Financial Topics Archives | Page 19 of 808

Dec

2024

Why you need to invest when the market is down

What You Need to Know When the Market Is Down

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

What do you do with your stocks when the market drops? If you’re like most people, your first instinct is to sell. It’s human nature. But when they decline, selling everything can seem like the best way out of a bad situation. However, instinctively selling when stocks drop is often counterproductive, and it may make more sense to invest while the market is down.

Key Points

• Selling stocks during a market downturn can be counterproductive; investing for the long term is often more beneficial.

• Dollar-cost averaging allows investors to buy more shares when prices are low, potentially increasing returns.

• Tax-loss harvesting can offset gains by selling investments at a loss and reinvesting in similar assets.

• Avoid high-risk investments and rash decisions during downturns; maintain a diversified portfolio to manage risk.

• Market downturns offer opportunities to buy stocks at lower prices, but decisions should align with long-term goals.

Should You Invest When the Market Is Down?

It’s generally a good idea to invest when the stock market is down as long as you’re planning to invest for the long term. Seasoned investors know that investing in the market is a long-term prospect. Stock market dips, corrections, or even bear markets are usually temporary, and, given enough time, your portfolio may recover.

When the market is down, it provides an opportunity to buy shares of stock through your online investing account at a lower price, which means you can potentially earn a higher return on your investment when the market recovers.

For example, in late 2007, stocks began one of the most dramatic plunges in their history. From October 2007 to March 2009, the S&P 500 Index fell 57%. During that time, many investors panicked and sold their holdings for fear of further losses.

However, the market bottomed out on March 9, 2009, and started a recovery that would turn into the longest bull market in history. Four years later, in 2013, the S&P 500 surpassed the high it reached in 2007. While that historic plunge of over 50% was terrifying, if you panicked and sold, rather than employ bear market investing strategies, you would have locked in your losses — and missed the subsequent recovery.

If, on the other hand, you had kept your investments, you would have seen stock values fall at first, but as the market reversed course, you may have seen portfolio gains again.

Consider the recent example of how the markets performed during the early stages of the Covid-19 pandemic in 2020. The S&P 500 fell about 34% from February 19, 2020, to March 23, 2020, as the pandemic ravaged the globe. However, stocks rebounded and made up the losses by August. As of the end of 2024, markets are hovering around record highs.

These examples illustrate why timing the market is rarely successful, but holding stock over the long term tends to be a smart strategy. It’s still important to keep in mind that the stock market can be volatile and can fluctuate significantly in the short term. Therefore, you must be prepared for short-term losses and have a long-term investment horizon.

4 Things to Consider Doing During a Market Downturn

When the stock market is down, it can be a worrying time for investors. But it’s important to remember that market downturns are a normal part of the investing process and that the market may eventually recover. Here are a few things to consider doing during a market downturn.

1. Stay Calm and Avoid Making Impulsive Decisions

It’s natural to feel worried or concerned when the stock market is down, but it’s essential to maintain a long-term perspective and not make rash decisions based on short-term market movements.

Buying and selling stocks based on gut reactions to temporary volatility can derail your investment plan, potentially setting you back.

You likely built your investment plan with specific goals in mind, and your diversified portfolio was probably based on your time horizon and risk tolerance preferences. Impulsive selling (or buying) can throw off this balance.

Instead of letting emotions rule the day, consider having a plan that includes investing more when the market is down (aka buying the dip). These strategies involve buying stocks on sale, and the hope is that the downturn is temporary and you’ll be able to ride any upturn to potential earnings.

So, when markets take a tumble, your best move is often to stay calm and stick to your predetermined strategy.

That said, any investment decisions you make should be based on your own needs. Just because the market is down doesn’t mean you have to buy anything. Buying stocks on impulse just because they’re cheaper might throw a wrench in your plan, just like rushing to sell. Taking time to consider your long-term needs and doing research typically pays off.

2. Evaluate Your Portfolio

Review your portfolio and make sure it’s properly diversified. Portfolio diversification may reduce the overall risk of your portfolio by spreading your investments across different asset classes, like stocks, bonds, real estate, and cash. Investing in various assets and industries can protect your portfolio during a market downturn.

However, even if you have a well-diversified portfolio, you may also need to pay attention to your portfolio’s asset allocation during volatile markets. For example, during a down stock market, your stock holdings may become a lower percentage of your portfolio than desired, while bonds or cash become a more significant part of your overall holdings. If your portfolio has become heavily weighted in a particular asset class or sector, it could be strategic to sell some of those holdings and use the proceeds to buy securities to rebalance your portfolio at your desired asset allocation.

3. Take Advantage of Low Prices With Dollar-Cost Averaging

To help curb your impulse to pull out of the market when it is low — and continue investing instead — you may want to consider dollar cost averaging.

Here’s how it works: On a regular schedule — say every month — you invest a set amount of money in the stock market. While the amount you invest each month will remain the same, the number of shares you’ll be able to purchase will vary based on the current cost of each share.

For example, let’s say you invest $100 a month. In January, that $100 might buy ten shares of a mutual fund at $10 a share. Suppose the market dips in April, and the fund’s shares are now worth $5. Instead of panicking and selling, you continue to invest your $100. That month, your $100 buys 20 shares.

In June, when the market rises again, the fund costs $25 a share, and your $100 buys four shares. In this way, dollar cost averaging helps you buy more shares when the markets are down, essentially allowing you to buy low and limiting the number of shares you can buy when markets are up. This helps protect from “buying high.”

After ten years of investing $100 a month, the value of each share is $50. Even if some shares you bought cost more than that, your average cost per share is likely lower than the fund’s current price.

Steady investments over time are more likely to give you a favorable return than dumping a large amount of money into the market and hoping you timed it right.

4. Consider Tax-Loss Harvesting

If you’ve already experienced losses, you may want to consider tax-loss harvesting — the practice of selling investments that experienced a loss to offset your gains from other investments.

Imagine that you invest $10,000 in a stock in January. Over the year, the stock decreases in value, and at the end of the year, it is only worth $7,500. Instead of wishing you’d had better luck, you can sell that position and reinvest the money in a similar (but not identical) stock or mutual fund.

You get the benefit of maintaining a similar investment profile that will hopefully increase in value over time, and you can write off the $2,500 loss for tax purposes. You can write off the total amount against any capital gains you may have in this year or any future year, helping to lower your tax bill. This is tax-loss harvesting.

You can also deduct up to $3,000 of capital losses each year from your ordinary income. However, you must deduct your losses against capital gains first before using the excess to offset income. Losses beyond $3,000 can be rolled over into subsequent years, known as tax loss carryforward.

During major market downturns, this technique can ease the pain of capital losses — but it’s important to consider reinvesting the money you raise when you sell, or you’ll risk missing the recovery. But remember that with investing comes risk, so there’s no assurance that a recovery will occur.

4 Things to Avoid When the Market Is Down

Feeling anxious when the stock market is down is natural, but it’s important to remain calm and not let fear drive your investment decisions. Here are a few things to avoid when the stock market is down.

1. Trying to Time the Market

Timing the market is the idea that you will somehow beat the market by attempting to predict future market movements and buying and selling accordingly. However, it’s difficult to predict with certainty when the stock market will go up or down, so trying to time the market is generally a futile endeavor.

However, it’s difficult to predict with certainty when the stock market will go up or down, so trying to time the market is generally a futile endeavor. As they say: No one has a crystal ball in this business.

As a result, timing the market is not a strategy that works for most investors. Even during a down market, you should not wait until the market hits bottom to start investing in stocks again.

2. Selling All Your Stocks

You should resist the temptation to sell all of your stocks or make other rash decisions when the market is down. While it may be tempting to sell all of your stocks during a down market, it’s important to remember that the stock market usually recovers. If you sell all of your stocks when the market is down, you may miss out on the opportunity to participate in the market’s recovery.

3. Chasing After High-Risk Investments

When stocks are down, you may be inclined to try to earn quick profits by investing in high-risk assets — like commodities or cryptocurrencies — but these investments can be particularly volatile and are not suitable for everyone.

Moreover, riskier investment strategies like options and margin trading may be an appealing way to amplify returns in down markets. But if you are not comfortable using these strategies, you could end up with even bigger losses.

4. Abandoning Your Long-Term Financial Plan

It’s important to remember that the stock market is just one part of your overall financial plan. Keep your long-term financial goals in mind, and don’t let short-term market movements distract you from your larger financial objectives.

Risks to Investing During Down Markets

While the stock market generally recovers after a decline, there are exceptions to the idea that the market tends to snap back quickly or always trends upward.

Take the stock market crash of 1929. Share prices continued to slide until 1932, as the Great Depression ravaged the economy. The Dow Jones Industrial Average didn’t reach its pre-crash high until November 1954.

In addition, as of early 2023, the Nikkei 225 — the benchmark stock index in Japan — has yet to reach the peak of over 38,000 it hit at the end of 1989. Back then, the index went on to lose half its value in three years as an economic bubble in the country burst. However, the Nikkei did touch the 30,000 level at various points in 2021 for the first time since 1990.

So, investors need to remember that just because stock markets have recovered in the past doesn’t mean that it will always be that way. As the saying goes, past performance is not indicative of future results.

The Takeaway

Almost everyone feels a sense of worry (or fear) when the market is down. It’s only natural to find yourself swamped with doubts: What if the market keeps sliding? What if I lose everything? What if it’s one of those rare occurrences when the recovery takes ten years?

Rather than succumb to panic, perhaps the best course of action is to stay the course, and not to give in to your impulses to sell or scrap your entire investment strategy, but to stay the course. Using strategies like dollar-cost averaging, which allow you to invest in a down market sensibly, can be a part of a balanced investment strategy that helps build wealth 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.

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.

SOIN-Q424-036

Dec

2024

What Is a Pattern Day Trader?

By Inyoung Hwang | Financial Independence, invest, Investing | Comments Off

A pattern day trader is actually a designation created by the Financial Industry Regulatory Authority (FINRA), and it refers to traders who day trade a security four or more times within a five-day period.

Because of their status, there are certain rules and stipulations that apply only to pattern day traders, which brokerages and investing firms must adhere to. Read on to learn more about pattern day traders, what rules apply to them, and how they’re different from regular day traders.

Key Points

• A pattern day trader is classified as someone who executes four or more day trades within a five-day period, exceeding 6% of their total trading activity.

• Investors identified as pattern day traders must maintain a minimum balance of $25,000 in their margin accounts to meet regulatory requirements set by FINRA.

• Engaging in pattern day trading can yield profits, but it also carries significant risks, especially when utilizing margin accounts, which can amplify both gains and losses.

• The Pattern Day Trader Rule was established to limit excessive risk-taking among individual traders, requiring firms to impose stricter trading restrictions on active day traders.

• Being designated as a pattern day trader may lead to account restrictions, including a 90-day trading freeze if the minimum balance requirement is not met.

Pattern Day Trader, Definition

The FINRA definition of a pattern day trader is clear: A brokerage or investing platform must classify investors as pattern day traders if they day trade a security four or more times in five business days, and the number of day trades accounts for more than 6% of their total trading activity for that same five-day period in a margin account.

When investors are identified as pattern day traders, they must have at least $25,000 in their trading account. Otherwise, the account could get restricted per FINRA’s day-trading margin requirement rules.

How Does Pattern Day Trading Work?

Pattern day trading works as the rules stipulate: An investor or trader trades a single security at least four times within a five business day window, and those moves amount to more than 6% of their overall trading activity.

Effectively, this may not look like much more than engaging in typical day trading strategies for the investor. The important elements at play are that the investor is engaging in a flurry of activity, often trading a single security, and using a margin account to do so.

Remember: A margin account allows the trader to borrow money to buy investments, so the brokerage that’s lending the trader money has an interest in making sure they can repay what they owe.

Example of Pattern Day Trading

Here is how pattern day trading might look in practice:

On Monday, you purchase 10 shares of Stock A using a margin account. Later that day, you sell the 10 shares of Stock A. This is a day trade.

On Tuesday, you purchase 15 shares of stock A in the morning and then sell the 15 shares soon after lunch. Subsequently, you purchase 5 shares of stock A, which you hold only briefly before selling prior to the market close. You have completed two day trades during the day, bringing your running total — including Monday’s trades — to three.

On Thursday, you purchase 10 shares of stock A and 5 shares of stock B in the morning. That same afternoon, you sell the 10 shares of stock A and the 5 shares of stock B. This also constitutes two day trades, bringing your total day trades to five during the running four-day period. Because you have executed four or more day trades in a rolling five business day period, you may now be flagged as a pattern day trader.

Note: Depending on whether your firm uses an alternative method of calculating day trades, multiple trades where there is no change in direction might only count as one day trade. For example:

• Buy 20 shares of stock A

• Sell 15 shares of stock A

• Sell 5 shares of stock A

If done within a single day, this could still only count as one day trade.

Do Pattern Day Traders Make Money?

Yes, pattern day traders can and do make money — if they didn’t, nobody would engage in it, after all. But pattern day trading incurs much of the same risks of day trading. Day traders run the risk of getting in over their heads when using margin accounts, and finding themselves in debt.

This is why it’s important for aspiring day traders to make sure they have a clear and deep understanding of both margin and the use of leverage before they give serious thought to trading at a high level.

It’s the risks associated with it, too, that led to the development and implementation of the Pattern Day Trader Rule, which can have implications for investors.

What Is the Pattern Day Trader Rule?

The Pattern Day Trader Rule established by FINRA requires that an investor have at least $25,000 cash and other eligible securities in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000, the investor will need to bring the balance back up in order to day trade again.

Essentially, this is to help make sure that the trader actually has the funds to cover their trading activity if they were to experience losses.

Note that, according to FINRA, a day trade occurs when a security is bought and then sold within a single day. However, simply purchasing shares of a security would not be considered a day trade, as long as that security is not sold later on that same day, per FINRA rules. This also applies to shorting a stock and options trading.

The PDT Rule established by FINRA requires that an investor have at least $25,000 in their margin account in order to conduct four or more day trades within five days. But merely day trading isn’t enough to trigger the PDT Rule.

All brokerage and investing platforms are required by FINRA, a nongovernmental regulatory organization, to follow this rule. Most firms provide warnings to their clients if they are close to breaking the PDT rule or have already violated it. Breaking the rule may result in a trading platform placing a 90-day trading freeze on the client’s account. Brokers can allow for the $25,000 to be made up with cash, as well as eligible securities.

Some brokerages may have a broader definition for who is considered a “pattern day trader.” This means they could be stricter about which investors are classified as such, and they could place trading restrictions on those investors.

A broker can designate an investor a pattern day trader as long as the firm has a “reasonable basis” to do so, according to FINRA guidelines.

Why Did FINRA Create the Pattern Day Trader Rule?

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule during the height of the dot-com bubble in the late 1990s and early 2000s in order to curb excessive risk-taking among individual traders.

FINRA and the Securities and Exchange Commission (SEC) created the PDT margin rule amidst the heyday of the dot-com bubble in order to curb excessive risk taking among individual traders.

FINRA set the minimum account requirement for pattern day traders at $25,000 after gathering input from a number of brokerage firms. The majority of these firms felt that a $25,000 “cushion” would alleviate the extra risks from day trading. Many firms felt that the $2,000 for regular margin accounts was insufficient as this minimum was set in 1974, before technology allowed for the electronic day trading that is popular today.

Investing platforms offering brokerage accounts are actually free to impose a higher minimum account requirement. Some investing platforms impose the $25,000 minimum balance requirement even on accounts that aren’t margin accounts.

Pattern Day Trader vs Day Trader

As discussed, there is a difference between a pattern day trader and a plain old day trader. The difference has to do with the details of their trading: Pattern day traders are more active and assume more risk than typical day traders, which is what catches the attention of their brokerages.

Essentially, a pattern day trader is someone who makes a habit of day trading. Any investor can engage in day trading — but it’s the repeated engagement of day trading that presents an identifiable pattern. That’s what presents more of a risk to a brokerage, especially if the trader is trading on margin, and which may earn the trader the PDT label, and subject them to stricter rules.

Does the Pattern Day Trader Rule Apply to Margin Accounts?

As a refresher: Margin trading is when investors are allowed to make trades with some of their own money and some money that is borrowed from their broker. It’s a way for investors to boost their purchasing power. However, the big risk is that investors end up losing more money than their initial investment.

Investors trading on margin are required to keep a certain cash minimum. That balance is used as collateral by the brokerage firm for the loan that was provided. The initial minimum for a regular margin account is $2,000 (or 50% of the initial margin purchase, whichever is greater). Again, that minimum moves up to $25,000 if the investor is classified as a “pattern day trader.”

FINRA rules allow pattern day traders to get a boost in their buying power to four times the maintenance margin excess — any extra money besides the minimum required in a margin account. However, most brokerages don’t provide 4:1 leverage for positions held overnight, meaning investors may have to close positions before the trading day ends or face borrowing costs.

If an investor exceeds their buying power limitation, they can receive a margin call from their broker. The investor would have five days to meet this margin call, during which their buying power will be restricted to two times their maintenance margin. If the investor doesn’t meet the margin call in five days, their trading account can be restricted for 90 days.

Does the Pattern Day Trader Rule Apply to Cash Accounts?

Whether the Pattern Day Trader Rule applies to other types of investing accounts, like cash accounts, is up to the specific brokerage or investing firm. The primary difference between a cash account vs. a margin account is that with cash accounts, all trades are done with money investors have on hand. Some trading platforms only apply the PDT rule to margin accounts and don’t apply it to cash accounts.

However, some platforms may adhere to FINRA rules that govern margin accounts even if they don’t offer margin trading. This means that a $25,000 minimum balance of cash and other securities must be kept in order for an investor to do more than four day trades in a five-business-day window.

Investors with cash accounts also need to be careful of free riding violations. This is when an investor buys securities and then pays for the purchase by using proceeds from a sale of the same securities. Such a practice would be in violation of the Federal Reserve Board’s Regulation T and result in a 90-day trading freeze.

Pros of Being a Pattern Day Trader

The pros to being a pattern day trader are somewhat obvious: High-risk trading goes along with the potential for bigger rewards and higher profits. Traders also have a short-term time horizon, and aren’t necessarily locking up their resources in longer-term investments, either, which can be a positive for some investors.

Also, the use of leverage and margin allows them to potentially earn bigger returns while using a smaller amount of capital.

Cons of Being a Pattern Day Trader

The biggest and most obvious downside to being a pattern day trader is that you’re contending with a significant amount of risk. Using leverage and margin to trade compounds that risk, too, so day trading does require thick skin and the ability to handle a lot of risk. (Make sure to consider your risk tolerance and investment objectives before engaging in day trading.) Given the intricacies of day trading, it can also be more time and research intensive.

Tips to Avoid Becoming a Pattern Day Trader

Here are some steps investors can take to avoid getting a PDT designation:

1. Investors can call their brokerage or trading platform or carefully read the official rules on what kind of trading leads to a “Pattern Day Trader” designation, what restrictions can potentially be placed, and what types of accounts are affected.

2. Investors can keep a close count of how many day trades they do in a rolling five-day period. It’s important to note that buying and selling during premarket and after-market trading hours can cause a trade to be considered a day trade. In addition, a large order that a broker could only execute by breaking up into many smaller orders may constitute multiple day trades.

3. Investors can consider holding onto securities overnight. This will help them avoid making a trade count as a day trade, although with margin accounts, they may not have the 4:1 leverage afforded to them overnight.

4. If an investor wants to make their fourth day trade in a five-day window, they can make sure they have $25,000 in cash and other securities in their brokerage account the night before to prevent the account from being frozen.

5. Investors can open a brokerage account with another firm if they’ve already hit three day trades over five days with one trading platform. However, it’s good to keep in mind that the PDT rule is meant to protect investors from excessive risk taking.

It’s also important to know that taking time to make wise or careful investment decisions could be in the investor’s favor.

The Takeaway

Pattern day traders, as spelled out by FINRA guidelines, are traders who trade a security four or more times within five business days, and their day trades amount to more than 6% of their total trading activity using a margin account.

Being labeled a pattern day trader by a brokerage can trigger the PDT Rule, which means that the trader needs to keep at least $25,000 in their margin account. While day trading can reap big rewards, it also has big risks — and that’s something that brokerages are keenly aware of, and why they may choose to have stricter requirements for pattern day traders.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

What happens if you get flagged as a pattern day trader?

If you’re labeled as a pattern day trader, your brokerage may require you to keep at least $25,000 in cash or other assets in your margin account as a sort of collateral.

Do pattern day traders make money?

Yes, some pattern day traders make money, which is why some people choose to do it professionally. But many, perhaps most, lose money, as there is a significant amount of risk that goes along with day trading.

What is the pattern day trader rule?

The Pattern Day Trader Rule was established by FINRA, and requires traders to have at least $25,000 in their margin account in order to conduct four or more day trades within five days. If the account dips below $25,000 the trader needs to deposit additional funds.

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.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

SOIN-Q424-035

Dec

2024

Understanding Cash in Lieu of Fractional Shares

By Matthew Warholak | Growing Wealth, invest, Investing | Comments Off

It’s not uncommon for publicly-traded companies to restructure based on changing market conditions or their stock price. When companies merge, acquire competitors, or split their stock, it can raise the question of how to consolidate or restructure the company’s outstanding shares.

If such a corporate action generates fractional shares for investors, the company’s leadership has a few options for how to proceed: They could distribute the fractional shares to shareholders, round up to the nearest whole share, or pay cash in lieu of fractional shares. Investors need to be aware of cash in lieu because it can affect a portfolio and taxes.

Key Points

• Cash in lieu of fractional shares is a payment method where investors receive cash instead of fractional shares due to corporate actions like stock splits or mergers.

• Companies may opt for cash in lieu to simplify management and avoid dealing with fractional shares after events such as stock splits or acquisitions.

• Receiving cash in lieu is taxable, and investors must report it as capital gains, calculating their cost basis accurately to determine tax obligations.

• Corporate actions like stock splits, mergers, and spinoffs can lead to fractional shares, prompting the need for cash in lieu payments to investors.

• Understanding how cash in lieu of fractional shares works helps investors navigate the complexities of corporate actions and their financial implications.

What Is Cash in Lieu?

Cash in lieu is a type of payment where the recipient receives money instead of goods, services, or an asset.

In investing, cash in lieu refers to funds received by investors following structural company changes that unevenly disrupt existing stock prices and quantities. Instead of receiving fractional shares after a stock split or a merger, investors receive cash.

Following corporate actions like a stock split or a merger, the newly-adjusted stock supply can be uneven and often results in fractional shares. Rather than holding or converting fractional shares to whole shares, some companies opt to aggregate and sell all of the partial shares in the open market – where investors can buy stocks. After the sale of these shares, the company will pay cash to the investors who did not get fractional shares.

The company’s board ultimately determines how the company will maintain or return value to investors. Opting to distribute cash in lieu is a company’s method of disposing of fractional shares and returning the cash balance to investors that’s proportionate to prior holdings.

💡 Recommended: What Are Fractional Shares and How Do They Work?

Why Investors Receive Cash in Lieu

Investors can receive cash in lieu for various reasons involving company restructuring that affects the number of outstanding shares, stock price, or both.

The following events can lead to investors receiving cash in lieu of fractional shares.

Stock Split

A stock split occurs when a company’s board of directors determines that the company’s high share price may be too high for new investors. The company will then execute a stock split to lower the stock’s price by issuing more shares at a fixed ratio while maintaining the company’s unchanged value. Companies will often approve a stock split so its share price looks more attractive to more investors and gains more liquidity and marketability.

Depending on the predetermined ratio, a stock split could generate fractional shares. For example, a 3-to-2 stock split would create three shares for every two shares each investor holds. If you own five shares of the stock, you would have 7.5 shares after the split. Thus, a stock split would cause any investor with an odd number of shares to receive a fractional share.

However, suppose the company’s board isn’t keen to hold or deal with fractional shares. In that case, they will distribute investors’ whole shares and liquidate the uneven remainders, thus paying investors cash in lieu of fractional shares.

Conversely, a company may execute a reverse stock split because its stock price is too low, and they want to raise it. If stock prices get too low, investors may become fearful of buying the stock, and it may risk being delisted from exchanges.

When a stock undergoes a reverse stock split, investors usually receive one share for a specific number of shares they own, depending on the reverse split ratio. For example, a stock valued at $3.50 may undergo a reverse 1-for-10 stock split. Every ten shares are converted into one new share valued at $35.00. Investors who own 33 shares, or any number not divisible by ten, would receive fractional shares unless the company decides to issue cash in lieu of fractional shares.

Companies may notify their shareholders of an impending stock split or reverse split on Forms 8-K, 10-Q, or 10-K, as well as any settlement details if necessary.

Merger or Acquisition

Company mergers and acquisitions (M&As) can also create fractional shares. When publicly-traded companies combine or are bought, investors will often receive stock as part of the deal using a predetermined ratio. These stock purchase deals often result in fractional shares for investors in all involved companies.

In these cases, it’s rare for the ratio of new shares received to be a whole number. Companies may opt to return full shares to investors, sell fractional shares, and disburse cash in lieu to investors.

💡 Recommended: What Happens to a Stock During a Merger?

Spinoff

Suppose an investor owns shares of a company that spins off part of the business as a new entity with a separately-traded stock. In that case, shareholders of the original company may receive a fixed amount of shares of the new company for every share of the existing company held. Depending on the structure of the spinoff, investors may receive cash in lieu of fractional shares of the new company.

How Is Cash in Lieu of Fractional Shares Taxed?

Like many other forms of investment profits, cash in lieu of fractional shares is taxable, even though the payment occurred without the investor’s endorsement or action. Investors will pay a capital gains tax on the payment.

However, if you have a tax-advantaged account, like a 401(k) or individual retirement account (IRA), you do not have to worry about reporting or paying taxes on the gains of cash in lieu payment.

Some investors may simply report the payment on the IRS Form 1040’s Schedule D as sales proceeds with zero cost and pay capital gains tax on the entire cash settlement. However, the more accurate and tax-advantageous method would apply the adjusted cost basis to the fractional shares and pay capital gains tax only on the net gain.

💡 Recommended: A Guide to Tax-Efficient Investing

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Own part of a stock with fractional share investing.

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How to Report Cash in Lieu of Fractional Shares

As noted above, if you receive cash in lieu of fractional shares, you’ll have to pay capital gains taxes on the windfall. To ensure you’re paying the right amount of tax, you’ll have to take a few extra steps to determine your cost basis and accurately report the cash in lieu payment.

Gather Your Documents

Investors may receive the cash through their investment broker and an IRS Form 1099-B at year-end with a “cash in lieu” or “CIL” notation. To accurately report your cash in lieu payment, you’ll need the Form 1099-B, your original cost basis, the date you purchased the stock, the date of the stock split or other corporate action, and the reason why you received the cash in lieu of fractional shares.

Calculate Your Cost Basis

Calculating the cost basis for cash in lieu of fractional shares is a little tricky due to the share price and quantity change. The new stock issued is not taxable, nor does the cost basis change, but the per-share basis does.

Consider the following example:

• An investor owns 15 shares of Company X worth $10.00 per share ($150 value)

• The investor’s 15 shares have a $7.00 per share cost basis ($105 total cost basis)

• Company X declares a 1.5-to-1 stock split

After the stock split, the investor is entitled to 22.5 shares (1.5 x 15 shares = 22.5 shares) valued at $6.67 each ($150 value / 22.5 shares = $6.67 per share), but the company states they will only issue whole shares. Therefore, the investor receives 22 shares plus a $3.34 cash in lieu payment for the half share ($6.67 x 0.5 = $3.34 per half share).

The investor’s total cost basis remains the same, less the cash in lieu of the fractional shares. However, the adjusted cost basis now factors in 22 shares instead of 15, equaling a $4.77 per share cost basis ($105 total cost basis / 22 shares = $4.77 cost basis) and a $2.39 fractional share cost basis.

Finally, the taxable “net gain” for the cash payment received in lieu of fractional shares equates to:

$3.34 cash in lieu payment – $2.39 fractional share cost basis = $0.95 net gain.

So, rather than paying capital gains taxes on the $3.34 payment, you pay taxes on the $0.95 gain. You report this figure on the IRS Form 1040’s Schedule D.

The Takeaway

It’s not always possible to anticipate a company’s actions, like a merger or stock split, and how it will affect shareholders’ stock. If the company doesn’t wish to deal with fractional shares, shareholders need to understand the alternative payments, such as cash in lieu of fractional shares, and how it affects them. While cash in lieu can be burdensome, knowing the nuances of the payment and how it is taxed may benefit your portfolio.

Though you may receive cash in lieu of fractional shares, investors may still consider fractional shares to add to their investment portfolio.

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

Is cash in lieu of fractional shares taxable?

If you receive cash in lieu of fractional shares, the cash is taxable. The payment can be taxed as a short-term or long-term capital gain, depending on how long you’ve held the stock.

Is cash in lieu a dividend?

Investors can receive cash in lieu of fractional shares for a dividend payment. However, cash in lieu is not a dividend and is not taxed like a dividend.

Is cash in lieu a capital gain?

Cash in lieu is treated as a capital gain because the IRS considers it a stock sale. When you receive cash in lieu of fractional shares, you may have to pay capital gains taxes on the payment.

What is a cash in lieu settlement?

A cash in lieu settlement is an agreement between two parties in which one party agrees to pay the other party an agreed-upon amount of cash instead of some other form of payment or consideration.

SoFi Invest®

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

SOIN-Q324-023

Dec

2024

Guide to Credit Card Foreign Transaction Fees

By Kelly Boyer Sagert | Credit, credit card | Comments Off

If you’ve used your credit card outside of the U.S. — or simply made a purchase online through a merchant that wasn’t U.S.-based — you may have noticed an extra cost added to your purchase. Called a foreign transaction fee, these charges can add up quickly.

Luckily, it is possible to steer clear of credit card fees for international transactions. Let’s take a closer look at what a foreign transaction fee on a credit card is, how much they typically run, and how you can avoid them.

What Is a Credit Card Foreign Transaction Fee?

A credit card foreign transaction fee is a surcharge, or an additional charge, that some credit cards add to transactions that are processed outside of the U.S. Put another way, it’s a cost that applies for credit card processing when certain conditions are met.

Credit card foreign transaction fees may apply when you make an online purchase from a merchant that’s located outside of the U.S. Additionally, they may apply when you’re using a credit card in another country.

While broadly referred to as a foreign transaction fee, this fee is actually composed of two different charges. One part comes from the credit card issuers and the other is from the credit card network (think Visa or Mastercard, for example).

Recommended: What is a Charge Card?

How Are Credit Card Foreign Transaction Fees Calculated?

To find out how international credit card fees are calculated for your particular credit card, check your card’s terms and conditions. You’ll likely find information on foreign transaction fees in a section titled “Rates and Fees” or “Pricing and Terms.”

In general, however, the amount of your credit card’s international fees is calculated based on a set percentage of the transaction amount.

For example, say your credit card charges a 3% foreign transaction fee, and you’re paying about $50 for souvenirs you bought at a merchant abroad. In this instance, the credit card network may take 1.5% of the transaction, while the credit card issuer would deduct 1.5%. That would result in a total foreign transaction fee of $1.50 for that particular purchase.

Recommended: How to Avoid Interest on a Credit Card

How Much Do Credit Card Foreign Transaction Fees Cost?

Some cards don’t come with credit card international fees, meaning you don’t have to worry about this credit card cost. For cards that do charge foreign transaction fees, this fee can range from 1% to 3% per transaction, with 3% being the average rate.

When this credit card fee for international transactions is charged once, it may not seem like a big deal. But if you make a lot of overseas purchases, it can really add up. If you have a 3% foreign fee credit card, for example, that will tack on $3 for every $100 you put on the card.

Foreign Transaction Fees vs Currency Conversion Fees

A foreign transaction fee isn’t the same thing as a currency conversion fee. Rather, a currency conversion fee is generally one portion of the overall foreign transaction fee you may be charged.

A currency conversion fee is the cost charged by the credit card network to cover the cost of converting funds into the currency of the merchant. So, if you were making a purchase in Spain, the currency would get converted from U.S. dollars to the euro.

Visa and Mastercard charge a 1% currency conversion fee to card issuers. It’s up to the card issuer whether to pass along that fee to the cardholder as part of the overall foreign transaction fee charged — an example of how credit card companies make money.

Spotting Credit Card Foreign Transaction Fees

Aside from looking at the terms and conditions you were provided when you received your credit card, you can look at your card issuer’s website to learn more about any foreign transaction fees. Information is typically listed in the “fees” section. You also could use the search function on that webpage to find any mentions of foreign transaction fees.

Another option is to look at your credit card statement, as issuers must list fees separately on your monthly bill. By reviewing this section of your statement, you’ll see what you’re actually being charged for purchases you’ve made that trigger this fee. Besides, routinely reviewing your credit card statement is a good credit card rule to follow anyways, as it can help you track your spending and notice any potentially fraudulent activity.

When Are Credit Card Foreign Transaction Fees Charged?

Just like every credit card doesn’t charge a credit card annual fee, not all credit cards charge a foreign transaction fee. If yours does, then the credit card issuer will charge them when you’re using your card for purchases made outside of the U.S. This can include when you’re traveling in a foreign country and buying goods and services, or if you shop online with a merchant located abroad.

Tips for Avoiding Credit Card Foreign Transaction Fees

Hoping to steer clear of a foreign fee on credit cards? Here are some ways you may be able to do so.

Find a Card With No Foreign Transaction Fees

The most straightforward way to avoid foreign transaction fees is to simply choose a credit card that doesn’t charge them. Some travel reward cards, for example, list zero foreign transaction fees as a benefit for card holders.

This isn’t limited to travel reward cards, however, and it doesn’t apply to all of them. In other words, you’ll want to make sure to shop around before committing to a card.

Consider an International Credit Card

If you’re a frequent traveler or have a big trip coming up, you may decide to get an international credit card. This will allow you to make purchases and use ATMs in many (but not all) countries around the world. An international credit card also can be helpful if you don’t want to convert U.S. dollars to that country’s currency or use traveler’s checks for your expenditures.

However, some international credit cards do have foreign transaction fees, so check carefully before signing up for one.

Exchange Your Money Before Traveling

You can also avoid foreign transaction fees by exchanging U.S. currency into the native currency for the place(s) you plan to travel. Then, you can simply pay cash for purchases.

Most major banks in the United States will exchange U.S. dollars for the appropriate foreign currency before you travel. They may not have less commonly used currencies available though, so double check before you head to the bank.

You may be able to directly exchange cash at a local bank, or you may need to place an order with a bank online or over the phone. Exchanges may occur the same day, or they may take a couple of days to complete.

If you run out of time, airports will likely have currency exchange services available, either in-person or through a kiosk. Although convenient, the exchange rates are usually less favorable to you than what your bank can offer.

Also keep in mind that carrying cash while traveling can involve risk of loss or theft.

Open a Bank Account With No Foreign Transaction Fees

Another possibility is to open a bank account that allows you to use ATMs without foreign transaction fees or out-of-network fees. Or, you might check to see if your local bank already offers this feature. Some banks have partnerships with financial institutions abroad that can allow you to withdraw funds without paying fees, while others simply reimburse any incurred costs.

Before taking out too much cash, however, keep in mind the potential safety risks of carrying around a large amount of money.

Recommended: When Are Credit Card Payments Due?

The Takeaway

Once you know what a foreign transaction fee on a credit card is, you can figure out how to avoid them. At its simplest, a foreign transaction fee is an expense charged by many credit card companies when transactions are made with a merchant outside of the U.S. Not all credit cards charge this fee, so it can make sense to shop around for one that doesn’t if you know you’ll be making these kinds of purchases.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Are credit card foreign transaction fees tax-deductible?

In general, businesses (but not individuals) can deduct credit card fees as long as the business can demonstrate that the card was used for business expenses. Check with your accountant for any specific questions.

Do foreign transaction fees apply to online purchases?

Yes, they may. If you’re using a credit card that charges foreign transaction fees, then those fees will apply to online purchases if the merchant is not located in the United States.

Do all credit cards have foreign transaction fees?

No, they don’t. A number of travel cards don’t charge foreign transaction fees, though they’re not necessarily the only type of credit card that doesn’t levy this fee.

Are foreign transaction fees affected by exchange rates?

Typically, foreign transaction fees are based on a predetermined percentage of each transaction. That percentage doesn’t fluctuate when the exchange rate changes.

Photo credit: iStock/Vera Shestak

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.

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.

SOCC-Q324-032

Dec

2024

Should You Call Roadside Assistance for a Flat Tire?

By Kim Franke-Folstad | Insurance, servicing | Comments Off

Flat tires are one of the top reasons motorists call roadside assistance. Even when you know how to change a tire yourself, calling roadside assistance can be a good move. If you’re stuck on a dark or busy road or you have kids in the car, roadside assistance is safe and fast.

Roadside assistance plans are available from your car insurance provider, car rental companies, and other sources. We’ll explain how roadside assistance works, how much it costs for them to change a tire, and what else the service covers.

What Is Roadside Assistance?

Roadside assistance coverage is designed to help motorists experiencing a range of problems, from a dead battery to an overheated engine. You can call a toll-free number or use an app to contact your provider, and a dispatcher will send a qualified technician to your location. Depending on what services you require, your plan may pay all or some of the costs involved in getting your car back on the road.

You may be able to get roadside assistance coverage as part of your auto insurance policy. There also are auto clubs that sell subscription plans, or you may have a plan through your car warranty, credit card, car rental company, or another source.

If you’re one of many people who sit down annually for a personal insurance planning session, discuss this option with your insurer.

Recommended: Car Insurance Terms Explained

What Are the Benefits of Roadside Assistance?

Having a specific point of contact anytime you’re in need is arguably the top benefit of having roadside assistance coverage. This is especially important for first-time drivers. Instead of making multiple calls to find help from a nearby mechanic or garage, you can program your provider’s number into your phone or store it in your glove compartment with other relevant papers. If your provider offers an app, you can take advantage of that convenience.

With one call, you can get useful advice on what to do next. After assessing your situation, the dispatcher will get the appropriate service person out to help you. If your car can’t be fixed onsite, you can get a tow to a repair shop — and that cost may be covered as well.

Some plans offer benefits such as posting bond if you’re charged with a traffic violation or reimbursing you if you’re away from home and have to stay in a hotel overnight. Plans also may provide discounts on car maintenance, car rentals, hotels, and other perks. However, extra benefits may come at an extra cost.

What Does 24-Hour Roadside Assistance Cover?

All roadside assistance programs are not the same, so it’s important to understand the coverage details and limitations of each plan you may be considering.

A plan may offer free fuel delivery, for example, for drivers who run out of gas — but typically there will be a charge for the gasoline received. Similarly, a plan may offer free lockout assistance, but a driver can expect to be charged if the locksmith has to make a new key. And there is usually a limit on how many miles a car can be towed for free.

Some plans limit the number of service calls you can make in a year. And plans also can have different rules regarding when a driver is or isn’t covered. With some plans, for example, you must be driving your own car when you call for assistance. But some plans will cover you even if you’re the passenger or driver in someone else’s car.

Programs generally include some type of coverage for:

1. Changing a Flat Tire

If you have a usable spare tire, your service provider likely can change a flat or blown tire onsite. If not, they can tow you to someone who can help.

2. Vehicle Towing

If your vehicle can’t be safely repaired or restarted onsite, roadside assistance can tow it to a nearby repair shop.

3. Battery Jump-Start or Replacement

Roadside assistance can give your dead battery a jump-start and, if that doesn’t work, tow you to a repair shop to get a new battery installed.

4. Lockout Assistance

If you’ve locked your keys in your car, roadside assistance can get a locksmith to help. Even if you’ve lost your keys, the service may be able to get you back in your vehicle and back on the road.

5. Winching Service

Your service provider may bring in a winch to extricate your car if it’s stuck in mud, ice, or a ditch.

6. Fuel Delivery

If you run out of gas, your provider can deliver fuel to your location. And if the battery in your electric car needs a charge, you can ask for a tow to the nearest charging station.

7. Quick Fix First-Aid

If you have a minor mechanical problem that can be fixed quickly, it may be possible to do so onsite. If not, the service can tow your car to a nearby repair shop.

Recommended: How to Lower Your Car Insurance

Auto Insurance Companies That Offer Roadside Assistance

Insurance companies that provide roadside assistance typically offer these services as an add-on to an auto policy. If you aren’t sure if you already have roadside protection, contact your agent or log in to your account on your insurer’s website to get information about your coverage. The information may also appear on your insurance card.

If your car is damaged after an accident or in a flood or fire, your auto policy’s collision or comprehensive coverage may apply to your towing costs. But this is not the same as having roadside assistance or “towing and labor” coverage.

Here are a few insurance companies that offer roadside assistance:

Allstate

Allstate offers its 24-hour roadside assistance programs to both policyholders and non-policyholders. Costs and coverage vary based on the plan you choose.

Geico

Geico’s roadside assistance program is available to policyholders as an add-on, and it covers most of the basics other plans offer. The cost is determined by the number of vehicles you want to cover.

Liberty Mutual

To access Liberty Mutual’s 24-hour assistance program, which offers basic roadside services, you must purchase optional towing and labor coverage as an add-on to your policy.

Nationwide

Nationwide offers roadside assistance as an optional add-on for policyholders. The plan covers the same basic services offered by other insurers, but optional features and other program details may vary by state.

Progressive

Emergency roadside assistance for flat tires is available as an optional add-on for Progressive auto insurance policyholders. Progressive’s program covers service basics such as towing, jump-starts, flat tires, and lockout assistance.

State Farm

State Farm’s roadside assistance program is an add-on for policyholders. If you have this coverage and need assistance, State Farm will be billed directly for any basic services you receive, so you may not have to worry about turning in your receipts and waiting to be reimbursed.

How Much Does Roadside Assistance Cost for a Flat Tire?

The cost to get your flat tire fixed may depend on if you have a usable spare tire and other factors. If you have a good spare tire available, the roadside assistance technician may be able to change your tire onsite and get you right back on the road at no charge.

If, for some reason, the tire can’t be changed onsite and your vehicle must be towed to a repair shop, the tow charge will be based on mileage. Many roadside assistance plans will go 15 miles or to the nearest qualified repair shop for free. But if you ask to be towed to a shop that’s farther away, you may have to pay for any extra mileage.

When your car arrives at the repair shop, you can expect to be charged if you need any parts or repairs, or a new tire.

How Much Does Roadside Assistance Cost Without Insurance

The most inexpensive way to get roadside assistance coverage is usually to have it included as an add-on through your auto insurance policy. Allstate, for example, offers its Roadside Advantage plan membership without an Allstate auto policy starting at $89 for the first year.

If your insurer doesn’t have 24-hour roadside assistance, or if you don’t like the plan your insurer is offering, you may want to check out online insurance companies to see what’s available based on your budget and needs.

How to Change a Flat Tire Yourself

Even if you have roadside assistance coverage, it can be a good idea to know how to fix a flat tire — just in case you forget your phone or can’t get cell service when you run into trouble.

If no one ever taught you how to change a tire, you might want to practice sometime when you’re in a safe place and you’re not in a hurry or wearing nice clothes. There are plenty of YouTube videos on the topic, or you can ask someone who knows their way around a car for a demonstration.

Here are a few tire-changing basics:

1. Drive Prepared

Make sure your spare is in good shape and your jack, lug wrench, and owner’s manual are always in your car. You might want to keep rain gear, work gloves, a flashlight, and wheel wedges in your trunk as well.

2. Safety First

If you suspect your tire is flat, turn on your hazard lights and pull off to the side of the road — as far as you can. Once you’ve stopped, you can put on your parking brake and get out to inspect your car. If you do indeed have a flat, secure your tires with wheel wedges or a couple of large stones.

To change a rear tire, place the wedges behind the front tires. To change a front tire, place the wedges behind the rear tires.

3. Remove the Hubcap/Wheel Cover

Consult your owner’s manual for instructions on removing the hubcap or wheel cover.

4. Loosen the Lug Nuts

Turn the lug nuts counterclockwise with your lug wrench. (Getting them started may require some effort!) Loosen the lug nuts about a quarter- to half-turn, but don’t take them off completely.

5. Put the Jack in Place

Check your owner’s manual for specific placement instructions.

6. Use the Jack to Raise the Vehicle

Carefully raise your car until the flat tire is about 6 inches above the ground.

7. Unscrew the Lug Nuts and Take off the Tire

Remove the lug nuts completely and put them in a safe place (a cup, envelope, hat, purse, etc.). Pull the flat tire toward you until it comes free and place it on the ground on its side.

8. Put on the Spare

Grab the spare tire and place it on the hub by lining up the rim with the lug bolts. Push gently until you can see the lug bolts through the rim.

9. Put the Lug Nuts Back in Place

Put the lug nuts back on the lug bolts and tighten them by hand.

10. Lower the Car and Tighten the Lug Nuts Again (and Again)

Lower the vehicle until the tire is touching the ground, but don’t let it down all the way yet. Tighten the lug nuts with the wrench, as tight as you possibly can, then lower the car all the way to the ground and remove the jack. Tighten each lug nut again with the wrench to be sure they’re all as secure as possible. Replace the hubcap (only if you can and want to), or put it in the trunk with the flat tire.

11. Stow Your Stuff

Congratulate yourself for being prepared, and be sure you put everything back in the trunk before you pull away. If you have a tire gauge, check to see if the spare has plenty of air (temporary spares typically require 60 psi). If the pressure is low, drive with caution to the nearest repair shop.

12. Get Your Damaged Tire Repaired

Spare tires aren’t meant to be driven on for long. Get your car to a tire shop or garage as quickly as possible to buy new tires or get your old tire patched.

Should You File an Insurance Claim?

It can be convenient and less expensive to purchase roadside assistance coverage as an add-on to your car insurance policy. But keep in mind that when you use your insurer’s plan — even for a flat tire — it can count as an insurance claim.

Though occasional use likely won’t cause your insurer to drop you or raise your auto insurance rates, if you make several roadside assistance claims over a short period, it could affect your overall policy. You might want to ask your insurance agent if multiple roadside assistance claims could be a problem. (And get it in writing if the answer is no.)

Do Insurance Policy Deductibles Apply to Roadside Assistance Claims?

Even with roadside assistance coverage, you could end up having to pay some out-of-pocket costs. And if your auto insurance policy has a deductible that applies to roadside assistance claims, you might have to pay that amount, as well. This could be another topic to cover with your insurance agent. (Read more about the different types of deductibles.)

Recommended: How to Lower Car Insurance

The Takeaway

Roadside assistance insurance can cover a range of problems you might have on the road — from fixing a flat tire to unlocking the car to jump-starting the battery.

Insurance companies typically offer roadside assistance as an add-on to an auto policy. Plans may look pretty much the same from one company to the next, but it can be a good idea to look beyond the basics to find the level of coverage and other benefits that are a good fit for your needs and budget.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

FAQ

What should I do if my tire is flat?

If you know how to change a tire and you can pull off the road to a safe place, you might want to tackle the job yourself. But if you aren’t prepared to DIY, you can call roadside assistance instead. A technician may be able to change your tire onsite and get you back on the road for free.

Will 911 help with a flat tire?

If your tire is flat and you’re in potential danger or blocking traffic, the safest move is to turn on your flashers and call 911 for assistance. The 911 dispatcher will then assess your situation and determine whether to send help. If you don’t feel you’re in danger or that your car has become a hazard to others, you can call your roadside assistance company’s toll-free number for help.

Can you drive a couple of miles on a flat tire?

Driving on a flat tire, even for a short distance, can further damage the tire and possibly the rim. If you can turn on your hazard lights and drive slowly to a safer location, that may be your best option, but you should try to limit the distance you travel.

How much does it cost to put on a spare tire?

If you have roadside assistance coverage, it may not cost you anything to have your flat tire replaced onsite with your spare.

Should you tip roadside assistance for a flat tire?

There’s no obligation to tip any service provider your roadside assistance plan sends to help you. However, just as with any service, if you feel that person went above and beyond, you may want to show your gratitude with a tip.

Photo credit: iStock/okugawa

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SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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

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

SOPRO-Q324-002