Investing Archives | Page 9 of 191

Dec

2024

Evaluating the Pros and Cons of Alternative Investments

By MP Dunleavey | Growing Wealth, invest, Investing | Comments Off

As alternative investments have become more accessible for all investors, it’s essential to weigh the pros and cons of these assets: on the one hand, alts offer the potential for diversification and higher returns — but they’re often higher cost, illiquid, and subject to complex tax treatment.

Understanding the advantages and disadvantages of these assets is especially crucial right now, because alts used to be the province of high net-worth and accredited investors. Now, however, alts are accessible to individual (retail) investors via conventional instruments like mutual funds and ETFs, as well as some retirement accounts like certain types of IRAs.

Pros and Cons of Alternative Investments
Advantages	Disadvantages
May provide portfolio diversification.	Many alts have low liquidity and/or come with redemption restrictions.
May offer higher returns compared with traditional assets.	Alts may employ high-risk strategies like short selling and leverage.
May offer passive income opportunities.	Some alts could be subject to higher volatility in some circumstances.
May be a hedge against inflation or interest rate fluctuations.	Owing to lack of transparency, obtaining historic data on certain alternatives can be difficult.
Accessible through ETFs and mutual funds, and some available via traditional retirement accounts, e.g. an IRA.	Investing directly in alternatives, or via a fund, may require complex tax treatment that varies from one asset class to the next.
Alts may appeal to investors’ personal hobbies and interests (e.g. wine, art, collectibles).	May require high minimum investment and often charge higher fees.

Recommended: What Are Alternative Investments?

Pros of Investing in Alts

There are a number of reasons why investors may find alternative investments attractive.

Diversification

Whereas traditional investments tend to move in tandem with the markets, this makes them vulnerable to market volatility, and increases risk exposure. But because most alternative investments have a low correlation with stock and bond markets, they generally move independently, and can thus provide a buffer against risk.

Investing in alts therefore can provide portfolio diversification, which may also help improve risk-adjusted returns over time.

Potential for Higher Returns

There are a couple of reasons why some alts may deliver higher portfolio returns. The first relates to the factors above. Because alternative investments have a low correlation with other assets and provide diversification (and a hedge against inflation or interest rates), this can improve a portfolio’s risk-adjusted returns.

The second is that some alts — e.g. hedge funds, private equity, venture capital, derivatives trading — employ high-risk strategies like short selling, various types of options trading, and leverage (among others), that may deliver higher returns.

Keep in mind that pursuing above-average returns almost always means a much higher risk exposure.

Potential for Passive Income

Some alternatives, like real estate, not only offer the potential for gains but the possibility of passive income as well. For example, real estate investment trusts (REITs) are required to distribute at least 90% of the fund’s income to shareholders.

In addition, certain types of alts (for example, some private equity stocks and funds that invest in these) may also pay dividends, which can also enhance income.

Hedge Against Inflation

Similarly, investing in alternative assets like real estate or commodities (e.g precious metals) can, in some cases, provide a hedge against inflation. That’s because tangible alts may increase in value during inflationary periods versus more traditional asset classes, which may see their value eroded by inflation.

By the same token, some alts can provide a hedge against interest rate risk, again because they have a low correlation with the asset classes that suffer in periods of rising rates.

The challenge here for investors is that both interest rates and inflation can be unpredictable, and using certain assets as a hedge is no guarantee of success.

Recommended: 2023 Capital Gains Tax Guide

Alts Are Available Through ETFs and Mutual Funds

As noted above, a shift has occurred in recent years, allowing individual investors to access different alternative asset classes within traditional fund structures like ETFs and mutual funds.

This is one way that retail investors can gain access to this class of assets that once was limited to high net-worth and accredited investors.

The relative accessibility of publicly traded funds can allow individuals to invest in different alternative sectors — e.g. private equity, private credit, real estate, currencies (including digital currencies) — through these vehicles.

That said, although a mutual fund is a type of pooled investment fund, that doesn’t eliminate all the risk factors that can come with investing in alts.

Accessible via Retirement Accounts

Related to the above, another advantage to investing in alts for individual investors is that it’s possible in some cases to add alts to your IRA. While most mainstream or discount brokers don’t yet offer this option, it’s possible to find asset managers that do.

It bears repeating, though, that retirement funds are meant for the long term, and it’s wise to carefully vet all investment choices in order to limit losses.

Personal Appeal

Some alternatives, such as collectibles (e.g. wine, art, memorabilia, antiques, classic cars) offer the additional gratification of fulfilling an investor’s passion or hobby.

Alternative investments,
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Start trading funds that include commodities, private credit, real estate, venture capital, and more.

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

Cons of Investing in Alts

Alternative investments, which fall outside the realm of conventional securities and strategies, by their nature come with a few disadvantages investors must keep in mind.

Low Liquidity/Redemption Issues

Alternative investments are notoriously illiquid. That means that they aren’t traded frequently, and the markets for these assets can be smaller with lower trading volume.

For example, some collectibles also come with a high degree of risk because a car, case of wine, set of sports cards, could become worthless if there is a shift in taste or trends. These types of tangible or physical investments — including certain types of real estate and commodities — are also more vulnerable to environmental factors (fire, flood, weather, deterioration) that can instantly erode the asset’s value.

High-Risk Strategies

In the quest for higher returns, many alternative asset classes use high-risk strategies that include the risk of total loss. Trading futures, options, and other derivatives, for example, can be highly risky, especially for less experienced investors.

The same is true of certain vehicles, like investing in hedge funds (which also come with high fees) which employ a high degree of leverage, or venture capital, where an investment in a particular venture can go south.

Recommended: What Are Liquid Assets?

Complex Tax Treatment

Some alts may offer certain tax advantages. However, alts can be taxed in different ways, and don’t necessarily lower your investment taxes.

Most investment gains are taxed according to capital gains tax rules, but that isn’t always true of alternative investments when purchased directly, or when investing in a fund. It might be wise to consult a tax professional.

Higher Costs

Some alts come with a higher barrier to entry in terms of investment fees, management fees, and other charges that are not as common with conventional securities.

Hedge funds, for example, typically have a very high minimum investment requirement, often in the six or seven figures, in addition to management and performance fees that can hit 20%.

Lack of Transparency and Publicly Available Data

One of the most troubling aspects of alternative investments is that there is very little transparency around how these assets are traded, their historical price data, and so on.

This can make it difficult to conduct certain types of technical or fundamental analysis, as you might with stocks, in order to gauge the real-time value of a certain asset, never mind its long-term potential.

The Takeaway

As investors’ interest in branching out beyond the traditional asset classes continues to grow, alternative investments may continue to spark new interest among individuals, especially as the availability of alts expands into new vehicles, like conventional mutual funds, ETFs, and even retirement accounts.

Understandably, investors are often on a quest to find the next new thing that will help tamp down risk and improve returns. But alts do come with some notable risk factors that investors must take into account before embarking on any new strategies.

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.

Photo credit: iStock/cagkansayin

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.

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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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

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Dec

2024

Benefits of ETFs — Pros & Cons in Investment Portfolio

By Inyoung Hwang | Growing Wealth, Investing | Comments Off

Exchange-traded funds (ETFs) are funds that can be used to build a relatively simple and low-cost diverse portfolio. There are many investing benefits to ETFs, which is why they’ve grown in popularity both for DIY investors and for more traditional money managers. However, there are cons investors should be aware of, too.

Key Points

• ETFs offer diversified exposure across various assets, potentially reducing large swings in overall portfolio value.

• They tend to be cost-effective due to lower management fees compared to mutual funds.

• ETFs provide flexibility with real-time trading, similar to stocks.

• Tax efficiency is enhanced in ETFs because of fewer capital gains distributions.

• However, ETFs can have hidden costs like bid-ask spreads and brokerage fees.

What Are the Benefits of ETFs?

Exchange-traded funds (ETFs) have become increasingly popular in recent years, especially with the rise of online investing allowing people to buy and sell them quickly.

As an investment tool, ETFs have become popular: there were almost 10,000 ETFs in the world with trillions of dollars in assets under management (AUM) at the end of 2023. In the U.S., there was more than $7 trillion in AUM in ETFs.

Here are some of the benefits of ETFs, which has helped spur their popularity.

ETFs Trade Similar to Stocks

ETFs are traded on stock exchanges and can be bought and sold throughout the day, like individual stocks. The market determines the price for a share of an ETF and changes throughout the day. This means investors can buy and sell ETFs efficiently, making them a convenient investment option.

Portfolio Diversification

An additional benefit of an ETF is that you don’t need a lot of money to invest in many different things. One share of an ETF offers investors a way to diversify their portfolio by investing in a basket of assets, such as stocks, bonds, or commodities, rather than just a single asset. This can help to reduce the overall risk of an investment portfolio.

Accessible Across Markets

There is also a range of ETFs on the market now: stocks, bonds, commodities, real estate, and hybrids that offer a mix. ETFs also vary in how they target certain assets — aggressively or defensively, specific to one asset class or broad. So investors should be able to find what they want and build a diverse portfolio.

Lower Costs

Most ETFs are passively managed and track a benchmark index, meaning portfolio managers don’t actively manage the fund to try to beat the market or an index. Passive investing, as opposed to active investing, may be more cost-effective because there tends to be less overhead and fewer investment fees.

Because there is often less overhead, ETFs generally charge investors a lower operating expense ratio than actively managed mutual funds. The operating expense ratio is the annual rate the fund charges to pay for portfolio management, administration, and other costs.

There are other costs investors need to consider, like commissions for trades and a bid/ask spread.

Tax Efficiency

ETFs tend to be more tax efficient than mutual funds because they typically generate fewer capital gains and capital gains taxes. This is because passively managed ETFs tend to have lower turnover than actively managed mutual funds, which means they sell fewer assets and, thus, result in fewer capital gains.

Transparency

ETFs generally disclose their holdings daily, so investors can see exactly what assets the ETF holds. This can be helpful for investors who want to know what they are investing in.

Flexibility

ETFs can be used as a part of various investment strategies, including as part of a long-term buy-and-hold strategy or as a short-term trading tool. This makes them a flexible investment option for a wide range of investors.

Moreover, investors can trade thematic ETFs — funds focusing on a specific trend or niche industry, like robotics, artificial intelligence, or gender equality. However, there are pros and cons to thematic ETFs. While they allow investors to make more targeted investments, the shares of these funds can be volatile. Because they’re so focused, these ETFs may also diminish the most important benefit of ETFs: broad, diverse exposure.

Disadvantages of ETFs

While ETFs offer many benefits to investors, there are also some potential disadvantages to consider. These disadvantages include the following:

Lack of Personalization

Because ETFs are not actively managed, they do not consider an investor’s specific financial goals or risk tolerance. A lack of personalization means that ETF investors may be unable to tailor their investment portfolio to their particular financial needs.

Tracking Error

ETFs are usually designed to track the performance of a particular index or basket of assets. However, the performance of the ETF may not precisely match the performance of the underlying index due to various factors, such as the fund’s expenses or the timing of when it buys and sells assets. This is known as a tracking error.

Short-Term Trading Costs

ETFs can be traded on the market throughout the day, making them attractive to short-term traders. However, the commission costs of trading ETFs can add up over time, which can eat into investment returns.

Limited Choices

While many ETFs are available, the range of options may be limited compared to other investment vehicles, such as mutual funds. Thus, investors may be unable to find an ETF that perfectly matches their investment needs.

Counterparty Risk

Certain ETFs may use financial instruments, such as futures contracts or swaps, to gain exposure to specific assets. These instruments carry counterparty risk, which means that there is a risk that the counterparty will not fulfill its obligations under the contract. This can expose ETF investors to additional risks.

Complexity

Some ETFs use complex investment strategies, such as leveraged or inverse ETFs, which can be difficult for some investors to understand. Complex investing strategies can make it challenging for investors to fully understand the risks and potential returns of these types of ETFs.

Market Risk

ETFs, like all investments, are subject to market risk, meaning the value of an ETF can go up or down depending on the performance of the underlying assets.

What to Consider When Investing in ETFs

When investing in ETFs, it is essential to consider the following factors:

• Investment objective: Determine your investment goals and how ETFs fit into your overall investment strategy. This can help you choose an ETF that aligns with your financial goals and risk tolerance.

• Asset class: Consider which asset classes you want to invest in and whether an ETF that tracks those assets is available. For example, if you want to invest in large-cap domestic stocks, look for an ETF that tracks a particular large-cap domestic stock index.

• Diversification: ETFs offer a way to diversify your investment portfolio by investing in a basket of assets rather than just a single asset. Consider the level of diversification an ETF offers and whether it aligns with your investment goals.

• Expenses: ETFs typically have lower fees than mutual funds because they are not actively managed. However, it is still important to compare the expenses of different ETFs to ensure you are getting the best value for your money.

• Tax considerations: ETFs tend to be more tax efficient than mutual funds because they generate fewer capital gains. However, it is still important to consider the tax implications of investing in an ETF and whether it aligns with your overall financial plan.

Investing With SoFi

ETFs are becoming increasingly more popular and ubiquitous in the financial markets, with some being more targeted in focus than others. So, being aware of an ETF’s investments can be important for an investor who chooses to put dollars into this financial vehicle. But, as with any investment, they have their pros and cons, which investors should familiarize themselves with before investing.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is the benefit of investing in an exchange-traded fund?

Exchange-traded funds (ETFs) offer investors a convenient and cost-effective way to diversify their portfolios by investing in a basket of assets. ETFs are also typically more tax efficient than mutual funds and offer investors the ability to buy and sell their shares on a stock exchange.

Are ETFs a good investment?

Depending on their investment goals and risk tolerance, ETFs may be a good investment for some investors. ETFs offer a convenient and cost-effective way to diversify a portfolio and provide access to a wide range of asset classes. However, it is important for investors to consider the specific ETF they are considering and how it fits into their overall investment plan.

Why are ETFs better than stocks?

For some investors, ETFs may be a better investment option than individual stocks because they offer diversification by investing in a basket of assets rather than just a single stock.

Is an ETF better than a mutual fund?

Whether an ETF is better than a mutual fund depends on the specific circumstances of the investor and their investment goals. ETFs tend to have lower fees than mutual funds because they are not actively managed and may also be more tax efficient due to their lower turnover. However, mutual funds offer a more comprehensive range of investment options and may be more suitable for some investors.

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.

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.

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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Dec

2024

Businesswoman Using Her Phone Standing At Office

How Do You Cash Out Stocks? Guide to Selling Stocks

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

Table of Contents

Can You Cash Out Stocks?
What Happens When You Sell a Stock?
How to Cash Out Your Stocks: 5 Steps
Motivations for Selling Stocks
Understanding Types of Sell Orders
Factors to Assess When Cashing Out Stocks
Pros and Cons of Reinvesting Profits
Platforms for Buying and Selling Stocks
FAQ

Cashing out stocks essentially means selling them, and most investors should be able to sell their stocks without too much trouble. Buying stocks can be fairly straightforward, whether online or through a financial advisor. But, when it’s time to sell shares, some beginning investors struggle with how to turn their stocks back into cash. After all, money invested in stocks is not immediately cash.

Investors may want to sell stocks for a wide variety of reasons. They might wish to reinvest the cash into another asset with an eye toward long-term gains. Or they could choose to withdraw funds from the stock market to cover short-term, daily expenses with cash earned from the sale. So, how might investors go about cashing out stocks? And, what factors might individuals curious about how to cash out stocks bear in mind? Here’s an overview of the how and when of selling stocks.

Key Points

• Stocks can be cashed out by selling them through a broker on a stock exchange.

• Selling stocks can provide cash for major expenses or to reinvest in other assets.

• Steps to cash out stocks include determining investment goals, accessing a brokerage account, placing a sell order, waiting for the sale to be completed, and receiving the proceeds.

• Motivations for selling stocks include accessing cash for expenses, cashing out profits, preventing significant losses, day trading, and offloading low-performing stocks.

• Types of sell orders include market orders, limit orders, stop orders, and trailing sell stop orders.

Can You Cash Out Stocks?

Investors can cash out stocks by selling them on a stock exchange through a broker. Stocks are relatively liquid assets, meaning they can be converted into cash quickly, especially compared to investments like real estate or jewelry. However, until an investor sells a stock, their money stays tied up in the market.

What Happens When You Sell a Stock?

When you sell a stock for a higher price than you paid, the proceeds from the sale will include your original investment plus your gains and minus any fees. If you sold your stock at a lower price than you paid, your total return will be less than your original investment (depending on how much of an overall loss you’re taking), minus any fees. So, you can have either a positive or negative return.

How to Cash Out Your Stocks: 5 Steps

There are several steps involved in selling stocks, including the following:

1. Determine your investment goals: Consider why you want to sell your stocks and whether it aligns with your overall investment goals.

2. Access your brokerage account: You need to access or log in to your brokerage account to sell your stocks.

3. Place an order to sell your stocks: Once you’re logged into your brokerage account, you can place a sell order (like the orders outlined below) to sell your stocks. You can choose to sell at a specific price or through a market order, which will sell the stocks at the current market price.

4. Wait for the sale to be completed: After placing an order to sell your stocks, you will need to wait for the sale to be completed. This can take anywhere from a few seconds to several days, depending on market conditions and the type of order you have placed.

5. Receive the proceeds from the sale: After the sale is completed, the proceeds from the sale will be deposited into your brokerage account or sent to you in the form of a check.

Motivations for Selling Stocks

Some investors watch their portfolios closely, selling stocks regularly to cash out profits or avoid significant losses.

However, one common reason investors decide to sell stocks is that they need the cash from the investments to pay for living expenses. While different investors might sell for various reasons, it can be helpful to understand the motivation that drives the desire to sell.

So, why might investors want to cash out stocks? Some common reasons could include the following:

Motivation for Selling Stocks

Accessing Cash for Life Expenses

If investors know they’ll need cash for a major life expense, such as buying a car or home, they may choose to cash out some stocks. Selling shares might ensure there’s enough cash around to cover big expenses.

One benefit to having cash on hand instead of having money invested in stocks is that cash is not subject to the ups and downs of the stock market. However, the value of cash is impacted over time by inflation.

Some investors might also opt to move money out of stocks into potentially more secure investments, such as bonds or a money market account, until they’re ready to pay for that large expense.

Cashing Out Profits

If it appears as though a recession is coming or investors have seen significant gains in their portfolio, they might choose to cash out to lock in the profits. It’s important to understand, however, that attempting to time the stock market to avoid losses during unstable economic conditions is risky. What seems to be a trend in the market one day may or may not indicate how the markets may perform in the future.

Investors may want to ask themselves whether they’re interested in cashing out based on an emotional reaction (fear of recent market ups and downs, for instance) or a need for profits.

Preventing Significant Losses

The goal of investing in stocks is to earn profits or generate a positive return – online investing, or otherwise – is to not take losses. Still, there are some instances in which it could make sense to sell at a loss.

For example, an investor may sell specific stock holdings to prevent the likelihood of deeper losses in the future. Another scenario that might drive an investor to want to sell stocks is an industry-wide hardship, where numerous companies in one sector of the economy experience financial calamity at the same time. Industry-wide hardships may negatively impact the value of specific stock holdings.

In other instances, a company might reduce or eliminate shareholder dividends. Earning dividends may be a prime reason an investor bought the stock in the first place, so they decide to sell the stock because it’s no longer part of their investment strategy.

Day Trading

Day trading is one way of selling stocks, but it can involve significant risks. Day trades are the purchasing and selling (or vice versa) of the same stock on the same day. Here, traders are attempting to gain profit through short-term trades — typically through the use of technical or market analyses, which can require an in-depth knowledge of the intricacies of trading.

If it were possible to clearly predict future stock movements, everyone might want in on the stock market. But, stocks are volatile. Rather than guessing based on company news and technical indicators, traders who wish to make shorter term trades might choose to set a price goal. For instance, if they buy shares at $10 each, they could set a goal to sell them when they reach $18 per share.

Offloading Low Performing Stocks

Even if investors conduct thorough research on a company before buying a stock, they may later realize it wasn’t a boon for their portfolio. If a purchased stock continues to decline in value over time, investors may opt to offload the low-performing stock.

Also, some investors sell low-performing stocks at the end of the year for tax-loss harvesting, where investors sell investments at a loss to reduce their overall tax burden.

Understanding Types of Sell Orders

Once an investor has decided to cash out a stock, there are several options for how to sell. Each comes with different amounts of control over the sale. Here’s an overview of the most common types of sell orders:

Understanding Types of Sell Orders

Market Orders

When placing a market order, an investor agrees to sell their shares at the current market price per share. The sell order will be placed immediately or when the market reopens if the order is placed after hours.

One upside of market orders is that the trade can usually be executed quickly. A downside is that the investor has no control over the selling price.

Limit Orders

With a limit order, however, an investor can set the minimum price they are willing to sell their shares for. The sell order only gets executed if and when the stock reaches that price or higher.

For example, if you want to sell a stock currently trading at $50 per share and place a sell limit order at $55, the order will only be filled if the stock price rises to $55 or above.

The upside of limit orders is that investors can control the selling price (and potentially get a higher price than the current market rate). But, one possible downside is that their order won’t go through instantly and, potentially, might never go through (if the stock doesn’t reach the selected price).

Stop Orders or Stop-Loss Orders

A stop-loss order is placed with a brokerage to automatically sell a security when it reaches a specific price, known as the stop price. The reason investors set stop orders is to prevent incurring significant losses if a stock plummets in value.

For example, if you own a stock currently trading at $50 per share and place a stop-loss order at $40, the order will be triggered, and the stock will be sold if the price falls to $40 or below.

The upside of stop orders is that they can help protect against significant losses if the stock price drops unexpectedly (but not guarantee that you’ll avoid them). However, stop-loss orders do not guarantee a specific price, and the actual sale price may differ from the stop price due to market fluctuations.

Trailing Sell Stop Orders

Investors may also choose to place a trailing sell stop order, which allows you to set a stop price for a security that adjusts automatically as the price of the security moves in your favor.

With a trailing sell stop order, you can set the initial stop price at a certain percentage or dollar amount below the market price. The stop price will then adjust automatically as the market price of the security increases so that the stop price remains a fixed percentage or dollar amount below the market price. If the market price of the security then falls and reaches the stop price, the order will be triggered, and the security will be sold.

Trailing sell stop orders may allow traders to benefit from gains when a stock’s price rises while still protecting themselves from potential losses.

Factors to Assess When Cashing Out Stocks

There are several factors that you should consider when cashing out stocks:

• Capital gains taxes: Cashing out stocks may result in capital gains, which are subject to taxes. It is important to consider the tax implications of cashing out stocks. Not all stock holdings are taxed similarly, which could impact an investor’s decision to sell or not to sell.

• Investment goals: Consider why you are cashing out stocks and whether it aligns with your overall investment goals. If you are cashing out stocks to meet a short-term financial need, selling may be necessary even if the stock price is not optimal. However, if you are cashing out stocks as part of a long-term investment strategy, it may be worth holding onto the stocks, even if they’ve declined in price, because they may still appreciate over time.

• Fees and commissions: Brokerage firms generally charge investment fees and commissions for executing trades, which can impact the overall profit or loss on the sale of your stocks. Considering these fees and commissions is important when deciding whether to cash out stocks.

Pros and Cons of Reinvesting Profits

Investors may choose to sell stocks to gain or spend cash. But, individuals may want to reinvest earnings from the stocks sold into other assets. If investors decide to reinvest their profits, they need to consider the advantages and disadvantages of doing so.

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Pros:

• Benefit from potential compound growth

• Diversify your portfolio

• Hedge against inflation

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Cons:

• Lose out on opportunity to use profits for other financial needs

• Capital gains taxes

• Exposure to market risk

Pros

• Compound growth: Reinvesting stock profits allows you to compound your returns on your investments, which may significantly increase your overall returns over time.

• Diversification: Reinvesting stock profits can help you diversify your portfolio and reduce risk by investing in various stocks rather than holding a lot of cash.

• Hedge against inflation: Cash is subject to inflation, which makes cash savings lose value over time. Over a long-term period, cash tends to lose value, whereas the stock market tends to grow. By reinvesting rather than holding on to cash, investors may be less likely to lose money due to inflation.

Recommended: 5 Tips to Hedge Against Inflation

Cons

• Opportunity cost: Reinvesting stock profits means that you are not using the proceeds from the sale of your stocks to meet other financial goals or needs, such as paying off debt or saving for a down payment on a house.

• Taxes: Reinvesting stock profits may result in capital gains tax, which can reduce the overall returns on your investments.

• Market risk: The value of your investments can fluctuate due to market conditions, and reinvesting stock profits means you are exposed to the risks of the stock market.

Platforms for Buying and Selling Stocks

People just getting started with building a portfolio of stocks have several options. Options might include online platforms or traditional phone-in and in-person traders, including:

Online Brokerage Accounts

There are numerous online brokerage accounts and digital apps where investors can buy and sell stocks to build a portfolio. Online brokerage accounts and apps can be a convenient investment method, allowing users to sell from anywhere. Unlike many traditional brokerage firms, many trading apps don’t charge a commission on trades.

Opening a brokerage account will require identity verification and connection with a bank account for deposits and withdrawals.

Financial Advisors

Investors can also make stock trades over the phone or in person by working with a financial advisor. Sell orders placed through these individuals generally get executed within 24 hours, so it can be a slower method to cash out stocks. Before the arrival of web-driven trading, most stocks were bought and sold through traditional investment brokers or financial advisors.

The Takeaway

Before selling any stocks, investors might opt to evaluate their short- and long-term financial goals. Then, they could devise a plan to pursue those objectives, which may lead to cashing out stock holdings. However, knowing when to sell a stock can take time and effort. Rather than trying to time the market and sell stocks to lock in immediate profits and avoid future losses, individuals may want to invest for the long term.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How long does it take to cash out stocks?

The time it takes to cash out stocks can vary depending on the type of order you place and market conditions. Generally, it can take anywhere from a few seconds to several days for a sale of stocks to be completed.

Do you get money when you sell stock?

Yes, you will receive money when you sell stock, as long as its value is more than $0. The proceeds from the stock sale will be deposited into your brokerage account or sent to you in the form of a check. The amount of money you receive will depend on the price you sell the stock and any fees or commissions charged by the brokerage firm.

Can I withdraw money from stocks?

To access cash from stocks, you need to sell your holdings and use the proceeds from the sale to withdraw cash from your brokerage account.

SoFi Invest®

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

SOIN-Q424-031

Dec

2024

What Is a Shareholder Activist?

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

A shareholder activist may be a hedge fund, institutional investor, or wealthy individual who uses an ownership stake in a company to influence corporate decision-making. Shareholder activists, sometimes called activist investors, typically seek to change how a company is run to improve its financial performance. However, they may also have other objectives, such as increasing transparency or promoting social responsibility.

Activist shareholders can impact the way a company is managed, thus affecting its stock price. As such, you may benefit from understanding shareholder activism and how these investors may impact the stocks in your portfolio.

Key Points

• Shareholder activists use ownership stakes to influence corporate decisions, aiming to improve financial performance or promote transparency and social responsibility.

• Activists can be hedge funds, institutional investors, or wealthy individuals seeking changes in company management.

• Activist investors may use media and shareholder voting to gain support for their proposals and influence company strategies.

• Goals of activism vary, from improving environmental impact to unlocking shareholder value through strategic changes.

• Activism can lead to stock volatility, but targeted stocks may still be valuable for diversified portfolios if proposed changes are supported.

How Shareholder Activism Works

Shareholder activism is a process in which investors purchase a significant stake in a company to influence the management of the company. When an investor builds up a large enough stake in a company, this usually opens up channels where they may discuss business proposals directly with management.

Activist investors may also use the shareholder voting process to wield influence over a company if they believe it is mismanaged. This more aggressive tactic may allow activist shareholders to nominate their preferred candidates for the board of directors or have a say on a company’s management decisions.

Activist investors typically own a relatively small percentage of shares in a company, perhaps less than 10% of a firm’s outstanding stock, so they may need to convince other shareholders to support their proposals. They often use the media to generate support for their campaigns.

Shareholder activists may also threaten lawsuits if they do not get their way, claiming that the company and its board of directors are not fulfilling their fiduciary duties to shareholders.

Activist investors’ goals can vary. Some investors may want to see companies improve their environmental and social impact, so they will suggest that the company adopt a Corporate Social Responsibility framework. Other investors try to get the company to adopt changes to unlock shareholder value, like selling a part of the company or increasing dividend payouts.

However, shareholder activism can also be a source of conflict between shareholders and management. Some activist investors may prefer the company unlock short-term gains that benefit shareholders, perhaps at the expense of long-term business operations. These investors may exit a position in a company once they unlock the short-term gains with little concern for the company’s future prospects.

Types of Shareholder Activists

There are three primary types of shareholder activists: hedge funds, institutional investors, and individual investors. So, your average investor who may be doing a bit of online investing or building a retirement portfolio likely wouldn’t qualify as a shareholder activist. Each type of shareholder activist has its distinct objectives and strategies.

Hedge Funds

Hedge funds are private investment vehicles usually only available to wealthy individuals who make more than $200,000 annually or have a net worth over $1 million. These funds often take a more aggressive approach to shareholder activism, like public campaigns and proxy battles, to force a company to take specific actions to generate a short-term return on its investment.

Institutional Investors

Institutional investors are typically large pension funds, endowments, and mutual funds that invest in publicly-traded companies for the long term. These investors often use their voting power to influence a company’s strategy or management to improve their investment’s financial performance.

Individual Investors

Though less common than hedge funds and institutional investors, very wealthy individual investors sometimes use their own money to buy shares in a company and then push for change.

Examples of Shareholder Activists

Shareholder activism became a popular strategy in the 1970s and 1980s, when many investors – called “corporate raiders” – used their power to push for changes in a company’s management. Shareholder activism has evolved since this period, but there are still several examples of activist investors

For example, Carl Icahn is one of the most well-known shareholder activists who made a name for himself as a corporate raider in the 1980s. He was involved in hostile takeover bids for companies such as TWA and Texaco during the decade.

Since then, Icahn has been known for taking large stakes in companies and pushing for changes, such as spin-offs, stock buybacks, and management changes. More recently, Icahn spearheaded a push in early 2022 to nominate two new directors to the board of McDonald’s. His goal was to get McDonald’s to change its treatment of pigs. However, his preferred nominees failed to get elected to the board.

Another well known activist investor is Bill Ackman, the founder and CEO of Pershing Square Capital Management, a hedge fund specializing in activist investing. Ackman is known for his high-profile campaigns, including his battle with Herbalife.

In 2012, Ackman shorted the stock of Herbalife, betting the company would collapse. He accused Herbalife of being a pyramid scheme and called for a government investigation. Herbalife denied the allegations, and the stock continued to rise. Ackman eventually closed out his position at a loss.

Other examples of shareholder activists include Greenlight Capital, led by David Einhorn, and Third Point, a hedge fund founded by Dan Loeb.

In 2013, Einhorn took a stake in Apple and pushed for the company to return more cash to shareholders through share repurchases and dividends. Apple eventually heeded his advice and initiated a plan to return $100 billion to shareholders through dividends and buybacks.

In 2011, Loeb’s hedge fund took a stake in Yahoo and pushed for the company to fire its CEO, Scott Thompson. Thompson eventually resigned, and Yahoo appointed Loeb to its board of directors. More recently, in 2022, Loeb took a significant stake in Disney and started a pressure campaign calling on the company to spin-off or sell ESPN. However, he eventually backed off that suggestion.

Is Shareholder Activism Good for Individual Investors?

Depending on the circumstances, a shareholder activist campaign may be good for investors. Some proponents argue that shareholder activism can improve corporate governance, promote ESG investing, and lead to better long-term returns for investors.

Others contend that activist investors are primarily interested in short-term gains and may not always have the best interests of all shareholders in mind. While individual investors may benefit from a stock’s short-term spike after an activist shareholder’s campaign, this rally may not last for investors interested in long-term gains.

The Takeaway

Shareholder activists use their financial power to try to influence the management of publicly traded companies. Because activist investors often leverage the media to promote their goals, individual investors may read about these campaigns and worry about how they could affect their holdings.

Generally, the impact of shareholder activism on investors depends on the specific goals of the activist and the response of the company’s management. If an activist successfully pressures management to make changes that improve the company’s performance, this can increase shareholder value. However, if an activist’s campaign is unsuccessful or the company’s management resists the activist’s demands, this can lead to a decline in the stock price.

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/xavierarnau

SoFi Invest®

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

SOIN-Q424-015

Dec

2024

Guide to IRA Contribution Deadlines

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Fortunately for retirement savers, the IRS allows some flexibility in funding traditional or Roth IRAs. You have until tax day of the following year to make contributions.

In other words: Your last day to make an IRA contribution for tax year 2024 is April 15, 2025. If you file an extension on your return, your ability to contribute to an IRA is not extended, however.

Knowing how long you have to make an IRA contribution is important, as it can help you save a little more, and potentially reap some tax benefits.

What Is the IRA Contribution Deadline?

A conventional tax year extends from January 1 of the year through December 31 (corporate tax years can be different). However, the deadline for individuals making the maximum annual IRA contribution doesn’t follow that timeline; generally you have until tax day in April of the following year.

In most years, the deadline for filing your tax return is April 15. However, if the 15th falls on a holiday or weekend, the deadline is generally pushed to the next business day.

The deadline also applies to both annual contributions and catch-up contributions for regular IRAs. A catch-up contribution of $1,000 is allowed for taxpayers aged 50 or older.

Again, if you file an extension on your tax return, that will not give you extra time to contribute to an ordinary IRA. That said, the rules related to contribution deadlines and extensions are somewhat different for other types of IRAs, like SEP and SIMPLE IRAs designed for those who are self-employed or own small businesses. (see below).

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.

Traditional, Roth, SEP, and SIMPLE IRA Contribution Deadlines for 2024

Contributions limits and deadlines vary, depending on the type of IRA you have.

IRA Type	2024 Annual Contribution Limit	Contribution Deadline for the 2024 Tax Year
Traditional IRA	$7,000, or $8,000 if you’re 50 or older	April 15, 2025
Roth IRA	$7,000, or $8,000 if you’re 50 or older	April 15, 2025
SEP IRA	25% of compensation or $69,000, whichever is less (SEP plans do not have catch-up provisions)	April 15, 2025, unless the employer filed an extension; the extension deadline is Oct. 15, 2025
SIMPLE IRA	$16,000, or $19,500 if you’re 50 or older	January 30, 2025 for employee contributions; April 15, 2025 for employer contributions (or Oct. 15, 2025, if there’s an extension)

How IRA Contributions Work

Contributions refer to the funds you deposit in a retirement account like an IRA (but also a 401(k) or 403(b)). Most retirement accounts have rules that govern the maximum amount you can contribute per year and the tax implications for contributing to one type of account vs. another.

• Generally speaking, traditional IRAs, as well as SEP and SIMPLE IRAs, are considered tax-deferred accounts. That means your contributions are typically tax deductible in the year you make them (though some restrictions apply if you or your spouse is covered by a workplace retirement account). But you will owe taxes on withdrawals.

• The money you contribute to a Roth IRA is an after-tax contribution, and is not tax deductible. Qualified withdrawals after age 59 ½ are tax-free, however.

Roth accounts have more restrictions than other types of IRAs. One important distinction is the income cap: For tax year 2024: Single filers whose modified adjusted gross income (MAGI) is $161,000 or higher, and those who are married, filing jointly with a MAGI of $240,000 or higher, are not eligible to open a Roth IRA.

Other Types of IRAs

In addition to the ordinary traditional and Roth IRA options, self-employed people, sole proprietors, and those with small businesses can set up SEP or SIMPLE IRAs.

• A SEP IRA, or Simplified Employee Pension IRA, is a retirement plan that can be set up by employers, sole proprietors, or the self-employed. Employers make contributions for employees (employees don’t contribute). Employers are not required to contribute to a SEP every year.

• A SIMPLE IRA, or Savings Incentive Match Plan for Employees IRA, is similar to a 401(k) but for businesses with 100 or employees or less. Both the employer and the employees can contribute to a SIMPLE IRA.

Both SEP and SIMPLE IRAs are tax-deferred accounts, similar to a traditional IRA. Contributions in most cases are tax deductible, but the account holder must pay ordinary income tax on withdrawals. The rules and restrictions governing withdrawals vary, so you may want to check the details at IRS.gov or consult a tax professional.

Pros and Cons of Maxing Out Your IRA Early or Late

Maxing out your IRA, i.e., making the full annual contribution allowed, could help you save more for retirement. And as with any contribution amount, there can be tax benefits depending on the type of IRA you’re funding.

Whether it makes sense to contribute earlier in the year or wait until the contribution deadline depends on your financial situation.

Here are some of the advantages and disadvantages of maxing out an IRA earlier vs. later.

	Maxing Out an IRA Early	Maxing Out an IRA Late
Pros	• Maxing out your plan sooner allows it more time to grow, potentially. Growth depends on the investments you choose for your IRA; there are no guarantees of returns and there is always a risk of loss. • If your financial situation changes you’ll have the reassurance of knowing that your plan is fully funded for the year.	• Waiting to max out your IRA until tax day could give you more time to max out your 401(k) before the year-end contribution deadline. • If you have a Roth IRA, waiting to make contributions can help you better gauge the maximum amount you can save, based on your income.
Cons	• Fully funding an IRA early in the year could leave you short financially if you need money for other goals. • There’s a risk of contributing too much to a Roth IRA, based on what your income and filing status allows, which could trigger a tax penalty.	• Delaying contributions might mean missing out on potential growth (but there are no guarantees your money will grow). • Waiting too long could result in missing the annual contribution deadline altogether if you come up short and don’t have enough money to save.

Maxing Out an IRA Early

Maxing Out an IRA Late

Pros

• Maxing out your plan sooner allows it more time to grow, potentially. Growth depends on the investments you choose for your IRA; there are no guarantees of returns and there is always a risk of loss.

• If your financial situation changes you’ll have the reassurance of knowing that your plan is fully funded for the year.

• Waiting to max out your IRA until tax day could give you more time to max out your 401(k) before the year-end contribution deadline.

• If you have a Roth IRA, waiting to make contributions can help you better gauge the maximum amount you can save, based on your income.

Cons

• Fully funding an IRA early in the year could leave you short financially if you need money for other goals.

• There’s a risk of contributing too much to a Roth IRA, based on what your income and filing status allows, which could trigger a tax penalty.

• Delaying contributions might mean missing out on potential growth (but there are no guarantees your money will grow).

• Waiting too long could result in missing the annual contribution deadline altogether if you come up short and don’t have enough money to save.

What If You Contribute Too Much to Your IRA?

If you contribute too much money to your IRA, the IRS can treat it as an excess contribution. Excess IRA contributions can happen if you:

• Aren’t keeping track of contributions throughout the year

• Miscalculate the amount you can contribute to a Roth IRA, based on your income and filing status

• Make an improper rollover contribution

If you make excess IRA contributions, the IRS can apply a 6% penalty for each year the excess amounts remain in your account. You can avoid the 6% tax by withdrawing excess contributions and any earnings from those contributions by the tax filing deadline or extension deadline if you filed one.

The Takeaway

If you have any type of IRA, it’s important to mark your calendar each year with the contribution deadline so that you can plan the cadence of your contributions in relation to other expenses. Because most types of IRAs allow additional time for contributions, this can help you save more — and possibly reap additional tax benefits.

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

What is the last day to contribute to an IRA for tax year 2024?

The traditional and Roth IRA contribution deadline for the 2024 tax year is April 15, 2025. If you’re an employer, or self-employed individual contributing to an SEP IRA, you’d have until tax day to contribute, unless you filed a tax extension. In that case, you’d be able to use the extension deadline instead.

Can I contribute to an IRA after December 31?

Yes, you can contribute to an IRA for the current tax year up until the federal tax deadline, which is typically April 15 of the following year. In years where the federal tax deadline falls on a holiday or weekend, the date is pushed up to the next business day.

Can I open an IRA in 2025, but contribute for 2024?

If the 2025 tax year is already underway, and the April tax deadline has passed, you cannot open an IRA and make contributions for the 2024 tax year. You could, however, open a traditional or Roth IRA before the April 2025 tax filing deadline and fund it with contributions for the 2024 tax year.

Photo credit: iStock/MicroStockHub

SoFi Invest®

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

SOIN0223001

Evaluating the Pros and Cons of Alternative Investments

Pros of Investing in Alts

Diversification

Potential for Higher Returns

Potential for Passive Income

Hedge Against Inflation

Alts Are Available Through ETFs and Mutual Funds

Accessible via Retirement Accounts

Personal Appeal

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Cons of Investing in Alts

Low Liquidity/Redemption Issues

High-Risk Strategies

Complex Tax Treatment

Higher Costs

Lack of Transparency and Publicly Available Data

The Takeaway

Benefits of ETFs — Pros & Cons in Investment Portfolio

What Are the Benefits of ETFs?

ETFs Trade Similar to Stocks

Portfolio Diversification

Accessible Across Markets

Lower Costs

Tax Efficiency

Transparency

Flexibility

Disadvantages of ETFs

Lack of Personalization

Tracking Error

Short-Term Trading Costs

Limited Choices

Counterparty Risk

Complexity

Market Risk

What to Consider When Investing in ETFs

Investing With SoFi

FAQ

What is the benefit of investing in an exchange-traded fund?

Are ETFs a good investment?

Why are ETFs better than stocks?

Is an ETF better than a mutual fund?

How Do You Cash Out Stocks? Guide to Selling Stocks

Can You Cash Out Stocks?

What Happens When You Sell a Stock?

How to Cash Out Your Stocks: 5 Steps

Motivations for Selling Stocks

Accessing Cash for Life Expenses

Cashing Out Profits

Preventing Significant Losses

Day Trading

Offloading Low Performing Stocks

Understanding Types of Sell Orders

Market Orders

Limit Orders

Stop Orders or Stop-Loss Orders

Trailing Sell Stop Orders

Factors to Assess When Cashing Out Stocks

Pros and Cons of Reinvesting Profits

Pros:

Cons:

Pros

Cons

Platforms for Buying and Selling Stocks

Online Brokerage Accounts

Financial Advisors

The Takeaway

FAQ

How long does it take to cash out stocks?

Do you get money when you sell stock?

Can I withdraw money from stocks?

What Is a Shareholder Activist?

How Shareholder Activism Works

Types of Shareholder Activists

Hedge Funds

Institutional Investors

Individual Investors

Examples of Shareholder Activists

Is Shareholder Activism Good for Individual Investors?

The Takeaway

Alternative investments,
now for the rest of us.

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

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