Jun
13
2023
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How to Start Investing in Utilities

By | Growing Wealth, invest, Investing | Comments Off on How to Start Investing in Utilities

Investors looking for a value investment that typically provides steady income without much volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally stable investments.

Investing in utilities is considered to be low risk compared to other different types of stocks, since utility companies are regulated entities with few competitors. Plus, their profits and expenditures are very predictable, so they tend to provide steady performance.

In addition, utilities are a constant in modern life — people always need them — so utility companies tend to ride out economic downturns without significant volatility, and may provide higher dividends than other fixed income assets.

What are Utility Stocks?

The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.

The utilities sector includes companies that generate traditional power as well as alternative and sustainable energy (sometimes called green energy), as well as companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.

Since there will always be a consumer demand for basic utility services, the sector continues to invest in infrastructure, resulting in continuous growth.

There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market.

It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant volatility.

Who Should Invest in Utilities Stocks?

Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.

Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Choosing Utilities Stocks to Invest in

There are a number of ways to evaluate a stock in a utility company before buying it — here’s what investors might want to consider.

New Utility Companies and Emerging Markets

Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.

Companies with Moderate Dividend Payouts

Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.

Undervalued Utility Companies

Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.

Utilities with Healthy Credit Ratings

Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.

Other factors to consider when choosing utility stocks:

•  The region in which the company operates
•  The regulatory market in that region
•  The utility the company provides and its business model
•  The dividend rate
•  The company’s financials

Investors who want to gain exposure to a broad cross section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.

Benefits of Investing in Utilities Stocks

There are several reasons investors choose to add utility stocks to their portfolio:

•  They tend to pay out higher dividends than other fixed-income assets and stocks.
•  They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.
•  They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.
•  They can be a safe haven asset during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.
•  They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.
•  Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Downsides of Investing in Utilities

Although there are many reasons to invest in utilities, like any investment, they come with some downsides:

•  They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.
•  They don’t provide opportunity for significant short-term growth. Here, their stability can be seen as a negative.
•  Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.
•  Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.
•  Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.

The Takeaway

Investing in utility stocks can be a good way to diversify a portfolio, by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy — and that allows utility companies to weather economic downturns relatively well.

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.


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

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

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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Jun
13
2023
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How Long Will My Retirement Savings Last?

By | Budgeting & Goals, Financial Independence, invest | Comments Off on How Long Will My Retirement Savings Last?

Knowing how long your retirement savings will last is a complicated, highly personal calculation. It’s based on how much you’ve saved, how you’ve chosen to invest your money, your Social Security benefit, whether you have other income streams — and more.

And even when you have all the information at your fingertips, it can be hard to make an accurate calculation, because life is fraught with unexpected events that can impact how much money we need and how long we’re going to live.

Taking those caveats into account, though, it’s still important to make an educated estimate of how much money you’re likely to accumulate by the time you retire, as well as how much you’re likely to spend.

What Factors Affect My Retirement Savings?

Here are some of the many variables that can come into play when deciding how long your retirement savings might last.

Retirement Plan Type

Whether it’s a defined-benefit plan like a pension, or a defined contribution plan like an employer-sponsored 401(k), 403(b), or 457, the kind of account you contribute to will likely have an impact on how much and what method you use to save for retirement.

Pension Plan

With a pension plan, retirement income is usually based on an employee’s tenure with the company, how much was earned, and their age at the time of retirement. Pensions can be a reliable retirement savings option when available because they reward employees with a steady income, typically once per month.

One potential downside, however, is that pension plans can be terminated if a company is acquired, goes out of business, or decides to update or suspend its employee benefits offerings. Indeed, pension plans have been far less common compared with defined-contribution plans like 401(k)s and 403(b)s and the like.

401(k) Plan

With a 401(k) plan, participants can contribute either a percentage of or a predetermined amount from each paycheck. The money is deposited pre-tax, and the accountholder generally owes taxes when they withdraw the money in retirement.

In some cases, the funds employees contribute are matched by their employer up to a certain amount (e.g. the employer might contribute 50 cents for every dollar up to 6%).

Unlike a pension plan, the amount of retirement funds the participant saves is based on how much they personally contributed, whether they received an employer match, the rate of return on their investments, and how long they’ve had the plan.

IRA or Roth IRA

An Individual Retirement Account, or IRA, is a retirement account that’s not sponsored by an employer. Individuals set up and fund their own IRAs.

There are no income limits for a traditional IRA, but contributions are capped at $7,000 per year ($8,000 if you’re 50 and up).

On the other hand, a Roth IRA has limits on contributions based on filing status and income level.

Recommended: How to Open Your First IRA

Less Common Plans

Other types of retirement plans like Employee Stock Ownership Plans (ESOP) and Profit Sharing Plans are less common and have their own unique benefits, drawbacks, and details.

Social Security

Social Security is a federally run program used to pay people aged 62 and older a continuing income. Social Security benefits are structured so that the longer you wait to claim your benefit check, the higher the amount will be.

Expected Rate of Return on Investments

If a person puts money into a defined-contribution plan or makes investments in stocks, bonds, real estate, or other assets, there are a number of return outcomes that could affect their retirement savings.

An investment’s performance is about more than just appreciation over time. Learning how to calculate the expected rate of return on the investment can help you get a clearer picture of what the payoff will look like when it’s time to retire.

Unexpected Expenses

One never really knows what retired life might bring. Lots of unexpected expenses could arise.

An extensive home repair or renovation or maybe even a costly relocation to another state or country might make an unforeseen dent in retirement funds.

A major medical incident or the factoring in of long-term care can be another unexpected expense, as are caregiver costs if you or a family member need help.

Some seniors are surprised to learn that health care can get costly in retirement and Medicare may not always be free. Many of the services they might need could require out-of-pocket payments that eat into savings.

As much as we might not want to imagine such scenarios, there could be the chance of a divorce during retirement, which could cause a redraft of the savings plan.

Creating a budget to estimate expenses is a great way to get ahead of any surprising financial setbacks that could sneak up down the line.

Inflation

Inflation can take a hefty toll on retirement savings. Even average rates of inflation might have a significant impact on how much retirement funds will actually be worth when they’re withdrawn. For example, $1,500 in January 2000 had the same buying power as $2,293.68 in March of 2020.

Understanding how inflation can affect your retirement savings might ensure you have enough funds padded out to support you for the long haul.

Market Volatility and Investment Losses

Regardless of financial situation or age, checking in on retirement accounts and the climate on Wall Street could help clarify how market swings might affect your retirement savings.

Retirees with defined contribution plans might suffer financial losses if they withdraw invested funds during a volatile market. Not panicking and having enough emergency funds to cover 3-6 months of living expenses can help you weather the storm. Talking to an investment advisor about rebalancing a portfolio to reduce risk is another option for getting ahead of this unexpected savings speedbump.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

Ways to Calculate How Much You Might Need to Retire

Are you on track for retirement? That’s something that can be calculated in many ways, which vary in efficacy depending on who you ask.

Here are a few formulas and calculations you can use to consider how much to save for retirement:

The 4 Percent Rule

The 4 Percent Rule, first used by financial planner William Bengen in 1994, assesses how different withdrawal rates can affect a person’s portfolio to ensure they won’t outlive the funds. According to the rule, “assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe [for retirement].” Bengen has since adjusted the rule to 4.5% for the first year’s withdrawal.

The jury is out on whether 4% is a safe withdrawal rate in retirement, but many people have used it to weather poorly performing stock markets.

The Multiply by 25 Rule

This one can get a little controversial, but the Multiply by 25 rule, which expanded upon Bengen’s 4% Rule with the 1998 Trinity Study, involves taking a “hoped for” annual retirement income and multiplying it by 25 to determine how much money would be needed to retire.

For example, if you’d like to bring in $75,000 annually without working, multiply that number by 25, and you’ll find you need $1,875,000 to retire. That figure might seem scary, but it doesn’t factor in alternate sources of income like Social Security, investments, etc.

This rule has been banked on by many retirees. However, it’s based on a 30-year retirement period. For those hoping to retire before the age of 65, this could mean insufficient funds in the later years of life.

The Replacement Ratio

The Replacement Ratio helps estimate what percentage of someone’s pre-retirement income they’ll need to keep up with their current lifestyle during retirement.

The typical target in many studies shows 70-85% as the suggested range, but variables like income level, marital status, homeownership, health, and other demographic differences all affect a person’s desired replacement ratio, as do the types of retirement accounts they hold.

Also, the Replacement Ratio is based on how much a person was making pre-retirement, so while an 85% ratio might make sense for a household bringing in $100,000 to $150,000 per year, a household with higher earnings — say $250,000 — might not actually need $212,000 each year during retirement. A way to supplement this calculation could be to estimate how much of your current spending will stay the same during retirement.

Social Security Benefits Calculator

By entering the date of birth and highest annual work income, the Consumer Financial Protection Bureau’s Social Security Calculator can determine how much money you might receive in estimated Social Security benefits during retirement.

Other Factors To Calculate

Expected Rate of Returns

Determining the rate of return on investments in retirement can help clarify how long your savings could last. An investment’s expected rate of returns can be calculated by taking the potential return outcomes, multiplying them by the likelihood that they’ll occur, and totaling the results.

Here’s an example: If an investment has a 50% chance of gaining 30% and a 50% chance of losing 20%, the expected rate of returns would be 50% ⨉ 30% + 50% ⨉ 20%, which is an estimated 25% return on the investment.

Home Improvement Costs

If a renovation is looking like it will be necessary down the line, you might calculate how much that home repair project could cost and factor it into your retirement planning.

Inflation

You might also consider using an inflation calculator to uncover what your buying power will really be worth when you retire.

Making Retirement Savings Last Longer

If you’re still wondering how long your savings will last or seeking potential ways to make it last longer, a few of these strategies could help:

Lower Fixed Expenses

Unexpected expenses are likely to creep up regardless of how much you save, but by lowering fixed expenses like mortgage and rent payments, food, insurance, and transportation costs, you might be able to slow the spending of your savings over time. Setting a budget is a solid way to see this in black and white.

Maximize Social Security

While opting into Social Security benefits immediately upon eligibility at 62 might sound appealing, it could significantly reduce the benefit over time. With smaller cost of living adjustments later in life, a lengthy retirement (people are living longer than ever before) could mean less money when you need it the most.

Stay Healthy

Unexpected medical expenses might still occur, but by safeguarding health and wellbeing earlier in life, you could avoid costly chronic conditions like high blood pressure, diabetes, or heart disease.

Keep Earning

Whether it’s staying in the full-time workforce for a couple more years or starting a ride-share side hustle during retirement, continuing to bring in money can help you stretch your savings out a little longer.

The Takeaway

Everyone wants a secure retirement. An important step in your retirement plan is calculating how long your savings will likely last. While there is no way to know for sure, this is such an important step in long-term planning that many different methods and strategies have evolved to help people feel more in control.

There are investment strategies, tax strategies, and income strategies that can help you create a realistic forecast of how you’re doing now, and how your retirement savings may play out in the future. Because there are so many risks and variables — from the markets to an individual’s own health — just having a basic calculation will prove useful.

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


Help grow your nest egg with a SoFi IRA.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Jun
12
2023
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Ordinary vs Qualified Dividends

By | Growing Wealth, invest, Investing | Comments Off on Ordinary vs Qualified Dividends

The vast majority of dividends are considered ordinary dividends, but some are qualified dividends and the tax treatment is different for each.

While sorting out which type of dividend you have can be confusing, it’s important to know the difference as they are taxed at different rates: Qualified dividends are taxed at the preferential capital gains rate, while ordinary dividends are taxed as income.

How Are Dividends Paid?

Typically, dividends are paid in cash, and they’re sent by the company directly to your brokerage, which will deposit the money into your account. Or many companies mail checks directly to investors who own shares in their firms.

Alternatively, you might get dividends as additional shares of stock. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares with your dividend payment. This has the advantage of both simplifying the process (since you won’t have to receive the cash and then buy more shares yourself), and potentially being less expensive, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs offer the ability to buy additional shares at a discount.

Less commonly, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company or physical assets the company owns.

Recommended: Capital Gains Tax Guide

What Is a Qualified Dividend?

Certain dividends from holding shares of stock in domestic companies and some foreign companies — and which an investor has held for a minimum period of time — are qualified dividends.

Qualified dividends are taxed at a lower rate than ordinary dividends. They’re taxed at the long-term capital gains rate, which ranges from 0% to 20%. Most people won’t pay more than 15% on qualified dividends. As such, investors typically prefer to receive qualified dividends, but they’re the less common kind of dividend paid out.

Qualified dividends must meet certain requirements:

•   The dividend must be paid by a U.S. company or a qualified foreign corporation.

•   The dividend must not be of the type that does not qualify.

•   If you hold common stock, you must have held the shares for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. (That’s the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend.)

•   If you hold preferred stock, you must have held the shares for more than 90 days during the 181-day period starting 90 days before the ex-dividend date.

•   A mutual fund must have held the investment unhedged for more than 60 days during the 121-day period starting 60 days before the ex-dividend date, and investors must have held their shares of the mutual fund for the same period.

How to Figure Out If You Have a Qualified Dividend

For investors about to count the number of days they’ve held a stock, be sure to include the day they sold the stock, but do not include the day they bought it.

Here is an example:

Imagine you bought 1,000 shares of ABC Company common stock on July 2, 2021, and you sold the 1,000 shares on August 11, 2021. ABC Company paid a cash dividend of 25 cents per share with an ex-dividend date of July 15, 2021.

Your Form 1099-DIV from the company shows $250 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you only held shares of ABC Company for 40 days of the 121-day period that began 60 days before the ex-dividend date, so you have no qualified dividends from ABC Company.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Start investing in dividend
paying assets with SoFi invest.

What Is an Ordinary Dividend?

Once you understand qualified dividends, it’s easy to spot the difference between ordinary dividend vs. qualified dividend: Any dividend that isn’t a qualified dividend is considered an ordinary dividend — and that’s most of them.

In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time. (Qualified dividends are reported in box 1b on IRS Form 1099-DIV, while ordinary dividends are reported in box 1a.)

Certain kinds of dividends are not qualified dividends even if they’re reported in box 1b of your Form 1099-DIV, according to the IRS. The following dividends are on this list:

•   Capital gains distributions

•   Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions

•   Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year

•   Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation

•   Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property

•   Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends

•   Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends

Ordinary dividends must be reported on IRS Form 1040, line 3b, and they are taxed at ordinary income rates, which range from 10% to 37%.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How Qualified and Ordinary Dividends are Reported at Tax Time

Generally, an investor will receive a Form 1099-DIV — “Dividends and Distributions” — from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year.

Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.

On Form 1099-DIV, dividends are reported as follows:

•   Box 1a: Ordinary dividends, representing the total dividends paid to you during that tax year

•   Box 1b: Qualified dividends, and this will be the portion of total dividends that qualify for the lower tax rate

•   Box 3: Non-dividend distributions, which are a nontaxable return of capital

If you have had taxes withheld from your dividends, this will be reported in box 4.7.

The Takeaway

Understanding qualified versus ordinary dividends can help investors make decisions about what account to hold their dividend-paying investments in: Inside a retirement account, such as an IRA, an investor will owe no taxes on dividend income, but they’ll often pay ordinary income taxes on all withdrawals.

Outside a retirement account, an investor will pay lower rates on qualified dividends, and may be able to use dividends to supplement other income or to reinvest in their portfolio.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Claw Promotion: Customer must fund their Active Invest account with at least $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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Jun
12
2023

Pros & Cons of Buying Mid-Cap Stocks

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Pros & Cons of Buying Mid-Cap Stocks

Mid-cap stocks are shares of publicly traded companies with market capitalizations of about $2 billion to $10 billion. The range also indicates where they fall in the spectrum of valuation between small-cap and big-cap (sometimes called large-cap) companies.

Because the stocks are approximations based on a company’s current value, their classification might change over time. There are also pros and cons to investing in mid-cap stocks — as there are when investing in stocks of all types and sizes.

Market Capitalization Investing

Market capitalization is a company’s total value: the number of outstanding shares a company has multiplied by the current price per share. For example, a company with 40 million shares selling at $100 a share would have a market cap of $4 billion.

When investing, the case can be made for including small-, mid-, and big-cap stocks in your portfolio. But when thinking about the numbers involved — small-cap companies have a value of less than $2 billion, and large-cap companies have a value of over $10 billion — understand that the values also govern potential growth.

In other words, small-cap stocks might grow into mid-cap stocks. But a large-cap stock can only stay a large-cap stock unless the value goes down. (Investors have informally come up with valuation categories for nano cap stocks, micro-cap stocks, and mega-cap stocks, but there isn’t a broad consensus about their cutoff values.)

Either way, when investing, the hope is generally for stocks to increase in value or appreciate — and the prevailing wisdom is that small- and mid-cap stocks are appealing because they have room to grow.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Market Cap As a Basic Investor Tool

Knowing the market cap of a company can help investors compare the company to others of similar size. An investor choosing auto-manufacturing stocks could look at mid-cap companies in that particular market sector and compare how they are doing against one another.

To dig even deeper into the basics, it’s good to understand the difference between stocks and bonds. Bonds are a type of debt instrument, whereas stocks represent ownership in a company. Generally, stocks have the potential to offer the highest gains, while bonds are generally safer.

Investing In Mid-Cap Stocks

Finding an investment strategy that makes sense for you is largely about understanding the trade-offs involved. There’s really no such thing as a sure thing in finance, and probably the only way to think about the “best” mid-cap stocks is to look for ones that will offer a return on investment — and ideally a large one, sooner rather than later.

Beyond that, here’s a look at a couple of possible advantages and disadvantages of investing in mid-cap stocks.

Growth, Earnings, Capital

Pro: Whether mid-cap stocks are the sole investments being targeted for a portfolio or they’re part of a more diverse selection, a good argument for them is that they are often companies that are trying to expand.

These are established companies in industries that are experiencing rapid growth, or are expected to. And thanks to that growth, the average mid-cap company’s earnings often grow at a faster rate than the average small cap, and with less stock volatility and risk.

Most mid-cap companies are small caps that have burgeoned, and some are on their way to becoming large-cap businesses. Growth eases the ability to access financing to fuel expansion, so mid-caps typically have an easier time obtaining financing than small caps do.

Investing in mid-cap stocks can be the happy medium between small-cap growth and large-cap stability.

Con: Mid-cap stocks can be more vulnerable than large-cap ones. Being middle tier, by definition, means such companies don’t have as much capital to sustain them through market downturns as big-cap companies do.

And because they are also not massive companies like large-cap companies with a value over $10 billion, it also means they are not as diversified as bigger-cap companies. If the market for that company disappears, the company is also at risk.

Performance

Pro: Because $2 billion to $10 billion is a sizable range of valuations, it means that mid-cap stocks often outperform large- and small-cap stocks just because it’s a markedly wide net of stocks. There are no guarantees that that will happen, of course, which is very important to keep in mind. And, naturally, historical performance is not necessarily an indicator of what will happen in the future.

Con: Investment risk is risk, and even those who don’t dabble in investing likely know that something that seems low risk isn’t the same as something that is not a risk. It doesn’t matter how many reports you read — there are always exceptions. It’s still a good idea to read up on different strategies and try to develop a sense of why some investments are riskier than others.


💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Researching Mid-Cap Stocks

Many mid-cap companies are household names, and you’d likely recognize a whole host of them. Even so, it’s best for anyone interested in investing in mid-cap stocks to do their homework — look at who’s running the company, who’s already invested, and what the stated goals in earnings and annual reports are.

And it might be smart to consult a financial professional if you need guidance.

It’s tempting to think of a “hot tip” as something you must rush to get in on, but it’s worth taking a breath and considering what you might be overlooking by fixating on something that seems lucrative but also requires urgent action. Again, do your homework.

The Takeaway

Market capitalization is a way for investors to understand the value of different companies and compare their performance and outlook, and mid-cap stocks — which can be seen as lying between small-cap growth and big-cap stability — are one investment strategy to consider.

But there are pros and cons to investing in mid-cap stocks, as there are when investing in other types of stocks. It’s always best to do as much research as you deem necessary before making decisions, and even consider consulting with a financial professional.

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.

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Jun
09
2023

IRA Basis: Guide to Tracking It for Traditional and Roth IRAs

By | invest, Investing, Preparing for Retirement | Comments Off on IRA Basis: Guide to Tracking It for Traditional and Roth IRAs

Investing money in an individual retirement account (IRA) can be an important part of saving for retirement. Among the types of IRAs you may have are Traditional IRAs and Roth IRAs. With a Traditional IRA, you can often deduct your contributions in the year you make them and pay tax on your withdrawals. A Roth IRA works in the opposite way — contributions are generally not tax-deductible and your earnings and withdrawals can be tax-free.

Because of the way that withdrawals from IRAs can be tax-free, it’s important to be aware of your IRA basis. When you withdraw money from a Traditional or Roth IRA, you may only need to pay tax on withdrawals that exceed your basis.

What Is a Roth IRA Basis?

The total amount that you’ve contributed to your Roth IRA over the years is considered your Roth IRA basis. Because Roth IRA contributions are not deductible in the year that you contribute them, you can withdraw your contributions at any time without tax or penalty.

Is a Roth IRA Basis Different From a Traditional IRA Basis?

Calculating your Traditional IRA basis is a bit different than calculating your Roth IRA basis. Understanding these differences in large part comes down to understanding what an IRA is and how various types of IRAs work.

When calculating your Roth IRA basis, you add up all of the contributions you make. This is because no Roth IRA contributions are tax-deductible.

With a Traditional IRA, on the other hand, some contributions are deductible in the year that you make them. So your Traditional IRA basis only includes contributions that were not tax-deductible in the year that you made them.

What Are the Rules of a Roth IRA Basis?

Contributing to a Roth IRA can be a great way to invest and save for retirement, because your earnings and withdrawals are tax-free, as long as you make qualified distributions. Your Roth IRA basis is easy to calculate, since it’s the net total of any contributions that you make, minus any distributions.

What Are the Rules of a Traditional IRA Basis?

If you open a Traditional IRA, you’ll want to make sure that you’re familiar with the rules of a Traditional IRA basis. Your basis in a Traditional IRA is the total of all of any non-deductible contributions you made, as well as any non-taxable amounts included in rollovers, minus all of your non-taxable distributions.

How Is IRA Basis Calculated?

When you start saving for retirement, you’ll want to make sure that you are accurately calculating your IRA basis. The exact formula for calculating your IRA basis varies slightly based on whether you have a Traditional or Roth IRA.

💡 Recommended: When Should You Start Saving for Retirement?

Roth IRA Basis Formula

Contributions to a Roth IRA are never tax-deductible. That means that you will use the sum of all of your contributions to calculate your Roth IRA basis.

Traditional IRA Basis Formula

Calculating your Traditional IRA basis works in a slightly different fashion. Because many contributions to Traditional IRAs are tax-deductible in the year you make them, you don’t include all of your contributions when calculating your basis. Instead, you will only use the contributions that are NOT tax-deductible when calculating your Traditional IRA basis. If all of your Traditional IRA contributions are tax-deductible, then your basis will be $0.

Why Is Knowing Your IRA Basis Important?

Not knowing your IRA basis is a retirement mistake you can easily avoid. You want to know what your IRA basis is, because it represents the amount of money that you can withdraw from your IRA without tax or penalty.

Generally, any withdrawals up to your tax basis are tax and penalty-free, while withdrawals above your tax basis may be subject to income tax and/or a 10% penalty. While it is usually not a good idea to withdraw money from your retirement accounts, knowing your basis can help you make an informed decision.

💡 Recommended: How to Open an IRA: A Beginner’s Guide

Starting an IRA With SoFi

Understanding your IRA basis is an important part of investing and planning for your retirement. At its simplest, you can calculate your IRA basis by adding up all of your non-tax-deductible contributions and subtracting any previous distributions. For your Roth IRA basis, you can use all of your contributions, while for Traditional IRAs you can only use the value of any contributions that you did not deduct from your taxes. Your IRA basis is the amount that you can typically withdraw from your account without having to pay income tax and/or a penalty.

Opening an IRA online with SoFi can be a great way to start saving for retirement. Starting a Traditional IRA may allow you to lower your taxable income this year, while contributing to a Roth IRA your retirement by allowing your retirement contributions to grow tax-free. It can be a smart financial decision to use one of these accounts to make sure you have enough money put aside for your retirement.

Help grow your nest egg with a SoFi IRA.

FAQ

Do I have an IRA basis?

Everyone with an IRA has an IRA basis, although it’s possible that your IRA basis is $0. Your IRA basis is the net total of your non-tax-deductible contributions minus any distributions. For a Roth IRA, you use the value of all your contributions, while with a Traditional IRA, it’s only the contributions that were not tax-deductible.

How do I find my IRA basis?

Your IRA basis is the sum of any non-tax-deductible contributions that you make to an IRA minus any distributions that you take from your account. Your IRA basis is not generally reported anywhere. So if you don’t know your basis, you will need to calculate it based on your historical contributions and distribution amounts.

Who keeps track of your IRA basis?

The IRS does not generally keep track of your IRA basis — you are responsible for making sure your IRA basis is accurately calculated. If you use an accountant, they may calculate and track your IRA basis. You’ll want to make sure that you are accurately tracking your basis so that you can correctly pay any taxes you owe on IRA distributions.

Photo credit: iStock/Eva-Katalin

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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