Financial Topics Archives | Page 100 of 822

Feb

2025

Rate of Return (RoR): Formula and Calculation Examples

By Kenny Zhu | Growing Wealth, invest, Investing | Comments Off

Calculating rate of return, as it relates to investing, is a way for investors or traders to get a sense of how much money they stand to gain or lose from their investments. It’s a relatively simple formula and calculation, and can help investors evaluate their overall performance in the markets. It does have some shortcomings, however, such as not accounting for the time value of money or the timing of cash flows. So, there are alternative calculations out there to help get even more accurate results.

Key Points

• The Rate of Return (RoR) measures an investment’s gain or loss as a percentage of its initial value over a specific period.

• Calculating RoR involves identifying the initial and end values, applying the formula, and can be done manually or using tools like Excel.

• RoR helps investors evaluate investment performance, compare different investments, and make informed decisions about resource allocation.

• Understanding RoR is crucial for assessing investment performance, aligning with financial goals, and determining market performance relative to other opportunities.

What Is Rate of Return?

Rate of return (RoR) is a measure of an investment’s gain or loss, expressed as a percentage of its initial value, over a given period of time. If calculated correctly, your rate of return will be expressed as a percentage of your initial investment. Positive rate of return calculations indicate a net gain on your investment, while negative results will indicate a loss.

Don’t confuse this with the expected rate of return, which forecasts your expected returns using probability and historical performance.

When using the rate of return formula, your chosen time period is referred to as your “holding period.” Regardless of whether your holding period lasts days, months, or even years. It’s important that you keep the time periods consistent when comparing investment performance.

How to Calculate Rate of Return

You can calculate the rate of return on your online investing or other type of investing activity by comparing the difference between its current value and its initial value, and then dividing the result by its initial value.

Multiplying the result of that rate of return formula by 100 will net you your rate of return as a percentage. You’ll know whether you made money on your investment depending on whether your result comes in as positive or negative.

Rate of Return Formula

The standard rate of return formula can be represented as follows:

R = [ ( Ve – Vb ) / Vb ] x 100

In this equation:

R = Rate of return

Ve = End of period value

Vb = Beginning of period value

The aforementioned formula can be applied to any holding period to find your rate of return “R” over that timespan.

“Ve,” your end of period value, should represent the value of your investment, including any interest or dividends earned over your holding period.

Finally “Vb” should represent the value of your initial investment. It will be used as the relative basis on which your investment returns are calculated.

Example of Calculating Rate of Return

To help you understand how to calculate the rate of return, we’ll walk you through an example. Again, here’s the formula:

R = [ ( Ve – Vb ) / Vb ] x 100

Let’s say an investor buys an investment for $125 a share which pays no dividends. This $125 investment will be your beginning of period value (“Vb”).

After one year, the value of the investment rises to $150 and the investor chooses to sell it. Given that $150 represents the value of the investment at the end of the holding period, $150 will be your end of period value (“Ve”).

To calculate the rate of return, enter the values for Vb and Ve into the rate of return formula. With the correct values in place, your equation should look like this:

R = [ ( $150 – $125 ) / $125 ] X 100

Solving out this formula using order of operations, your calculations should proceed as follows:

R = [ $25 / $125 ] X 100

R = 0.2 X 100

R = 20%

If done correctly, the formula should calculate a one year rate of return of 20%, based on the beginning and end of period values provided.

Considerations When Using Rate of Return

The main advantages of the rate of return calculation is that it’s simple and easy to calculate. It gives you a straightforward method to measure the profitability of an investment over any time period.

However, its simplicity does result in some shortcomings, particularly when it comes to more complex investments with numerous cash flows. We dive into these limitations below.

Recommended: What Is a Good Rate of Return?

What are the Limitations of Simple Rate of Return?

The main limitations of the simple rate of return calculation are that it ignores the time value of money and timing of cash flows.

The time value of money is an important concept when it comes to finance, as it explains that money today is always worth more than the same sum of money paid in the future. This is due to the inherent earnings potential of cash held now.

In tandem with the concept above, the simple rate of return calculation also fails to account for the timing of cash flows.

Cash flows are particularly important when dealing with more complex portfolios or investments that might have multiple reinvestment periods over time or multiple dividend payouts.

The simple rate of return calculation, in some ways, oversimplifies the rate of return into a simple accounting measure over an arbitrary amount of time. To address these shortcomings, professionals typically use alternate measures like internal rate of rate (IRR) and annualized rate of return.

Annualized Rate of Return Formula

The annualized rate of return is a slightly more complicated formula that solves the compatibility issues of the simple rate of return calculation by standardizing all calculations over an annual period.

The annualized rate of return formula can be exhibited as follows.

Ra = ( Ve / Vb ) 1 / n – 1 X 100

Where,

Ra = Annualized Rate of Return

Ve = End of period value

Vb = Beginning of period value

n = number of years in holding period

Annualized rate of return (Ra) standardizes your rate of return on an annual basis; this allows you to make fair comparisons with other annualized performance figures.

“Ve,” your end of period value, represents the value of your investment at the end of the holding period, including any interest or dividends earned.

“Vb” represents the value of your initial investment.

Other Types of Return Formulas

There are a multitude of other return metrics that can help you evaluate performance.

While the calculations for these metrics fall outside the scope of this reading, we touch on some of the most commonly used ones and why they’re used.

• Internal Rate of Return (IRR): This represents the expected annual compound growth rate of a specific investment and is usually used to help determine whether an investment is worthwhile.

• Return on Invested Capital (ROIC): Measures a firm’s profitability in relation to the total debt and equity invested by stakeholders.

• Return on Equity (ROE): Measures a firm’s net income in relation to the total value of its shareholder’s equity.

How Investors Can Use Rate of Return

Retail investors, institutional investors, and even corporate decision makers use the rate of return to gauge the performance of their investments over time. It’s useful when compared against a benchmark index, return expectations, or other investment options to gauge how your investment performed on a relative basis.

When comparing investment returns, it’s important to make sure you’re making fair comparisons to ensure you’re making apples-to-apples comparisons. For example, the S&P 500 might not serve as a fair benchmark for a portfolio invested 100% in international equities, as these are substantially different investment types. Benchmark comparisons give meaning to your rate of return and help you evaluate whether you’re outperforming on a relative basis.

Test your understanding of what you just read.

The Takeaway

Knowing how to calculate your rate of return gives you a useful tool for evaluating your investments’ performance. The best part about the rate of return calculation is that it can be done over almost any timespan, provided the returns you’re trying to compare have the same holding period.

Investors can calculate rate of return by hand, or by using an online spreadsheet. The same is true for annualized rate of return — which helps to standardize return rates over longer periods. Those are fairly simple ways to gauge investment returns, but there are a number of other metrics that help you assess and compare investment returns, so be sure to use the tool that aligns best with what you need to know.

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.

Photo credit: iStock/AleksandarNakic

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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 $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-013

Feb

2025

Guide to Transferring 401(k) to a New Job

By Jamie Cattanach | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

It’s easy to forget about an old 401(k) plan when changing to a new job. Some people may forget about it because the company that manages the 401(k)never reminds them. Others are aware of their old account, but they put off the rollover because they think it will be difficult to do.

But by not rolling over your 401(k), you might be losing some serious cash. Here are a few key reasons to prioritize a 401(k) rollover.

Key Points

• Rolling over a 401(k) may save an employee money if their new employer’s 401(k) plan or a rollover IRA charges lower fees.

• Rolling over a 401(k) to a new employer’s plan or into a rollover IRA might provide access to better investment options.

• There’s no requirement to roll over a 401(k) to a new employer’s plan, but consolidating 401(k) savings may make managing them easier.

• If an employee requests that the funds from a 401(k) rollover be sent to them directly, they have 60 days to send the funds to the new 401(k) plan or IRA account. If they miss the deadline, they may be taxed and have to pay a penalty, since the IRS generally considers this an early withdrawal.

• Some 401(k) plans offer financial services, such as financial advisor consultations, to help employees manage their plan.

3 Reasons to Transfer Your 401(k) to a New Job

Rolling over a 401(k) can have some significant benefits. Here are three main reasons to consider rolling over a 401(k):

1. You May Be Paying Hidden Fees

Certain fees go into effect when you open a 401(k), which typically include administrative, investment, and custodial fees.

Employers may cover some of these fees until you leave the company. Once you’re gone, that entire cost might shift to you. If the fees are high, rolling over a 401(k) to a plan with lower fees can be advantageous.

2. You Might Be Missing Out on Certain Types of Investments

If you aren’t happy with the investment options in your old plan and your new employer allows you to roll over your old 401(k), you might gain access to a broader range of investment vehicles that better aligns with your financial goals.

Just be aware that investments come with risk, so it makes sense to consider your personal risk tolerance when choosing investment options.

Also, if you leave your 401(k) where it is, you may forget about it and your portfolio may no longer have your desired asset allocation as you get older. It’s important to keep tabs on your investments to ensure they are on track and appropriate for your time horizon and goals.

3. You Could Lose Track of Your 401(k) Account

It’s more common than you might think for people to lose track of old 401(k) accounts. According to one estimate, there are more than 29 million forgotten 401(k) accounts in the U.S. By rolling over a 401(k) to a new plan, you’ll know where your money is.

Losing track of a 401(k) account is not necessarily the fault of an investor — it may simply be logistics. It’s harder and more time-consuming to juggle multiple retirement accounts than it is to manage one. Plus, if you change jobs several times throughout the years, you could end up with a few different 401(k) plans to keep track of.

Do You Have to Rollover Your 401(k) to a New Employer?

You aren’t required to roll over your 401(k) to a new employer’s plan. If you have more than $7,000 in the old 401(k) account, you can leave the funds where they are. But keep in mind that you will no longer be able to make contributions to the account. In fact, one reason you might want to roll over the money into an individual retirement account (IRA) is that you can make annual contributions. In 2024 and 2025, you can contribute up to $7,000 in an IRA, and those 50 and older can contribute up to $8,000.

What happens to your 401(k) when you leave your job and you have between $1,000 and $7,000 in your account? In that case, your former employer may not allow you to keep it there. Instead, they might roll over the 401(k) into an IRA in your name. If you have less than $1,000 in your 401(k), the employer will typically cash out the funds and send you a check for the amount.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What to Do With Your 401(k) After Getting a New Job

When you get a new job, and you have a 401(k) from your previous employer, you have several options. As mentioned above, you can leave the money in your old employer’s 401(k) plan if you have more than $7,000 in the account. But if you have less than that in account, or you don’t like your old employer’s 401(k) plan, you can do one of the following:

Roll Over a 401(k) to Your New Employer’s Plan

If your new employer offers a 401(k) plan and you are eligible to participate, you can roll the money over from your old plan to the new plan. Consolidating your 401(k)s can help you manage all of your retirement savings in one place.

The process is usually simple. You can request that the 401(k) administrator at your old company move the funds into your new employer’s plan through what’s known as a direct transfer.

Roll Over a 401(k) to an IRA

An IRA is another option for your 401(k) funds. Rolling a 401(k) into an IRA can give you more control over your investment options, and you can do it through a direct transfer of funds from your old employer to a new IRA account you set up. Just keep in mind that IRAs don’t come with employer-provided benefits, such as matching contributions.

Recommended: IRA vs 401(k): What Is the Difference?

Cash Out Early

You can also choose to cash out your 401(k). However, if you’re younger than 59 ½, you will have to pay taxes on the money, and perhaps an additional 10% early withdrawal penalty.

Under some qualifying circumstances, the 10% fee may be waived, such as when the funds will be used for eligible medical expenses. But if there are no qualifying circumstances in your situation, think carefully about cashing out your 401(k) to make sure it’s the right choice for you.

What Happens to Your 401(k) if You’ve Been Fired?

If you’ve been fired, you will still have access to the funds you’ve contributed to the account as well as the fully vested employer contributions, known as the 401(k) vested balance.

And as long as you have more than $7,000 in the account, you’ll generally have the same options covered above — you can keep the 401(k) where it is, roll it over to your new employer’s plan, roll it over to an IRA at an online brokerage, or cash it out.

How Long Do You Have to Transfer Your 401(k)?

If you are rolling over your 401(k) to a new employer’s plan or into an IRA, you generally have 60 days from the date you receive the funds to deposit them into the new account. If you don’t complete the rollover within 60 days, the funds will be considered a distribution and they’ll be subject to taxes and penalties if you are under the age of 59 ½.

Advantages of Rolling Over Your 401(k)

Rolling over your 401(k) to your new employer’s plan may provide several benefits. Here are a few ways this option might help you.

One Place for Tax-Deferred Money

Transferring your 401(k) to your new employer’s plan can help consolidate your tax-deferred dollars into one account. Keeping track of and managing one 401(k) account may simplify your money management efforts.

A Streamlined Investment Strategy

Not only does consolidating your old 401(k) with your new 401(k) make money management more straightforward, it can also streamline your investments. Having one account may make it easier to coordinate your investment strategies, target your asset allocations, monitor your progress, and make any adjustments as needed.

Financial Service Offerings

Some 401(k) plans offer financial services, such as financial planner consultations to do such things as answer employees’ questions and help them with general financial planning. If your previous employer didn’t provide this and your new plan does, taking advantage of it may be helpful to you.

Disadvantages of Transferring 401(k) to a New Job

There are some potential drawbacks of rolling over a 401(k) to a new employer’s plan to consider as well. These may include:

• Loss of certain investment options: Your new employer’s plan may offer different investment options than your old plan, and you may lose some options you liked. The new plan might also offer fewer investment options, limiting your ability to diversify your portfolio.

• Increased fees: The new employer’s plan may have higher fees associated with it, which could eat into your investments over time.

• Possible delays: The process of rolling over your 401(k) can take time, which could cause delays in accessing your funds.

How to Roll Over Your 401(k)

So, how do you transfer your 401(k) to a new job? If you’ve decided to roll your funds into your new employer’s 401(k), these are the steps to take:

1. Contact your new plan’s administrator to get what’s known as the account address for the new 401(k)plan, and then give that information to your old plan’s administrator.

2. Complete any necessary paperwork required by your old and new employers for the rollover.

3. Request that your former plan administrator send the funds directly to the new plan. You can also have them send a check to you (it should be made out to the new account’s address), which you then give to the new plan’s administrator.

401(k) Rollover Rules

You may select a direct rollover, trustee-to-trustee transfer, or indirect rollover when rolling over your 401(k) to a new plan.

With a direct rollover, your old employer makes out a check to the new account address. Because the funds are directly deposited into the new account, no taxes are withheld.

With a trustee-to-trustee transfer, the old plan administrator sends the funds to the new plan via an electronic transfer.

With an indirect rollover, the check is payable to you, with 20% withheld for taxes. You’ll have 60 days to roll over the remaining funds into your employer’s plan or an IRA or other retirement plan.

Rolling Over a 401(k) Into an IRA

If you choose to roll your 401(k) funds into an IRA, the process is relatively straightforward. Here are the typical steps to take to roll over a 401(k) into an IRA:

1. Choose an IRA custodian: This is the financial institution that will hold your IRA account. Some popular choices include brokerage firms, banks, credit unions, and online lenders.

2. Open an IRA account: Once you have chosen an IRA custodian, you can open an IRA account. You will need to provide personal information such as your name, address, and Social Security number.

3. Request a 401(k) distribution: Contact the plan administrator of your old employer’s 401(k) and request a distribution of your account balance. You will need to specify that you want to do a “direct rollover” or “trustee-to-trustee” transfer to your new IRA account, since these are the most straight forward transfers.

4. Provide IRA custodian information: Give the 401(k) plan administrator the IRA custodian’s name, address, and account information, so they know where to send the funds.

5. Wait for the funds to be transferred: The process of transferring funds can take several weeks.

6. Monitor the account: Once the rollover is complete, check your IRA account to ensure that it has been funded and that the balance is correct.

7. Invest your funds: After the funds have been transferred to your IRA account, you can begin making investments with the money.

Your 401(k) plan administrator may have specific procedures for rolling over your account, so be sure to follow their instructions. Also, as noted above, there are some rules to follow, such as the 60-day rollover rule. It’s essential to abide by these to avoid penalties.

Test your understanding of what you just read.

The Takeaway

There are benefits to rolling over a 401(k) after switching jobs, including streamlining your retirement accounts and making it easier to manage them. You may choose to roll over your 401(k) into a new employer’s plan, or into an IRA that you manage yourself, which could give you more investment options to choose from. Be sure to weigh the pros and cons of the different choices to help decide which one is best to help you save for retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Should I roll over my 401(k) to a new employer?

It depends on your specific situation and goals. You might consider rolling over your 401(k) to your new employer if the new plan offers better investment choices or if consolidation leads to lower account fees. Another potential benefit is convenience — it’s easier to manage one account than two. That said, if control is most important to you, rolling over your 401(k) to an IRA, and having more investment options, may be the better choice for you.

How long do you have to move your 401(k) after leaving a job?

If the balance in your 401(k) is $7,000 or more, you can typically leave it there as long as you like. If your balance is $1,000 to $7,000, your former employer may not allow you to leave it there and instead might roll over the 401(k) into an IRA. If you have less than $1,000 in your 401(k), the employer will typically cash out the 401(k) and send you a check for the amount.

Once you initiate the rollover process, you typically have 60 days from the date of distribution to roll over your 401(k) from your previous employer to an IRA or another employer’s plan. Otherwise, it may be considered a taxable distribution and may be subject to penalties. This is primarily the case for indirect rollovers, but check with your plan administrator for specific details.

How do I roll over my 401(k) from my old job to my new job?

To roll over your 401(k) from your old job to your new job, you should contact the administrator of your new employer’s 401(k) plan and ask for the account address for the plan. Next, give the account address to your old plan’s administrator and ask them to transfer the funds directly to the new 401(k).

What happens if I don’t roll over my 401(k) from my previous employer?

Depending on the amount of money in your account, you don’t necessarily need to roll it over. If you have more than $7,000 in your 401(k), you can generally leave it with your old employer, as long as the plan allows it. But if you have less than $7,000 in your account, your employer may not allow you to leave it there. In that case, they might move it to an IRA for you, or send you a check for the money, if it’s less than $1,000.

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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

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.

SOIN-Q424-038

Feb

2025

SPAN Margin: How It Works, Pros & Cons

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

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Many brokerage accounts require traders to maintain a margin account when trading options, which involves depositing funds or securities as collateral to reduce the risk of potential losses.

The SPAN system determines margin requirements on options and futures trading accounts by considering key factors, such as volatility, price changes, and portfolio composition to conduct a one-day risk global assessment.

In this sense, options margin is quite different from the margin accounts used for trading stocks and other securities, where margin refers to the use of debt to increase a position.

Key Points

• SPAN stands for Standardized Portfolio Analysis of Risk, and is used by brokerages, investment banks, and exchanges to estimate a portfolio’s worst-case risk scenario for options and futures trading.

• The SPAN system incorporates factors like market volatility, price changes, time decay, and portfolio composition to ensure margin requirements align with a trader’s risk exposure, so there is enough collateral to cover potential losses.

• The SPAN margin calculation evaluates risk scenarios using sophisticated algorithms that automate the margin-setting process.

• Advantages of using SPAN include a holistic portfolio approach and potentially lower margin requirements; disadvantages involve fluctuations in daily margin requirements due to changing market conditions.

• Though the SPAN risk assessment and modeling method was developed for the derivatives markets, it is now employed as a risk-management tool for other financial instruments as well.

What Does SPAN Stand For?

SPAN stands for standardized portfolio analysis of risk, and is a framework used by exchanges and financial institutions to ensure that options and futures traders have enough collateral to cover potential losses.

Today, many derivative exchanges use the SPAN system for risk analysis.

What Is SPAN Margin?

The SPAN margin calculation helps options traders understand risk in their portfolios, and assists brokers in managing risk by ensuring that options and futures margin traders have enough collateral in their accounts to cover potential losses.

The SPAN system relies on algorithmic calculations to estimate a portfolio’s one-day worst-case risk scenario.
SPAN margin is calculated using key inputs such as the strike price, time decay, market volatility, price changes, and position offsets, among other factors.

What Is a Stock Margin Account?

The margin in an options or futures account is different from how a stock margin account functions when making stock trades on margin. When trading stocks and other securities, margin allows traders to use leverage (i.e., borrow funds) to increase their position. The risk of using a margin account is the potential for steep losses, possibly exceeding the initial investment.

By contrast, SPAN is used by options and futures exchanges around the world to determine a trader’s one-day worst-case scenario based on their portfolio positions. This risk modeling ensures the correct amount of collateral is deposited.

Margin requirements can be determined in an automated way from the calculation’s output.

How Does SPAN Margin Work?

The SPAN margin calculation uses modeled risk scenarios to determine margin requirements on options and futures. Some key variables included in the algorithm are strike prices, risk-free interest rates, price changes in the underlying assets, volatility shifts, and the effect of time decay on options.

Not all options positions have margin requirements. Buying options, for example, typically does not require margin, while selling (or writing) options requires a deposit to mitigate potential risks.

In essence, the options seller exposes the broker to risk when they trade. To reduce the risk that the trader won’t be able to pay back the lender, margin requirements establish minimum deposits that must be kept with the broker. (This is different from the margin requirements needed in a stock trading account.)

Instead of relying on fixed or static figures, the SPAN system automates the margin-setting process, relying on sophisticated algorithms and a range of inputs. SPAN margin looks at the worst-case scenario in terms of one-day risk, so the margin requirement output will change each day.

The analysis is done from a total-portfolio perspective since all assets are considered. For example, the SPAN margin calculation can take excess margin from one position and apply it to another.

Pros and Cons of SPAN Margin

There are upsides and downsides to SPAN margin in options and futures trading.

The Advantages

The key advantage of SPAN margins is that it is intended to cover potential losses.

Net option sellers benefit from SPAN’s holistic portfolio approach. SPAN combines options positions when assessing risk. If you have an options position with a substantial risk in isolation, but another options position that offsets that risk, SPAN considers both. The effect is a potentially lower margin requirement.

On top of that, futures options exchanges that use the SPAN margin calculation allow Treasury bills to be margined.

The Downsides

Changing market conditions can result in significant fluctuations in daily margin requirements.SPAN margin isn’t without its challenges. One big drawback is how much margin requirements can shift from day to day. If the market gets volatile or prices move suddenly, you might find yourself scrambling to meet a higher margin call to keep your positions open.

Another issue is the complexity. SPAN’s calculations aren’t always easy to follow, especially for newer traders. Unlike simpler, fixed-margin systems, SPAN relies on a lot of variables, so you might not always know what to expect with your margin needs.

Although SPAN’s portfolio-wide approach is helpful, it can sometimes create confusion. Margin offsets across different positions might be hard to follow unless you’re closely tracking how everything is allocated. This makes it important to stay on top of your portfolio and understand how SPAN applies to your trades.

The Takeaway

SPAN margin is a helpful risk-management tool for options trading. Algorithms determine margin requirements based on a one-day risk analysis of a trader’s account, taking into consideration factors such as market volatility and position size.

By considering the entire portfolio, SPAN helps ensure that margin requirements are in line with a trader’s risk exposure. This provides a more dynamic, accurate approach to managing risk.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

🛈 While SoFi does not offer futures trading at this time, investors may purchase put and call options on SoFi’s options trading platform.

FAQ

What does SPAN stand for in margin trading?

SPAN margin stands for “standardized portfolio analysis of risk.” It is a system used by many options and futures exchanges worldwide to gauge a portfolio’s risk level, and ensure that the trader has enough collateral to cover potential losses.

How is SPAN margin used?

SPAN margin is used to manage risk. It calculates the amount of good-faith deposit a trader must add to their account in order to engage in options or futures trading. To help ensure that traders maintain adequate collateral for their positions, mitigating risks to the broker, exchanges use the SPAN system to calculate a worst possible one-day outcome and set a margin requirement accordingly.

What is a SPAN calculation?

SPAN is calculated using risk assessments. That means an array of possible outcomes is analyzed based on different market conditions using the assets in a portfolio. These risk scenarios specify certain changes in variables such as price changes, volatility shifts, and decreasing time to expiration in options trading.

Photo credit: iStock/NakoPhotography

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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 $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-097

Feb

2025

Businesswoman Using Her Phone Standing At Office

How Do You Cash Out Stocks? Guide to Selling Stocks

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

Table of Contents

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

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

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

Key Points

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

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

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

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

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

Can You Cash Out Stocks?

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

What Happens When You Sell a Stock?

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

How to Cash Out Your Stocks: 5 Steps

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

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

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

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

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

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

Motivations for Selling Stocks

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

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

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

Motivation for Selling Stocks

Accessing Cash for Life Expenses

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

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

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

Cashing Out Profits

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

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

Preventing Significant Losses

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

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

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

Day Trading

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

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

Offloading Low Performing Stocks

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

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

Understanding Types of Sell Orders

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

Understanding Types of Sell Orders

Market Orders

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

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

Limit Orders

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

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

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

Stop Orders or Stop-Loss Orders

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

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

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

Trailing Sell Stop Orders

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

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

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

Factors to Assess When Cashing Out Stocks

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

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

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

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

Pros and Cons of Reinvesting Profits

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

thumb_up

Pros:

• Benefit from potential compound growth

• Diversify your portfolio

• Hedge against inflation

thumb_down

Cons:

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

• Capital gains taxes

• Exposure to market risk

Pros

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

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

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

Recommended: 5 Tips to Hedge Against Inflation

Cons

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

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

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

Platforms for Buying and Selling Stocks

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

Online Brokerage Accounts

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

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

Financial Advisors

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

Test your understanding of what you just read.

The Takeaway

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

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

FAQ

How long does it take to cash out stocks?

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

Do you get money when you sell stock?

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

Can I withdraw money from stocks?

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

SoFi Invest®

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

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q424-031

Feb

2025

phone keyboard financial graph coffee mobile

How to Analyze Stocks: 4 Ways

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Why Analyzing Stocks Is Important
Understanding Financial Statements
4 Ways to Analyze a Stock
Quantitative vs Qualitative Analysis
Pros and Cons of Doing Your Own Stock Analysis
FAQ

When it comes to investing in stocks, there’s no single way to analyze stocks to find a sure winner. That being said, there are many methods that ordinary investors can use to find stocks that are trading at a discount to their underlying value.

The first step in how to analyze a stock before buying is reviewing financial statements. From there, investors can use various methods of analysis to assess investment opportunities and potentially identify worthwhile investments.

Key Points

• There are four common methods of analyzing stocks: technical analysis, qualitative analysis, quantitative analysis, and fundamental analysis.

• Technical analysis focuses on supply and demand patterns in stock charts to make investment decisions.

• Qualitative analysis examines factors like a company’s leadership, product, and industry to evaluate investment opportunities.

• Quantitative analysis uses data and numerical figures to predict price movements in stocks.

• Fundamental analysis looks at a company’s financial health and value to determine if its stock is underor overvalued.

Why Analyzing Stocks Is Important

The process of stock analysis can reveal important information about a company and its history, allowing investors to make more informed decisions about buying or selling stocks. Analyzing stocks can help investors identify which investment opportunities they believe will deliver strong returns. Further, stock analysis can assist investors in spotting potentially bad investments.

Whether you’re strategy involves short vs. long term investing, or day trading, analyzing stocks is going to be important.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Understanding Financial Statements

The first step in understanding stock analysis is knowing the basics of business reporting. There are three main types of financial statements that an investor may need to look at when doing analysis:

• Income statement: This statement shows a company’s profits, which are calculated by subtracting expenses from revenue.

• Balance sheet: The balance sheet compares a company’s assets, liabilities, and stockholder equity.

• Statement of cash flows: This statement outlines how a company is spending and earning its money.

In addition to these statements, a company’s earnings report contains information that can be useful for doing qualitative analysis. The annual report includes the company’s plans for the future and stock value predictions.

4 Ways to Analyze a Stock

The next step in stock evaluation is deciding which type of analysis to do. Here’s a look at some of the different methods for how to analyze a stock.

1. Technical Analysis

Technical analysis is a method for analyzing stocks that looks directly at a stock’s supply and demand in order to make investing decisions. This form of analysis takes the stance that all information needed is present within stock charts and the analysis of history and trends.

Some key focal points of technical analysis are:

• Stock prices move in trends.

• History repeats itself.

• Stock price history can be used to make price predictions.

• Stock price contains all relevant information for making investing decisions.

• Technical analysis does not consider intrinsic value.

Trend indicators are one of the most important parts of technical analysis. These indicators attempt to show traders whether a stock will go up or down in value. Uptrends mean higher highs and higher lowers, whereas downtrends mean lower lows and lower highs. Some common trend tools include linear regression, parabolic SAR, MACD, and moving averages.

Technical analysis also uses leading indicators and lagging indicators. Leading indicators signal before new trends occur, while lagging indicators signal after a trend has ended. These indicators look at information such as volume, price, price movement, open, and close.

There can be some pros and cons to using technical analysis, however, which can be important to consider when factoring in your risk tolerance.

Day traders tend to focus on technical analysis to try to capitalize on short-term price fluctuations. But because technical analysis generally focuses on short-term fluctuations in price, it’s not as often used for finding long-term investment opportunities.

Further, while technical analysis relies on objective and consistent data, it can produce false signals, particularly during trading conditions that aren’t ideal. This method of analysis also fails to take into consideration key fundamentals about individual shares or the stock market.

2. Qualitative Stock Analysis

When considering how to analyze a stock, it’s also a good idea to look at whether the company behind the stock is really a good business. Qualitative analysis looks into factors like a company’s leadership team, product, and the overall industry it’s a part of.

A few key qualitative metrics to look at are:

• Competitive advantage: Does the company have a unique edge that will help it be successful in the long term? If a company has patents, a unique manufacturing method, or broad distribution, these can be positive competitive advantages.

• Business model: Analyzing a business model includes looking at products, services, brand identity, and customers to get a sense of what the company is offering.

• Strong leadership: Even a great idea and product can fail with poor management. Looking into the credentials of the CEO and top executives of a company can help in evaluating whether it’s a good investment.

• Industry trends: If an industry is struggling, or looks like it may in the future, an investor may decide not to invest in companies in that industry. On the other hand, new and growing industries may be better investments. This is not always the case, as there are strong companies in weak industries, and vice versa.

3. Quantitative Analysis

Similar to technical analysis, quantitative analysis looks at data and numbers in an attempt to predict future price movements. Specifically, quantitative analysis evaluates data, such as a company’s revenues, price-to-earnings ratio, and earnings-per-share ratio, and uses statistical modeling and mathematical techniques to predict a stock’s value.

The upside is that this financial data is publicly available, and it creates an objective, consistent starting point. It can help with identifying patterns, and it can be useful in assessing risk. However, it requires sifting through a lot of data. Further, there’s no certainty when it comes to patterns, which can change.

4. Fundamental Analysis

Fundamental analysis looks at a company from a basic financial standpoint. This gives investors a sense of the company’s financial health and whether its stock may be under- or overvalued. Fundamental analysis takes the stance that a company’s stock price doesn’t necessarily equate to its value.

There are a number of key tools for fundamental analysis that investors might want to familiarize themselves with and use to get a fuller picture of a stock.

Earnings Per Share (EPS)

One of the main goals for many investors is to buy into profitable companies. Earnings per share, or EPS, tells investors how much profit a company earns per each share of stock, and how much investors are benefiting from those earnings. Companies report EPS quarterly, and the figure is calculated by dividing a company’s net income, minus dividend payouts, by the number of outstanding shares.

Understanding earnings per share can give investors guidance on a stock’s potential movement. On a basic level, a high EPS is a good sign, but it’s especially important that a company shows a high or growing EPS over time. The reason for this is that a company might have a temporarily high EPS if they cut some expenses or sell off assets, but that wouldn’t be a good indicator of the actual profitability of their business.

Likewise, a negative EPS over time is an indicator that an investor may not want to buy a stock.

Revenue

While EPS relates directly to a company’s stock, revenue can show investors how well a company is doing outside the markets. Positive and increasing revenues are an indicator that a company is growing and expanding.

Some large companies, especially tech companies, have increasing revenues over time with a negative EPS because they continue to feed profits back into the growing business. These companies can see significant stock value increases despite their lack of profit.

One can also look at revenue growth, which tracks changes in revenue over time.

Price-to-earnings (P/E) Ratio

One of the most common methods of analyzing stocks is to look at the P/E ratio, which compares a company’s current stock price to its earnings per share. P/E is found by dividing the price of one share of a stock by its EPS. Generally, a lower P/E ratio is a good sign.

Using this ratio is a good way to compare different stocks. One can also compare an individual company’s P/E ratio with an index like the S&P 500 Index to get a sense of how the company is doing relative to the overall market.

The downside of P/E is that it doesn’t include growth.

Price-Earnings-Growth (PEG) Ratio

Since P/E doesn’t include growth, the PEG ratio is another popular tool for analyzing stocks and evaluating stock performance. To look at EPS and revenue together, investors can use the price-earnings-growth ratio, or PEG.

PEG is calculated by dividing a stock’s P/E by its projected 12-month forward revenue growth rate. In general, a PEG lower than 1 is a good sign, and a PEG higher than 2 indicates that a stock may be overpriced.

PEG can also be used to make predictions about the future. By looking at PEG for different time periods in the past, investors can make a more informed guess about what the stock may do next.

Price-to-Sales Ratio (P/S)

The P/S ratio compares a company’s stock price to its revenues. It’s found by dividing stock price by revenues. This can be useful when comparing competitors — if the P/S is low, it might be more advantageous to buy.

Debt-Equity Ratio

Although profits and revenue are important to look at, so is a company’s debt and its ability to pay it back. If a company goes into more and more debt in order to continue growing, and they’re unable to pay it back, it’s not a good sign.

Debt-equity ratio is found by dividing a company’s total liabilities (debt) by its shareholder equity. In general, a debt-equity ratio under 0.1 is a good sign, while a debt-equity ratio higher than 0.5 can be a red flag for the future.

Debt-to-EBITDA

Similar to debt-to-equity, debt-to-EBITDA measures the ability a company has to pay off its debts. EBITDA stands for earnings before interest, tax, depreciation, and amortization.

A high debt-to-EBITDA ratio indicates that a company has a high amount of debt that it may not be able to pay off.

Dividend Yield

While a stock’s price can vary significantly from day to day, dividend payments are a way that investors can earn a consistent amount of money each quarter or year. Not every company pays out dividends, but large, established companies sometimes pay out some of their earnings to shareholders rather than reinvesting the money into their business.

Dividend yield is calculated by dividing a company’s annual dividend payment by its share price. The average dividend yield for S&P 500 companies is around 2%.

One thing to note is that dividends are not guaranteed — companies can change their dividend amounts at any time. So if a company has a particularly high dividend yield, it may not stay that way.

Price-to-Book Ratio (P/B)

Price-to-book ratio, or P/B, compares a company’s stock market value to its book value. This is a useful tool for finding companies that are currently undervalued, meaning those that have a significant amount of growth but still relatively low stock prices.

P/B ratio is found by dividing the market price of a stock by the company’s book value of equity. The book value of equity is found by subtracting the company’s total liabilities from its assets.

Company Reports and Projections

When companies release quarterly and annual earnings reports, many of them include projections for upcoming revenue and EPS. These reports are a useful tool for investors to get a sense of a stock’s future. They can also affect stock price as other shareholders and investors will react to the news in the report.

Professional Analysis

Wall Street analysts regularly release reports about the overall stock market as well as individual companies and stocks. These reports include information such as 12-month targets, stock ratings, company comparisons, and financial projections. By reading multiple reports, investors may start to see common trends.

While analysts aren’t always correct and can’t predict global events that affect the markets, these reports can be a useful tool for investors. They can keep them up-to-date on any key happenings that may be on the horizon for particular companies. The information in the reports also can result in stock prices going up or down, since investors will react to the predictions.

Quantitative vs Qualitative Analysis

Here’s a quick rundown looking at the key differences between quantitative and qualitative analysis. Again, this can be important when weighing your risk need to knows as an investor.

Quantitative vs. Qualitative Analysis
Quantitative Analysis	Qualitative Analysis
Looks at data and numerical figures to predict price movements	Looks at business factors such as leadership, product, and industry
May require sifting through a lot of data, and may be difficult for some investors	Metrics include business models, competitive advantage, and industry trends
Concerned more with the “quantity” and hard data a business produces	Concerned more with the “quality” of a business

Pros and Cons of Doing Your Own Stock Analysis

If you feel like you can do a little stock analysis on your own, there are some pros and cons to it.

Pros

Perhaps the most obvious pro to doing your own stock analysis is that you don’t need to pay someone else to do it, you can do it on your own schedule, and learn as you go. You can develop knowledge that’ll likely help you as you continue to invest in the future. There are also numerous tools out there that you can use to analyze stocks which may not have been around in years or decades past.

Cons

Stock analysis can be an involved process, which can require a lot of investment in and of itself — both monetarily (if you’re using paid tools) and in terms of time. Depending on how deep you want to go, too, it can be a complex process. You may get frustrated or burnt out, or even make a mistake that leads to a bad investment decision.

💡 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).

Test your understanding of what you just read.

Buying Stocks With SoFi

There are a number of ways to analyze stocks, including technical, fundamental, quantitative, and qualitative analysis. The more an investor gets comfortable with terms like P/E ratio and earnings reports, the more informed they can be before making any decisions. Stock analysis is an involved process, however, and may be above the typical investors’ head and ability.

It is important to do your research and homework in relation to your investments, however. If you feel like you could use some guidance or a helping hand, speaking with a financial professional is never really a bad idea.

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

FAQ

What is the best way to analyze a stock?

There’s no “best” way to analyze stocks. The right option for an investor will depend on their personal preferences and investing objectives. And remember, there’s no need to just use one method to analyze a stock — often, analysts will combine different methods of analysis to generate a more robust stock analysis.

What are key indicators to look for when analyzing a stock?

There are a ton of potential indicators that investors can look at, but some broad indicators that investors can start with include stock price history, moving averages, a company’s competitive advantages, business models, and industry trends.

What is an example of stock analysis?

A very, very basic example of stock analysis would include looking at a stock’s share price, comparing it to its historical averages and moving averages, overall market conditions, and looking at the company’s financial statements to try and gauge where it might move next.

What Is Rate of Return?

How to Calculate Rate of Return

Rate of Return Formula

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Example of Calculating Rate of Return

Considerations When Using Rate of Return

What are the Limitations of Simple Rate of Return?

Annualized Rate of Return Formula

Other Types of Return Formulas

How Investors Can Use Rate of Return

The Takeaway

3 Reasons to Transfer Your 401(k) to a New Job

1. You May Be Paying Hidden Fees

2. You Might Be Missing Out on Certain Types of Investments

3. You Could Lose Track of Your 401(k) Account

Do You Have to Rollover Your 401(k) to a New Employer?

Get a 1% IRA match on rollovers and contributions.

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

What to Do With Your 401(k) After Getting a New Job

Roll Over a 401(k) to Your New Employer’s Plan

Roll Over a 401(k) to an IRA

Cash Out Early

What Happens to Your 401(k) if You’ve Been Fired?

How Long Do You Have to Transfer Your 401(k)?

Advantages of Rolling Over Your 401(k)

One Place for Tax-Deferred Money

A Streamlined Investment Strategy

Financial Service Offerings

Disadvantages of Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

401(k) Rollover Rules

Rolling Over a 401(k) Into an IRA

The Takeaway

FAQ

Should I roll over my 401(k) to a new employer?

How long do you have to move your 401(k) after leaving a job?

How do I roll over my 401(k) from my old job to my new job?

What happens if I don’t roll over my 401(k) from my previous employer?

What Does SPAN Stand For?

What Is SPAN Margin?

What Is a Stock Margin Account?

How Does SPAN Margin Work?

Pros and Cons of SPAN Margin

The Advantages

The Downsides

The Takeaway

FAQ

What does SPAN stand for in margin trading?

How is SPAN margin used?

What is a SPAN calculation?

Can You Cash Out Stocks?

What Happens When You Sell a Stock?

How to Cash Out Your Stocks: 5 Steps

Motivations for Selling Stocks

Accessing Cash for Life Expenses

Cashing Out Profits

Preventing Significant Losses

Day Trading

Offloading Low Performing Stocks

Understanding Types of Sell Orders

Market Orders

Limit Orders

Stop Orders or Stop-Loss Orders

Trailing Sell Stop Orders

Factors to Assess When Cashing Out Stocks

Pros and Cons of Reinvesting Profits

Pros:

Cons:

Pros

Cons

Platforms for Buying and Selling Stocks

Online Brokerage Accounts

Financial Advisors

The Takeaway

FAQ

How long does it take to cash out stocks?

Do you get money when you sell stock?

Can I withdraw money from stocks?

Why Analyzing Stocks Is Important

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

Student Loan
Refinancing

Personal
Loans

Online
Investments