Investing Archives | Page 42 of 194

Jan

2025

How Do Interest Rates Affect the US Stock Market?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

The impact of interest rates and their fluctuations are a fact of life for investors, and there are several ways interest rates can affect the stock market. For example, higher interest rates raise the cost of borrowing for consumers and corporations, which can ultimately affect public companies’ earnings, and potentially, stock prices. The reality for stock market investors is that even minor adjustments to interest rates can significantly impact their portfolios.

But the effects interest rates may have on stock prices goes much deeper than that. Here’s how rising or falling interest rates could affect stocks, stock prices, and the stock markets.

Key Points

• Interest rates affect stock markets by influencing borrowing costs for consumers and corporations, which can impact public companies’ earnings and stock prices.

• Higher interest rates increase borrowing costs, potentially slowing the economy and reducing stock prices.

• Lower interest rates can boost stock markets by making borrowing cheaper, encouraging spending, and increasing company revenues.

• Changes in interest rates can shift investor preferences between stocks and bonds, depending on the yield environment.

• Diversifying portfolios and monitoring Federal Reserve policies can help investors manage the impact of interest rate fluctuations.

What’s the Fed Fund Rate?

While many market factors come into play to determine interest rates, the Federal Reserve, or the U.S. central bank, influences rates and sets the fed funds rate. The fed funds rate is the rate that financial institutions trade federal funds, which has a downstream effect on interest rates of all types, from mortgage rates to the effective interest rate you’ll pay on your credit card balance.

Zooming out even more to try and get more context, the Fed has a “dual mandate”:

• Create the best environment for maximum employment.

• Stabilize prices, or keep inflation in check.

One of the tools the Fed has in its toolkit to try to achieve these twin goals is controlling short-term interest rates — or, the Fed Funds rate. This is done by the Federal Open Market Committee (FOMC) — made up of 12 Fed officials — which meets eight times a year to set the federal funds rate, or the target interest rate.

The federal funds rate is the rate banks charge each other to lend funds overnight.

Other factors influence general interest rates, like consumers’ demand for Treasuries, mortgages, and other loans. But when the Fed adjusts the federal funds rate, it has sweeping ripple effects on the economy by broadly changing the cost of borrowing.

When Rates Go Up, What Happens to the Stock Market?

The Fed may increase interest rates in response to some macroeconomic trend, such as rising prices (or inflation). That was the case in 2022 and 2023, when the Fed increased interest rates in response to rising inflation. That’s generally a sign that the economy is a bit too hot, or growing too fast.

If the U.S. economy is growing too fast, the Fed can hike interest rates to get a grip on rising inflation – again, which is exactly what happened in 2022 and 2023 – which effectively makes goods and services more expensive. This is to make borrowing and getting credit more expensive, which curbs consumer and business spending, reduces widespread prices, and hopefully gets the economy back on an even keel.

Another example: In the early 1980s, Fed Chair Paul Volcker jacked up interest rates to above 20% in order to tame runaway inflation; prices were rising by more than 10% annually during the period. Volcker’s interest rate moves were a big reason why the average 30-year mortgage rate was above 18% in 1981.

As for how that affects the stock market? Generally, it leads to a decline, though not always. Since costs go up after a rate hike, earnings can fall, and investor sentiment can take a hit, too.

When Rates Go Down, What Happens to the Stock Market?

Conversely, when rates go down, the market may rally, as the Fed is signaling that it wants to give the economy a shot in the arm. That means borrowing costs could decline, more people could potentially be spending money, and businesses could drive more revenue and profits. Those are all things investors want to see and hear, so they may increase demand for stocks, lifting the market overall.

Again, the Fed might do this if it thinks the economy is too slow or contracting, and wants to boost activity. This move, known as loose monetary policy, is one way the Fed attempts to hit the mandate of creating the best environment for maximum employment.

In short: Lower interest rates make it easier for consumers, businesses, and other economic participants to borrow money and get easier access to credit. When credit flows, Americans are more likely to spend money, create more jobs, and more money enters the financial markets.

Recent history bears this strategy out. In 2008, when the global economy cratered, and both employment and spending were in free fall, the Fed slashed rates to near zero percent to make credit easier to get and restore confidence among consumers and businesses that the economy would stabilize. The Fed again cut interest rates in March 2020 to near zero percent to stimulate the economy during the initial waves of shutdowns due to the coronavirus pandemic.

Do Rate Changes Impact the Bond Market?

Generally, higher interest rates tend to be a headwind for stocks, partly because investors will prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

But lower rates may make the stock market more attractive to investors looking to maximize growth. Because investors cannot get an attractive yield from lower-risk bonds in a low rate environment, they will put money into higher-risk assets like growth stocks to seek an ideal return. So, there tends to be an inverse relationship between stocks and bonds depending on the prevailing interest rate environment.

Other Areas Affected by Rate Changes

While the stock market may be affected by rate changes, so are consumers and businesses.

Consumers

In a period of high interest rates, publicly traded companies face a potential indirect threat to revenues, which could hurt stock prices.

That’s due to the reduced levels of disposable income in a high-rate environment. Higher rates make it more expensive for consumers to borrow money with credit cards, mortgages, or personal or small-business loans.

Consumers’ tighter grip on their pocketbooks may negatively affect companies, who find it more challenging to sell their products and services. With lower revenues, companies can’t reinvest in the company and may experience reduced earnings.

Companies

Businesses that are publicly traded can experience significant volatility depending on interest rate fluctuations. For instance, changes in interest rates can impact companies through bank loan availability.

When rates rise, companies may find it more difficult to borrow money, as higher interest rates make bank loans more expensive. As companies require capital to keep the lights on and products rolling, higher rates may slow capital borrowing, which can negatively impact productivity, cut revenues, and curb stock growth.

Correspondingly, companies can borrow money more freely in a lower interest rate environment, which puts them in a better position to raise capital, improve company profitability, and attract investors to buy their stock.

Protecting Your Investments From Higher Rates

There are strategies you can use to protect your portfolio when interest rates change.

• Monitor the Federal Reserve and its rates policy. The FOMC meets eight times a year to discuss economic policy strategy. Even if they don’t result in an interest rate change, announcements from the meetings can significantly impact the stock market.

• Diversify your portfolio. Investors can try to diversify their portfolio up front. A portfolio with a mix of investments like stocks, bonds, real estate, commodities, and cash, for example, may be less sensitive to interest rate moves, thus minimizing the impact of any volatile interest rate fluctuations.

• Look into TIPS. Investing in Treasury Inflation Protected Securities (TIPS) may help fortify a portfolio against interest rate swings. TIPS are a form of Treasury bonds that are indexed to inflation. As inflation rises, TIPS tend to rise. When deflation is in play, TIPS are more likely to decrease.

The Takeaway

Changes in interest rates can have far-reaching effects on the stock market. In general, higher interest rates tend to have a dampening impact on stocks, while lower interest rates tend to boost market prices. Higher interest rates effectively mean higher borrowing costs that can slow down the economy and companies’ balance sheets and drag down stock prices. Additionally, higher interest rates can boost the appeal of bonds relative to equities, which also acts as a drag on stocks.

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FAQ

How do rate changes affect stock prices?

Rate changes can and do affect stock prices. Typically, when rates rise, the market falls, and conversely, when rates fall, the market rises.

What sectors are impacted the most when rates change?

The financial services industry is one of the most heavily impacted industries when it comes to rate changes, but so are several others, including retail and manufacturing.

How do interest rates affect inflation?

Higher interest rates may serve to lower inflation by reducing overall demand in the economy. Higher rates means higher prices, and fewer people will make purchases accordingly, which should have a downstream effect of lowering prices in response to lower demand.

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Jan

2025

What Is a Robo Advisor?

By Susan Guillory | Investing | Comments Off

Key Points

• A robo advisor is a computer algorithm that helps manage investments by selecting and recommending portfolios based on an individual’s financial goals, risk preferences, and time horizon.

• Robo advisors offer cost efficiency, potential performance, and the ability to control for human error in investment decisions.

• They typically charge management fees ranging from 0.25% to 0.50% of assets under management, making them a lower-cost alternative to traditional financial advisors.

• Robo advisors primarily use low-cost ETFs and index funds to build portfolios, offering a range of investment options for different goals and risk tolerances.

• While robo advisors provide convenience and cost efficiency, they may have limitations in terms of investment choices and flexibility compared to self-directed or professionally managed portfolios.

What Is a Robo Advisor?

Despite the name, a robo advisor is neither a robot nor an actual financial advisor, but a sophisticated computer algorithm that picks investments for you and helps you manage them over time.

Typically, a robo advisor provides you with a questionnaire so you can set some parameters, like your financial goals, risk preferences, and time horizon. The algorithm then recommends an automated portfolio that aligns with your responses. You can use a robo investing as you would any account — for retirement, as a taxable investment account, or even for your emergency fund — and you typically invest using automatic deposits or contributions.

Based on your goals, the robo advisor automatically rebalances the portfolio to stay within your chosen allocation. And some robo advisors may offer services like tax-loss harvesting. It can be a surprisingly easy yet sophisticated way to set up a portfolio, but it helps to know some of the details of robo investing in order to decide how a robo advisor might fit into your plan.

Understanding Robo Advisors

The history of robo investing or automated investing is an interesting one. While traditional (human) advisors have long worked with investors to help them create financial plans and manage their portfolios and other financial accounts, that system hasn’t worked for everyone.

First of all, paying a live financial advisor to manage your money can be expensive, and sometimes the account minimums required to work with a professional advisor can be high as well. Also, in the last few decades, it has become evident that technological advances in financial services might benefit investors, but couldn’t afford (or didn’t want) to work with a live advisor.

A Brief History of Automated Investing

Lifecycle funds and target date funds were among the first types of accounts to harness the power of technology to create automated portfolios for investors. These were, and still are, designed primarily for retirement savings.

While there’s some variation in how target date and similar funds work, the basic idea is that an investor can pick a fund that’s geared toward a target date for their retirement (e.g. 2030, 2040, 2050, etc.). The fund’s portfolio is pre-designed. It provides a mix of investments that starts out more aggressive and gradually becomes more conservative as the target date approaches.

To accomplish this gradual shift, most funds use an automated portfolio management function called a glide path. (Some college savings plans use a similar automated glide path function.) And some funds might have some input from a live portfolio manager.

The Evolution of Robo Investing

How do robo advisors work, and how are they different? Robo investing evolved partly as a way to improve on target and lifecycle funds, and offer investors an automated portfolio that they could adjust themselves, without the predetermined glide path. Target funds, sometimes called “set it and forget it” funds, generally don’t give investors the option of adjusting the underlying assets in the fund.

Robo advisors — which build an investor’s portfolio with low-cost index and exchange-traded funds or ETFs — can also be used more easily for a range of shorter- and longer-term investing goals, not only retirement.

In addition, robo advisor portfolios are designed to align with a range of investor goals, not only a target retirement date. For example, an investor with a very aggressive — or very conservative — outlook could select an automated portfolio that reflects their risk tolerance.

Benefits of Using Robo-Advisors

Why consider robo investing? It turns out there are quite a few benefits, including cost efficiency, potential performance, time, and helping control for human error.

Cost

When you remove the human part of the investment equation, the cost to invest with a robo advisor is often lower. That opens new possibilities for those who might have been turned off by the price, or higher account minimums, that come when you work with a professional investment advisor.

Encouraging long-term financial plans and investment is important because many people may be financially unprepared for the future. The median retirement account value in the U.S. for people ages 35 to 44 is about $65,000. For those under 35, the median retirement savings amount is just $13,000, according to 2020 Federal Reserve data.

Performance

What’s more, many robo advisors offer low or no investment minimums, which can help some investors get started sooner — another potential upside, given the time value of money in the investing process.

Performance is also worth considering, as the portfolio returns of an automated investment account can be comparable to what you’d get with a live investment advisor. This is due to the lower cost of robo investing, in many cases, since lower investment costs help improve overall returns.

💡 Recommended: How to Track Robo-Advisor Returns

Another benefit is that you aren’t limited to a human advisor’s work schedule. Robo advisors are working for you 24/7, and you may have the flexibility to make changes to your investments.

Correcting for Human Error

Another key benefit of robo advisors is that they can help control human behavior. People — whether brand-new investors or seasoned professionals — are prone to make investment decisions based on emotions.

The awareness of these cognitive and behavioral biases, as they’re called, has fueled the thriving field of behavioral research, which examines how fear (or excitement) can inspire poor investment choices.

The understanding of these human impulses has also helped shape robo advisor technology. Because the portfolio is managed by the underlying technology, that can help people stick to their plan, and make logical financial choices rather than emotional ones.

Automated Tax-Loss Harvesting

Automated tax-loss harvesting is often considered a valuable tool for tax-efficient investing because it involves using an algorithm — rather than a human advisor — to sell securities at a loss so as to offset capital gains and potentially lower an investor’s tax bill. Some robo advisors offer this service as part of their automated portfolio structure (SoFi’s automated platform does not).

Ordinary tax-loss harvesting uses the same principle, but the process is complicated and an advisor might only harvest losses once or twice a year versus automated tax-loss harvesting which can be done more frequently.

Limitations of Robo Advisors

While it’s true that automated portfolios offer a seemingly streamlined and often lower-cost approach to investing, there is more to the story.

Fewer Choices

Choosing a robo platform does give you some control over your investments, but your choices are quite limited compared with a portfolio you set up yourself or with a professional.

The investments in an automated portfolio are typically low cost ETFs available through that robo platform. When you build your own portfolio through a brokerage, for example, you typically have a greater universe of choices, including index mutual funds, actively managed funds, individual stocks, and more.

Less Control

Automated portfolios are managed, essentially, by complex technological calculations that occur automatically behind the scenes. For that reason, it’s difficult for an individual investor to step in if they have a sudden life event or change of plan.

In that sense, if you want to have more flexibility or control over your investments, a robo platform may not be a good fit.

How Robo Advisors Make Money

Part of answering the question, “how do robo advisors work,” requires looking at their cost structure. Given the number of different robo advisors on the market today, those costs can vary.

Some robo advisors charge fees on a per-trade basis, while some charge a percentage of the value of your portfolio. Others may charge a flat monthly fee, particularly if an investor’s balance is under a certain threshold.

Many robo advisors state their cost structure clearly up front, but not all do. In either case, it’s wise to double check what you’re paying. Most robo advisors still allow you to ask basic questions of a live professional, if you need to.

How Much Do Robo Advisors Cost?

All investments come with their respective costs, and it’s important for investors to look beneath the hood, so to say, and know what the fees are.

While traditional advisors typically charge a fee of about 1% of assets under management, robo advisors’ management fees generally range from 0.25% to 0.50% of your assets. So if you have a $10,000 account balance, the annual fee to use the robo advisor would be about $25. That said, fees vary and there are frequently more than one type of cost associated with any portfolio.

For example: Although robo advisors do use low-cost index funds and exchange-traded funds, the cost of those funds is passed onto the investor as well, in addition to the robo advisor’s basic management fee. Generally, all investment costs are deducted automatically from your account, which is why you may have to look carefully to gauge what you’re really paying.

The fees charged by robo-advisors are important to pay attention to even if they seem low. Consider that a 0.25% fee would reduce an annual return of 7% to 6.75%. This reduction may not seem like much, but over the course of time, these costs can add up.

💡 Recommended: What Are the Different Types of Investment Fees?

So it bears repeating: Always weigh the fee options of different robo-advisors to make sure that what you’re paying is worth it to you. For example, a slightly higher fee might also give you access to a human financial advisor, who could offer you investment advice. If that kind of service is important to you, it might be worth paying a little bit extra.

Want to start investing?

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Choosing the Right Robo Advisor

In addition to the fees you’ll pay, there are a number of other factors worth considering when you’re deciding whether a robo-advisor is right for you, including:

Types of Investments

Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.

ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.

Mutual funds also include dozens or even hundreds of securities, but they only trade once per day. Mutual funds can be passively or actively managed. For example, index funds are mutual funds that hold a mix of investments and track an index.

Just as you would examine an ETF or mutual fund to see what investments it holds, when choosing a robo advisor, make sure that it offers the types of investments that you want to include in your portfolio.

The main difference, of course, is that a mutual fund or index fund generally invests in only one asset class — like stocks or bonds or commodities. A robo advisor can include a variety of asset types, to create a portfolio that’s allocated or aligned with your goals.

Account Type

You’ll typically be offered two broad types of accounts when you consider a robo advisor: a retirement account or a regular taxable investment account. A standard investment account has no limits on the amount of money you can invest.

Retirement accounts, such as traditional IRA and Roth IRAs, offer specific tax advantages, but these come with contribution limits. The 2023 annual contribution limit for a traditional or Roth IRA is $6,500, with a $1,000 “catch-up” provision for those 50 and older.

Be clear about your goals when you choose your account type. If you’re saving for retirement, the tax advantages of retirement accounts are important to consider.

But if you’ll need access to the money sooner because you’re saving for another goal, consider a regular taxable account. You don’t want to face the early withdrawal penalties and tax implications that can come with dipping into retirement accounts too early.

💡 For more information on withdrawal penalties, check out our guides on 401(k) Early Withdrawal and IRA Withdrawal Rules.

Portfolio Offerings

Robo advisors usually offer a fixed number of investment options or pre-set portfolio allocations — sort of like a prix-fixe menu at a restaurant. The robo advisor will typically have you fill out a questionnaire, and then recommend one of these portfolios based on your goals, comfort with risk, and time horizon.

In some cases the questionnaire doesn’t lock you into a portfolio, so you might be able to override the default selection to create a portfolio of your choice. If you don’t see an option you want, it’s important to ask.

Additional Perks of Automated Investing

Once you’ve signed up for an account with a robo advisor, you will typically be offered a range of automated services.

Rebalancing

Based on the process described above, let’s assume you were placed in an allocation that consists of a mix of 60% stocks and 40% bonds. Over time this allocation will likely shift a bit as investments fluctuate based on the movement of the market.

For example, the stock market may grow faster during a particular period of time than the rest of your portfolio. Rebalancing your portfolio helps you buy and sell assets to realign the investments inside your portfolio to the desired allocation.

Recurring Contributions

Many robo-advisors make it easy to establish sound financial habits such as ongoing saving by establishing recurring contributions. A common example of recurring contributions is in an employer sponsored plan such as a 401(k).

The value of recurring contributions is that they automate the tough decision of saving for the future. This strategy is not just limited to your 401(k), and might help you be more disciplined with your other accounts.

Access to Humans

Some robo-advisors combine the cost-effectiveness of technology with the expertise of humans by offering access to financial professionals. This hybrid approach can enable investors to ask questions, discuss goals, and plan for the future. Robo-advisors might charge for this service, but it tends to be optional if it is offered.

Robo Advisor Growth & Growing Pains

Since their inception in 2008-2009, robo advisors have gained in popularity, with roughly $800 billion under management today. Still, the number of people who choose automated platforms is a small fraction of the overall investor population — about 1%.

Generally, investors who choose robo advisors tend to tilt younger, with some robo companies reporting that their average investor is under 40.

Despite the steady growth of this market, robo advisors have seen some growing pains. In a couple of cases, the use of cash deposits by the investment company warranted SEC intervention, and companies have also been charged with misleading investors as to the exact nature of the investments offered by the robo platform.

The Takeaway

There’s no denying that the convenience and cost efficiency of robo advisors has generated a lot of interest from investors. Robo advisors can offer investors a streamlined experience, and they can also be a low-cost way to set up an investment portfolio to help investors reach their goals.

As noted above, however, there are potential drawbacks to the one-size-fits-all approach of robo-advisors. These automated plans may not be useful for investors with more complicated situations (e.g., if you’re going through a divorce, navigating multi-generational wealth, or seeking answers to nuanced questions like the timing of your retirement versus saving for college).

Cases like these, and others, may require a more hands-on approach or a strategy tailored to an individual’s unique circumstances or life events, which is not what a robo-advisor is designed to do.

That said, robo advisors can be an effective financial tool, especially for those who are just starting to invest, and who don’t yet have complicated investment needs. For example, younger investors who are still accumulating assets may find that robo-advisors are a good fit. The low cost of robo-advising has lowered the barrier to entry for many investors, giving them access to tools once reserved for higher-net-worth individuals.

Ready to get started investing for your goals? Check out SoFi Invest® automated investing platform. We’ll help you select and manage a portfolio without charging a management fee.

Open an automated investing account and start investing for your future with as little as $50.

About the author

Susan Guillory

Susan Guillory is an accomplished writer and author specializing in personal finance, business, lending, and credit cards. Read full bio.

You may also be interested in:

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Jan

2025

What Is an IPO?

By Inyoung Hwang | Investing | Comments Off

Table of Contents

IPO Definition
How Do IPOs Work?
Why Does A Company IPO?
Pros and Cons of an IPO
Participating in an IPO
Things to Know Before Investing in an IPO

What Is an IPO?

An IPO, or initial public offering, refers to privately owned companies selling shares of the business to the general public for the first time.

“Going public” has benefits: It can boost a company’s profile, bring prestige to the management team, and raise cash that can be used for expanding the business.

But there are downsides to going public as well. The IPO process can be costly and time-consuming, and subject the business to a high level of scrutiny.

Key Points

• An IPO, or initial public offering, is when a privately owned company sells shares of the business to the general public for the first time.

• Companies typically hire investment bankers and lawyers to help them with the IPO process.

• Reasons for a company IPO include raising capital, providing an exit opportunity for early stakeholders, and gaining more liquidity and publicity.

• Pros of an IPO include an opportunity to raise capital, future access to capital, increased liquidity, and exposure.

• Cons of an IPO include costs and time, disclosure obligations, liability, and a loss of managerial flexibility.

How Do IPOs Work?

To have an IPO, a company must file a prospectus with the SEC. The company will use the prospectus to solicit investors, and it includes key information like the terms of the securities offered and the business’s overall financial condition.

Behind the scenes, companies typically hire investment bankers and lawyers to help them with the IPO process. The investment bankers act as underwriters, or buyers of the shares from the company before transferring them to the public market. The underwriters at the investment bank help the company determine the offering price, the number of shares that will be offered, and other relevant details.

The company will also apply to list their stock on one of the different stock exchanges, like the New York Stock Exchange or Nasdaq Stock Exchange.

IPO Price vs Opening Price

The IPO price is the price at which shares of a company are set before they are sold on a stock exchange. As soon as markets open and the stock is actively traded, that price begins to go up or down depending on consumer demand, which is known as the opening price.

💡 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.

History of IPOs

While there are some indications that shares of businesses were traded during the Roman Republic, the first modern IPO is widely considered to have been offered by the Dutch East India Company in the early 1600s. In general, the Dutch are credited with inventing the stock exchange, with shares of the Dutch East India Company being the sole company trading in Amsterdam for many years.

In the U.S., Bank of North America conducted the first American IPO, which likely took place in 1783. A report claims investors hiding cash in carriages evaded British soldiers to buy shares of the first American IPO.

Henry Goldman led investment bank Goldman Sachs’ first IPO — United Cigar Manufacturers Co. — in 1906, pioneering a new way of valuing companies. A challenge for retail companies at the time was that they lacked hard assets, as other big businesses like railroads had at the time. Goldman pushed to value companies based on their income or earnings, which remains a key part of IPO valuations today.

Why Does A Company IPO, or “Go Public”?

Defining what an IPO is doesn’t explain why a company “goes public” — an important detail in the process. Because an IPO requires a significant amount of time and resources, a business probably has good reason to go through the trouble.

Raising Money

A common reason is to raise capital (money) for possible expansion. Prior to an IPO, a private company may procure funding through angel investors, venture capitalists, private investors, and so on.

A company may reach a size where it is no longer able to procure enough capital from these sources to fund further expansion. Offering sales of stock to the public may allow a company to access this rapid influx of investment capital.

💡 Quick Tip: Keen to invest in an IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

Exit Opportunity

An IPO may be a way for early stakeholders, such as angel investors and venture-capital firms, to cash out of their holdings. Venture-capital firms in particular have their own investors that need to provide returns for. IPOs are a way for them to transfer their share of a private company by selling their equity to public investors.

More Liquidity

Venture-capital firms and angel investors aren’t the only ones who may be seeking more liquidity for stakes in companies. Liquidity refers to the ease with which an investor can sell an asset. Stocks tend to be much more liquid assets than private-company stakes.

Hence, employees with equity options can also use IPOs as a way to gain more liquidity for their holdings, although they are usually subject to lock-up periods.

Publicity

From the roadshow that investment banks hold to inform potential investors about the company to when executives may ring the opening bell at a stock exchange, an IPO can bring out greater publicity for a company.

Being listed as a public company also exposes a business to a wider variety of investors, allowing the business to obtain more name recognition.

Pros and Cons of an IPO

As with any business decision, there are downsides and risks to going public that should be considered in conjunction with the potential benefits. Here’s a look at a few:

Pros	Cons
An IPO may allow a company to raise capital on a scale otherwise unavailable to it. It can use these funds to expand the business, build infrastructure, and to fund research and development.	Public companies must keep the public informed about their business operations and finance. They are subject to a host of filing requirements from the SEC, from initial disclosure obligations to quarterly and annual financial reports.
After an IPO, companies can issue more stock, which can help with future efforts to raise capital.	Companies and company leaders may be liable if legal obligations like quarterly and annual filings aren’t met.
IPOs increase liquidity, which allows business owners and employees to more easily exercise stock options or sell shares.	Public companies must consider the concerns and opinions of a potentially vast pool of investors. Private companies on the other hand, often answer to only a small group of owners and investors.
Public companies may use stock as payment when acquiring or merging with other businesses.	Public companies are under more scrutiny than their private counterparts, as they’re forced to disclose information about their business operations.
IPOs can generate a lot of publicity.	Going public is time consuming and expensive.

Participating in an IPO: 3 Steps to Buying IPO Stock

steps to buying IPO stock

1. Read the Prospectus

IPOs can be hard to analyze: It’s difficult to learn much about a company going public for the first time. There’s not a lot of information floating around beforehand since when companies are private, they don’t really have to disclose any earnings with the SEC. Before an IPO, you can look at two documents to get information about the company: Form S-1 and the red herring prospectus.

2. Find Brokerage

If you want to purchase shares of a stock in an IPO, you’ll most commonly have to go through a broker. Some firms also let you buy shares at the offering price as opposed to the trading price once the stock is on the public market.

3. Request Shares

Once a brokerage account is set up, you can let your broker know electronically or over the phone how many shares of what stock you’d like to buy and what order type. The broker will execute the trade for you, usually for a fee, although many online brokerages now offer zero commission trading.

Who Can Buy IPO Stock?

Not everyone has the ability to buy shares at the IPO price. When a company wants to go public, they typically hire an underwriter — an investment bank — that structures the IPO and drums up interest among investors. The underwriter acquires shares of the company and sets a price for them based on how much money the company wants to raise and how much demand they think there is for the stock.

The underwriter will likely offer IPO shares to its institutional investors, and it may reserve some for other people close to the company. The company wants these initial shareholders to remain invested for the long-term and tries to avoid allocating to those who may want to sell right after a first-day pop in the share price.

Investment banks go through a relatively complicated process in part to help them avoid some of the risks associated with a company going public for the first time. It’s possible that the IPO could become oversubscribed, e.g when there are more buyers lined up for the stock at the IPO price than there are actual shares.

When Can You Sell IPO Stock?

Shortly after a company’s IPO there may be a period in which its stock price experiences a downturn as a result of the lock-up period ending.

The IPO lock-up period is a restriction placed upon investors who acquired company stock before it went public that keeps them from selling their shares for a certain period of time after the IPO. The lock-up period typically ranges from 90 to 180 days. It’s meant to prevent too many shares in the early days of the IPO from flooding the market and driving prices down.

However, once the period is over, it can be a bit of a free-for-all as early investors cash in on their stocks. It may be worth waiting for this period to pass before buying shares in a newly public company.

Things to Know Before Investing in an IPO

An IPO, by definition, gives the investing public an opportunity to own the stock of a newly public company. However, the SEC warns that IPOs can be risky and speculative investments.

IPO Market Price

To understand why investing in an IPO can be risky, it is helpful to know that the business valuation and offering price have not been determined not by the market forces of supply and demand, as is the case for stocks trading openly in a market exchange.

Instead, the offering price is usually determined by the company and the underwriters who negotiate a price based on an often-competing set of interests of involved parties.

Post-IPO Trading

Purchasing shares in the market immediately following an IPO can also be risky. Underwriters may do what they can to buoy the trading price initially, keeping it from falling too far below the offering price.

Meanwhile, IPO lock-up periods may stop early investors and company executives from cashing out immediately after the offering. The concern to investors is what happens to the price once this support ends.

Data from Dealogic shows that since 2010, a quarter of U.S. IPOs have seen losses after their first day.

IPO Due Diligence

Investors with the option to invest in an IPO should do so only after having conducted their due diligence. The SEC states that “being well informed is critical in deciding whether to invest. Therefore, it is important to review the prospectus and ask questions when researching an IPO.”

Investors should receive a copy of the prospectus before their broker confirms the sale. To read the prospectus before then, check with the company’s most recent registration statement on EDGAR, the SEC’s public filing system.

IPO Alternatives

Since the heady days of the dot-com bubble, when many new companies were going public, startups have become more disgruntled with the traditional IPO process. Some of these businesses often complain that the IPO model can be time-consuming and expensive.

Particularly in Silicon Valley, the U.S. startup capital, many companies are taking longer to go public. Hence, the emergence of so many unicorn companies — businesses with valuations of $1 billion or greater.

In recent years, alternatives to the traditional IPO process have also emerged. Here’s a closer look at some of them.

Recommended: Guide to Tech IPOs

Direct Listings

In direct listings, private companies skip the process of hiring an investment bank as an underwriter. A bank may still offer advice to the company, but their role tends to be smaller. Instead, the private company relies on an auction system by the stock exchange to set their IPO price.

Companies with bigger name brands that don’t need the roadshows tend to pick the direct-listing route.

SPACs

Special purpose acquisition companies or SPACs have become another common way to go public. With SPACs, a blank-check company is listed on the public stock market.

These businesses typically have no operations, but instead a “sponsor” pledges to seek a private company to buy. Once a private-company target is found, it merges with the SPAC, going public in the process.

SPACs are often a speedier way to go public. They became wildly popular in 2020 and 2021 as many famous sponsors launched SPACs.

Crowdfunding

Crowdfunding is collecting small amounts of money from a bigger group of individuals. The advent of social media and digital platforms have expanded the possibilities for crowdfunding.

The Takeaway

Initial public offerings or IPOs are a key part of U.S. capital markets, allowing private businesses to enter the world’s biggest public market. Conducting an IPO is a multi-step, expensive process for private companies but allows them to significantly expand their reach when it comes to fundraising, liquidity and brand recognition.

For investors, buying an IPO stock can be tempting because of the potential of getting in on a company’s growth early and benefiting from its expansion. However, it’s important to know that many IPO stocks also tend to be untested, meaning their businesses are newer and less stable, and that the stock price can fluctuate — creating considerable risk for investors.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

Explore the IPO Series:

What Is the IPO Process?

What Are IPO Proceeds?

IPO vs Acquisition: Advantages and Disadvantages

How Are IPO Prices Set?

What Is an IPO Underwriter and What Do They Do?

What Is an IPO Roadshow?

How Many Companies IPO Per Year? 2023 Trends

What Is a Quiet Period?

What Is IPO Subscription Status?

Navigating the IPO Lock-up Period

What Is IPO Due Diligence?

How to Find Upcoming IPO Stocks Before Listing Day

What Is an IPO Pop?

What to Do With Company Stock If Your Company Goes Public

IPO Book-Building Process Explained

Hot Issues (IPOs): What You Need to Know

What Is Pre-IPO Placement?

Do IPOs Offer Dividends?

Testing the Waters: What It Means in an IPO

Shorting an IPO: When Can You Do It?

Guide to the Dual-Track Process for IPOs

What Is Gross Spread?

IPO Oversubscription: Definition & Examples

A Guide to Tech IPOs

History of IPOs That Failed

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.

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.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

SOIN0623094

Jan

2025

Margin Trading: What It Is and How It Works

By Carla Tardi | Investing | Comments Off

In the investing ecosystem, the term “margin” is used to describe the money that may be borrowed from a brokerage to execute trades or a strategy. Buying assets on margin can help magnify gains and returns, but it can do the same with your losses.

When you buy on margin, you’re purchasing assets using money that you borrow from your broker. Margin trading might seem more complicated than some other ways to invest in the stock market, but it’s a method that many investors favor — especially experienced investors. If there’s one thing to know about margin trading, though, it’s that it can cut both ways, and may incur serious risks.

Table of Contents

What Is Margin Trading?
How Does Margin Trading Work?
Example of Margin Trading (Buying on Margin)
Potential Benefits of Margin Trading
Potential Risks of Margin Trading
How to Get Started With Margin Trading
FAQ

What Is Margin Trading?

Margin trading, or “buying on margin,” is an advanced investment strategy in which you trade securities using money that you’ve borrowed from your broker to potentially increase your return. Margin is essentially a loan where you can borrow up to 50% of your security purchase, and as with most loans, a margin loan comes with an interest rate and collateral.

Trading on margin is similar to “buying on credit.” Using margin for a trade is also known as leveraging. Margin interest rates are determined by your broker, and collateral types can be stock holdings or cash. Traders must also maintain a margin balance, known as the maintenance margin, in their accounts to cover potential losses.

As noted, margin trading is a bit more complicated (and risky) than some other ways to invest in the stock market, but it’s a tactic used by many investors.

How Does Margin Trading Work?

While margin trading may seem straightforward, it’s important to understand all the parameters.

For all trades, your broker acts as the intermediary between your account and your counterparty. Whenever you enter a buy or sell trade on your account, your broker electronically executes that trade with a counterparty in the market, and transfers that security into/out of your account once the transaction is completed.

To execute trades for a standard cash account vs. margin account, your broker directly withdraws funds for a cash trade. Thus every cash trade is secured 100% by money you’ve already deposited, entailing no risk to your broker.

In contrast, with margin accounts, a portion of each trade is secured by cash, known as the initial margin, while the rest is covered with funds you borrow from your broker.

Consequently, while margin trading affords you more buying power than you could otherwise achieve with cash alone, the additional risk means that you’ll always need to maintain a minimum level of collateral to meet margin requirements.

While margin requirements can vary by broker, we’ve defined and outlined the minimums mandated by financial regulators.

Term	Amount	Definition
Minimum margin	$2,000	Amount you need to deposit to open a new margin account
Initial margin	50%	Percentage of a security purchase that needs to be funded by cash
Maintenance margin	25%	Percentage of your holdings that needs to be covered by equity

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

Example of Margin Trading (Buying on Margin)

Here’s an example of how margin trading works, or could work, in the real world. Imagine you open a margin account with $2,000 at a brokerage firm. It’s helpful to keep the maintenance margin in mind, too, when reading through this example.

Now, say you have your eyes set on Stock X, that’s trading at $100 per share. You can afford to buy 10 shares with the cash in your account. But, you want to buy more — margin allows you to do that. Given your margin account’s 50% initial margin requirement, that means you can effectively double your purchasing power.

So, you can buy 20 shares of Stock X for a total of $2,000, and $1,000 of that purchase would be buying on margin.

If Stock X appreciates in value by, say, 100% (it’s now worth $200 per share), you could sell your holdings and end up with $4,000. You could then pay back your brokerage for the margin loan, and have realized a greater return than you would have without using margin.

But the opposite can happen, too. If Stock X depreciates by 50% (it’s now worth $50) and you sold your holdings, you’d have $1,000, and owe your broker $1,000. So, you’ve wiped out your cash reserves by using margin — one of its primary risks.

To recap: In both scenarios, the margin loan balance remains the same ($1,000), while the equity value took the entire gain or loss.

Bear in mind, too, that for simplicity, this example ignores interest charges. In a real margin trade, you would need to also back out any interest expense incurred on the margin loan before calculating your return; this would act as an additional drag on earnings.

Potential Benefits of Margin Trading

As noted, margin trading has some pretty obvious benefits or advantages. Those may include the following:

• Potential to enhance purchasing power. A primary benefit of margin trading is the potential expansion of an investor’s purchasing power, sometimes exponentially. This could possibly help boost returns if the price of the stock or other investment purchased with a margin trade goes up.

• Possible lower interest rates. Benefits of margin loans might include lower interest rates relative to other types of loans, such as personal loans, if the investor is borrowing money to make trades. Plus, there typically isn’t a repayment schedule.

• Diversification. You could also use margin trading to diversify your portfolio.

• Selling short. Another potential advantage might be a complicated trading method called short selling. Margin trading might make it possible for you to sell stocks short. Short selling differs from most other investment strategies in that investors make a bet that a stock’s price will fall.

Note, however, that the rules for short selling with a margin account can get even more complicated than a traditional margin trade. For instance, Regulation T of the Federal Reserve Board requires margin accounts to have 150% of the value of the short sale when the trade is initiated.

While the benefits of being able to buy more investments — and potentially generate larger returns — might seem appealing to some investors, there are also some potential risks to using margin. It might be worth considering these before you decide if trading on margin is right for you.

Potential Risks of Margin Trading

There are potential benefits, and there are potential risks associated with margin trading. Here are some of those risks:

• Possible loss beyond initial investment. While a primary benefit of margin trading may be increased buying power, investors could lose more money than they initially invested. Unlike a cash account, the traditional way to buy stocks or other investments, losses in a margin account can actually extend beyond the initial investment.

For example, if an investor purchases $20,000 worth of stock with a cash account, the most they can lose is $20,000. If that same investor uses $10,000 of their own money and a margin — essentially a loan — of $10,000 and the stock loses value, they may actually end up owing more money than their initial $10,000.

• Possibility of margin call. Another potential negative aspect of margin trading is getting a margin call. Investors might need to put additional funds into their account on short notice if a margin call is triggered because the investment lost value. Moreover, a drop in value might mean an investor needs to sell off some or all of the investment, even at an inopportune time.

The SEC warns investors that they must sell some of their stock, or deposit more funds to cover a margin call. If you get a margin call, it is your responsibility to deposit more funds, add securities or sell holdings in your account. If you don’t meet the margin call after a number of warnings from your broker, then the broker has the right to sell all or some of the current positions to bring the account back up to minimum value.

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

How to Get Started With Margin Trading

Typically, the first step to getting started with margin trading is to open a margin account with a brokerage firm.

Even if you already have a stock or investment account, which are cash accounts, you still need to open a margin account because they are regulated differently. First-time margin investors need to deposit at least $2,000 per FINRA rules. If you’re looking to day trade, this dollar figure goes up to $25,000 according to FINRA rules. This is the minimum margin when opening a margin trading account.

Once the margin account has been opened and the minimum margin amount deposited, the SEC advises investors to read the terms of their account to understand how it will work.
The SEC advises investors to hedge their risks by making sure they understand how margin works, understanding that interest charges may be levied by your broker, knowing that not all assets can be purchased on margin, or even communicating with your broker to get a sense if a margin account is the right tool for you.

The Takeaway

Margin trading, as discussed, means that investors are trading securities with borrowed funds from their brokers. This allows them to potentially increase their returns, but also carries the risk of ballooning losses. As with most investing strategies and vehicles, margin trading comes with a unique set of potential benefits, risks, and rewards.
Margin trading can seem a little more complicated than some other approaches to investing. As the investor, it is up to you to decide if the potential risks are worth the potential rewards, and if this strategy aligns with your goals for the future.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 11%*

FAQ

Is margin trading profitable?

Margin trading can be profitable, but there are no guarantees for investors that it will be. It can also lead to outsized and substantial losses for investors, so it’s important to consider the risks and potential benefits.

What happens if you lose money on margin?

If you lose money on margin, you may have a negative balance with your brokerage, and owe the broker money. You may also be subject to interest charges on that balance, too.

Should beginners trade on margin?

It’s best to consult with a financial professional before trading on margin, but generally, it’s likely that professionals would recommend beginners do not trade on margin.

How do you pay off margin?

Typically, if you have a negative balance in your margin account, you can reduce or pay it off by simply depositing cash into your account, or selling assets.

SoFi Invest®

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

Jan

2025

Financial Consulting Services 101

By Rebecca Lake | Investing | Comments Off

When you need help putting together a solid plan for your money, you might seek out financial consulting services. A financial consultant can offer advice and guidance on things like investing, retirement planning, and building wealth. You may also hear financial consultants referred to as financial advisors, as the terms are often used interchangeably, though there may be some slight differences.

What is financial consulting designed to do? In simple terms, it’s all about helping clients formulate a strategy for managing their money. What working with a personal finance consultant looks like for you can depend on your situation and goals.

Key Points

• Broadly speaking, financial consultants help clients identify strategies to help them reach financial goals.

• Services offered by financial consultants may include investment management, estate planning, tax planning, and retirement planning, among others.

• Financial consultants and financial advisors may hold certificates or designations that reflect advanced training, such as Certified Financial Planner (CFP) or Accredited Financial Planner (AFP).

• Choosing the right consultant requires evaluating the scope of services they offer, their professional certifications and designations, their fee structure, and more.

What Is a Financial Consultant?

Broadly speaking, a financial consultant is someone who offers advice about money – be it retirement planning or buying stocks or other securities – in a professional capacity. A financial consultant may work independently or be employed by a financial consulting firm, and they may offer services online or in-person.

Examples of Financial Consulting Services

Financial consultants can offer a variety of services to their clients. Again, those clients may be individual investors, business owners, or even a non-profit organization. The types of services a financial consultant may offer can include:

• Basic financial planning, such as creating a household budget

• Estate planning

• Tax planning and legacy planning

• Retirement planning

• College planning

• Succession planning for clients who own a business

A financial consultant’s overall goal is to help clients create a comprehensive plan for managing their money. Financial consultants may work with a diverse mix of clients, or niche down to offer their services to a specific demographic or client base, such as dual income couples, with no kids or members of the LGBTQ community.

Financial Consultants vs. Financial Advisors

The terms “financial consultant” and “financial advisor” are often used interchangeably, as their meaning is roughly, but not quite, the same. There are some important differences, including the licensure that each is required to hold in order to practice, and the regulators each operates under. Generally, they both offer financial advice and guidance in a professional capacity, though.

Other Names for Financial Professionals

Financial consultants and financial advisors can go by more specific names, depending on which professional certifications they hold. Certifications and designations signify that a consultant or advisor has completed advanced training and education in a particular area. Here are some of the most common designations for financial professionals:

• Certified Financial Planner (CFP®)

• Chartered Financial Consultant (ChFC)

• Certified Public Accountant (CPA)

• Accredited Financial Planner (AFP)

• Registered Investment Advisor (RIA)

• Certified Annuity Advisor (CAA)

• Certified Financial Consultant (CFC)

• Certified Tax Advisor (CTA)

• Chartered Financial Manager (ChFM)

Navigating the alphabet soup of designations for financial consulting services can be confusing and it helps to understand what type of advice you need.

For instance, if you want to work with an advisor who can help with everything from budgeting to retirement planning, then you might choose a Certified Financial Planner. On the other hand, you might want to work with a registered investment advisor if you’re specifically seeking investment help.

The main thing to know about financial consulting services is that there’s more than one option to choose from. Taking time to research a consultant or advisor’s background and qualifications can make it easier to find the right person to work with when you need consulting services.

When Would You Need Financial Consulting?

Working with a financial consultant is a personal decision. With that in mind, you might start working with a consultant at any time if you feel that you need help managing your finances. If you need more specific examples of when it makes sense to hire a financial consultant, here are a few scenarios to consider:

• Your parents pass away, leaving you $500,000 in assets. You might work with a financial consultant to figure out the best way to maximize your inheritance while minimizing taxes.

• After 15 years of marriage, you and your spouse have decided to divorce. You decide to hire a financial consultant to help you create a plan for managing the assets that you’re leaving the marriage with.

• You’re a parent to a child with special needs who will require long-term care after you’re gone. You reach out to a financial consultant to discuss setting up a trust to pay for their care when the time comes.

Financial consulting services can be an appropriate choice when you have a difficult financial decision to make or you’re trying to navigate a situation that feels overwhelming. Winning the lottery, for instance, could leave you paralyzed with indecision about what to do with the money.

A financial consultant can also help you move through changing life stages. That can include getting married or divorced, having a child, starting or selling a business, or changing careers. Financial consultants can look at the bigger financial picture to help you get through the changes while keeping your long and short-term goals in sight.

Finding the Right Financial Consultant

Finding a financial advisor starts with taking inventory of your needs to determine what kind of advice is appropriate. Once you’ve figured out what kind of help you need, the next step is creating a list of advisors in your area that you might want to work with.

Asking questions can help you get a feel for how an advisor operates. Here are some examples of the types of questions you might want to ask:

• What kind of financial consulting services do you offer?

• Do you hold any professional certifications or designations?

• Do you specialize in working with a particular type of client?

• What is your investment style?

• How are your fees structured and what do you charge for consulting?

• What is your preferred method of communication?

• How often will we meet?

If you’re considering a robo-advisor, then it may be a good idea to look at how the platform manages portfolios, what benefits or features are included, and what you’ll pay for consulting services. Should you choose a robo-advisor vs. financial advisor? There are some pros and cons to consider.

On the pro side, a robo-advisor can be a less expensive way to get financial consulting services. The typical financial advisor cost is around 1% of assets under management per year. Robo-advisors may cost much less, with some offering services charging a fraction of what a human advisor would.

Of course, there’s a trade-off to consider, since you’re not getting financial advice with a human element behind it. For instance, if market volatility sets in and you’re tempted to sell off stocks in a panic, a robo-advisor wouldn’t be able to talk you through it the way a human advisor could. Taking that into consideration can help you decide which one might be right for you.

The Takeaway

A financial consultant’s job is to help you feel more secure and confident when making decisions about your money. Whether you need a consultant’s services or not can depend on where you are financially right now and where you want to go in the future.

If you’re not investing yet, there’s a simple way to get started. With SoFi Invest, you can open an investment account online in minutes and get on the path to building wealth. You can choose from automated investing or DIY investing to build a portfolio that matches your goals and risk tolerance.

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 a financial consultant the same as a financial advisor?

Financial consulting and financial advisory services are typically grouped together, as they generally mean the same thing. A financial consultant or a financial advisor can provide advice about things like investing, retirement planning, and estate planning. The difference is that consultants may offer their services on a one-time basis, while financial advisors may work with clients long-term.

What does a financial consultant cost?

What you’ll pay for financial consulting services can depend largely on the type of professional you’re working with. A typical financial advisor’s fee is around 1% annually, though it’s possible to pay more or less, depending on the kind of services you receive. Robo-advisor financial consulting can cost less, though it does lack the human element.

What does a financial consultant do?

Financial consultants help their clients create a plan for managing money. A financial consultant may work with individual investors, businesses, or organizations to offer financial advice. Financial consulting services may cover a broad scope of topics or concentrate in just one or two areas of financial planning.

Photo credit: iStock/skynesher

SoFi Invest®

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

SOIN0423016

What’s the Fed Fund Rate?

When Rates Go Up, What Happens to the Stock Market?

When Rates Go Down, What Happens to the Stock Market?

Do Rate Changes Impact the Bond Market?

Other Areas Affected by Rate Changes

Consumers

Companies

Protecting Your Investments From Higher Rates

The Takeaway

FAQ

How do rate changes affect stock prices?

What sectors are impacted the most when rates change?

How do interest rates affect inflation?

What Is a Robo Advisor?

Understanding Robo Advisors

A Brief History of Automated Investing

The Evolution of Robo Investing

Benefits of Using Robo-Advisors

Cost

Performance

Correcting for Human Error

Automated Tax-Loss Harvesting

Limitations of Robo Advisors

Fewer Choices

Less Control

How Robo Advisors Make Money

How Much Do Robo Advisors Cost?

Want to start investing?

Our robo-advisor service can offer a portfolio to suityour needs and risk level.

Choosing the Right Robo Advisor

Types of Investments

Account Type

Portfolio Offerings

Additional Perks of Automated Investing

Rebalancing

Recurring Contributions

Access to Humans

Robo Advisor Growth & Growing Pains

The Takeaway

You may also be interested in:

What Is an IPO?

How Do IPOs Work?

IPO Price vs Opening Price

History of IPOs

Why Does A Company IPO, or “Go Public”?

Raising Money

Exit Opportunity

More Liquidity

Publicity

Pros and Cons of an IPO

Participating in an IPO: 3 Steps to Buying IPO Stock

1. Read the Prospectus

2. Find Brokerage

3. Request Shares

Who Can Buy IPO Stock?

When Can You Sell IPO Stock?

Things to Know Before Investing in an IPO

IPO Market Price

Post-IPO Trading

IPO Due Diligence

IPO Alternatives

Direct Listings

SPACs

Crowdfunding

The Takeaway

Explore the IPO Series:

What Is Margin Trading?

How Does Margin Trading Work?

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

Example of Margin Trading (Buying on Margin)

Potential Benefits of Margin Trading

Potential Risks of Margin Trading

How to Get Started With Margin Trading

The Takeaway

FAQ

Is margin trading profitable?

What happens if you lose money on margin?

Should beginners trade on margin?

How do you pay off margin?

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