May
05
2023

Which Number Is the Routing Number on a Check?

By | Family Finances, money, Money & Life, Terminology | Comments Off on Which Number Is the Routing Number on a Check?

If you’re wondering what those digits across the bottom of a check mean, the first one you see at the lower left is the routing number. Those three sets of numbers have different meanings and uses; they help financial transactions get processed swiftly and efficiently. They move funds from one place to another with precision.

Going from left to right, your checks are typically printed with the routing number, account number, and check number. It can be helpful to understand what a routing number represents in more detail. Those digits are useful when writing checks, signing up for direct deposit, and doing other banking activities.

Read on to learn about this important number and more, including:

•   What is a routing number?

•   Which number is the routing number on a check?

•   How is a routing number different from your bank account number?

•   When do you need to use a routing number?

What Is a Routing Number?

A routing number is a 9-digit identification number that’s been assigned to your bank or credit union by the American Bankers Association (ABA). It’s often referred to as an ABA number or a routing transit number (RTN). According to the ABA, a routing number can only be issued to a federal or state-chartered institution deemed to be eligible for a master account with the Federal Reserve.

The purpose of a routing number is to indicate which financial institution is responsible for processing a payment and to ensure the funds go to the correct place. Each bank has its own unique routing number to distinguish it from all of the other banks. This helps to avoid any confusion, mix-ups, or mistakes. For example, if your bank has a similar name to another one, it’s still distinguishable because of the financial institutions’ different routing numbers.

Routing numbers are only used in the U.S., but some large national and global banks may possess multiple routing numbers based on where the account is held or where you reside. A bank may also use more than one routing number for different transactions, such as one for wire transfers and another for processing checks.

Where to Find a Routing Number on a Check

Many of us, at one time or another, look at the digits on a check and wonder which one is the routing number. As previously mentioned, when you look at the bottom of a check, you’ll find three separate series of numbers. Typically, your routing number in the bottom left corner, your individual bank account number the second cluster of digits, and the check number can be found to the right of the account number. However, there are times when these numbers can appear in a different order, such as on an official bank check.

All of the numbers featured on the bottom of the check are printed with magnetic ink character recognition (MICR), an electric ink that makes the digits more machine-readable and helps banks process checks more quickly. The ink can’t be faked or copied, offering enhanced security for the account holder and the bank.

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Routing Number vs. Bank Account Number

Now that you know which is the routing number on a check, consider that the routing and bank account numbers are two distinct things.

•   As noted earlier, the routing number identifies the financial institution responsible for the transaction and makes sure the money deposited or debited goes to the right place.

•   Your bank account number on the other hand, is a series of numbers used to pinpoint a specific savings, checking, or business account. It’s created especially for you and pertains only to your individual funds. If you have a checking and savings account with the same bank, each account will have its own separate number but the routing number for both will remain identical.

While routing numbers contain 9 digits, bank account numbers can have anywhere between 5 and 17 numbers. Generally though, account numbers are within the 8 to 12 digit range.

A routing number is safe to share and is available to the public. Your own bank account number is best to keep private whenever possible and only supplied to trusted sources. The combination of your personal account number with a bank’s routing number, can in some cases give someone direct access to your money.

What Are Routing Numbers Used For?

Routing numbers are necessary because in a financial transaction, these digits help banks identify each other. This is key in the event where you need to transfer money from one account to another. For example, if you send a loved one a check for their birthday, the routing number on the bottom of the check indicates the funds come from your particular bank and account.

You will find some instances when accessing your routing number will be necessary. Here’s some of those situations:

Setting Up Direct Deposit

Getting your earnings directly deposited into your bank account has pretty much made paper paychecks obsolete. In fact, one survey by the American Payroll Association found 93% of people use direct deposit as their method of getting paid.

If your employer gives you the option of receiving your pay via direct deposit, signing up should be pretty seamless. You’ll most likely fill out a form giving your company’s HR or payroll department your bank’s routing number along with your personal account number so they know exactly where to deposit your paycheck. Once you set up a direct deposit, come pay day, your money will automatically show up in your account. (Of course, make sure to use the digits for a current account vs. sending direct deposit to a closed account.)

Direct deposit isn’t only for paychecks. It can also be implemented for receiving Social Security and other government payments, annuities, travel and expense reimbursements, and 401(k) disbursements, among others.

Making a Wire Transfer

A wire transfer is a fast way of sending money electronically from one bank account to another. Some details to note:

•   These accounts can be domestic (between two U.S accounts) or between an international and a U.S. account. Wire transfers can be sent through your bank branch or online bank account. You can also choose to go with a wire service entity such as Western Union.

•   In order to send money via a wire transfer, you’ll need to provide the account you’re using to complete the transfer, the recipient’s bank name and routing number, plus their bank account number. Additionally, you may also need to provide your bank’s routing number and your individual bank account number.

•   Many banks charge a wire transfer fee for sending or even receiving one. An incoming fee may be around $15 and an outgoing one can trigger a charge of $25 on domestic transactions.

•   If it’s not an urgent matter, it will cost less to send money electronically through an Automated Clearing House (ACH) transfer. An ACH transaction uses an electronic network system that represents more than 10,000 financial institutions in the U.S. You may wonder what ACH transaction fees are like? They are typically free for bank clients, which is a nice benefit. The downside of an ACH is it can take a couple of days to process, whereas a wire transfer can be processed the same day .

Recommended: ACH vs. Check: What Are the Differences?

Paying a Bill Online

Making a bill payment online and scheduling automatic payments for your recurring monthly bills can make life a lot easier. In order to make online bill payments, whether you arrange for it to be automatically deducted or log on to the biller, such as a utility or credit card company, those bill payees will need both your financial institution’s routing number along with your individual account digits.

You can also pay businesses or people electronically directly from your bank account through apps such as Venmo and PayPal. When you sign up for these apps, you can choose where you want your payments to come from, or go to, if someone is sending you money. One choice is to link to your bank account, in which case, those apps will need your routing and account numbers.

Recommended: Changing the Due Dates of Your Bills: Is it Possible?

Filing Your Taxes

Getting or expecting a refund this year? Direct deposit for your tax refund is the fastest and most reliable way to get your money. And, it’s also popular. According to the IRS, 80% of taxpayers choose direct deposit as the method in which they get their refund. If you choose this option, you’ll need to enter your bank name, routing number, and the bank account digits where you want to receive your refund.

Make sure you verify you’ve put in the correct routing and bank account numbers on your federal and, if applicable, state return before you sign and submit it. If not, the IRS will send you a paper check instead.

Looking Up a Bank

Nowadays with so many banks offering enticing reasons to open an account, such as a signup bonus , low-interest rates, and low-to-no monthly fees, it’s possible to have a checking account with one bank and a savings account with another. In this case, you’ll have a routing number for each bank. You’ll need to know both if you want to transfer money between accounts, for example.

Thanks to the internet, you may find the other bank’s routing number simply by going on their website. Some may list it on the home page or elsewhere, like the FAQ section. You can also use a search engine to type in the name of the bank and “What is their routing number?” to try to find out the information.

Finding a Routing Number Without a Check

Don’t have a check handy? No problem. There are definitely other ways you can easily get your routing number. Here’s how:

Monthly Bank Statement

Banks and credit unions make a monthly statement available to customers either online or on paper that’s sent through the mail. When you have your statement, you should find the bank’s routing number along with your account number on the top of the first page.

If you can’t locate it, try logging on to the bank’s website and do a search for your routing number or explore your account details to find those digits.

Checking your monthly bank statement frequently is a good way to keep on top of your transactions. Review your statement regularly to check for any bank errors or fraudulent activity such as incorrect debits from an altered check or a continued recurring charge from a long-ago canceled subscription. If you discover any type of errors, contact your bank right away.

Mobile Banking App

Having 24/7 online access to your bank account makes finding your routing number possible from your couch. Many banks have a mobile app these days. While these apps tend to differ in setup and layout depending on your bank, you should be able to find your routing number through the app by looking up your account details.

You can also access your bank statement through the app and as previously mentioned, generally find your routing number that way.

Your Local Bank Branch

If all else fails and you can’t easily find your bank’s routing number, visit your nearby branch in person to get the information. Sometimes the bank will have the routing number posted in the lobby area so you can simply jot it down or take a photo of it with your phone. Asking a teller or bank officer directly if it’s not displayed.

Can’t make it to the bank or have an account at an online vs. traditional bank? Call their customer service number. A representative can typically give you the bank’s routing number over the phone.

Look It up Through the ABA

The American Bankers Association has a routing number lookup tool called the ABA Routing Number Lookup. This mechanism allows you to locate the routing number for your bank or credit union. One thing to know when using the ABA Routing Number Lookup, users are limited to no more than two lookups a day and to 10 lookups a month. You’ll also have to agree to terms for access and use of the ABA’s tool.

The Takeaway

Your bank’s routing number can be found at the bottom of your personal checks on the far left-hand side. If you don’t have a check at your fingertips, you may need to find your bank’s routing number another way. You might call your bank, get it from your bank statement, or find it through the bank’s mobile app.

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FAQ

Is the routing number always first on a check?

Typically, yes, the routing number is the first set of digits at the bottom left-hand area of a check. But in some cases, it can be switched up and appear after the account number, such as on a bank check.

Are routing numbers 8 or 9 digits?

Routing numbers are always 9 digits. Your individual bank account number typically falls between 8 and 12 digits, but it can be anywhere between 5 and 17 numbers, depending on your financial institution.

Which is the account number on a check?

The account number on a personal check is the group of numbers that appears on the bottom, normally sandwiched between the routing number on the left and the check number on the right.

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SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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May
04
2023
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What Is an Accredited Investor?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is an Accredited Investor?

An accredited investor is either a person or an institution, like a bank, qualified to invest in certain private investments, like a hedge fund or a venture capital fund.

Individuals must meet specific financial criteria, or have the necessary industry experience to be accredited.

First, many hedge funds have high minimums in order to invest. Investment minimums like $100,000 or even $1 million may immediately preclude the average retail investor from participating.

Further, some private investment firms may follow legal guidelines that allow only the participation of accredited investors, those who meet certain net worth or income criteria as determined by the Securities and Exchange Commission.

The Accredited Investor Defined

There are two major categories of accredited investors: individuals and legal entities, which can include trusts, limited liability companies, and businesses.

Businesses like banks, investment broker-dealers, insurance companies, and pension or retirement plans are common examples of accredited investors.

Many private placement investment firms — some of which may take on a high level of risk, use complicated investment products and strategies, or change strategies rapidly — require investors to be accredited in order to circumvent the SEC’s legal requirements.

“One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering,” according to the SEC’s Office of Investor Education and Advocacy.

If an investment firm sells its product only to accredited investors, it may avoid the SEC’s many rules and regulations.

When an investment is sold to the public, it is under the regulatory authority of the SEC. (For example, a mutual fund that is sold to retail investors falls under the purview of the SEC.) This includes certain disclosures and extensive reporting requirements to the SEC.

Why might an investment firm choose this route? For one, adhering to the SEC regulations can be an expensive and labor-intensive process. So private investment companies are able to circumvent the arduous filing and disclosure requirements by selling only to accredited investors.

In the eyes of the law, accredited investors are savvier or have the means to take on the risk that such investment opportunities produce.

Who Qualifies as an Accredited Investor?

For individuals to qualify as accredited investors, they must prove that they have the means necessary to take the risk involved in such investments. This can be done in one of a few ways:

First, the individual must have earned income that exceeded $200,000 (or $300,000 if married) in each of the prior two years, and reasonably expects the same for the current year.

Or they must have a net worth over $1 million, either alone or with a spouse or spousal equivalent. That does not include the value of their primary residence.

On Aug. 26, 2020, the SEC updated the qualification criteria. Individuals who have Series 7, Series 65, or Series 82 licenses in good standing can now be considered accredited investors.

The SEC said this was done to allow those with knowledge and expertise to invest in private investment markets even if they do not yet meet the financial qualifications.

General partners, directors, and executives with the private fund also qualify as accredited investors.

With the recent expansion of the qualification parameters, “knowledgeable employees” of the investment fund also now qualify as accredited investors.

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For a trust to qualify as an accredited investor, assets must total more than $5 million, and the trust cannot have been formed specifically to purchase the investment.

The trust must also be directed by a “sophisticated” person — someone who the investment company reasonably believes has the requisite experience and ability to understand the risks associated with the investment.

As of the most recent changes, LLCs with assets of over $5 million may also qualify.

Alternatively, an entity can qualify as an accredited investor when all of the equity owners are individually accredited investors.

Because this is not reporting that is siphoned through the SEC, investment companies typically collect the information necessary to confirm that a person is an accredited investor, or may require that potential customers sign off that they are accredited investors.

The Net Worth Requirement

One of the qualifications for being an accredited investor is to have a net worth of $1 million. How do you calculate your net worth?

Generally, individual net worth is calculated by taking a person’s assets and subtracting liabilities.

Assets are things of value that a person owns, and liabilities are debts owed.

For example, imagine a person has the following assets: a primary residence, a checking account, a 401(k) account, and a car.

They also have a mortgage loan and two student loans — those are their liabilities.

To determine their net worth, they would first total the value of the assets and then the liabilities, and subtract the value of the latter from the former.

That said, the SEC has a few specific rules about what is counted in a net worth calculation.

As mentioned, a primary residence is not to be included in the person’s net worth calculation.

A mortgage on a primary residence is also not to count in the net worth calculation, unless the value of the mortgage is greater than the value of the home.

If the mortgage is “under water,” then the amount of the loan that exceeds the fair market value of the home should be included.

When considering other real estate holdings with a spouse or spouse equivalent, it is not necessary that they be held under both names. For example, a property held by just one of the two parties would count.

How Can Non-Accredited Investors Invest?

You don’t need to be an accredited investor to begin building wealth for the future.

There are plenty of opportunities for investors of every level to get involved and earn returns in the stock exchange.

It’s important to understand that all investments carry some amount of risk. Otherwise, there would be no opportunity to earn a rate of return.

It’s always a good idea for investors to familiarize themselves with the risks involved with their desired investments.

To start, investors can open an account at a brokerage or with an online trading platform to buy and sell securities like stocks and exchange-traded funds (ETFs).

New investors will want to be mindful of investing fees, as those will reduce any potential investment returns. This includes account fees, trading commissions, and the fees built into the funds themselves, called expense ratios.

The Takeaway

An accredited investor — a person or an entity — is qualified to invest in certain private investments like a hedge fund or a venture capital fund. Individuals must meet a substantial financial bar or have industry expertise to be accredited.

The rules for accredited investors can be seen as both protections for those investing, as well as advantageous for private investment firms.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.

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

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

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Apr
24
2023
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What Is the Dow Jones?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is the Dow Jones?

The Dow Jones Industrial Average is one of the earliest examples of a stock index, a collection of 30 blue-chip company stocks that are calculated into one number that’s supposed to represent the U.S. stock market as a whole or a subset of it.

Now there are hundreds of indices, which represent everything from smaller companies (The Russell 2000), to specific industries, like the KBW Bank Index, to the S&P 500 — the oft-cited index that represents a broad cross-section of America’s largest companies. But the Dow is still watched, domestically and worldwide, as a leading market indicator.

What Is the Dow Jones Industrial Average?

The Dow Jones Industrial Average is based on the performance of 30 companies that represent the industry leaders in the world economy: Apple, Microsoft, JP Morgan Chase, Nike, Coca-Cola, Walmart, Disney, along with companies like Dow or Caterpillar that you may not be as familiar with, but are massive and play an important role in business in the United States and around the world.

The Dow is considered an index of blue-chip companies, which signals not only some of the largest companies, but also the most solid and well established.

Nonetheless, the companies on the Dow Jones Industrial Average change regularly, reflecting changes in the U.S. economy.

It’s important for investors to follow the Dow, as it’s one of the leading stock market indicators. And while it’s certainly not the only one, understanding the Dow’s movements in addition to other indicators can help inform your investing strategy.

What Makes the Dow Jones Industrial Average Different?

The Dow Jones Industrial Average is just one of many collections of stocks whose value is represented in a single number. The Dow Jones Industrial Average isn’t just distinct because of its age, but because of how it’s calculated.

The other two major stock indices that are frequently cited as bellwethers of the overall market, the S&P 500 and the Nasdaq Composite, are both “market capitalization weighted,” whereas the Dow Jones Industrial Average is “price-weighted.”

That means that the Dow Jones Industrial Average’s “points” are calculated from the per-share price of every stock in the index, as opposed to the company’s overall value. As such, the DJIA doesn’t reflect the overall stock market return, but rather it can be used as a gauge of market trends and/or investor sentiment.

In a market-weighted index, the influence any given stock has over the index’s overall value is determined by a company’s market capitalization or market cap. A company’s market cap is determined by multiplying the number of shares by the value of the stock.

In this type of index, the influence of a company is determined by how valuable the company is, not solely by the price of a stock.

Example of How Stock Price Can Skew an Index

Apple only joined the Dow Jones Industrial Average after it did a stock split, lowering its per share price from around $650 to under $100, but increasing the number of shares by seven. Had it split its stock before joining the Dow, it would have entered the index with a price of nearly $900, as opposed to around $126, giving the company an outsize role on the index.

Because the Dow Jones Industrial Average is price weighted, adding companies with hefty per-share price tags could cause problems. That’s the main reason that companies like Alphabet, the parent company of Google, and Amazon, aren’t included in the index. On the other hand, Microsoft, which is worth over $1 trillion, is priced at below $200 a share and is a member of the Dow Jones Industrial Average.

The Dow Divisor

Today’s economy is far different from the late 19th century or the late 1920s — the number of industries in which the U.S. has large, established companies has grown, and the size of those companies is bigger.

In order to account for some of these changes over time, the Dow Divisor is used to determine the value of the Dow Jones Industrial Average. Using the Dow Divisor can help in historical comparisons and account for differences that may arise due to a stock split or other factors.

How the Dow Jones Industrial Average Changed Over Time

The Dow Jones Industrial Average is intimately tied up with the history of the markets and American financial journalism. The Dow Jones Industrial Average is just eight years younger than the Wall Street Journal, which was founded in 1889, while the Dow Jones Industrial Average was founded as a 12-company index in 1896.

The Dow Jones Industrial Average was originally developed by Charles Dow and Edward Jones.

But it wasn’t the first ever stock index; that title belongs to the Dow Jones Transportation Average, a collection of railroad stocks that Dow came up with in 1884.

The 12 companies initially included in 1896 were companies that reflected the shape of the American economy — largely manufacturing and agricultural companies and the transportation networks that helped move goods. The companies included in that first year were:

•   American Cotton Oil

•   American Sugar

•   American Tobacco

•   Chicago Gas

•   Distilling & Cattle Feeding

•   General Electric

•   Laclede Gas

•   National Lead

•   North American

•   Tennessee Coal & Iron

•   U.S. Leather

•   U.S. Rubber

The Dow Jones Industrial Average in the 20th Century

The index was expanded to its current number of 30 in 1928, and by 1932 the Index started to resemble the American economy as we might recognize it today, with a mixture of manufacturing (General Motors, Chrysler), retail (Sears, Woolworth), consumer (Coca-Cola, Procter & Gamble) technology (IBM) and energy (multiple descendants of John Rockefeller’s Standard Oil).

The first companies associated with the personal computer revolution came much later (IBM being an exception), with Hewlett-Packard getting added in 1997, Intel and Microsoft added in 1999, and Apple only joining the Dow in 2015, when it replaced AT&T.

Walmart was added to the index in 1997. America’s entertainment industry, one of its leading export industries, was only represented in the index in 1991, when Disney was added.

Right now the Dow Jones Industrial Average “covers all industries except transportation and utilities,” according to S&P Dow Jones Indices.

While the Dow Jones Industrial Average is managed by S&P Dow Jones Indices, it still retains a connection with the Wall Street Journal and its publishing company, Dow Jones. The editor of the paper is part of the committee that determines membership in the Dow Jones Industrial Average.

The Takeaway

Investors can look to the Dow Jones Industrial Index as an overall indicator of how the largest companies in the U.S. are performing. Historically, the Dow Jones Industrial Average has shown similar returns to the S&P 500, which tracks 500 large-cap U.S. companies.

Indexes, like the Dow Jones Industrial Index, can provide helpful insight for investors. They can be used to help investors compare current and past stock prices, to determine the market performance. Understanding this information can be helpful to investors as they review their own portfolio and adjust their investing strategy.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commission, but other fees apply (full fee disclosure here), and members can access complimentary financial advice from a professional.

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
13
2023
What Are Countercyclical Stocks?

What Are Countercyclical Stocks?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Countercyclical Stocks?

Countercyclical stocks tend to perform relatively well during economic downturns and underperform during periods of economic expansion. These stocks are typically associated with industries or sectors that provide essential goods or services in demand, even during periods of economic hardship. Examples of countercyclical sectors include consumer staples, utilities, and healthcare.

Countercyclical stocks can be a vital component of a well-diversified investment portfolio. As the economy experiences ups and downs, these stocks can help to provide stability and even generate profits during difficult times. Understanding countercyclical stocks and how they can benefit your portfolio is crucial for investors looking to maximize their returns and minimize risk.

How Countercyclical Stocks Work

Countercyclical stocks — sometimes called non-cyclical or defensive stocks — work by providing stability to an investment portfolio during economic downturns. Investors can use these stocks in a defensive investment strategy, as they tend to perform well even during economic hardship when other stocks are underperforming. This can help increase diversification and reduce the risk in an investment portfolio.

In contrast to countercyclical stocks, cyclical stocks tend to follow the broader economic cycle, with returns correlated to fluctuations in the market.

💡 Recommended: Cyclical vs Non-Cyclical Stocks: Investing Around Economic Cycles

Countercyclical stocks are closely related to specific industries or sectors. Industries such as consumer staples, utilities, and healthcare provide products and services considered necessities, so they tend to be less sensitive to changes in the economy. This means that even during tough times, people will still need to buy these products and services, providing a stable source of income for the companies that produce them.

For example, during a recession, people may cut back on discretionary spending, such as dining out or buying expensive clothes. However, they will still need to buy groceries, pay for utilities, and seek medical care. As a result, companies in these sectors may see stable sales and profits, which can drive up the value of their stocks even during a bear market.

It is important to note that not all stocks within a countercyclical industry will necessarily follow the countercyclical trend. Factors such as changes in government policies, technological innovations, and shifts in consumer behavior can impact the performance of these stocks.

Additionally, some countercyclical stocks may underperform during economic expansions when the demand for their products and services is lower.

It is essential to conduct thorough research and analysis before making any investment decisions, including investing in countercyclical stocks. Research may include reviewing the company’s financial performance, analyzing industry trends, and considering the political and economic environment. By taking these steps, you can identify the best countercyclical stocks to add to your portfolio and potentially generate profits even during difficult economic times.

Examples of Countercyclical Businesses

As noted above, countercyclical businesses tend to perform well during economic downturns and underperform during periods of economic expansion. Investors tend to add countercyclical stocks to their portfolios when investing with the business cycle.

Here are some examples of countercyclical industries and the types of companies that can be considered countercyclical:

•   Consumer staples, such as food, beverage, and household products, provide products and services that are considered necessities, so they tend to be less sensitive to changes in the economy. This means that even during tough times, people will still need to buy these products, providing a stable source of income for the companies that produce them. Examples of businesses in this industry include grocery stores, packaged food manufacturers, and beverage companies.

•   Utilities, such as water, electricity, and gas, provide essential services that people cannot do without. As a result, these companies tend to be less affected by changes in the economy and can even benefit from them as people continue to use these services even when they are cutting back on discretionary spending. Examples of firms in this industry include utility companies, water treatment facilities, and energy providers.

•   Healthcare companies provide medical services and products. During economic downturns, people may cut back on discretionary spending but still need to pay for medical care and other essential health services. This means that healthcare companies can provide a stable source of income even during difficult times. Examples of businesses in this industry include hospitals, pharmaceutical companies, and medical equipment manufacturers.

Risks of Countercyclical Investments

Investing in countercyclical stocks may provide stability to an investment portfolio during economic downturns, but several risks are also associated with these types of investments.

Here are some of the risks to consider:

Market Volatility

The stock market can be volatile and unpredictable, and market fluctuations can impact even countercyclical stocks. For example, during a recession, even the most stable countercyclical industries can experience a decline in demand for their products and services.

Company Specific Risks

Not all companies within a countercyclical industry will perform equally well, even during difficult economic times. It is important to conduct thorough research and fundamental analysis to identify companies with strong financials and a history of stable performance.

Dependence on Government Policies

Countercyclical industries like healthcare and utilities may depend heavily on government policies and regulations. Changes to these policies can impact the performance of these companies and the industries in which they operate.

Interest Rates

Interest rates can impact the overall stock market’s performance, including countercyclical stocks. When interest rates are low, investors may be more likely to invest in stocks, which can drive up stock prices. Conversely, when interest rates are high, investors may shift their investments to bonds or other fixed-income investments, which can drive down stock prices.

💡 Recommended: How Do Interest Rates Impact Stocks?

The Takeaway

Investing in countercyclical stocks can provide several benefits to your portfolio. These stocks can help to provide stability during tough economic times and can even generate profits — through dividends and price appreciation — when other stocks are underperforming. By diversifying your portfolio to include countercyclical stocks, you can reduce your overall risk and potentially maximize your returns.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

Photo credit: iStock/Eoneren

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.

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