Dec
12
2024
What is a Retail Investor? Definition, Pros, and Cons

Retail Investors: Definition, Pros, and Cons

By | Growing Wealth, invest, Investing | Comments Off on Retail Investors: Definition, Pros, and Cons

Generally, there are two primary types of investors: institutional and retail investors. Unless you work at an investment bank or big brokerage firm, you likely fall into the latter category. Institutional investors generally buy and sell securities on behalf of corporations, funds, organizations, or other high-net-worth individuals, whereas retail investors make investment decisions for themselves.

Here’s a closer look at what a retail investor is, and the pros and cons of investing on your own.

Key Points

•   Retail investors are non-professional individuals who invest money in their own accounts through brokerage firms.

•   Retail investors may manage their own accounts, or hire a professional to guide their investment decisions.

•   Retail investors typically make smaller transactions compared to institutional investors.

•   The SEC protects retail investors by enforcing securities laws and providing online education.

•   Retail investor activity may impact individual stocks and the market at large.

What Is a Retail Investor?

A retail investor is a non-professional, individual investor who invests money in their own accounts, typically through traditional or online brokerage firms. They may invest as an active investor, allocating the money and making trades on their own, or they may hire a professional, such as a financial planner or advisor, to oversee the investment decision-making process.

Retail trading typically involves relatively small transactions, perhaps in the hundreds or thousands of dollars. Institutional investors, such as hedge funds, might move millions of dollars with every trade. The Securities and Exchange Commission (SEC) protects retail investors by enforcing securities laws and providing online education for investors.

How Retail Investing Works

Retail investors start by opening a brokerage account with a broker for traditional or online investing. Online brokers may offer automated accounts, also known as robo advisors, that can help investors who prefer a hands-off approach to building a financial portfolio.

Investors transfer money into their brokerage account and then buy and sell securities, including a wide range of stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Alternatively, they can have a financial professional buy and sell securities on their behalf.

Retail investors may choose to invest in various securities depending on their investment goals and risk tolerance. For example, an investor looking for long-term growth may decide to invest in stocks, while an investor looking for steady income may choose to invest in bonds. Retail investors may also diversify their portfolios by investing in a mix of securities, such as stocks, bonds, and alternative assets.

Investors may have to pay investment commissions and fees to make trades, especially when working with a professional. Because retail investors tend to make smaller trades, these fees may be relatively high. That said, many online brokerages have reduced or eliminated commissions for individuals making trades for certain securities like stocks or ETFs. Investors can minimize the impact of commissions or fees by avoiding frequent trades and holding investments over the long term.

Recommended: How to Invest in Stocks: A Beginner’s Guide

Overview of the U.S. Retail Investment Market

It is difficult to determine the exact size of the retail investment market in the U.S., as it is constantly changing and is influenced by various factors, such as economic and political events and market sentiment. Nonetheless, retail investors represent a significant portion of the American markets. By some estimates, there are millions and millions of retail investors, and American households own tens of trillions, or a majority of the U.S. equity market directly or through retirement accounts, mutual funds, and other investments.

The U.S. retail investment market has grown significantly in recent years, with many individual investors participating. This growth has been driven partly by the increasing availability of investment products and services and the increasing use of technology in the financial industry, making it easier for retail investors to access and trade securities.

What Impact Do Retail Investors Have on the Markets?

Retail investors can greatly impact individual stocks and the market at large. According to some experts, individuals are now having a greater impact on the market than they have for the last decade.

For example, retail investors took more interest in active trading during the pandemic in 2020, and flocked to online brokers, trading apps, and automated investing services. During this time, investors drove up the price of so-called “meme stocks” to thwart hedge funds attempting to make money shorting the stock. Such campaigns created volatility throughout the market.

Whether this enthusiasm will continue remains to be seen. But some believe the recent popularity points to a permanent structural change in which retail investors continue to play a significant role in market movements in the future.

Pros and Cons of Being a Retail Investor

Being a retail investor can give you access to many benefits, though there are a few drawbacks to be aware of as well. Here’s a look at some pros and cons of being a retail investor compared to an institutional investor.

Pros: Being a Retail Investor

Some of the potential pros of being a retail investor include:

•   Control: As a retail investor, you can make your own investment decisions and choose the securities you invest in. This can be a significant advantage for those who want to control their investment portfolio and actively participate in the investment process.

•   Diversification: Retail investors can diversify their portfolios by investing in various securities, such as stocks, bonds, and alternative investments. Diversification may help reduce risk by spreading investments across multiple assets rather than being heavily concentrated in just one or a few investments.

•   Accessibility: The retail investment market is generally more accessible to individual investors than the institutional investment market, which is typically only open to large organizations, businesses, and high-net-worth individuals.

Cons: Being a Retail Investor

However, being a retail investor also has some potential drawbacks, including:

•   Limited resources: Retail investors may have fewer resources and less access to information than larger institutional investors. This can make it more challenging for retail investors to compete with institutional investors in some cases.

•   Higher costs: Retail investors may also face higher costs than institutional investors, such as higher trading fees and other expenses. These higher costs can eat into investment returns and make it more difficult for retail investors to achieve their financial goals.

•   Lack of expertise: Some retail investors may have a different level of expertise or knowledge about investing than professional investors or financial advisors. This can make it more challenging for them to make informed investment decisions.

Retail vs Institutional Investors: What Are the Differences?

Retail and institutional investors are two types of investors who buy and sell securities for different purposes. Some key differences between retail and institutional investors include the following.

Retail Investors

 Institutional Investors
Size Invest a relatively small amount of money Generally have significantly more capital and resources at their disposal
Investment goals May have various investment goals, such as saving for retirement, generating income, or growing their wealth over the long term May have more specific investment goals, such as maximizing returns or minimizing risk for clients or a particular group of investors
Investment strategies May focus on individual stocks and bonds, or use mutual funds and ETFs to diversify their portfolio May use more complex investment strategies, like quant trading and various derivatives
Access to information Relies on publicly available information or seeks guidance from financial advisors or other professionals Generally have access to more information and research, such as proprietary data and contacts within companies and governments
Costs Higher trading fees and other investment costs Lower trading fees and other investment costs

The Takeaway

If you’re an individual saving for the future with investments, you’re a retail investor. While there are some disadvantages to being a retail investor compared to an institutional investor, there are also many benefits, and it’s a good way to build financial security over time.

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.

FAQ

Who is an individual retail investor?

A retail investor is an individual investor who buys and sells securities for their personal account rather than for a client, organization, or business. Retail investors may include individuals who invest in stocks, bonds, mutual funds, ETFs, and other securities through a brokerage account or other financial institution.

How do retail investors invest?

Retail investors invest in various securities and other financial instruments through a brokerage account or other financial institution. Some common ways retail investors invest include stocks, bonds, mutual funds, ETFs, and alternative investments.

How do I become a retail investor?

To become a retail investor, you’ll need to open a brokerage account with a financial institution, such as a bank or an online broker.

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.
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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12
2024

Guide to Taxes and Mutual Funds

By | Growing Wealth, invest, Investing | Comments Off on Guide to Taxes and Mutual Funds

Mutual fund investors pay taxes on the income or capital gains they see from their investments. But the specific tax treatment of mutual fund investments depends on several variables, which can breed confusion. For a long time, mutual funds have been a popular investment vehicle for millions of investors, largely because they offer an easy way to purchase no-fuss, diversified assets with relative ease. This out-of-the-box diversification and risk mitigation is something that individual stocks can’t match.

Read on to learn how taxes on mutual funds work, what investors should expect or anticipate when dealing with mutual funds and the IRS, and some strategies for tax-efficient investing.

Key Points

•   Mutual fund investors must pay taxes on income or capital gains distributed by the fund, including dividends, interest, and realized capital gains.

•   The tax treatment of mutual fund investments varies depending on the type of fund and the income or capital gains it generates.

•   Shareholders may owe taxes on mutual fund holdings even without selling shares, due to realized gains from distributions.

•   The amount of tax paid depends on the type of fund, income or capital gains, and the investor’s tax situation.

•   Strategies to minimize taxes include investing in tax-efficient funds, using tax-deferred accounts, and employing a buy-and-hold strategy to avoid short-term capital gains taxes.

Quick Mutual Fund Overview

A mutual fund is a pooled investment vehicle that allows individuals to invest in a professionally managed portfolio of stocks, bonds, and other securities. Mutual funds are managed by professional portfolio managers who use the pooled capital to buy and sell securities according to the fund’s stated investment objective. When investors buy into a mutual fund while online investing, they’re purchasing a spectrum of assets all at once.

Mutual funds can be actively managed, where the portfolio manager actively buys and sells securities in the fund, or passively managed, where the fund tracks an index. Mutual funds are a popular way for individuals to diversify their portfolios and access professional investment management.

Recommended: How to Buy Mutual Funds Online

Do You Pay Taxes on Mutual Funds?

Mutual fund investors generally need to pay taxes on any income or capital gains the mutual fund distributes, including dividends, interest, and realized capital gains from the sale of securities within the fund.

It’s worth noting that mutual funds can be structured in different ways, and the tax treatment of mutual fund investments can vary depending on the specific type of mutual fund. For example, some mutual funds are classified as tax-exempt or tax-deferred, which means that they are not subject to certain taxes or that taxes on the income or gains from the fund are deferred until later.

When a mutual fund distributes income or capital gains to its investors, it must provide them with a Form 1099-DIV, which reports the distribution amount and any associated taxes. Investors are then responsible for reporting this income on their tax returns and paying any taxes that are due.

How Are Mutual Funds Taxed?

Mutual funds are taxed based on the income and capital gains they generate and distribute to their investors. This income and capital gains can come from various sources, such as dividends on stocks held by the fund, interest on bonds held by the fund, and profits from the sale of securities within the fund.

The tax treatment of mutual fund investments can vary depending on the type of fund and the type of income or capital gains it generates. Here are some general rules to keep in mind:

Paying Tax on “Realized Gains” from a Mutual Fund

It may come as a surprise that shareholders may owe taxes on their mutual fund holdings even if they don’t sell shares of the fund. That’s because shareholders still generate income from those holdings, which are often called “realized” gains.

Mutual funds are often actively managed, meaning that a portfolio manager regularly makes decisions about what the fund contains by buying and selling investments — a process that can net profits. Those profits, or gains, are then passed back to shareholders as distributions (or as dividends) or reinvested in the fund.

When shareholders are awarded distributions from funds, they see a “realized” gain from their investment. For that reason, shareholders may end up owing tax on investments that they have not sold or may have lost value over the year.

Paying Capital Gains on Mutual Funds

Most investors likely know that when they sell shares of a mutual fund, they’ll need to pay taxes on the earnings. Specifically, they’ll pay capital gains tax on the profit from selling an investment. The capital gains tax rate will vary depending on how long an investor holds the investment (short-term versus long-term).

Because funds contain investments that may be sold during the year, thereby netting capital gains, investors may be responsible for capital gains taxes on their mutual fund distributions. As each fund is different, so are the taxes associated with their distributions. So reading through the fund’s prospectus and any other available documentation can help investors figure out what, if anything, they owe.

How Much Tax Do You Pay on Mutual Funds?

The amount of tax you may need to pay on mutual fund investments depends on the type of fund, the type of income or capital gains the fund generates, and your individual tax situation.

Here are some general rules to keep in mind:

•   Dividends: Dividends paid by mutual funds are taxed at different rates, depending on whether the payouts are ordinary or qualified dividends. Qualified dividends are taxed at a lower rate than ordinary dividends; they’re taxed at the long-term capital gains rate, which ranges from 0% to 20%. In contrast, ordinary dividends are taxed at an investor’s ordinary income tax rate.

•   Interest: The tax on the interest income from mutual funds depends on whether the payout comes from tax-exempt bonds, federal debt, or regular fixed-income securities. Depending on the type of asset, the interest may be taxed at ordinary income tax rates or exempt from certain taxes.

•   Capital gains: When a mutual fund sells securities for a profit, it may realize a capital gain, which is subject to tax. The tax rate on capital gains depends on how long the securities were held and your tax bracket. Short-term capital gains (on securities held for one year or less) are taxed at the same rate as ordinary income. In comparison, long-term capital gains (on securities held for more than one year) are generally taxed at the lower capital gains tax rate.

How to Minimize Taxes on Mutual Funds

Here are a handful of ways to potentially lower taxable income associated with mutual funds:

Know the Details Before You Invest

Do your homework! The holdings in each fund and how they’re managed will ultimately play a significant role in the tax liabilities associated with each fund. Before investing in a specific mutual fund, it’s worth digging through the prospectus and other documents to understand what to expect.

For example, an investor can typically find out ahead of time if a mutual fund makes capital gains distributions or how often a fund pays out dividends. Those types of income-generating events will need to be declared to the IRS come tax time.

Some investors may look for tax-efficient funds specifically designed to help mutual fund investors avoid taxes.

Use a Tax-deferred Account

Some brokerage or investment accounts — including retirement accounts like IRAs and 401(k) plans — are tax-deferred. That means they grow tax-free until the money they contain is withdrawn. In the short term, using these types of accounts to invest in mutual funds can help investors avoid any immediate tax liabilities that those mutual funds impose.

Recommended: Are Mutual Funds Good for Retirement?

Hang Onto Your Funds to Try and Avoid Short-term Capital Gains

If the goal is to minimize an investor’s tax liability, avoiding short-term capital gains tax is important. That’s because short-term capital gains taxes are steeper than the long-term variety. An easy way to ensure that an investor is rarely or never on the hook for those short-term rates is to subscribe to a buy-and-hold investment strategy.

This can be applied as an overall investing strategy in addition to one tailor-made for avoiding additional tax liabilities on mutual fund holdings.

Talk to a Financial Professional

Of course, not every investor has the same resources, including time, available to them. That’s why some investors may choose to consult a financial advisor specializing in these services. They usually charge a fee, but some may offer free consultations. For some investors, the cost savings associated with solid financial advice can outweigh the initial costs of securing that advice.

How Do You Report Mutual Funds on Your Taxes?

If you own mutual funds, you will generally need to report any income or capital gains you receive from the fund on your tax return.

Mutual funds are required to provide their investors with a Form 1099-DIV, which reports the amount of any dividends, interest, and capital gains distributions the fund paid out during the year. Make sure to keep this form for your records and use it to help complete your tax return.

You will then need to report any dividends, interest, and capital gains distributions you received from your mutual fund on your tax return, specifically on IRS Form 1040 or Schedule D (Form 1040).

The Takeaway

Mutual fund taxes are generally unavoidable, but with a little planning, you may be able to minimize the amount you get taxed. Employing some of the above strategies can help you minimize your mutual taxes. For example, those investing for long-term financial goals, like retirement, can use tax-deferred accounts as their primary investing vehicles. And by using those accounts to invest in mutual funds and other assets, they can help offset their short-term tax liabilities.

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.

FAQ

Do you pay taxes when you sell mutual funds?

Yes, you may be required to pay taxes when you sell mutual funds. The specific taxes you may be required to pay will depend on several factors, including the type of mutual funds you are selling, how long you have held the funds, and the type of gains you have earned from the sale.

Are mutual funds taxed twice?

Mutual funds are not taxed twice. However, some investors may mistakenly pay taxes twice on some distributions. For example, if a mutual fund reinvests dividends into the fund, an investor still needs to pay taxes on those dividends. Later, when the investor sells shares of the mutual fund for a gain, they’ll have to pay capital gains taxes on those earnings.

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.

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
12
2024
woman shopping online with credit card

Can a Personal Loan Hurt Your Credit?

By | Credit, personal_loan | No Comments

Taking out a personal loan can both help and hurt your credit. In the short term, applying for a new loan can have a small, negative impact on your scores, due to the hard inquiry by the lender. If managed well, however, having a personal loan can boost your credit profile over time by adding to your positive payment history and broadening your credit mix. This could make it easier to get approved for loans and credit cards with attractive rates and terms in the future.

Here’s a closer look at how personal loans affect your credit score, both positively and negatively, plus guidelines on when it makes sense to take one out.

Key Points

•   Personal loans can initially take a few points off your credit score due to the lender’s hard inquiry.

•   Responsible management of a personal loan can help build your credit by adding to your positive payment history.

•   Missing payments on a personal loan can significantly harm your credit score.

•   Personal loans can help lower credit utilization if used to pay off credit card debt.

•   Over time, having a personal loan should benefit your credit more than harm it.

How Is Your Credit Score Calculated?

What makes up your credit score?

Understanding how personal loans impact your credit starts with knowing how your credit score is calculated. The most common credit scoring model, FICO®, uses five components to calculate your score. Here’s a look at each factor and how much weight it’s given in FICO’s calculation.

•   Payment History (35%): Your record of making on-time payments to lenders is the most important component of your score. This helps creditors determine how much risk they are taking on by extending credit.

•   Amounts Owed (30%): This includes the total amount of debt you currently have and your credit utilization ratio, which measures the percentage of available credit you’re using. If you’re tapping a lot of your available credit on your credit cards, it suggests you may be overextended and, thus, at higher risk of defaulting on a loan.

•   Length of Credit History (15%): This factor takes into account the average age of your accounts, the age of your oldest account, and how long it has been since you used certain accounts. Generally, having a longer credit history can positively affect your score.

•   New Credit (10%): A small but still important part of your score is how much new credit you’ve recently taken out. Opening new accounts or having too many credit inquiries can temporarily lower your score.

•   Credit Mix (10%): Your credit mix looks at how many different types of credit you hold. Having a variety of credit types — like credit cards, retail accounts, and installment loans — can positively affect your score.

A personal loan can influence several of these factors, for better or worse, depending on how you manage it.

Want to find out what your credit score is?
Check out SoFi’s credit score
monitoring tool in the SoFi app!

How Do Personal Loans Work?

A personal loan is a lump sum of money borrowed from a lender, such as a bank, credit union, or online lender. Personal loans are typically unsecured, meaning you don’t need to provide collateral (like your car or home), and can be used for various purposes like consolidating debt, covering medical bills, or funding a wedding.

When you take out a personal loan, you agree to repay it in fixed monthly installments over a predetermined period, usually ranging from two to seven years. The interest rate, determined by your creditworthiness, and any lender fees affect how much you’ll pay in total.

Recommended: Is There a Minimum Credit Score for Getting a Personal Loan?

Ways Personal Loans Can Hurt Your Credit

While personal loans can be beneficial, they also have the potential to harm your credit. Here’s how:

Requires a Hard Credit Inquiry

When you apply for a personal loan, the lender typically performs a hard credit inquiry to evaluate your creditworthiness, which can adversely impact your credit score. Hard inquiries remain on your credit report for two years. However, their negative effect on your score is minor (typically 5 points or less) and lasts only about a year.

Note that prequalifying for a personal loan, which involves a soft inquiry, won’t have any impact on your score. This can give you an estimate of the interest rate and loan amount you can expect in a loan offer.

Can Increase Overall Debt

Taking out a personal loan can increase your overall debt, which can negatively affect the “amounts owed” component of your credit score. This may cause you to see a slight drop in your score. However, if you’re consolidating credit card debt, you will reduce that debt by paying it down with the personal loan, and your amounts owed won’t be impacted.

Can Negatively Impact Payment History If You Miss a Payment

Since payment history is the largest factor in credit scoring, missing just one payment on your personal loan can result in a substantial drop in your score. While being just a few days late may not affect your credit, lenders can report payments that are more than 30 days overdue to the credit bureaus. Late payments remain on your credit reports for seven years.

Setting up autopay or reminders can help ensure you make your payments on time and avoid this credit score setback.

Can Shorten Your Credit History

Taking on a new loan can shorten the average age of your credit accounts, which could have a small negative impact on your score. Generally, a longer credit history is considered better than a shorter one.

How Personal Loans Can Help Your Credit

Despite the risks, personal loans can also positively influence your credit when managed wisely. Here’s how:

Can Add to Your Credit Mix

Your credit mix accounts for 10% of your score. Adding a personal loan to your portfolio — especially if you primarily have revolving credit, like credit cards — can enhance your credit profile by showing that you can manage different types of credit responsibly.

Can Improve Your On-Time Payment History

Consistently making on-time payments on your personal loan demonstrates financial responsibility, which can strengthen your payment history — the most significant component of your score. It may take a few months for the benefits to show up but over time, this can positively impact your credit.

May Help Lower Your Credit Utilization Ratio

If you take out a personal loan to pay off high-interest credit card debt (also known as a credit card consolidation loan), you can lower your credit utilization ratio, which is the percentage of your available credit you’re using. A lower ratio — ideally under 30% — is generally beneficial for your credit. However, this strategy only works if you keep your credit card spending low after paying off your balances with the loan.

When to Consider Taking Out a Personal Loan

Even though applying for a personal loan may result in a small, temporary drop in your credit score, there are times when taking on this type of debt can be a smart financial move. Here are some scenarios where you might consider getting a personal loan.

•  You want to consolidate high-interest debt: Personal loans typically have lower interest rates than credit cards, making them an attractive choice for paying off expensive credit card debt. An online personal loan calculator can help you determine how much you could potentially save. If you’re juggling several credit cards, a debt consolidation loan can also simplify repayment.

•  You’re facing unexpected expenses: Medical bills, home and car repairs, or other emergencies can sometimes justify taking out a loan. Using a personal loan may be more cost effective than putting these expenses on your credit card.

•  You have good or excellent credit: The best personal loan interest rates are generally reserved for borrowers who have strong credit. While there are personal loans for bad credit, they typically come with higher interest rates and other less-than-ideal terms.

•  You earn a steady paycheck: Getting a personal loan generally only makes sense if you have a regular income and earn enough to comfortably cover the monthly payments for the term you select.

The Takeaway

Personal loans can have a positive or negative impact on your credit depending on how you manage them. Initially, applying for a personal loan can slightly downgrade your score. This is due to the hard inquiry, as well as the loan’s impact on the average age of your accounts and (potentially) your overall debt load. However, if you repay the loan responsibly, having a personal loan can ultimately help your credit by adding positive payment history, diversifying your credit mix, and — if you use it pay off credit card debt — reducing your credit utilization rate.

Before taking out a personal loan, you’ll want to assess your financial situation, shop around for the best rates and terms, and make sure the monthly payments work with your budget.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Is a personal loan bad for your credit?

A personal loan isn’t inherently bad for your credit, but its impact depends on how you manage it. Initially, applying for a loan may lower your score slightly due to the hard credit inquiry. In addition, taking on more debt can increase your amounts owed, which might affect your score. However, consistently making on-time payments can boost your payment history, a major factor in credit scores. And if you use a personal loan to consolidate credit card debt, you’ll lower your credit utilization ratio (how much of your credit limit you are using), which can positively impact your credit.

Will a personal loan affect my credit card application?

It can. If you applied for the loan recently, the hard credit inquiry may have slightly lowered your credit scores. Having a personal loan can also lower the average age of your accounts and, potentially, increase your debt load, which can negatively impact your credit. Over time, however, having a personal loan can improve your credit profile by adding to your positive payment history and, if you use it to consolidate credit card debt, lowering your credit utilization, making it easier to get approved for a credit card.

Will a personal loan affect my car loan application?

It can. When assessing your eligibility for a car loan, lenders typically consider your credit score, debt-to-income ratio, and overall financial profile. The hard credit inquiry for the personal loan might lower your credit score temporarily. In addition, the added debt from the loan could increase your debt-to-income ratio, making you appear higher risk to a lender. On the other hand, responsible repayment of the personal loan shows financial discipline, which can improve your credit profile over time. Ultimately, this could make it easier to get a car loan with attractive rates and terms.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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2024
How Income Tax Withholding Works

What Is Income Tax Withholding and How Does It Work?

By | Life & Career, money | Comments Off on What Is Income Tax Withholding and How Does It Work?

“What happened?!” may be your response when you look at your paycheck and see all of those deductions, whittling your hard-earned cash down to a (much) lower figure than you expected.

And perhaps, if you look more closely, you’ll notice a line on your paystub that shows a major amount of money subtracted and think, What is withholding tax? And why do they take so much?

Federal and state withholding taxes, also known as “taxes withheld,” are funds that your employer takes out and sends to the government to help federal programs. These taxes have a purpose, and in the long run, you’ll probably be glad they are deducted from your check rather than owed as a mega lump sum on Tax Day.

Read on to learn more about tax withholding, including factors that impact how much gets deducted and how to calculate your withholding taxes.

Key Points

•   Income tax withholding deducts money from your paychecks to cover your estimated tax liability, preventing large year-end bills.

•   Factors that affect tax withholding include income, filing status, claimed allowances, and extra withholding requests.

•   You can adjust your W-4 form to balance withholding, avoiding overpayment or tax debt.

•   Withholding exemptions are available for those with no tax liability.

•   Withheld taxes support federal programs and public services.

What is Income Tax Withholding?

Many people think their taxes are due mid-April, but the Internal Revenue Service (IRS) actually requires you to pay as you go, meaning you need to pay most of your tax during the year, as you receive income, rather than at the end of the year. When you see those federal and possibly state and local taxes being whisked out of each paycheck, that’s exactly what is happening.

A withholding tax is an amount, based on your salary, that your employer sets aside and then pays directly to the government on your behalf. It’s a credit against the full amount of personal income tax you will owe for the year. By doing this, your employer is helping you avoid a surprise tax bill come April. Tax withholding also helps ensure you won’t owe interest or a penalty for paying too little tax during the course of the year.

That said, how much is deducted from your paycheck can vary depending on a variety of factors. You are able to designate what portion of your check goes toward your taxes on the IRS W-4 form (more on that in a bit).

•   If you allocate too much, that means more than necessary is taken out, and you will likely receive a tax refund when you file your taxes.

•   If you set aside too little, you will probably owe a balance or have what’s known as a “tax bill” due during tax season to make up the difference.

Your federal withholding tax rate depends on your income and tax bracket.

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Factors That Determine Tax Withholding

There are several factors that determine just how much tax is withheld from your paycheck, whether it arrives as a paper check or via direct deposit. These include:

•   How much you earn: Generally, the more you earn, the higher the rate at which taxes are withheld

•   Your filing status: For instance, you might file your taxes as single, married filing jointly, or married filing separately.

•   How many (if any) withholding allowances you claim: Typically, if you claim a higher number of allowances, your withholding will be lower. This means more cash will flow your way on each payday, but you might owe taxes when you file. If you have a lower number of allowances, more money is taken out for taxes, and you could wind up getting a refund when your tax return is processed.

•   Whether you decide to have additional money withheld: Some individuals may ask their employers to withhold, say, an extra $100 or more per pay period if they find they typically owe taxes at year’s end.

Recommended: How to Reduce Your Taxable Income

What Is State Income Tax Withholding?

If you live in a state that levies income tax, you will also see tax withholding for that type of tax on your paycheck. There are just nine states that don’t tax earned income. In other words, you will not pay state taxes if you live in:

•   Alaska

•   Florida

•   Nevada

•   New Hampshire

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming

The concept of tax withholding works in the same way at the state level as it does at the federal: A certain portion is put toward your future state tax bill, and you may either owe or get a refund, depending on how much you paid in.

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What Is the Purpose of Tax Withholding?

As briefly mentioned above, tax withholding saves you from owing a huge bundle of taxes in April. If people were left to their own devices to set aside money for taxes, well, that might not always be a success. Every time you receive your paycheck, there are bills to pay, dinners out and movies to tempt you, and vacations to plan and take. As a result it can be hard to save money from your salary.

In addition to helping you avoid a surprise tax bill, tax withholding is also a way for the government to maintain its pay-as-you-go income tax system. If you pay too little in taxes throughout the year, you can get hit with an underpayment penalty and interest payments (on top of that surprise tax bill).

Recommended: Your Guide to Filing Taxes for the First Time

Tax and Employment Documents to Know

When you are first hired at a company, you typically fill out a W-4 form. This form is designed to help your employer estimate how much tax you’ll owe by the end of the year. To do this, the form asks you about your family, potential deductions you might claim, and any additional income you earn outside your W-2 job. Based on your answers, your employer will determine how much tax to withhold from your paychecks.

Then when tax time rolls around, you will receive IRS Form W-2. This includes information on how much income you earned in a given tax year, as well as how much you paid in federal, state, and other taxes.

You’ll use this W-2 to file your taxes, and it will determine whether you receive a tax refund, owe more taxes, or break even.

Calculating Income Tax Withholding

It can take a bit of tweaking to find that balance between overpaying in federal withholding and having to pay more when you file your taxes.

Some people like getting a tax refund because it’s a lump sum they can put toward debt or invest. But realize that overpaying is a bit like giving the government a free loan throughout the year.

While there may be fast ways to get a tax refund, perhaps you’d rather just hold onto that money in the first place. If you better balance what is taken out of your paychecks, you could take the excess you would have paid and put it in a high-yield savings account or invest it for the future.

If you’re wondering what is a withholding tax allowance that’s right for you, there’s help. The IRS has a Tax Withholding Estimator you can use based on your current situation. In general, the more allowances or exemptions you have, the less will be withheld from your pay; the fewer the exemptions, the more will be withheld.

While you aren’t asked to fill out a new W-4 each year, you may request one if you think you need to adjust the withholding amount.

Some of the times it might be wise to adjust how much income tax is withheld include:

•   Starting a new job or position

•   Having a child

•   Getting married or divorced

•   Buying a house.

Can I Be Exempt from Tax Withholding?

To be exempt from tax withholding means that no federal taxes will be withheld from your pay. You might also have no state or local taxes (if applicable) deducted. Here are the ways in which someone might qualify to be exempt from such taxes:

•   If all of your federal income tax was refunded because you have no tax liability and you expect the same thing to happen this year, then you may be exempt from withholding taxes. (But note, Social Security and some other taxes may still be withheld as part of other types of payroll deductions.)

•   Certain types of income are considered exempt. For instance, money paid to foster parents for their taking care of children in their homes may be tax-free. Payments from workers’ compensation is another example of funds that may be tax-exempt.

The Takeaway

Paying taxes may not be fun, but it’s important to remember that this money is put toward things we all enjoy, like smooth roads and education programs. And federal withholding from your paycheck keeps you from having a giant bill when you file taxes.

When it comes to tax withholding, it’s important to understand how much is being withheld from each paycheck and whether you need to modify your W-4 to find a better balance between overpaying and owing more money come Tax Day.

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FAQ

Does the government pay for income tax withholdings?

Money that is withheld from your earnings, known as income tax withholding, goes to the government. These dollars help pay for federal programs that benefit citizens and keep our country running, from education to transportation to security.

How can someone qualify for a withholding exemption?

To qualify as tax-exempt, you would have to have had no tax liability in the previous year and expect the same status in the current tax year. Also keep in mind that some forms of income may be tax-exempt, such as payments for in-home foster care of children or for workers’ compensation.

Why has my employer withheld too much income tax?

If your employer withheld too much income tax, then you will likely get a refund at tax time. You can update your withholding on your W-4 form; the more allowances you have, the less money will be withheld to cover your tax liability.

Why has my employer withheld too little income tax?

If you wound up owing the IRS money at tax time, the issue could be that you have too many exemptions or allowances claimed on your W-4 form, meaning your employer is not withholding enough money from your paycheck. You may want to adjust your W-4, knowing that the lower your number of allowances, the more money your employer with withhold and send to the IRS on your behalf.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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.

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12
2024

Delayed vs Real-Time Stock Quotes

By | Growing Wealth, invest, Investing | Comments Off on Delayed vs Real-Time Stock Quotes

Stock quotes, which may be seen on financial news networks or websites, are typically reported in real time, or with a delay. The main difference between the two is that real-time quotes are the most up-to-date, while delayed quotes lag behind real-time quotes by several minutes, in most cases.

For the average investor who isn’t making changes to their portfolio, real-time quotes may be more precise than they need. For those investors, delayed stock quotes may suffice. Here’s what you need to know about the difference between real-time stock quotes and delayed quotes.

Key Points

•   Real-time stock quotes provide immediate price information, reflecting current market conditions.

•   Delayed stock quotes are typically behind by up to 20 minutes.

•   Active traders benefit from real-time quotes for precise, up-to-the-minute data.

•   Long-term investors may find delayed quotes sufficient, as they do not focus on minute-by-minute changes.

•   Real-time data can be costly, prompting some providers to offer delayed quotes to conserve resources.

What Are Real-Time Stock Quotes?

Real-time stock quotes relay price information for various securities in real-time, or instantaneously. In other words, a real-time stock quote is the actual and immediate stock price at any given point in time. The quotes reflect demand for a stock or assets on stock markets around the world.

How Real-Time Quotes Work

Stock quotes include ticker symbols that denote the stock of a specific company or firm, and the price of a stock’s current (real-time) valuation. Those values are determined by trading activity — supply and demand, in other words. Those values also fluctuate during the trading day.

The letters and numbers comprising a quote — either real-time or delayed — reflect different types of investments or commodities and their prices — the price at which they’re currently trading. Typically the ticker symbol is similar in some way to the company name, and you can use it to look up the stock price.

For example, the ticker AAPL is Apple; XOM is the ticker for ExxonMobil; JNJ is the ticker for Johnson & Johnson; UDMY is Udemy; LULU is Lululemon.

Those symbols, when displayed on a ticker tape, are generally followed by or attached to their current trading price.

Real-time quotes are provided by many sources, including financial news networks and websites. Many online investing brokerages also offer their clients access to them as well. Real-time stock quotes provide traders and active investors with more accurate information.

What Are Delayed Quotes?

Delayed stock quotes are valuations of securities that are not in real-time — they’re delayed, as the name indicates. Depending on the source of the quote, the information relating to stock or share prices can be delayed by several minutes, or even up to 20 minutes.

For instance, it’s not unusual that you might login to your investment brokerage and see delayed stock quotes relaying information about the value of your current investments. There will likely be a note telling you how delayed the data is (15 minutes, for example), so that you know the pricing isn’t in real-time.

Most people should be able to tell if a quote is delayed, too, if the price remains static for minutes at a time. Real-time quotes, on the other hand, can fluctuate second-by-second, depending on the security and the source.

For investors engaged in day trading, delayed quotes wouldn’t be sufficient; these investors require up-to-the-minute (or to the second) price quotes in order to execute their strategies. But for the majority of buy-and-hold investors, knowing the very latest price of a security may not matter to their long-term plans.

How Delayed Quotes Work

Delayed stock quotes work the same way that real-time quotes do, in that they reflect current market conditions and data relating to security values. But the reporting is delayed for a variety of reasons.

The most common reason that you may come across a site or information source with delayed stock quotes is that fetching and reporting real-time quotes is costly and resource-consuming. As such, companies may opt to report delayed quotes instead.

Real-Time vs Delayed Stock Quotes

Real-time streaming stock quotes change second to second, and can showcase the volatility of stock prices. When stock exchanges are open, trading is constant, and the dynamics of supply and demand for specific stocks change their prices rapidly. So, watching real-time streaming stock quotes means seeing those price fluctuations occur in real time, as the name implies. That can have implications for how traders and investors make decisions.

That can have implications for how traders and investors make decisions when online investing.

Using real-time stock quotes can be useful for active traders or investors, or high-frequency traders — professionals who are making numerous stock trades every day or week and may be managing other people’s portfolios, too. For these traders, knowing stock prices down to the minute helps inform their decision to buy or sell. That real-time price, ultimately, determines their stock trading profit (or loss).

There’s also after-hours trading to keep in mind, too. Stock markets have trading hours — the New York Stock Exchange (NYSE) and NASDAQ are open between 9:30 am and 4 pm, for example. At other times, investors may still be able to swap securities, but prices are much more volatile after-hours, and because it’s difficult to get real-time quotes after-hours, values can change dramatically before stock markets reopen.

Investors can also execute a market-on-open trade, during which a transaction completes as soon as the markets do open.

While security prices do fluctuate, they generally don’t fluctuate all that much over a relatively short interval (15 minutes, for example). And since the average investor may not be all that interested in minute-by-minute price fluctuations, using a delayed stock quote could provide all the information they need.

Think about it this way: If an investor were looking to rebalance their portfolio — something they may only do two or three times per year — a real-time stock quote isn’t going to give them much more actionable information than a delayed stock quote to help them make an informed decision.

Delayed stock quotes also don’t relay the second-by-second volatility of the market, which can be hard for some investors to digest.

Why Do Stock Quotes Get Delayed?

As mentioned, delayed stock quotes are lagging because they require resources to gather and report. The information is out there, and is collected by firms that supply quotes and pricing information to other companies. Depending on the individual security and the source of the information, a delay is likely the result of a company opting to supply delayed quotes rather than real-time quotes to consumers in order to save on costs.

As such, a small percentage of quote-providers offer consumers real-time market information — and often only to those who pay for it. That’s not to say that real-time data isn’t available for free, but the gathering and reporting can be costly, which is why some providers use delayed quotes.

How Real-Time Quotes Affect Your Investment Strategy

One big question investors may have: How do these two different types of stock quotes actually affect someone’s investment strategy? That depends largely on whether you’re into active investing, and how often they’re swapping positions in their portfolio.

Real-time stock quotes are mainly used by day traders, or active investors who are executing trades on a daily or hourly basis. In those cases, the relatively small fluctuations in price due to market volatility, which occurs in real time, can determine whether a trade is profitable or not.

Real-time stock quotes are mainly used by day traders, or active investors who are executing trades on a daily or hourly basis.

For example, if a trader was trying to time a trade to execute at a specific price, a delayed quote might be useless. The time lag could cause them to miss their window, and bobble the trade.

How Delayed Quotes Affect Your Investment Strategy

As noted, if investors are only rebalancing their portfolios every so often, real-time quotes won’t matter all that much to their investing strategies. They aren’t trying to turn a profit from day-trading, in other words, and are taking a longer-term approach to their investing.

As such, for long- or medium-term investors who may only occasionally buy or sell securities, delayed quotes will do the trick. If you’re not checking on your portfolio every day and are only considering asset allocation every few months, there isn’t much of an advantage to looking at real time quotes over delayed ones.

Real-time quotes do provide more information than delayed quotes, though, in that they’re more precise. That can help you if you’re weighing decisions regarding either short-term vs long-term investments.

Deciding Which Stock Quote is Right for You

Most investors may not give much thought to real-time versus delayed stock quotes, unless they are active traders, as discussed. Whether or not you need up-to-the-minute quotes really depends on whether you’re doing a lot of trading, and doing that trading within tight time frames in which seconds or minutes matter. So, real-time quotes can give you more insight as to when it’s time to buy, sell, or hold.

Accordingly, if you’re more of a passive investor, you can probably stick to delayed stock quotes to get a broader idea of a security’s value.

The Takeaway

Real-time stock prices are updated to the second; delayed stock prices might be updated every 15 minutes, every hour, or every day, depending on the provider and the security involved.

For investors who aren’t looking to profit from small price fluctuations, it won’t make much of a difference if the quotes they’re using are delayed or not. That said, it’s never a bad idea to use real-time trading data, if an investor has access to it.

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.

FAQ

What is a delayed stock quote?

A delayed stock quote is a quote that does not relay real-time value information regarding stock or security values. Instead, the information is delayed by around 15 or 20 minutes, in many cases.

What are real-time stock quotes?

Real-time stock quotes reflect the current market value of a security in real time — meaning up-to-the-minute, or second. Real-time quotes fluctuate constantly based on supply and demand for a security on the market.

Are real-time quotes better than delayed quotes?

Real-time quotes aren’t necessarily better than delayed quotes, but they do reflect more current information which can be better for active investors or day traders.

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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.

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