old 401(k)

Pros and Cons of Cashing Out Your 401(k)

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Student Loan
Refinancing

Personal
Loans

Online
Investments