Investing Archives | Page 54 of 191

May

2024

Catch-Up Contributions, Explained

By Laurel Tincher | invest, Investing, Preparing for Retirement | Comments Off

Catch-up contributions allow individuals 50 and older to contribute additional money to their workplace retirement savings plans like 401(k)s and 403(b)s, as well as to individual retirement accounts (IRAs).

Catch-up contributions are designed to help those approaching retirement age save more money for their retirement as they draw closer to that time.

Learn how catch-up contributions work, the eligibility requirements, and how you might be able to take advantage of these contributions to help reach your retirement savings goals.

Key Points

• Catch-up contributions allow individuals 50 and older to contribute additional money to their workplace retirement savings plans and individual retirement accounts (IRAs).

• Catch-up contributions were created to help older individuals “catch up” on their retirement savings if they haven’t been able to save enough earlier in their careers.

• The catch-up contribution limits for 2023 and 2024 vary depending on the retirement savings plan, such as 401(k), 403(b), and IRAs.

• To be eligible for catch-up contributions, individuals need to be age 50 or older, and certain retirement plans may have additional allowances based on years of service.

• Catch-up contributions can provide benefits such as increased retirement savings, potential tax benefits, and additional financial security as retirement approaches.

What Is a Catch-Up Contribution?

A catch-up contribution is an additional contribution individuals 50 and older can make to a retirement savings plan beyond the standard allowable limits. In addition to 401(k)s, 403(b)s, and IRAs, catch-up contributions can also be made to Thrift Savings Accounts, 457 plans, and SIMPLE IRAs.

Catch-up contributions were created as a provision of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. They were originally planned to end in 2010. However, catch-up contributions became permanent with the Pension Protection Act of 2006.

The idea behind catch-up contributions is to help older individuals who may not have been able to save for retirement earlier in their careers, or those who experienced financial setbacks, to “catch up.” The additional contributions could increase their retirement savings and improve their financial readiness for their golden years.

While employer-sponsored retirement plans are not required to allow plan participants to make catch-up contributions, most do. In fact, nearly all workplace retirement plans offer catch-up contributions, according to a 2023 report by Vanguard.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. The money you save each year in a Traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

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.

Catch-Up Contribution Limits: 2023-2024

Each year, the IRS evaluates and modifies contribution limits for retirement plans, primarily taking the effects of inflation into account. The standard annual contribution limit for a 401(k) in 2023 is $22,500, and $23,000 for 2024. For a traditional or Roth IRA, the standard contribution limit is $6,500 in 2023, and for 2024 the limit is $7,000.

Catch-up contributions can be made on top of those amounts. Here are the catch-up contribution limits for 2023 and 2024 for some retirement savings plans.

Plan	2023 Catch-Up Limit	2024 Catch-Up Limit
IRA (traditional or Roth)	$1,000	$1,000
401(k)	$7,500	$7,500
403(b)	$7,500	$7,500
SIMPLE IRA	$3,500	$3,500
457	$7,500	$7,500
Thrift Savings Account	$7,500	$7,500

This means that you can make an additional $7,500 in catch-up contributions to your 401(k) for a grand total of up to $30,000 in 2023 and $30,500 in 2024. And with traditional and Roth IRA catch-up contributions of $1,000 for both years, you can contribute up to $7,500 in 2023 and $8,000 in 2024 to your IRA.

Catch-Up Contribution Requirements

In order to take advantage of catch-up contributions, individuals need to be age 50 or older — or turn 50 by the end of the calendar year. If eligible, they can make catch-up contributions each year after that if they choose to — up to the annual contribution limit.

Certain retirement plans may have other allowances for catch-up eligibility. For instance, with a 403(b), in addition to the catch-up contributions for participants based on age, employees with at least 15 years of service may be able to make additional contributions, depending on the rules of their employer’s plan.

To maximize the advantages of catch-up contributions, it’s a good idea to become familiar with the rules of your plan as part of your retirement planning strategy.

Benefits of Catch-Up Contributions

There are a number of benefits to making catch-up contributions to eligible retirement plans.

• Increased retirement savings: By helping to make up for earlier periods of lower contributions to your retirement savings plan, catch-up contributions allow you to increase your savings and potentially grow your nest egg in the years closest to retirement.

• Possible tax benefits: Making catch-up contributions may help lower your taxable income for the year you make them. That’s because contributions to 401(k)s and traditional IRAs are made with pre-tax dollars, giving you a right-now deduction. And contributions beyond the standard limits could lower your taxable income for the year even more. (Of course, you will pay tax on the money when you withdraw it in retirement, but you may be in a lower tax bracket by then.)

• Additional security: Making catch-up contributions may give you an extra financial cushion as you approach retirement age. And those contributions may add up in a way that could surprise you. For instance, if you contribute an additional $7,500 to your retirement account from age 50 to 65, assuming an annualized rate of return of 7%, you could end up with more than $200,000 extra in your account.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Make Catch-Up Contributions

To make catch-up contributions to an employer-sponsored plan, contact your plan’s administrator or log into your account online. The process is typically incorporated into a retirement savings plan’s structure, and you should be able to easily indicate the amount you want to contribute as a catch-up.

To make IRA catch-up contributions, contact your IRA custodian (typically the institution where you opened the IRA) to start the process. In general, you have until the due date for your taxes (for example, April 15, 2024 for your 2023 taxes) to make catch-up contributions.

Finally, keep tabs on all your retirement plan contributions, including catch-ups, to make sure you aren’t exceeding the annual limits.

The Takeaway

For those 50 and up, catch-up contributions can be an important way to help build retirement savings. They can be an especially useful tool for individuals who weren’t able to save as much for retirement when they were younger. By contributing additional money to their 401(k) or IRA now, they can work toward a goal of a comfortable and secure retirement.

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

Do you get employer match on catch-up contributions?

It depends on whether your plan allows employer matching for catch-up contributions. Not all plans do. Even if your employer does match catch-up contributions, they might set a limit on the total amount they will match overall. Check with your plan administrator to find out what the rules are.

Are catch-up contributions worth it?

Catch-up contributions can be beneficial to older workers by helping them potentially build a bigger retirement nest egg. These contributions may be especially helpful for those who haven’t been able to save as much for retirement earlier in their lifetime. Making catch-up contributions might also provide them with tax benefits by lowering their taxable income so that they could possibly save even more money.

How are catch-up contributions taxed?

For retirement savings plans like 401(k)s and traditional IRAs, catch-up contributions are typically tax deductible, lowering an individual’s taxable income in the year they contribute. However, catch-up contributions to Roth IRAs are made with after-tax dollars. That means you pay taxes on the money you contribute now, but your withdrawals are generally tax-free in retirement.

Photo credit: iStock/mapodile
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SoFi Invest®

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

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May

2024

Mutual Funds vs Stocks: Differences and How to Choose

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

Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.

Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.

Key Points

• Mutual funds offer a diversified portfolio in a single investment, whereas stocks are shares in individual companies.

• Mutual funds can be actively or passively managed, with some tracking market indexes.

• Stocks provide direct ownership in a company, offering potential for higher returns and greater risk.

• Mutual funds are managed by professionals, making them a good option for those who prefer not to manage their investments.

• The choice between mutual funds and stocks depends on individual financial goals, risk tolerance, and investment strategy.

What’s the Difference Between Mutual Funds and Stocks?

The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.

Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.

Different Types of Mutual Funds

Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).

Some types of mutual funds include:

• Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.

• Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.

• Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.

• Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.

• Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.

What Are Stocks?

Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.

Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:

• Value stocks: Companies that are trading lower than their potential value, based on fundamentals.

• Growth stocks: Companies with a track record of steady growth.

• Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.

Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.

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

Pros and Cons of Mutual Funds

Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.

Pros	Cons
Diversification is simplified	Some funds may underperform
Easy access to the markets	Higher minimum investments
May be cheaper than stocks	Not all funds are low-cost

Pros of Mutual Funds:

• Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.

• Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.

• Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.

Cons of Mutual Funds:

• Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.

• Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.

• Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.

Pros and Cons of Individual Stocks

Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.

Pros	Cons
High return potential	Higher risk
Greater flexibility	More difficult to diversify
Low costs	More time-consuming

Pros of Individual Stocks:

• Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.

• You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.

• Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.

Cons of Individual Stocks:

• Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.

• Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.

• Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You can buy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.

Choosing Between Mutual Funds and Stocks

There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.

Here’s a simple breakdown of how to compare the two when deciding where to invest.

Consider mutual funds if you…	Consider stocks if you…
Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market.	Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment.	Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses.	Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.

The Takeaway

Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Which is riskier, stocks or mutual funds?

Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.

Which investment is best for beginners, mutual funds or stocks?

Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.

Are mutual funds worth it?

Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.

Photo credit: iStock/Eva-Katalin

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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.

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.

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

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

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May

2024

Guide to Special Margin Requirements

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Special margin requirements refer to higher-than-normal requirements for margin traders. That typically means requirements that are above 25%.

According to the Securities and Exchange Commission (SEC), many brokers keep even higher maintenance margin requirements, typically between 30% and 40% — and sometimes higher depending on the type of securities purchased. These special margin requirements may vary.

Key Points

• Special margin requirements are set above the standard 25% maintenance margin rate, indicating a need for higher equity in the account.

• These requirements are often applied to volatile stocks or concentrated positions, enhancing broker security.

• Margin trading uses securities in your account as collateral to amplify potential returns, though it also involves paying interest on borrowed funds.

• The SPAN system helps calculate these requirements by assessing one-day risk in futures and options markets.

• Brokers issue margin calls when account equity falls below the required percentage, necessitating additional deposits or liquidation by the account holder.

What Are Special Margin Requirements?

Special margin requirements are higher than standard margin requirements — above a maintenance margin rate of 25%. Higher margin rate requirements mean you must maintain a higher equity amount in your account when trading on margin.

Margin trading refers to using cash and securities in your account as collateral to purchase more assets. In doing so, you can use leverage to amplify returns — but you must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to know the rules of margin accounts and also which stocks feature special margin requirements.

When it comes to trading stocks on margin, there are plenty of blanket rules and regulations in place. For instance, the Federal Reserve requires a 50% initial margin and a 25% maintenance margin.

The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE) also require at least $2,000 of cash or securities to be deposited before someone can trade in a margin account.

Special margin requirements are often found on highly volatile stocks, so just a small drop in the price of these stocks can trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in your account. Leveraged positions and other factors might also trigger special margin requirements.

Leverage and margin are related — but not the same.

Brokers do not just haphazardly issue special margin requirements. An analysis of historical volatility is used along with the use of SPAN margin. SPAN margin is calculated by standardized portfolio analysis of risk — a system used by exchanges around the world to control risk. SPAN margin determines margin requirements based on an assessment of one-day risk for a trader’s account. It is used primarily in options and futures markets. The SPAN system allows an exchange to know what a “worst-case” one-day move could be for any open futures position.

Special vs Standard Margin Requirements

Special Margin Requirement	Standard Margin Requirements
Brokers can determine special margin rates	Initial margin set at 50%
A special margin requirement might exist for a concentrated position	Some securities cannot be purchased on margin

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

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*For full margin details, see terms.

How Do Special Margin Requirements Work?

Special margin requirements work by enforcing stricter equity deposits in your account when trading volatile stocks. The broker wants to protect itself in the event the securities in your account rapidly drop in value. Another way a broker protects itself is by issuing margin calls when special margin requirement percentages are breached.

With a margin call, you must deposit more cash or securities into your account to meet the call. You can also liquidate your holdings to generate cash and increase your equity percentage. If you fail to meet the call on time, the broker might liquidate your positions for you.

For a broker, it’s important to have safeguards like special margin requirements in place in case financial markets turn volatile. If many investors face margin calls all at once, the broker could face credit risk if those investors are unable to repay loans used in margin trading.

Pros and Cons of Special Margin Requirements

In terms of benefits and drawbacks, the upside is that special margin requirements help to control risk when investors engage in day trading — and the downside is more restrictions on your margin trading account.

Here’s a deeper dive into positives and negatives for the broker and for the investor.

Pros and Cons for Brokers

Pros	Cons
Reduces risk when markets turn volatile	More restrictive trading could turn away customers
Allows for tighter margin calls on risky positions	Individuals might seek looser requirements from other brokers
Historical data provides a guide as to which stocks are most volatile	Uncertainty exists when trying to predict what the most volatile securities will be going forward

Pros and Cons for Investors

Pros	Cons
Highly volatile stocks are easier to identify	Higher equity is required to trade certain stocks
Provides a guardrail when trading stocks	Margin calls can trigger more quickly
Can be a tool to identify highly volatile stocks for options trading	Margin percentages can change without notice

The Takeaway

While many stocks and ETFs have initial margin amounts of 50% and maintenance margin levels at 25%, some volatile stocks have higher special margin requirements. These requirements help protect both brokers and investors in the event that the stock tanks.

Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds amplifies returns — positive and negative. It is important to be aware of the risks involved with this strategy.

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

What is a special margin account?

A margin account is a type of brokerage account in which your broker lends you cash, using the account’s equity as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your purchasing power but also exposes you to the potential for larger losses.

What are margin requirements?

Margin requirements are percentages of equity you must maintain in your margin trading account. According to Regulation T of the Federal Reserve Board, the initial margin for equities is 50% and maintenance margin is 25%. There are higher special margin requirements for highly volatile stocks. In addition, if you have a concentrated position, you might face a special higher margin requirement.

How much money do you need to open a margin account?

The NYSE and FINRA require a deposit of $2,000 or cash or securities with your broker before trading on margin. Some firms may require larger deposits.

Photo credit: iStock/akinbostanci

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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May

2024

What Happens When a Public Company Goes Private?

What Happens When A Company Goes Private?

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

Table of Contents

What Is Going Private?
What Happens if You Own Shares of a Company That Goes Private?
Why a Company May Go Private
How to Take a Company Private
Pros and Cons of Going Private

While there are plenty of benefits to going public, there are also some downsides to being listed on a major stock exchange. Public companies must abide by strict government compliance and corporate government statutes and answer to shareholders and regulatory bodies. Plus they’re subject to the whims of the broader stock market on a regular basis.

So, public companies can opt to go private and delist from a public stock exchange. What happens when a public company goes private? Here’s what you need to know about that process.

Key Points

• When a company transitions from public to private, it is delisted from stock exchanges and its shares are no longer publicly traded.

• This change means the company is exempt from the Sarbanes-Oxley Act and other stringent public compliance requirements.

• Going private can reduce financial and pricing stability due to decreased liquidity and fewer financing options.

• The process involves a buyout through a tender offer, often funded by private equity and requiring shareholder approval.

• Privatization allows for more autonomous control over business decisions and operations by reducing public and governmental scrutiny.

What Is Going Private?

When a company goes from public to private, the company is delisted from a stock exchange and its shareholders can no longer trade their shares in a public market. It also means that a private company no longer has to abide by the Sarbanes-Oxley Act of 2002. That legislation required publicly-traded companies to accommodate expansive and costly regulatory requirements, especially in the compliance risk management and financial reporting areas. (The legislation was created by lawmakers to help protect investors from fraudulent financial practices by corporations.)

Going private may also mean less pricing and financial stability, as private company shares typically have less liquidity than a public company traded on a stock exchange. That can leave a private company with fewer financing options to fund operations.

Going private also changes the way a company operates. Without public shareholders to satisfy, the company’s founders or owners can control both the firm’s business decisions and any shares of private stock. Private companies can consolidate power among one or a few owners. That can lead to quicker business decisions and a clear path to take advantage of new business opportunities.

By definition, a private company, or a company that has been “privatized”, may be owned by an individual or a group of individuals (i.e., a consortium) that also has a specific number of shareholders.

Unlike traditional stocks, investors in a private company do not purchase shares through a stock broker or through an online investment platform. Instead, investors purchase private equity shares from the company itself or from existing shareholders.

What Is Privatization?

Privatization is the opposite of an initial public offering. It’s the process by which a company goes from being a publicly traded company to being a private one. A private company may still offer shares of stock, but those shares aren’t available on public market exchanges. There’s no need to satisfy public shareholders and the company has less governmental oversight into its governance and documents.

(Note that privatization is also a term used to describe when a public or government organization switches to ownership by a private, non-governmental group.)

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What Happens if You Own Shares of a Company That Goes Private?

If shareholders approve a tender offer to take a public company private, they’ll each receive a payment for the number of shares that they’re giving up. Typically, private investors pay a premium that exceeds the current share price and shareholders receive that money in exchange for giving up ownership in the company.

This is the opposite of IPO investing, in which the public buys stock in a newly listed company, and private owners have a chance to cash out.

Why a Company May Go Private

Likely the biggest reason why a company would choose to go private are the costs associated with being a public company (largely to accommodate regulatory demands from local, state, and federal governments).

Those costs may include the following potential corporate budget challenges:

• The legal, accounting, and compliance costs needed to accommodate company financial filings and associated corporate governance oversight obligations.

• The costs needed to pay compliance, investor relations, and other staffing needs – or the hiring of third-party specialty firms to handle these obligations.

• The costs associated with paying strict attention to company share price – a public company always has to keep its eye on maximizing its stock performance and on keeping shareholders satisfied with the firm’s stock performance.

In addition, going private enables companies to free up management and staff to turn their attention to firm financial growth, instead of regulatory and compliance issues or shareholder concerns. Some public companies struggle to invest for the long-term because they’re worried about meeting short-term targets to keep their stock price up.

Going private also enables companies to keep critical financial and operational data away out of the public record — and the hands of competitors. Privatization could also help companies avoid lawsuits from shareholders and curb some litigation risk.

How to Take a Company Private

Typically, companies that go private work with either a private-equity group or a private-equity firm pooling funds to “buy out” a public company’s entire amount of publicly-traded stock. This typically requires a group of investors since, in most cases, it takes an enormous amount of financial capital to buy out a company with hundreds of millions (or even billions) of dollars linked to its publicly-traded stock.

Often a consortium of private equity investors gets help financing with a privatization campaign from an investment bank or other large financial institution. The fund usually comes in the form of a massive loan — with interest — that the consortium can use to buy out a public company’s shares.

With the funding needed to close the deal on hand, the private equity consortium makes a tender offer to purchase all outstanding shares in the public company, which existing shareholders vote on. If approved, existing shareholders sell their stock to the private investors who become the new owners of the company.

The goal is that the private investors will take the gains accrued through stronger company revenues and rejuvenated stock, to pay down the investment banking loan, pay off any investment banking fees accrued, and begin managing the income and capital gains garnered from their investment in the company. While this can take some time, the process of going private is much less intensive than the IPO process.

Company executives, meanwhile, can focus on growing the company. In many instances, newly-minted private companies may roll out a new business plan and prospectus that firm executives can share with potential shareholders, hopefully bringing more capital into the company. Sometimes private owners will plan to IPO the business again in the future.

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

Pros and Cons of Going Private

Taking a company private has both benefits and drawbacks for the company.

The Pros

In addition to lower costs, there are several other advantages to delisting a company.

• Establishing privacy. When a company goes public, it relinquishes the right to keep the company private. By taking a company private, it makes it easier to operate outside of the public eye.

• Fewer shareholders. Public companies don’t have to deal with external company sources that may make life difficult for company executives and may result in a loss of operational independence. Once a company goes private, the founders or new owners retain full control over the business and have the last word on all company decisions.

• A private company doesn’t have to deal with financial regulators. A private company doesn’t need to file financial disclosures with the U.S. Securities and Exchange Commission and other government regulatory bodies. While a private company may have to file an annual report with the state where it operates, the information is limited and financial information remains private.

The Cons

There are some disadvantages to taking a company private.

• Capital funding challenges. When a company goes private, it loses the ability to raise funds through the publicly-traded financial markets, which can be an easy and efficient way to boost company revenues. Yet by privatizing the company, publicly-funded capital is no longer an option. Such companies may have to borrow funds from a bank or private lender, or sell stock based on a state’s specific regulatory requirements.

• The owner may have more legal liability. Private companies, especially sole proprietorships or general partnerships, aren’t protected from legal actions or creditors. If a private company is successfully sued in court, the court can garnish the business owner’s personal assets if necessary.

• More powerful shareholders. While there are not as many shareholders at a private company, new owners, such as venture capitalists or private equity funds, may have strong feelings about the operational business decisions, and as owners, they may have more power over seeing their wishes carried out.

The Takeaway

Going private can be an advantage for companies that want more control at the executive level, and no longer want their shares listed on a public exchange. However, taking a company private may impact the company’s bottom line as corporate financing options thin out when public shareholders can no longer buy the company’s stock.

If a company you own stock in goes private, you will no longer own shares in that company or be able to buy them through a traditional broker. For investors, having different types of assets in an investment portfolio may be helpful in case something happens to or changes with one of them.

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

Is it good for a public company to go private?

Going private can have benefits for a public company, including lower costs related to legal, accounting, and compliance obligations, as well as costs associated with maximizing stock performance and keeping shareholders happy. In addition, going private may allow a company’s staff to focus more fully on financial growth, and keep critical company data out of the public record (and the hands of competitors).

However, there are potential drawbacks as well. For instance, a company may face capital funding challenges once it goes private since it can no longer raise funds through publicly-traded financial markets.

What happens to my private shares when a company goes public?

Once a company goes public (typically done through a process called an IPO, or initial public offering), your private shares become public shares, and they become worth the public trading price of the shares.

How long does it take for a public company to be private?

How long it takes for a public company to become private depends on the time it takes to complete the steps involved. For instance, the company has to buy out all of its publicly-traded stock; it usually works with a group of private investors to do this since the process is costly. Once they have the founding secured, a tender offer is made to purchase all outstanding shares in the public company, which the existing shareholders vote on. If that is approved, the shareholders sell their stock to the owners of the company. How long all this takes generally depends on the company and the specific situation.

Photo credit: iStock/Olezzo

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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.

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May

2024

Time Decay of Options: How It Works & Its Importance

By Brian Nibley | 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.

Time decay, as it relates to options trading, has to do with an option contract’s loss of value as it nears its expiration date. There are numerous variables in the mix when it comes to time decay, but knowing the basics of what the terms means, and how it can affect an investment strategy, can be important for investors.

Key Points

• Time decay refers to the reduction in an option’s value as its expiration date approaches.

• The rate of time decay is represented by theta, which accelerates as expiration nears.

• Options lose more value in the final month before expiration due to increased time decay.

• Intrinsic and extrinsic values are key components in options pricing, affected by time decay.

• Understanding time decay is crucial for options traders to manage potential profits and losses effectively.

What Is Time Decay?

Time decay is the loss of an option’s value as it gets closer to expiration. An option’s time value refers to the extent to which time factors into the value — or the premium — of the option. Time decay accelerates, or declines more quickly, as the expiration date gets closer because investors have less time to exercise the contract.

For options traders, understanding the power of time decay is important whether you’re buying call options or put options. Here are the basics you need to know.

Recommended: Options Trading: A Beginner’s Guide

How Time Decay Works

The rate of change in the time value of an option is known as theta. For traders who buy options with the intention of holding them until expiration, theta usually isn’t of great concern. That’s because traders who hold contracts until the expiry date are hoping that the underlying security moves so far in their favor that the reward in terms of intrinsic value will outweigh any loss in extrinsic value.

But traders who want to close their options position prior to expiration may be more concerned about time decay. Because the security will have less time to move in their favor, the potential profit from intrinsic value is reduced, and the potential loss of extrinsic value becomes greater.

While both intrinsic and extrinsic value are important for options traders of all kinds, the type of options trading strategy a trader is using can influence which factors they put more emphasis on.

Understanding Options Pricing

Time decay isn’t a difficult concept, but it does require a quick refresher about how options are traded and priced.

Four of the main variables that impact the price of an option are:

1. The underlying price and strike price

2. Time left until expiration

3. Implied volatility

4. Time decay

The underlying price, strike price, and expiration date of the options contract are the main factors that determine its intrinsic value, while implied volatility and time decay are the factors that determine its extrinsic value.

• Intrinsic value. An option’s intrinsic value refers to the option’s value at the time of expiration, which depends on the price of its underlying security relative to the strike price of the contract. In other words, whether the option is in the money, out of the money, or at the money.

• Extrinsic value. Extrinsic value refers to how time can impact the option’s value, i.e. its premium. As the expiration date of the options contract approaches, there’s less time for an investor to profit from the option, so time decay or theta, accelerates and the option loses value.

Interest rates can also affect options prices, but this is more of a macro factor that doesn’t have to do with the specific contract itself.

Thus, time value represents the added value an investor has to pay for an option above the intrinsic value. Options are sometimes referred to as depreciating or wasting assets because they tend to lose value over time, since the closer the option is to expiration, the faster its time value erodes.

Finally, user-friendly options trading is here.*

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

*Check out the
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How to Calculate Time Decay

The rate of an option’s time decay is measured by theta.An option with a theta of -0.05 (theta is expressed as a negative value) would be expected to fall about $0.05 each day until expiration, but this would likely accelerate during the days and weeks leading up to the expiry date.

Greek values like theta are constantly changing, and can therefore be one of the most difficult factors to take into account when trading options.

Example of Time Decay of Options

Imagine an investor is thinking about buying a call option with a strike price of $40. The current stock price is $35, so the stock has to rise by at least $5 per share for the option to be in the money. The expiration date is two months in the future, and the contract comes with a $5 premium.

Now imagine a similar contract that also has a strike price of $40 but an expiration date that is only one week away and comes with a premium of just $0.50. This contract costs much less than the $5 contract because the stock would have to gain almost 15% in value in one week to make the trade profitable, which is unlikely.

Thus, the extrinsic value of the second option contract is lower than the first, because of time decay.

How Does Time Decay Impact Options?

Option time decay is pretty straightforward in principle. Things can be more complicated in practice, but in general, options lose value over time. The more time there is between now and the expiry date of the option, the more extrinsic value the option will have. The closer the expiry date is to the current date, the more time decay will have taken effect, reducing the option’s value.

The basic idea is that because there’s less time for a security to move one way or the other, options become less valuable the closer they get to their expiration dates. This isn’t a linear process though. The rate of time decay accelerates over time, with the majority of decay occurring in the final month before expiration.

💡 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.

The Takeaway

If you think about it, the time value of an option is similar to other things that have a value which is time dependent. A fresh loaf of bread, a new car, a newly built home — these items would have an intrinsic value, but you might also pay a premium when they’re at full value.

As time passes, though, consumers will pay less for loaf of bread that isn’t fresh — or a car or home that’s older — because time has eroded some of the value. Similarly, as an option gets closer to its expiration date, it too loses value owing to the effects of time decay or theta.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. 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.

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. Currently, investors can not sell options on SoFi Active Invest®.

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.

Photo credit: iStock/Tatyana Azarova

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Catch-Up Contributions, Explained

What Is a Catch-Up Contribution?

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

Catch-Up Contribution Limits: 2023-2024

Catch-Up Contribution Requirements

Benefits of Catch-Up Contributions

How to Make Catch-Up Contributions

The Takeaway

FAQ

Do you get employer match on catch-up contributions?

Are catch-up contributions worth it?

How are catch-up contributions taxed?

Mutual Funds vs Stocks: Differences and How to Choose

What’s the Difference Between Mutual Funds and Stocks?

Different Types of Mutual Funds

What Are Stocks?

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Pros and Cons of Mutual Funds

Pros of Mutual Funds:

Cons of Mutual Funds:

Pros and Cons of Individual Stocks

Pros of Individual Stocks:

Cons of Individual Stocks:

Choosing Between Mutual Funds and Stocks

The Takeaway

FAQ

Which is riskier, stocks or mutual funds?

Which investment is best for beginners, mutual funds or stocks?

Are mutual funds worth it?

Guide to Special Margin Requirements

What Are Special Margin Requirements?

Special vs Standard Margin Requirements

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How Do Special Margin Requirements Work?

Pros and Cons of Special Margin Requirements

Pros and Cons for Brokers

Pros and Cons for Investors

The Takeaway

FAQ

What is a special margin account?

What are margin requirements?

How much money do you need to open a margin account?

What Happens When A Company Goes Private?

What Is Going Private?

What Is Privatization?

Alternative investments, now for the rest of us.

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What Happens if You Own Shares of a Company That Goes Private?

Why a Company May Go Private

How to Take a Company Private

Pros and Cons of Going Private

The Pros

The Cons

The Takeaway

FAQ

Is it good for a public company to go private?

What happens to my private shares when a company goes public?

How long does it take for a public company to be private?

Time Decay of Options: How It Works & Its Importance

What Is Time Decay?

How Time Decay Works

Understanding Options Pricing

Finally, user-friendly options trading is here.*

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

How to Calculate Time Decay

Example of Time Decay of Options

How Does Time Decay Impact Options?

The Takeaway

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