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Q: What Are Penny Stocks?

Penny stocks are low-priced securities that trade for less than $5 a share, though usually, they trade for less than $1.

Q: Are penny stocks good for beginners?

Penny stocks are generally not good for beginners. They are often very volatile and can be challenging to trade.

Jul

2024

What Are Penny Stocks & How Do They Work?

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Penny stocks are shares of companies that usually trade for less than $5 per share. They are highly speculative investments, meaning they carry a high degree of risk. Usually, traders looking for short-term gains use penny stocks, rather than long-term investors looking to build wealth.

But investors are often allured by penny stocks because they are relatively cheap and offer the prospect of high returns – but there are significant risks associated with penny stocks, too. Before trying to use penny stocks to make quick gains, investors must know how they work and the risks involved.

What Are Penny Stocks?

Penny stocks are low-priced financial securities that trade for less than $5 a share, though they often trade for less than $1.

Penny stocks are generally considered to be highly speculative, or relatively higher-risk investments. This is because most penny stocks are issued by small, unknown companies with little or no operating history. In addition, these companies often lack the financial resources to continue operating for very long and are susceptible to fraud.

Despite the risks, some investors are attracted to penny stocks because they offer the potential for significant returns over a short period of time. For example, if a penny stock’s price doubles from $0.30 per share to $0.60 per share, that’s a 100% return on investment on just a $0.30 price increase. Of course, the flip side is that you could possibly also lose all of your investment just as quickly.

Exploring Penny Stocks & How They Work

Although some penny stocks trade on major exchanges, such as the New York Stock Exchange or Nasdaq, most penny stocks trade on the over-the-counter (OTC) market, through the OTC Bulletin Board (OTCBB) or on the pink sheets.

Penny stocks that trade on the OTC market do not have the same regulatory requirements as companies listed on major exchanges. Companies that list their shares on the major exchanges are subject to a high degree of regulatory scrutiny; these publicly traded companies must meet minimum listing standards and provide regular financial reports to the Securities and Exchange Commission (SEC).

In contrast, over-the-counter stocks have fewer hoops to jump through, as they do not have to meet minimum listing requirements. However, penny stocks that trade on the OTCBB must file financial statements with the SEC, while penny stocks listed on the pink sheet are not required to do so.

Because many penny stocks do not have to report periodic financial statements to a regulatory agency, it can be difficult for investors to find adequate information to make informed investment decisions on these securities. This lack of knowledge is one of the reasons penny stocks tend to be higher-risk investments.

Penny Stocks Are Highly Speculative

As noted above, penny stocks are highly speculative investments often bought and sold by traders who want to make short-term gains. Because of this potential for significant, short-term gains, many people view penny stocks as a way to generate outsized returns quickly. However, this is far from the case; penny stocks tend to carry a high degree of risk and, as such, may be better investment options for investors with the time, money, and risk tolerance to dabble in this market.

Who Can Buy Penny Stocks?

Anyone can buy and sell penny stocks, though it is recommended that they have the appropriate risk tolerance before investing in these speculative securities.

To trade penny stocks, you’ll need to open an account with a brokerage that offers OTC trading. Many online brokers offer this service, but do your research before selecting one, including what kind of fees they charge. Once you have an account, you can start buying and selling penny stocks.

Pros of Penny Stocks

Penny stocks may be attractive to investors for a couple of key reasons.

High Reward Potential

There is a belief by some penny stock traders that these small securities have more room to grow than large stocks, thus resulting in significant, short-term price appreciation. The potential for short-term gains means that penny stocks may provide high rewards, despite their risks, especially if traders utilize buying on margin to make their trades.

Enjoyment

Just as some people like to gamble, others like to trade stocks and other securities for fun. Plenty of people would consider analyzing stock charts, reading up on unknown companies, and making bets as one of their hobbies. Traders like this might consider penny stocks as “fun spending,” not necessarily a part of a long-term investing strategy.

Cons of Penny Stocks

Penny stocks also have some drawbacks that investors should be aware of.

Small Likelihood of Success

Making money on a penny stock can be a rare occurrence. Investors should be aware of this, despite the tales of sudden wealth they may hear. Also, finding success trading penny stocks may often take longer than some investors expect or anticipate.

Possibility of Losing it All

A small likelihood of success means that there will inevitably be many failures. It is common for small, unestablished businesses to fold and go under, flounder, or have unsuccessful stock. When stocks become worthless, investors effectively lose all of their investment.

Lack of Liquidity

Penny stocks usually do not have a lot of liquidity, meaning it can be challenging to find buyers when you want to sell. This can make it hard to get out of a position if the stock price declines.

Volatility

Penny stocks tend to be highly volatile, which means that their prices can change a lot, rapidly. This can happen in either direction, making them a difficult tool for building long-term wealth.

Scammers

The penny stock segment of the market is often rife with scammers and fraudsters. Numerous penny stock newsletters promise big wins, and penny stock “investors” manipulate both the market and potential customers.

Researching Penny Stocks to Buy

It’s often difficult for investors to adequately research what penny stocks to buy and sell. Because many penny stock companies do not have to file reports to regulators, investors do not always have great information about the company’s finances, management, and operations.

One of the first things investors should do is check online resources like the OTC Markets website to search for company information on the penny stocks you’re interested in. Once you’ve done that, you can see if the companies have filed reports with the SEC through its EDGAR database. Using this company and financial information, you can develop a sense of the company’s finances and business practices.

Also, it may help to look at penny stocks that trade on exchanges such as the NYSE or NASDAQ. Because these stocks are required to file regular financial reports to the SEC, there is more easily accessible research investors can use to make investment decisions. Additionally, these companies are usually more stable and have more liquidity than penny stocks trading on the pink sheets or OTCBB.

Overall, you’d want to review as much public information as possible when researching penny stocks to buy and sell. When you make investment decisions with inadequate public information, you may open yourself up to relying on shady information that could come from paid promoters or fraudsters looking to pump and dump a stock.

The Takeaway

The allure of making significant, short-term gains by trading penny stocks draws many people into the market. But with the potential of high rewards comes the increased risk and a probability that gains will be hard to come by. Before diving into penny stock trading, assessing your risk tolerance is essential to see if this strategy is right for you.

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

FAQ

Can you make money with penny stocks?

While making money with penny stocks is possible, it is also possible to lose money. Penny stocks are generally considered a high-risk investment, and as such, they may not be suitable for all investors.

Are penny stocks good for beginners?

Trading penny stocks is likely not advisable for beginners, as they are often very volatile, difficult to research, and can be challenging to trade. It may be best to consult with a financial professional before trading penny stocks.

Are penny stocks popular investments?

Penny stocks are sometimes popular investments for traders looking for high-risk, high-reward investments. These stocks are typically very volatile, which can lead to significant profits or losses.

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Jul

2024

Creating an Investment Plan for Your Child

By Austin Kilham | Family Finances, invest, Investing | No Comments

From saving for college to getting a leg up on retirement, creating an investment plan for your child just makes sense. Why? Because when your kids are young, time is on their side in a really big way and it’s only smart to take advantage of it.

In addition, there are several different avenues to consider when setting up an investment plan for your kids. Each one potentially can help set them up for a stronger financial future.

🛈 SoFi currently does not offer custodial banking or investment products.

Why Invest for Your Child?

There’s a reason for the cliché, “Time is money.” The power of time combined with money may help generate growth over time.

The technical name for the advantageous combination of time + money is known as compound interest or compound growth. That means: when money earns a bit of interest or investment gains over time, that additional money also grows and the investment can slowly snowball.

Example of Compounding

Here is a simple example: If you invest $1,000, and it earns 5% per year, that’s $50 ($1,000 x 0.05 = $50). So at the end of one year you’d have $1,050.

That’s when the snowball slowly starts to grow: Now that $1,050 also earns 5%, which means the following year you’d have $1,152.50 ($1,050 x 0.05 = $52.50 + $1,050).

And that $1,152.50 would earn 5% the following year… and so on. You get the idea. It’s money earning more money.

That said, there are no guarantees any investment will grow. It’s also possible an investment can lose money. But given enough time, an investment plan you make for your child has time to recover if there are any losses or volatility over the years.

Benefits of Investing for Your Child Early On

There are other benefits to investing for your kids when they’re young. In addition to the potential snowball effect of compounding, you have the ability to set up different types of investment plans for your child to capture that potential long-term growth.

Each type of investment plan or savings account can help provide resources your child may need down the road.

• You can fund a college or educational savings plan.

• You can open an IRA for your child (individual retirement account).

• You can set up a high-yield savings account, or certificate of deposit (CD).

Even small deposits in these accounts can benefit from potential growth over time, helping to secure your child’s financial future in more than one area. And what parent doesn’t want that?

Are Gifts to Children Taxed?

The IRS does have rules about how much money you can give away before you’re subject to something called the gift tax. But before you start worrying if you’ll have to pay a gift tax on the $100 bill you slipped into your niece’s graduation card, it’s important to know that the gift tax generally only affects large gifts.

This is because there is an “annual exclusion” for the gift tax, which means that gifts up to a certain amount are not subject to the gift tax. For 2024, it’s $18,000. If you and your spouse both give money to your child (or anyone), the annual exclusion is $36,000 in 2024.

That means if you’re married you can give financial gifts up to $36,000 in 2024, without needing to report that gift to the IRS and file a gift tax return.

Also, the recipient of the gift, in this case your child, will not owe any tax.

Are There Investment Plans for Children?

Yes, there are a number of investment plans parents can open for kids these days. Depending on your child’s age, you may want to open different accounts at different times. If you have a minor child or children, you would open custodial accounts that you hold in their name until they are legally able to take over the account.

Investing for Younger Kids

One way to seed your child’s investing plan is by opening a custodial brokerage account, established through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

While the assets belong to the minor child until they come of age (18 to 21, depending on the state), they’re managed by a custodian, often the parent. But opening and funding a custodial account can be a way to teach your child the basics of investing and money management.

There are no limits on how much money parents or other relatives can deposit in a custodial account, though contributions over $18,000 per year ($36,000 for married couples) would exceed the gift tax exclusion, and need to be reported to the IRS.

UGMA and UTMA custodial accounts have different rules than, say, 529 plans. Be sure to understand how these accounts work before setting one up.

Investing for Teens

Teenagers who are interested in learning more about money management as well as investing have a couple of options.

• Some brokerages also offer accounts for minor teens. The money in the account is considered theirs, but these are custodial accounts and the teenager doesn’t take control of the account until they reach the age of majority in their state (either 18 or 21).

These accounts can be supervised by the custodian, who can help the child make trades and learn about investing in a hands-on environment.

• If your teenager has earned income, from babysitting or lawn mowing, you can also set up a custodial Roth IRA for your child. (If a younger child has earned income, say, from work as a performer, they can also fund a Roth IRA.)

Opening a Roth IRA offers a number of potential benefits for kids: top of the list is that the money they save and invest within the IRA has years to grow, and can provide a tax-free income stream in retirement.

Recommended: Paying for College: A Parents’ Guide

Starting a 529 Savings Plan

Saving for a child’s college education is often top of mind when parents think about planning for their kids’ futures.

A 529 plan is a tax-advantaged savings plan that encourages saving for education costs by offering a few key benefits. In some states you can deduct the amount you contribute to a 529 plan. But even if your state doesn’t allow the tax deduction, the money within a 529 plan grows tax free, and qualified withdrawals are also tax free.

That includes money used to pay for tuition, room and board, lab fees, textbooks, and more. Qualified withdrawals can be used to pay for elementary, secondary, and higher education expenses, as well as qualified loan repayments, and some apprenticeship expenses. (Withdrawals that are used for non-qualified expenses may be subject to taxes and a penalty.)

Though all 50 states sponsor 529 plans you’re not required to invest in the plan that’s offered in your home state — you can shop around to find the plan that’s the best fit for you. You and your child will be able to use the funds to pay for education-related expenses in whichever state they choose.

Other Ways to Invest for Education

Given the benefits of investing for your child’s education, there are additional options to consider.

Prepaid Tuition Plans

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices. Such plans are usually available only at public schools and for in-state students, but some can be converted for use at out-of-state or private colleges.

The main benefit of this plan is that you could save big on the price of college by prepaying before prices go up. One of the main disadvantages is that, with some exceptions, these funds only cover tuition costs (not room and board, for example).

Education Savings Plans

An education savings plan or ESA is similar to a 529 plan, in that the money saved grows tax free and can be withdrawn tax free to pay for qualified educational expenses for elementary, secondary, and higher education.

ESAs, however, come with income caps. Single filers with a modified adjusted gross income (MAGI) over $110,000, and married couples filing jointly who have a MAGI over $220,000 cannot contribute to an ESA.
ESAs also come with contribution limits: You can only contribute up to $2,000 per year, per child, and ESA contributions are only allowed up to the beneficiary’s 18th birthday, unless they’re a special needs student.

And while many states offer a tax deduction for contributing to a 529 plan, that’s not the case with ESA contributions; they are not tax deductible at the federal or the state level.

Investing Your Education Funds

Once you make contributions to an educational account, you can invest your funds. You will likely have a range of investment options to choose from, including mutual funds and exchange-traded funds (ETFs), which vary from state to state.

Many plans also offer the equivalent of age-based target-date funds, which start out with a more aggressive allocation (e.g. more in stocks), and gradually dial back to become more conservative as college approaches.

Depending on your child’s level of interest, this could be an opportunity to have them learn more about the investing process.

Thinking Ahead to Retirement Accounts

It’s worth knowing that as soon as your child is working, you are able to open a custodial Roth IRA, as discussed above. The assets inside the IRA belong to your child, but you have control over investing them until they become an adult.

While it’s possible to open a custodial account for a traditional IRA, most minor children won’t reap the tax benefits of this type of IRA. Most children don’t need tax-deductible contributions to lower their taxable income.

For that reason, it may make more sense to set up a custodial Roth IRA for your child, assuming the child has earned income. A Roth can offer tax-free income in retirement, assuming the withdrawals are qualified.

When to Choose a Savings Account for Your Child

Investing is a long-term proposition. Investing for long periods allows you to take advantage of compounding, and may help you ride out the volatility may occur in the stock market. But sometimes you want a safer place to keep some cash for your child — and that’s when opening a savings account is appropriate.

If you think you’ll need the money you’re saving for your child in the next three to five years, consider putting it in a high-yield savings account, which offers higher interest rates than traditional savings accounts.

You might also want to consider a certificate of deposit (CD), which also offers higher interest rates than traditional saving vehicles. The only catch with CDs is that in exchange for this higher interest rate, you essentially agree to keep your money in the CD for a set amount of time, from a few months to a few years.

While these savings vehicles don’t offer the same high rates of return you might find in the market, they are a less risky option and offer a steady rate of return.

The Takeaway

When considering your long-term goals for your child, having an investing plan might make sense. Whether you want to save for college, help your child get ahead on retirement, or just set up a savings account for your kids, now is the time to start. In fact, the sooner the better, as time can help money grow (just as it helps children grow!).

FAQ

Can a child have an investment account?

A parent or other adult can open a custodial brokerage account for a minor child or a teenager. While the custodian manages the account, the funds belong to the child, who gains control over the account when they reach the age of majority in their state (18 or 21).

What is the best way to invest money for a child?

The best way is to get started sooner rather than later. Perhaps start with one goal — i.e. saving for college — and open a 529 plan. Or, if your child has earned income from a side job, you can open a custodial Roth IRA for them.

What is a good age to start investing as a kid?

When your child shows an interest in investing, or when they have a specific goal, whether that’s at age 7 or 17, that’s when you’ll have a willing participant. Ideally you want to invest when they’re younger, so time can work in your favor.

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Jul

2024

Real Estate Crowdfunding: What Is It?

By Rebecca Lake | Growing Wealth, Home Ownership, invest | Comments Off

Real estate crowdfunding allows investors to pool funds together to invest in property. Crowdfunding has become a popular way to invest in real estate, and gain exposure to an alternative asset class without owning property directly.

Adding real estate to a portfolio can increase diversification while creating a potential buffer against inflation. Real estate crowdfunding platforms make it possible to invest in commercial and residential properties online, with potentially low barriers to entry. But accredited and nonaccredited investors (retail investors) are subject to different rules.

How Real Estate Crowdfunding Works

Real estate crowdfunding platforms seek out investment opportunities and vet them before making them available to investors. The platform then enables multiple investors to fund property investments at lower amounts than the actual property would cost. The minimum investment varies by platform, and might range from a few hundred dollars to upwards of $5,000.

Real estate investors then gain a proportional share of the profits. Depending on the nature of the investment, investors may see interest payments, rental income, or dividends. If a property is sold or assets are otherwise liquidated, investors could also see a profit.

Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

Real Estate Crowdfunding Examples

Investors can join a real estate crowdfunding marketplace and browse investment options, which may include:

• Individual residential properties

• Retail space

• Office buildings

• Warehouses and storage facilities

• Multifamily housing

• Real estate investment trusts (REITs)

• Real estate funds

Rather than concentrating capital in a single piece of property, real estate crowdfunding allows investors to distribute their capital among different types of properties. If you’re interested in how to invest in real estate in a hands-off way, crowdfunding can help you do it.

Crowdfunding Explained

What is crowdfunding? In simple terms, it’s the act of raising money from a crowd or pool of investors.

Crowdfunding is possible through Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The Act’s purpose was to make it easier for small businesses to raise funds following the fallout of the 2008 financial crisis.

The Securities and Exchange Commission (SEC) subsequently adopted a series of rules allowing crowdfunding to be applied to real estate investments.1,2

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Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Today, accredited and nonaccredited (retail) investors can invest in crowdfunded real estate, but there are different rules for each.

Accredited Investors

An accredited investor, according to the SEC, is someone who:

• Has a net worth exceeding $1 million, not including the value of their primary residence, OR

• Had income exceeding $200,000 annually ($300,000 for married couples) in each of the two prior years and expects the same level of income going forward, OR

• Holds a Series 7, Series 65, or Series 82 securities license

Investors who meet the qualifications to be accredited in the eyes of the SEC may invest any amount in crowdfunded real estate.

Nonaccredited Investors

Retail investors who don’t meet the criteria for accredited investors may be limited in how much they can invest in any Regulation Crowdfunding offering in any 12-month period. If either your income or net worth is less than $124,000, during any 12-month period you can invest up to $2,500, or 5% of your income or net worth, whichever is greater.

If both your income and net worth are $124,000 or higher, during any 12-month period you can invest up to 10% of your annual income or net worth, whichever is greater (not more than $124,000 total).

Advantages and Disadvantages of Real Estate Crowdfunding

Here’s a closer look at how the potential benefits and drawbacks of this alternative strategy compare.

Pros

Holding crowdfunded real estate in a portfolio can offer potential advantages:

• Minimum investments may be as low as a few hundred dollars.

• Crowdfunded property investments may yield above-average returns for investors who are comfortable with a longer holding period and highly illiquid assets.

• Investors have flexibility in choosing which type of property investments they’d like to fund, based on their goals and risk tolerance.

• Direct ownership isn’t required, which means there’s no need for investors to get a mortgage, come up with down payment funds, or deal with the headaches of managing a rental property.

• Nonaccredited investors are not shut out of crowdfunding real estate, thanks to SEC rulemaking, but are subject to other restrictions.

Cons

While there are some attractive features associated with real estate crowdfunding, there are some things investors may want to be wary of:

• Real estate crowdfunding platforms may charge hefty fees, which can detract from overall investment earnings.

• Generally speaking, crowdfunded real estate is illiquid since you’re meant to leave your capital in the investment for the duration of the holding period.

• Taxes on real estate gains can be complicated, as the dividend portion is typically taxed differently than profit from sales of properties. You may want to consult a professional.

• Returns are not guaranteed, and properties may underperform as market or economic conditions change.

• Nonaccredited investors are limited in how much they can invest in crowdfunded real estate by SEC regulations (see above).

Real Estate Crowdfunding Platforms

Online platforms allow investors to crowdfund real estate with a relatively low minimum investment amount. A typical minimum investment is $10,000 though some platforms allow investors to get started with $500 or less.

When comparing platforms that crowdfund real estate, it’s helpful to consider:

• Minimum and maximum investment thresholds

• Range of investment options

• Investment holding periods

• Fees

• Investment performance

• Vetting and due diligence

It’s also important to look at whether a platform works with accredited or nonaccredited investors. The best real estate crowdfunding platforms thoroughly vet properties before making them available to investors, have low minimum investment thresholds, and charge minimal fees.

How to Get Started

If you’re interested in real estate crowdfunding you’ll first need to decide how much money you’re comfortable investing. How much of your portfolio you should allocate to real estate investments can depend on:

• Your age and time horizon for investing

• Investment goals

• Risk tolerance

• Risk capacity, meaning how much risk you need to take to reach your goals

There’s no magic number to aim for. Some investors may be comfortable allocating a larger portion of their portfolio to alternative investments like real estate while others may prefer to limit their allocation to 5% or 10% instead.

Once you’ve got an amount in mind you can move on to researching real estate crowdfunding platforms. Remember to look at whether platforms work with nonaccredited investors if you don’t yet qualify for accredited status.

The Takeaway

Real estate crowdfunding offers an exciting opportunity to expand your portfolio beyond traditional stocks and bonds. You might consider this option alongside REITs, real estate funds, or real estate stocks if you’d like to reap some of the benefits of property investing without having to purchase a rental unit or a fix-and-flip home.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

How would earnings from real estate crowdfunding be taxed?

Owing to the complexity of real estate-related tax rules, you may want to consult a professional. Crowdfunded real estate investments can produce income in the form of dividends or interest, both of which are taxable at the dividend rate. Generally, any profits you clear when exiting would be treated as capital gains, and the holding period determines whether the short- or long-term rate applies.

Would real estate crowdfunding be considered a high-risk investment?

Real estate crowdfunding is risky, as interest rate fluctuations or changing market and economic conditions can affect outcomes. If you’re weighing real estate vs. stocks, remember that the two have little correlation to one another. Holding real estate in a portfolio can help balance risk and provide some protection against market volatility.

What is the difference between an accredited and nonaccredited investor?

An accredited investor satisfies one of three requirements established by the SEC, based on net worth, income, or securities licenses they hold. A nonaccredited investor does not meet these requirements and is generally considered a retail investor. A nonaccredited investor is subject to limits on how they may invest in crowdfunding opportunities.

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Jul

2024

Real Estate vs. Stocks: Pros and Cons

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Stocks are typically a staple in many portfolios, but real estate can be a valuable addition as it offers the potential for diversification. Investing in real estate — through direct ownership or other means — can also be a hedge against inflation and market volatility.

When it comes to investing in real estate vs. stocks, it’s less of an either-or proposition and more a question of understanding the role that each asset class can play in your investment strategy, as well as the potential risks.

The Nature of Real Estate Investments

Real estate is considered an alternative asset class as it generally doesn’t move in tandem with traditional securities like stocks and bonds. As such, real estate can be attractive on several levels for investors who are interested in diversifying their portfolios to balance risk, and potentially generating income through dividends, interest payments, or rental income.

If you’re interested in learning how to invest in real estate, some options include:

• Owning one or more rental properties

• Buying shares in a real estate investment trust (REIT)

• Investing in real estate funds or real estate stocks

• Joining a real estate crowdfunding platform

• Buying mortgage notes

• Buying land

• Purchasing a fix-and-flip property

Some of these options require more investment capital than others — it depends whether you’re buying shares of a real estate investment like a REIT, or purchasing a property outright — and each type of asset has different risks and rewards. Investors setting up a portfolio have flexibility in choosing where to put their money, based on their goals and risk tolerance.

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The Nature of Stock Investments

When comparing real estate vs. stocks, keep in mind there are only a few similarities. Unlike property, a stock is a type of security, meaning it has value and can be bought and sold. Owning shares of stock is a way of owning part of a company.

While it’s possible to own shares of a real estate investment — say, through a REIT, real estate-focused mutual funds, or crowdfunding platforms — investing in property often involves physical ownership, which is not the case with stocks.

Stocks are sold on exchanges in the U.S. The two largest are the New York Stock Exchange (NYSE) and the Nasdaq.1 Again, there can be some overlap with certain real estate investments, like REITS, that may trade on an exchange.

When you buy a share of stock you’re buying an ownership stake in a company. The more shares you buy, the more of the company you own. Some stocks pay dividends to investors, which represent a share of the company’s profits. Stocks can be:

• Preferred, meaning shareholders lack voting rights but receive priority payment of dividends

• Common, meaning shareholders have voting rights but are last in line to receive dividend payments2

Stocks can be bought and sold in individual shares or collectively through mutual funds and exchange-traded funds (ETFs). When you buy a mutual fund or ETF you’re buying a basket of investments, which can include stocks from different companies.

Investors may actively trade stocks to try and leverage market trends from one day to the next, or they may use a buy-and-hold approach to benefit from capital appreciation over time. Which path you choose depends on whether you’re looking for short-term or long-term gains.

Comparing Returns of Real Estate and Stocks

In weighing the merits of real estate vs. stocks it’s important to consider return profiles. So, which tends to perform better over time: stocks or real estate?

Historically, the numbers show that stocks tend to perform better than real estate. If you look at 2023, for instance, the S&P 500 posted a 26.06% return. Real estate, by comparison, returned 6.29% to investors.

Stocks don’t always best real estate, of course. As recently as 2022, the S&P 500 posted a negative return of -18.04% while real estate returned 5.67%. However, when you compare the historical data year by year, stocks tend to outperform real estate more often than not.

Does that mean real estate is a poor investment? Given its low correlation to the stock market, real estate could bolster returns in years when stock prices drop due to increased volatility.

Liquidity and Accessibility Differences

Liquidity refers to how easily you can sell an investment that you own. When you compare stocks vs. real estate, stocks are typically the more liquid of the two because it’s relatively easy to sell one or more shares of stock on an exchange.

With real estate, however, there may be obstacles that could make liquidating your investment more difficult.

For example, if you’re investing in crowdfunded real estate you may have to wait until the holding period ends to withdraw your initial investment. It’s not uncommon to see holding periods that last five to 10 years with real estate crowdfunding.

Illiquidity is also typical with other categories of alternative investments.

REIT or real estate fund shares may be easier to unload if there’s demand for them in the market. However, trying to sell a rental property you own could take time if there’s a lack of eager buyers. Weighing the pros and cons of REIT investing against other real estate investments can make it easier to decide which ones align with your needs.

Risk and Diversification Considerations

Real estate and stocks have different risks to weigh, as well as different paths to diversification.

Real Estate Risks

With real estate, the biggest risks tend to be:

• Market risk. Changing economic conditions or shifts in supply and demand can negatively affect real estate investment returns or make it more difficult to exit an investment.

• Credit risk. Renting properties can provide a steady income but there’s always the risk that your renters won’t pay on time, or at all.

• Location risk. A once-favorable location might suffer from environmental impacts or regulatory changes.

• Interest rate risk. When interest rates fluctuate, that can impact the ability to get loans for new purchases or repairs. Interest rates can also impact cash flow from a property.

Equities Risks

With stocks, the biggest threats tend to be:

• Market risk. Also known as systematic risk, market risk is the tendency of the market as a whole to rise and fall, impacting stocks in different sectors.

• Volatility. Some stocks are more volatile than others, i.e., their share price tends to fluctuate versus other stocks that have fewer ups and downs, such as blue-chip stocks.

• Inflation. Inflation can have a big impact on stocks owing to the change in demand for goods and the diminished purchasing power of capital.

• Economic and political factors. Economic factors can play into stock market movements here and abroad, influencing political climates, and vice versa.

Diversification and Real Estate Investments

In terms of potential diversification benefits, real estate may counterbalance the volatility of stocks because property values tend not to fluctuate as dramatically within shorter periods.

Investing in real estate may offer some protection against inflation, since property prices tend to rise in tandem with increases in other consumer prices.

Diversification and Equities

Diversifying with stocks usually means choosing investments in companies that represent different sectors of the market. You might allocate some of your portfolio to defensive, lower-risk stocks in the utilities and healthcare sectors while also investing in some higher-risk stocks that may generate better returns.

It’s also possible to invest in mutual funds and ETFs, which are types of pooled investments that offer diversification owing to the number of securities each fund holds.

The Takeaway

Whether it makes sense to invest in stocks vs. real estate ultimately hinges on what you need your portfolio to do for you. There’s an argument for holding both positions. But it’s wise to consider the risk factors that may come into play with each type of asset.

Equities can help investors target growth in specific sectors, but can be subject to systematic risk as well as economic shocks, and other factors. As an alternative asset class, real estate may help provide some ballast in your portfolio if stocks turn volatile. Real estate may also hedge against inflation. But real estate is generally illiquid, and the risks of certain types of property investments, or crowdfunding platforms, may not be obvious.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the main types of real estate investments?

Rental properties and fix-and-flip properties are two of the most popular ways to get started with real estate investing, if you prefer a hands-on approach. If you’d rather invest in real estate for passive income, you might consider REITs, real estate funds, real estate stocks, or crowdfunded real estate investments instead.

How do the historical returns of real estate and stocks compare?

Historically, average stock market returns have more or less matched real estate returns. However, there have been years where real estate returns have significantly outpaced stocks. Economic conditions, geopolitical events, and the interest rate environment can all play a part in influencing whether stocks or real estate produce better returns.

Are stocks more volatile than real estate?

Stocks tend to be more volatile than real estate, which is one of the reasons to consider property investments. Real estate may help bring some stability to your portfolio when stock prices are fluctuating due to uncertain market conditions. That said, real estate investments are subject to other risk factors such as interest rate changes, which affect prices, as well as weather and/or climate changes; the rise and fall of a location’s popularity; local zoning rules, as well as other issues investors need to bear in mind.

Photo credit: iStock/andreswd

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

SOIN-Q224-1900928-V1

Jul

2024

Commodity vs Security: What Are the Differences?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

The main difference between a commodity vs. security lies in what you own. Commodities are raw materials and basic goods, while securities represent an ownership stake (e.g. stock) or a debt obligation (e.g. bonds).

As such, investing in commodities and securities can offer two different paths to diversification.

Both commodities and securities can be traded on market exchanges. Between the two, commodities are typically categorized as alternative investments to the traditional array of stocks, bonds, and cash many investors hold.

Understanding Commodities

What are commodities? The Commodity Futures Trading Commission (CFTC) recognizes three categories of commodities:

• Agricultural

• Natural resources

• Financial instruments

In simple terms, commodities are raw materials typically used in the production of other goods. Commodities are considered a type of alternative investment because these products — whether oil, corn, or copper — don’t move in sync with traditional stock and bond markets, and may provide portfolio diversification.

Types of Commodities

Broadly speaking, commodities may be classified as hard or soft. Hard commodities are mined or extracted, while soft commodities are produced through agriculture.

Examples of agricultural commodities include wheat, soybeans, corn, and livestock. Natural resource commodities include gold, silver, copper, and timberland investments. Financial instruments include U.S. or foreign currencies, or options and futures contracts that invest in an underlying commodity.

The Commodity Exchange Act (CEA) regulates the trade of commodity futures in the U.S. Trading futures commodities must generally be done through a commodity exchange, with some limited exceptions. The CEA also enables the CFTC to regulate the commodities industry.

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Understanding Securities

Now, what are securities? The term securities refers to a broad range of investments where there’s an expectation that value or profit will be returned to the investor. Examples of securities include:

• Stocks

• Bonds

• Mutual funds and exchange-traded funds (ETFs)

• Mortgage notes

• Promissory notes

• Limited partnerships

• Oil and gas interests

• Debentures

• Investment contracts

Stocks and bonds are among the most commonly traded securities. When you buy shares of stock you’re getting an ownership stake in the underlying company. Should the value of your shares increase you could sell them at a profit.

Bonds are a debt obligation between the bond issuer and investors. When you buy a bond, you agree to let the bond issuer use your money for a certain period. During that time you’ll earn interest, and when the bond matures you can reclaim your original investment.

Certain types of financial instruments are excluded from this list. Checks, bank accounts, and traditional life insurance policies don’t meet the definition of a security.

How Securities Are Regulated

The Securities and Exchange Commission (SEC) regulates securities trading in the U.S. Some of the most significant laws relating to securities include:

• The Securities Act of 1933

• The Securities Exchange Act of 1934

• Investment Advisers Act of 1940

• Sarbanes-Oxley Act of 2002

• Dodd-Frank Wall Street Reform and Consumer Protection Act of 20105

Many securities are publicly traded on market exchanges. The New York Stock Exchange (NYSE), for example, is the world’s largest stock exchange. Securities that do not trade on an exchange may be traded privately or over the counter. Over-the-counter trading relies on a network of broker-dealers to complete the sale or purchase of securities.

Comparing Commodities and Securities

Commodities and securities can be used to achieve different goals in a portfolio. Both allow for diversification but they differ in how they work, what you’re trading, and the associated risks and rewards.

Here’s a simpler way to think of the difference between a security vs. commodity. Securities often represent the end product, while commodities are the building blocks of that product.

For example, take a company that produces computer chips. If you invest in the precious metals used to make computer chips (e.g. gold, silver, platinum), you’re investing in commodities. If you buy shares of company stock, those are securities.

Here are some of the important things to know if you’re weighing security vs. commodity trading.

	Commodities	Securities
Nature of the investment	Raw materials and basic goods	Stocks, bonds, mutual funds, investment contracts
Trading mechanism	Futures contracts and options can be bought and sold on a commodity exchange; commodity mutual funds and ETFs can be traded on a stock exchange	Publicly traded stocks and bonds can be bought and sold on stock exchanges
Potential Benefits	Portfolio diversification, potentially higher returns, inflationary hedge, potential insulation against market volatility	Potential gains through active trading, potential for long-term capital appreciation, potential for passive income from dividends
Potential Risks	Supply and demand, weather/climate conditions, geopolitical events can influence commodity pricing	Supply and demand, investor sentiment, economic conditions, interest rates, and company health can influence stock and bond prices
Regulatory body	Commodity Futures Trading Commission	Securities and Exchange Commission

Investing in Commodities vs Securities

Purchasing physical commodities isn’t realistic for the average investor, as doing so requires you to store them (or pay for storage) until you’re ready to sell. Instead, commodities are typically traded through one of the following:

• Options contracts

• Futures contracts

• Commodity mutual funds and ETFs

• Hedge funds (often the domain of high-net-worth investors)

Options and futures contracts are derivatives, meaning their value is determined by an underlying investment, i.e., the commodity you’re trading. Commodity funds and ETFs can offer exposure to a basket of investments, which may include individual securities.

For instance, rather than trading oil futures contracts, you might purchase an ETF that holds gas stocks. Or you could buy individual shares of energy stock if you prefer.

With securities, you have some of the same avenues for investing. You can purchase stand-alone stock shares or individual bonds. Mutual funds, an array of index funds, and ETFs can offer broad diversification. You could also trade stock options if you’re comfortable with speculative investments.

Whether it makes sense to choose a security vs. a commodity for your portfolio can depend on your risk tolerance and objectives.

Portfolio Diversification With Commodities and Securities

Commodities can offer exposure to alternative investments beyond traditional stocks and bonds. Thanks to options, contracts, and commodity funds you don’t need to purchase physical commodities. You can select which areas you’d like to target, based on whether you prefer hard vs. soft commodities.

You might choose to focus on a single category, such as agriculture. Or you might spread your investment dollars across agricultural commodities, natural resources, and financial instruments for a more well-rounded approach.

Diversifying with securities often means finding the right mix between stocks and bonds. Your optimal asset allocation may depend on your age, your time horizon for investing, and how much risk you’re comfortable taking. Within each securities category, you can decide how to invest based on:

• Whether you’re looking for a quick profit vs. longer-term gains

• Your preference for earning passive income from dividends or interest

• How much risk you need to take to achieve your goals

All investments carry some risk, though some are riskier than others. Commodities tend to veer toward the riskier side which is important to remember when deciding how to allocate your portfolio.

The Takeaway

The main difference between a commodity vs. a security lies in what you own. With commodities, you’re most often trading futures or options contracts for an underlying good, such as pork bellies, oil, or aluminum. With securities, you’re typically buying stocks or bonds, or derivatives contracts.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What is the difference between a security and a commodity?

The main difference comes down to what you’re investing in. With commodities, you’re most often trading futures or options contracts with an underlying raw material or good, such as pork bellies, oil, or aluminum. With securities, you’re typically buying shares of a company or funding bonds with the expectation of earning interest.

Can a commodity become a security?

A commodity can become a security if it meets the definition of an investment contract under the Howey Test. This test, which was formulated through a 1946 Supreme Court decision, defines an investment contract as being an investment of money in a common enterprise, with the reasonable expectation of profits due to the managerial efforts of others.

Is gold considered a commodity?

Yes, gold is considered a commodity. In terms of its uses as a raw material, gold is often a key element in jewelry production and electronics manufacturing. Historically, gold has also been used as a form of currency and is a form of legal tender in the United States, but it is not considered a security.

Photo credit: iStock/Jacob Wackerhausen

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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.
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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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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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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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.

SOIN-Q224-1900905-V1

What Are Penny Stocks & How Do They Work?

What Are Penny Stocks?

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

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

Exploring Penny Stocks & How They Work

Penny Stocks Are Highly Speculative

Who Can Buy Penny Stocks?

Pros of Penny Stocks

High Reward Potential

Enjoyment

Cons of Penny Stocks

Small Likelihood of Success

Possibility of Losing it All

Lack of Liquidity

Volatility

Scammers

Researching Penny Stocks to Buy

The Takeaway

FAQ

Can you make money with penny stocks?

Are penny stocks good for beginners?

Are penny stocks popular investments?

Creating an Investment Plan for Your Child

Why Invest for Your Child?

Example of Compounding

Benefits of Investing for Your Child Early On

Are Gifts to Children Taxed?

Are There Investment Plans for Children?

Investing for Younger Kids

Investing for Teens

Starting a 529 Savings Plan

Other Ways to Invest for Education

Prepaid Tuition Plans

Education Savings Plans

Investing Your Education Funds

Thinking Ahead to Retirement Accounts

When to Choose a Savings Account for Your Child

The Takeaway

FAQ

Can a child have an investment account?

What is the best way to invest money for a child?

What is a good age to start investing as a kid?

Real Estate Crowdfunding: What Is It?

How Real Estate Crowdfunding Works

Real Estate Crowdfunding Examples

Crowdfunding Explained

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Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Accredited Investors

Nonaccredited Investors

Advantages and Disadvantages of Real Estate Crowdfunding

Pros

Cons

Real Estate Crowdfunding Platforms

How to Get Started

The Takeaway

FAQ

How would earnings from real estate crowdfunding be taxed?

Would real estate crowdfunding be considered a high-risk investment?

What is the difference between an accredited and nonaccredited investor?

Real Estate vs. Stocks: Pros and Cons

The Nature of Real Estate Investments

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

The Nature of Stock Investments

Comparing Returns of Real Estate and Stocks

Liquidity and Accessibility Differences

Risk and Diversification Considerations

Real Estate Risks

Equities Risks

Diversification and Real Estate Investments

Diversification and Equities

The Takeaway

FAQ

What are the main types of real estate investments?

How do the historical returns of real estate and stocks compare?

Are stocks more volatile than real estate?

Commodity vs Security: What Are the Differences?

Understanding Commodities

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Alternative investments,
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