Investing Archives | Page 96 of 191

Oct

2023

How to Trade the Bullish Engulfing Candlestick Pattern

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

Traders use the bullish engulfing candlestick pattern to identify bullish reversals. It is an impressive two-day candlestick that features a candlestick body encompassing the previous day’s body. It is important to monitor confirmation signals in subsequent periods following a bullish engulfing pattern.

A bullish engulfing pattern occurs after a downtrend has taken place. The positioning of candlesticks relative to a price trend is a critical piece of candlestick analysis. The bullish turnaround is a signal of a trend reversal.

What Is a Bullish Engulfing Pattern?

The bullish engulfing pattern is a two-candlestick pattern consisting of a large green candle body (green indicates rising prices, but colors may differ based on your chart settings) that completely overlaps the previous time period’s body. It is a sign of a trend reversal from bearish to bullish.

This formation is more likely to portend a reversal when it follows four or more red (red indicates falling prices) candlesticks. The bullish engulfing pattern is thought to show that the bears have lost their momentum and the bulls are ready to take charge.

Recommended: What Is a Candlestick Chart?

The candle for the first period often features a small red body while the second time period is a candlestick with a large green body, sometimes happening on high volume. The candle for the second period also features a small gap down in price, which briefly gives confidence to the bears.

The bulls quickly grab the reins and drive prices higher intraday.

As with many candlestick patterns, it is important to know where one pattern’s position is relative to the prevailing trend. A bullish engulfing pattern should happen in a downtrend. While bullish engulfing candles can certainly happen in a sideways market or uptrend, they are not seen as definitive compared to when they take place after downward price action.

💡 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.

What Does a Bullish Engulfing Pattern Tell Traders?

A bullish engulfing candlestick pattern tells traders that a price trend reversal might be happening. Placement of the bullish engulfing candle is critical: It should occur in a downtrend. The large green body demonstrates strong upward momentum — the stock (or any other asset) opens near the low of the period and rallies throughout the session to settle near the high. You can also use candlesticks over other periods such as weeks or months or even on shorter time frame charts.

In the bullish engulfing pattern the engulfing candle comes after a small red candle in which prices traded in a relatively narrow range, but still featured decidedly bearish price action. In the larger context, the bearish trend must have been in place for a significant time. This setup makes the bullish engulfing candlestick even more important as it tells the trader that a new bull market might be brewing.

While the two-day pattern is interpreted as bullish, you might still want to wait for further evidence that the trend has indeed changed. Traders often hold off on buying shares until after subsequent price action holds the bullish engulfing candle’s closing price. A bullish engulfing formation illustrates a change in sentiment from bearish to bullish.

Example of a Bullish Engulfing Pattern

An example helps display the power of a bullish engulfing candle.

Let’s say a stock fell from a high of $150 per share six months ago. A downtrend is in place. You believe the stock is a good value based on fundamental analysis but you want to wait for a bullish price trend reversal before purchasing shares.

You notice prices have been falling for five straight days, but then today’s price action had a different tone. The stock opened the prior day at $110, ranged from $107 to $111, and settled at $108. It had a red (bearish) body since the stock closed below the opening price.

Today, the stock gapped down to open at $103, dropped to $101 early, then steadily climbed on strong volume throughout the session. It notched a high of $115, then closed at $113. Since the stock closed above the opening price, the candle had a green body. It also engulfed the previous day’s body.

The bullish engulfing candle appeared at the bottom of a price trend and demonstrated an increase in buying pressure. You decide to wait for further evidence that a bottom was established and that a price uptrend is now in place. Indeed, two days after the bullish engulfing pattern, the stock held the day 2 candle’s low price.

You go long shares at $115 and place a sell stop order at $100 (below the pattern’s lowest price). You are sure to monitor support and resistance levels as the price trends higher so you can manage your position keeping risk in mind.

Recommended: 5 Bullish Indicators for a Stock

How does the Bullish Engulfing Pattern Work?

The bullish engulfing candlestick pattern works by signaling a bullish trend reversal. Let’s review the benefits and drawbacks of this important candlestick formation.

Benefits of the Bullish Engulfing Pattern

There are several advantages of bullish engulfing patterns.

In general, they are easy to spot and interpret.

Offering traders defined stop loss levels is another benefit. You can also combine other technical indicators with engulfing formations to help confirm reversals.

Finally, engulfing candlestick patterns can be used on many timeframes and across different asset classes.

💡 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.

Drawbacks of the Bullish Engulfing Pattern

Technical analysis does not provide an absolute prediction, so take caution when interpreting specific patterns.

Moreover, no single indicator is a sure thing – and that goes for the bullish engulfing candlestick pattern. It might be helpful to use other technical indicators to buttress your trading thesis.

Another drawback of the bullish engulfing pattern is that you might see a bullish engulfing candle on a daily chart of a stock, but then see an equally bearish candlestick pattern on its weekly chart.

It’s also risky if the engulfing candle is so big that it leaves the trader with a potentially large stop loss if the asset price reverses lower after the pattern.

Finally, there is always the risk that a false breakout or breakdown takes place, so setting reasonable exit strategies is important.

How to Trade a Bullish Engulfing Pattern

You should analyze the existing trend and look for confirmation following a bullish engulfing candlestick. This concept is important when using technical analysis to research stocks.

For example, if a bullish engulfing day happens after many weeks of downward stock price action, then a bullish reversal might be more effective at taking shape.

Monitoring volume trends is also crucial when trading the bullish engulfing pattern. Look for high volume on the day of the engulfing candle.

Finally, it might be prudent to wait for confirmation of the bullish engulfing candlestick – that means you might buy shares of a stock the day after a bullish engulfing so long as the stock price remains above the engulfing candlestick’s low price.

As additional protection against outsize losses, sell stop order is often placed below the engulfing candle’s swing low.

The Takeaway

The bullish engulfing candlestick pattern helps traders spot potential trend reversals on a chart. The pattern is defined as a two-period candlestick pattern with a green (price rising) candlestick that closes above the previous period’s opening price after beginning the current period lower than the previous period’s close. The current day’s candle body completely overlaps the prior day’s real body.

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).

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.

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Oct

2023

What Is Pre-IPO Placement?

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

A pre-IPO placement involves the sale of unregistered shares in a company before they’re listed on a stock exchange for the first time. A pre-IPO placement usually occurs immediately before a company goes public.

Companies typically sell pre-IPO shares to hedge funds, private equity firms and other institutional investors that can purchase them in large quantities. It’s possible, however, to get involved in pre-IPO investing as an individual retail investor.

Investing in IPOs or pre-IPO stock could be profitable, if the company’s public offering lives up to or exceeds market expectations. But it’s also risky, since you never know how a stock will perform in the future.

How Does Pre-IPO Placement Work?

An IPO, or initial public offering, is an opportunity for private companies to introduce their stock to the market for the first time. A typical IPO requires a lengthy process, as there are numerous regulatory guidelines that companies must meet.

Once those hurdles are cleared, however, the company will have a date on which it goes public. Investors can then purchase shares of the company through the stock exchange where it lists.

Pre-IPO investing works a little differently. The end goal is still to have the company go public. But before that, the company sells blocks of shares privately, based on its IPO valuation. A successful pre-IPO gives the company attention, as well as capital from investors ahead of the actual IPO date.

For the most part, pre-IPO shares are restricted to high-net-worth investors, or accredited investors, i.e. those who can afford to invest large amounts of capital, and can afford to take on a certain amount of risk. A pre-IPO placement of shares could be made without a prospectus or even a guarantee that the IPO will occur.

Individual investors typically don’t have the funds required, or the stomach for that level of risk.

In return for that measure of uncertainty Pre-IPO investors get in on the ground floor and purchase shares before they’re available to the market at large. There may also be an added incentive. Because they’re buying such large blocks of shares, pre-IPO investors may get access to them for less than the projected IPO price.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

An Example of Pre-IPO Placement

Pre-IPO placements have gained popularity over the last decade, with more companies opting to offer them ahead of going public. Some of the companies that have offered pre-IPO stock include Uber and Alibaba, both of which have ties to e-commerce.

Alibaba’s pre-IPO offering was notable due to the fact that a single investor and portfolio manager purchased a large block of shares. The investor, Ozi Amanat, purchased $35 million worth of pre-IPO stock at a price that was below $60 per share.

He then distributed those shares among a select group of families. By the end of the first public trading day, Alibaba’s shares had risen to $90 each. Alibaba’s IPO delivered a 48% return to those pre-IPO shareholders due to higher-than-expected demand for the company’s stock.

In Uber’s case, PayPal agreed to purchase $500 million worth of the company’s common stock ahead of its IPO. PayPal then lost a large portion of its investment when the Uber stock price fell by about 30% following its IPO.

Pros and Cons of Pre-IPO Placement

There are benefits to pre-IPOs placements, but there are also some important drawbacks that investors should understand.

Pros of Pre-IPO Placement

From the perspective of the company, pre-IPO offerings can be advantageous if they help the company to raise much-needed capital ahead of the IPO. Offering private placements of shares before going public can help attract interest to the IPO itself, which could help make it more successful.

For investors, the benefits include:

• Access to shares of a company before the public.

• The potential ability to purchase shares of pre-IPO stock at a discount. So if a company’s IPO price is expected to be $30 a share, pre-IPO investors may be able to purchase it for $25 instead. This already gives them an edge over investors who may be purchasing shares the day the IPO launches.

• Purchasing shares at a discount can potentially translate to higher returns overall if the IPO meets or exceeds initial expectations. The higher the company’s stock price rises following the IPO, the more profits you could pocket by selling those shares later.

Cons of Pre-IPO Placement

While pre-IPO investing could be lucrative, there are some potential backs to consider. Specifically, there are certain risks involved that could make it a less attractive option for investors.

• The company’s IPO may not meet the expectations that have been set for it. That doesn’t mean a company won’t be successful later. Facebook, for example, is noteworthy for having an IPO described as a “belly flop”. A disappointing showing on the day a company goes public for the first time could shake investor confidence in the stock and bode ill for its future performance. That in turn could affect the returns realized from an investment in pre-IPO stock.

• The company may never follow through on its IPO and fails to go public. In that case, investors may be left wondering what to do with the shares they hold through a pre-IPO private placement. WeWork is an example of this in action. In 2019, the workspace-sharing company announced that it had scrapped its plans for an IPO, thanks to limited interest from investors and concerns over the sustainability of its business model. In 2021, the company did go public — but not through an Initial Public Offering. Instead, WeWork went public through a merger with a special acquisition company or SPAC.

• Pre-IPOs are less regulated than regular IPOs.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Summary of Pros and Cons of Pre-IPO Placement

Here’s a quick look at the benefits and drawbacks of pre-IPO placements:

Pre-IPO Private Placement Pros and Cons

Pros	Cons
• Investors have an opportunity to get into an investment ahead of the crowd • Pre-IPO investors may be able to purchase shares at a price that’s below the IPO price • Purchasing pre-IPO stock could yield higher returns if the IPO is successful	• Pre-IPO placements can be risky, as they’re less regulated than regular IPOs • There are no guarantees that an IPO will deliver the type of returns investors expect • Does not guarantee you’ll get the loan

Pros

Cons

• Investors have an opportunity to get into an investment ahead of the crowd

• Pre-IPO investors may be able to purchase shares at a price that’s below the IPO price

• Purchasing pre-IPO stock could yield higher returns if the IPO is successful

• Pre-IPO placements can be risky, as they’re less regulated than regular IPOs

• There are no guarantees that an IPO will deliver the type of returns investors expect

• Does not guarantee you’ll get the loan

How to Buy Pre-IPO Stock

Typically, only accredited investors can purchase pre-IPO placements. As of 2021, the Securities and Exchange Commission defines an accredited investor as anyone who:

• Earned income over $200,000 (or $300,000 if married) in each of the prior two years and reasonably expects to earn that same amount in the current year, OR

• Has a net worth over $1 million, either by themselves or with a spouse, excluding the value of their primary residence, OR

• Holds a Series 7, 65 or 82 license in good standing

If you meet these conditions for accredited investor status, then you may be able to purchase shares of pre-IPO stock through your brokerage account. Your brokerage will have to offer this service and not all of them do.

Other options for buying pre-IPO stock include purchasing it from the company directly. To do that, you may need to have a larger amount of capital at the ready. So if you’re not already an angel investor or venture capitalist, this option might be off the table.

You could also pursue pre-IPO placements indirectly by investing in companies that routinely purchase pre-IPO shares. For example, you might invest in a mutual fund or exchange-traded fund that specializes in private equity or late-stage companies preparing to go public. You won’t get the direct benefits of owning pre-IPO stock but you can still get exposure to them in your portfolio this way.

The Takeaway

For some high-net-worth or institutional investors, buying pre-IPO shares — a private sale of shares before a company’s initial public offering — might be possible. But it’s highly risky. For the most part, individual investors won’t have access to these kinds of private deals. But eligible investors may be able to trade ordinary IPO shares through their brokerage.

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

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

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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.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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

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Oct

2023

How Many Companies IPO Per Year? 2021 Trends

How Many Companies IPO Per Year? 2023 Trends

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

An initial public offering, or IPO, represents the first time a company makes its shares available for trade on a public stock exchange. The number of IPOs per year varies, depending on market conditions and the ease with which companies can raise capital via other methods.

Private companies can use IPOs to raise capital and fuel future growth, and hundreds of companies go public most years, presenting an opportunity for interested investors.

IPO statistics can offer some perspective on how frequently companies decide to go public and which sectors tend to see the most significant launches.

Number of IPOs by Year

A look at IPO history shows that the number of initial public offerings fluctuates significantly by year and decade. Since 2000, there have been some 6,013 IPOs. Here’s a look at IPO filings by year for that time frame:

Year	Number of IPOs
2000	397
2001	141
2002	183
2003	148
2004	314
2005	286
2006	220
2007	268
2008	62
2009	79
2010	190
2011	171
2012	157
2013	251
2014	304
2015	206
2016	133
2017	217
2018	255
2019	232
2020	480
2021	1,035
2022	181
2023*	79

*As of June 30, 2023.

The number of IPOs in any given year tend to follow movements in the economic cycle. In 2008, for example, there were just 62 IPOs as the economy and stock market were in the midst of a historic downturn. IPO activity didn’t pick up the pace again until 2010, once the Great Recession had ended.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Previous Year IPOs

Companies were more likely to go public in the 1980s and 1990s than in recent years. Between 1980 and 2000, an average of 311 firms went public each year.

IPO activity spiked in the mid-90s as entrepreneurs sought to join the growing dot-com bubble.

Meanwhile, an average of 187 firms went public annually between 2001 and 2011. In recent years, larger, more established companies are more likely to go public than smaller private firms.

However, a record number of companies — 1,035 — went public in 2021. Some analysts point to loose monetary policy and a booming stock market as reasons so many companies went public during the year.

Additionally, one of the factors driving IPOs during 2020 and 2021 was an increase in IPOs for special-purpose acquisition corporations (SPACs). SPACs are essentially holding companies that go public with the sole purpose of acquiring another company.

Recommended: What Is an IPO Pop?

Overview of IPOs in 2022 – 2023

Following the boom in IPOs in 2021, the number of companies that went public during 2022 and 2023 dramatically decreased, due to several factors, including tight monetary policy to combat inflation, and a dramatic decline in the stock market.

As of June 30, 2023, there have been only 79 U.S. market IPOs so far — a 37% drop compared with the number of IPOs in 2022 by this time. There were 125 IPOs by June 30, 2022.

Of the 79 that debuted this year, about 46.8% — 37 companies — showed negative returns as of June 30, 2023, and 42 showed positive returns (bearing in mind that 11 companies IPO’d in June, and their prices may fluctuate in the coming quarters).

That said, the IPO proceeds in Q1 of 2022 similar to Q1 of 2023: $2.5 billion and $2.4 billion respectively. But company valuations were higher in 2022, and the 24 IPOs in Q1 generated almost as much in proceeds that year as the 33 IPOs in Q1 of 2023.

Evaluating the performance of stocks after a company goes public can give you an idea of how successful IPOs tend to be overall. However, it’s important to remember that it’s impossible to predict whether a stock will boom or bust in the months and years after it starts trading.

IPO stocks are considered highly volatile, high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

The Takeaway

Looking at IPO statistics and IPOs by year can help you track trends and understand just how often companies go public, and why some years have more IPOs than others.

While the low interest rates and rising stock market of 2021 helped create a record year for 1,035 new companies, the climate now has changed: rates are higher, there’s more market volatility, and the slowing number of IPOs reflects that.

If you’re interested in adding IPOs to your portfolio, it’s also important to know which sectors tend to have the most and least IPO activity.

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

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Oct

2023

Cannabis Investing 101

By Amanda Holden | Growing Wealth, Investing | Comments Off

Investing in the cannabis industry is becoming a bigger area of interest for many investors, as marijuana becomes increasingly legal in different states around the U.S. As more states legalize cannabis use for recreational purposes, investors may be attracted to its growth potential – and the potential to drive returns for their portfolios.

But investing in cannabis carries some significant risks. It’s still a federally illegal substance, for one, and it’s unclear if there’s a path to national legalization. There’s a lot to take into consideration for investors.

Overview of Cannabis Legalisation

As of mid-2023, 23 states in the U.S., as well as the District of Columbia, Guam, and the Northern Mariana Islands, have legalized cannabis for recreational use. Many others have legal medical marijuana laws.

It’s likely that more states will legalize marijuana for recreational or medical use in the years ahead, too. Federal legalization is also a possibility, but for now, it’s uncertain. Given that over the past ten or so years recreational legalization has grown from zero to roughly half of states, though, investors see investing in cannabis as an opportunity.

Outside the U.S., Mexico legalized recreational marijuana in 2021, becoming the largest market for cannabis in the world. It followed Canada, which in 2018 made the same move.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How to Invest in Cannabis Stocks

The main ways investors can get exposure to marijuana businesses in their portfolios is by first, owning the individual stocks of cannabis-related companies. The other option is through cannabis-themed exchange-traded funds, or ETFs.

Cannabis Stocks

Historically, cannabis companies tended to remain private companies. But in Canada, medical use of marijuana has been legal since 2001, making the Toronto Stock Exchange and TSX Venture Exchange the listing venues for many cannabis-related businesses. Investors in the U.S. are able to trade Canadian stocks via American Depository Receipts (ADRs).

Then in 2018, medical marijuana company Tilray became the first cannabis company to directly list in the U.S., having its initial public offering (IPO) on the Nasdaq Stock Exchange. Since then, many other cannabis companies have gone public, including Cronos Group Inc., Canopy Growth Corporation, and Aurora Cannabis. There are also publicly-traded companies that offer cannabis or cannabis-related products or that are otherwise active in the cannabis space, such as Anheuser-Busch InBev, Altria Group, Molson Coors, and Scotts Miracle-Gro.

While a listing on a major exchange does not imply that an investment is good or bad, stocks that are listed on an exchange are held to higher regulatory and reporting standards. Those that don’t qualify to be listed on an exchange typically trade over-the-counter (OTC).

No matter where an investor purchases a stock – on an exchange or OTC – it’s wise to be cautious.

Get in on the IPO action at IPO prices.

SoFi Active Investing members can participate in IPO(s) before they trade on an exchange.

Different Types of Cannabis Companies

When investors think of cannabis stocks, they may think of marijuana growers. But this is not the only type of business available for investors to consider.

• Investors may be interested in biotech companies that are developing prescription drugs using the compounds found in marijuana (cannabinoids).

• There are companies that provide products and services to the cannabis industry itself, such as distribution, packaging, energy and lighting systems (for greenhouse growth), banking, and hydroponics – a plant-growing method that involves no soil.

• Another way to look at investing in marijuana businesses is via companies that do the majority of their business in other markets, but have growing cannabis-related arms.

Marijuana ETFs

An ETF is a basket of securities, such as stocks or bonds, that’s packaged into a single share that investors can find listed on stock exchanges. Many ETFs mirror the moves of an underlying index, like the S&P 500 Index or Nasdaq 100 gauge.

In general, ETFs have been lauded for their ability to help investors get exposure to a broad array of investments at a low cost. Similarly, a cannabis ETF could potentially allow an investor to diversify their stocks holdings, while avoiding pricey management or transaction fees and the research required when picking individual stocks.

Cannabis ETFs generally have higher expense ratios than those of the most popular, non-cannabis, low-cost ETFs. This is largely due to the fact that investing in individual marijuana stocks remains expensive, and the active management involved in curating stocks to include in the ETF.

Cannabis ETFs may also hold fewer stocks than more traditional ETF. This is typical of so-called thematic ETFs, ones that allow investors to wager on more niche trends. While such funds allow for more targeted bets, investors are also exposed to fewer names, making it more likely that a big move in one company will impact the price of the ETF as a whole.

Potential Risks of Cannabis Investing

Marijuana stocks have tended to be more volatile than the overall market. In addition, pot stocks have also been a target for short sellers – investors who bet shares of a company will fall. Investors who aren’t comfortable with such stock volatility may want to forgo investing in cannabis stocks.

Legal & Regulatory Risks

Because marijuana is still prohibited on the federal level in the U.S., there can be a legal risk to investing in pot-related companies. For instance, cannabis-related businesses in the U.S. are shut out from the banking system in many respects.

In addition, even if the U.S. were to pass federal legalization, that doesn’t mean growers and retailers will be able to sell their products immediately under a streamlined regulatory structure. Some states may put in place new regulation that makes pot sales and usage onerous.

After Canada legalized marijuana in 2018, many people thought that the move would lead to quick sales and profits. But in reality, the opening and licensing of cannabis stores took place slowly. Plus, illegal pot sales continued to thrive and compete with the legal marketplace.

In the first year after legalization, the stock value of Canada’s six largest marijuana companies plummeted by more than 50% on average.

New Industry and Market

Because the legal marijuana industry is relatively young, so are many of the companies within it. Many of these companies have untested business models.

From a stock investment standpoint, many of the stocks that are currently for sale in the OTC market qualify as microcap stocks and penny stocks. Many of these companies have yet to post positive earnings and bear no track record. Microcaps typically experience a high rate of failure and are often highly volatile.

Separately, unexpected developments and news reports may hit a new industry like cannabis. For instance, in 2019, many pot stocks took a dive amid concerns that vaping was tied to a serious respiratory disease.

Fraud

In addition to the general market risk that comes with investing in a new industry, fraud often attaches itself to new, exciting, and less-regulated industries.

In a 2018 investor bulletin, the Securities and Exchange Commission (SEC) alerted investors that their office regularly receives complaints about marijuana-related investments. “Scam artists often exploit ‘hot’ industries to trick investors,” the regulator said.

The SEC said investors should particularly be wary of risks related to investment fraud and market manipulation. Investment fraud includes unlicensed, unregistered sellers; guaranteed returns; and unsolicited offers. Meanwhile, market manipulation can involve suspended trading in shares, changes to a company name or type of business, and false press releases.

💡 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).

The Takeaway

Hunting for the next big marijuana investment may seem like an exciting endeavor. But investors should keep in mind that the cannabis industry may continue to encounter obstacles even if legalization on a broader scale occurs in the near future.

And outside the regulatory challenges, cannabis-related businesses tend to be newer, untested, and not yet profitable, posing greater risks for investors. The marijuana market may turn out to be an area of growth for stocks, but investors should weigh the considerable risks associated with it, too.

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.

SoFi Invest®

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

SOIN0723028

Oct

2023

How to Invest as a College Student

By SoFi Editors | Growing Wealth, invest, Investing | No Comments

There are numerous ways to invest for college students, including using brokerage accounts, or even retirement accounts like individual retirement accounts (IRAs) or 401(k)s. But there are many other things that college students should take into account before or while investing, too.

For college students, it’s never too early to start investing your money. In fact, the earlier you start, the faster you may be able to meet long-term goals such as a graduate degree, buying a house, or even retirement.

Why You Should Start Investing Early

There are a number of reasons to start investing early. Chief among them is potential return. The average annual return offered by the S&P 500 — a market-capitalization-weighted index of the 500 largest companies in the U.S. – is around 10%.

That’s considerably more than you’re likely to generate from putting your money in a savings account – even a high-yield savings account. That means that while money in a savings account is accruing interest, it’s actually losing value at the same time. Investing may help you outpace inflation and give you an extra boost towards your long term goals.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

3 Ways to Invest While in College

There are numerous ways for college students to invest their money, including the use of tax-advantaged retirement accounts, and traditional brokerage accounts.

IRA

Traditional and Roth IRAs are a type of retirement account that almost anyone can open up and start contributing to. There are rules regarding how much you can contribute every year, and when you can take withdrawals (depending on the type of IRA you open), but they can be relatively easy ways to kick-start a college students’ investment portfolio.

Brokerage Account

A brokerage account allows you to make investments through a brokerage firm by depositing funds with them. Your bank may already have brokerage options, or you may consider other outside firms.

A brokerage account allows students to buy and sell stocks, bonds, mutual funds, and other assets through a brokerage firm. Be aware that selling assets can trigger short-term or long-term capital gains taxes. Short-term taxes are charged at your regular income tax rate, and long-term rates are either 0%, 15%, or 20% depending on your tax bracket.

401(k)

A 401(k) is a type of retirement account offered through an employer, though there are some versions, such as Solo 401(k)s, you can open yourself. Like IRAs, there are annual contribution limits, and traditional and Roth 401(k)s to choose from.

The money you put in the account is tax deductible and it grows tax-free while it’s invested. That said, generally, you can’t withdraw money from the account until you reach age 59 ½, or you’ll be subject to a 10% early withdrawal penalty.

Steps to Start Investing as a College Student

For college students getting started investing, there are several steps that they can take to find their footing. It starts by giving some thought to your overall financial goals, determining what you can afford to invest, and then building your portfolio.

Set Clear Financial Goals

It’s important, before you make your first investment as a college student, to give some serious thought and consideration to your financial goals. Do you want to hit a total net worth or dollar amount by a certain age, for instance? Or, do you want to save up enough to buy a home or start a family?

These are the types of financial goals you should think about. Having clear financial goals in mind before you start investing can help guide your decision-making in regard to what types of investments you make.

Determine How Much Money You Can Set Aside

With your goals in mind, you’ll want to think about how much money you realistically can set aside to invest. Odds are, you won’t be able to invest your entire paycheck – there’s rent to pay and groceries to buy, after all. But if you can free up some additional money in your budget for investing, that should help you get your portfolio started. Again, think about how much you can realistically use for investment purposes.

Choose the Right Investment Account

Knowing how much you have to invest and some end-goals in mind, you’ll need to decide what type of investment account will best help you reach those goals. As discussed, this might be a retirement account like an IRA or 401(k), or a brokerage account, which will allow you to buy and sell stocks, or even day trade, if you’d like – though most financial professionals may caution against it.

Understand Types of Investments

You’ll also want to review and deepen your understanding of the various types of investments out there. That can include a variety of asset types such as stocks, bonds, cash, real estate, commodities, precious metals, and more. Not all types will be best for each and every investor – again, it depends on your goals.

Fund Your Investments

The rubber is finally starting to meet the road! You’ll finally want to actually fund your chosen account (be it a brokerage account, etc.) and make your initial investments. This marks the start of your investment portfolio.

Tips for Investing as a College Student

Investing as a college student may seem relatively easy – particularly to get started – but it never hurts to accept some guidance. Here are a few tips for investing as a college student.

Stay Diversified

A good rule of thumb for investors of all stripes is to try and stay diversified by investing in many types of assets and asset classes. The basic idea of portfolio diversification is that the fewer investments you expose yourself to, the more risk you take on should they perform poorly.

Imagine you invest in only one stock and that company folds — if that happens, you’ve lost your entire investment. However, if you invested in 100 different stocks, one company failing would affect you far less. Diversification, however, does not eliminate all risks, including the risk of loss.

One way to stay diversified is by investing in mutual funds or exchange traded funds, which bundle groups of stocks together, essentially doing the work of diversification for you.

Avoid Emotional Investing

The market experiences natural ups and downs. As these fluctuations occur, it’s important to try to avoid letting your emotions impact your investing.

When the market makes a big dip, you may feel the urge to sell investments. However, by doing so you’re actually locking in your losses. Examine what is motivating you to sell, as it’s usually a good idea to let reason prevail so you don’t miss out on any future upturn that may take place.

Timing the Market vs Time in the Market

When the market is doing well, you may find yourself tempted to get in on the action and end up buying investments that are too expensive. This type of buying and selling is known as timing the market. You may want to avoid checking the market multiple times a day to help keep your emotions in check and avoid the temptation to time the market.

It might help to think of investing as a long-term proposition. The longer you allow your investments to stay in the market, the more opportunity they have to ride out downturns — and the more opportunity you have to take advantage of an upswing.

Balancing Investing With Academic Responsibilities

As a college student, you should keep your studies in mind, first and foremost. Your academic responsibilities, in most cases, should probably take precedence over your investing activity – though you should keep an eye on your portfolio and learn as much as you can about the markets, too. Everyone is different, but the main point is to not ignore your studies in lieu of watching the market fluctuate.

Investing with SoFi Invest®

Investing as a college student isn’t necessarily difficult, and there are many ways to get started. But given that college students are often working with a limited budget, there may be constraints. Even so, it’s important for relatively young investors to take advantage of the time they have on their side, as the market tends to rise over the years.

College students can look at various retirement accounts, or even a simple brokerage account to get started investing. Investing involves risk, however, which is something students should keep in mind, too. It never hurts to consult with a financial professional, either.

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.

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The Takeaway

How to Invest as a College Student

Why You Should Start Investing Early

3 Ways to Invest While in College

IRA

Brokerage Account

401(k)

Steps to Start Investing as a College Student

Set Clear Financial Goals

Determine How Much Money You Can Set Aside

Choose the Right Investment Account

Understand Types of Investments

Fund Your Investments

Tips for Investing as a College Student

Stay Diversified

Avoid Emotional Investing

Timing the Market vs Time in the Market

Balancing Investing With Academic Responsibilities

Investing with SoFi Invest®

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