invest Archives

Mar

2025

What Are Discount Brokers? What to Look for in a Broker

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

Discount brokers make it possible for investors to buy and sell securities, without paying the higher fees associated with a full-service brokerage. Using a discount brokerage could make sense for investors who are comfortable making trading decisions without the help of an investment professional.

The rise of discount brokerage firms has made investing more accessible for a wider variety of people. Discount stockbrokers can offer both tax-advantaged and taxable investment accounts. It’s possible to build a portfolio with a discount broker that includes different types of investments, including stocks, exchange-traded funds (ETFs) and other securities.

What Is a Discount Broker?

Discount brokers offer investors access to lower-cost securities trading. Many discount brokerage firms operate online or via mobile investment apps. They’re often geared to the DIY investor who’s interested in self-directed trading.

Some of the characteristics of discount brokers can include:

• Investment selection that can include stocks, ETFs, mutual funds, bonds

• Low or zero commission fees to trade stocks and exchange-traded funds (ETFs)

• Fractional share trading

• Low minimum investment thresholds

• Investor-guided trading

While discount brokers offer a flexible way to invest they’re still subject to government regulation. Discount brokerage firms must register with the Securities and Exchange Commission (SEC). They must also belong to the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corp (SIPC).

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

History of Discount Brokers

Discount brokerages have grown in popularity in recent years but online trading has its roots in the 1980s.

In 1984, Charles Schwab introduced The Equalizer, the first DOS-based portfolio management and trading tool. Shortly after, competitors entered the market, including TeleBroker, the first phone-based keypad trading application, and StreetSmart, a PC-based trading software program.

In 1992, E-Trade became the first online brokerage service provider. By 1995, E-Trade generated 80% of its revenues from trading commissions and the number of new discount brokerages joining the fray continued to grow. Larger firms, such as Charles Schwab and Fidelity began offering discount broker services. Over the last decade or so, they’ve been joined by newer startups.

Along with the introduction of new online trading platforms and expanded investment options, the discount broker industry has evolved from a pricing perspective. Many, if not most brokerages now offer commission-free trades, for instance.

How Do Discount Brokerages Work?

Discount stock brokerages put the investor in the driver’s seat. You decide which type of account to open with a discount broker. This may be a tax-advantaged account, such as a traditional or Roth Individual Retirement Account (IRA). Or you may choose to open a taxable brokerage account instead.

Once you open your account, you can then decide how to allocate it and how much to invest.

With a discount brokerage, you decide how much to invest in each fund or stock. You also have control over how long you hold those investments and when you decide to sell. When you’re ready to execute trades, you may pay low or no commission fees to do so.

Discount brokerages can also open the door to new investment opportunities, beyond stocks or ETFs. For instance, you may be interested in investing in IPO stocks. With a discount brokerage account, you may have tools on hand to help you understand how the IPO process works and how companies set an IPO price. You can then compare IPOs and decide whether you want to invest, based on your investment goals and risk tolerance.

Discount brokers work well for newer investors and more advanced investors alike. They’re not as well suited for venture capitalists or investors with large portfolios who might be interested in crowdfunding options for investing or investors who want access to things like hedge funds and private equity.

Full-Service Brokers vs Discount Brokers: Key Differences

Brokerage firms help investors to execute trades of stocks and other securities. There are two main types of brokers to choose from: full-service and discount brokers.

Full-service Brokerages

Full-service brokerages assist clients with making trades. But they can also provide other services, including offering investment advice. For instance, a broker might recommend specific stocks or mutual funds to invest in. In exchange for this advice, investors pay fees on top of the commissions they may pay to complete trades.

Discount Brokerages

A discount brokerage differs in the scope of services provided and the fees investors pay. With discount stockbrokers, investors receive little to no direct personalized financial advice or analysis from investment professionals. Instead, it’s up to the investor to decide which securities to buy or sell.

Discount brokerage firms are effectively a link between investors and the market, as they help to carry out trade transactions. But they don’t have the higher fees associated with full-service brokerage firms.

Pros and Cons of Working With a Discount Stock Broker

Choosing a discount broker in place of a full-service broker can offer both advantages and disadvantages. While full-service brokers have a longer track record, discount brokers are making it easier for a broader group of investors to gain entry to the market.

Whether using a discount broker makes sense depends on what you need from a brokerage and what you’re willing or able to pay to build a portfolio. Here’s an overview of the main pros and cons to consider when comparing discount stockbrokers against a full-service option.

Pros of Using a Discount Broker

• Cost. Arguably, the best reason to consider discount brokers in lieu of full-service brokers is cost. Discount brokers charge lower commission fees to trade, and you’re not paying additional costs for their professional investment research or advice since you’re responsible for making investment decisions.

• Convenience. Discount stock brokerages make it easy to invest from virtually anywhere, since you can execute trades online or via mobile apps. If you come across a buying opportunity, for example, you can log in and complete the transaction in minutes without having to connect with a human broker first.

• Variety. Another advantage of using a discount stock broker is the selection of investments to which you have access. That may include not only stocks, mutual funds, ETFs and bonds but you may also be able to buy IPO stock, commodities, or options. Discount brokers make it easier to build a diversified portfolio in one place, with minimal costs.

• Self-directed trading. If you prefer making investment decisions yourself, a discount brokerage account allows you to do so. You can choose when to buy or sell and how much of your portfolio to allocate to one security versus another.

Cons of Using a Discount Broker

• No access to professional advice. While discount stockbrokers can be cost-friendly, they’re typically missing one big thing: professional advisors to guide you through the investment process and discuss potential investment risks. Whether this is a con for you depends on how comfortable you are charting your own course with investing.

• Customer support. Every discount brokerage is different in terms of the level of customer service and support they provide. Some may be more helpful than others, which is something to consider when choosing a discount broker.

• Not fee-free. While many discount brokers charge $0 commissions to trade U.S. stocks and ETFs, that doesn’t mean there are no fees for trading. You may pay fees to trade mutual funds, for example. Or the brokerage may charge an extra fee if you need to complete a trade by phone.

• Some limits: While discount brokerages give investors access to many types of investments, they don’t typically offer access to some riskier investments, such as hedge funds or crowdfunding.

What to Look for When Choosing a Discount Brokerage to Work With

If you’re interested in opening a brokerage account, researching your options is the first step. While picking the right brokerage won’t guarantee returns, it can make it easier for you to manage your portfolio and focus on your investments. When comparing discount brokers, here are some of the most important things to keep in mind.

• Cost. First, consider what you’ll pay to trade stocks and other securities at a particular brokerage. Also, be sure to check the full fee schedule to see what additional trading or account fees may apply.

• Investment selection. Next, consider what investments you can add to your portfolio with a particular discount stock broker. Some discount brokers may not offer certain options.

• Minimum investment. Depending on where you are on your investing journey, you may have a lot of money or a little to start trading. So consider the minimum investment required to open an account at different discount brokerage firms.

• User experience. If you’re going to be making trades online or via a mobile device, it’s important that the platform you use be easy to navigate. Check out websites and mobile apps for different discount brokers to see how they compare in terms of features and ease of use.

• Research tools. Discount stock brokerages may offer research and analysis tools to help you construct your portfolio. Consider what types of tools, (i.e. tickers, stock simulators, etc.) may be available to help with your investment decision-making.

• Customer support. Look at what type of customer support is available to help investors with a particular discount broker. The more ways you can communicate, such as email, by phone or live chat, the easier it may be to get help managing your account when you need it.

• Reputation. Finally, consider how well a discount broker stands out compared to the competition. Does it have a great reputation for low-cost trading, for example? Has it won any major industry awards? What are investors saying about the brokerage? Looking at a discount stockbroker’s overall reputation and track record can help decide if it’s a good fit.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Discount Brokers Make Investing Affordable

Opening an account with a discount broker can be a first step toward growing wealth. Because they’re generally a low-cost way to invest, you’re able to preserve more of your investment returns over time. These days, most brokers have had to adjust to account for discount brokers in the market, which is generally a good thing for investors.

But remember that discount brokers have their pros and cons, and that investors would do well to do some research before picking a broker. Each broker won’t be the right fit for each investor, so again, take the time to look into potential options before taking the plunge.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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

Mar

2025

What Is a Dead Cat Bounce and How Can You Spot It?

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

A dead cat bounce refers to an unexpected price jump that occurs after a long, slow decline — and typically just before another price drop. In other words, the price jump isn’t “live” and typically doesn’t last.

The danger can be that the apparent rebound might create a false sense of value, momentum, or optimism. That said, some investors may be able to take advantage of a dead cat bounce to create a short position. Unfortunately, it’s usually hard to identify a dead cat bounce until after the fact.

Nonetheless, investors may want to know some of the signs of this price pattern, as it can help them gauge certain market movements.

Key Points

• A dead cat bounce refers to a temporary price jump after a decline, often followed by another drop.

• It is difficult to identify a dead cat bounce in real-time, making it challenging for investors to take advantage of it.

• Dead cat bounces can occur in individual stocks, bonds, or market sectors.

• Investors should be cautious when interpreting price movements and consider other factors before making investment decisions.

• Active investors may use technical analysis and market indicators to help identify potential dead cat bounces.

What Is a Dead Cat Bounce?

The phrase “dead cat bounce” comes from a saying among traders that even a dead cat will bounce if it’s dropped from a height that’s high enough.

Thus, when a security or market experiences a steady decline and then appears to bounce back — only to decline again — it’s often dubbed a dead cat bounce.

What can be puzzling for investors is that the bounce, or “recovery”, doesn’t have a rhyme or reason; it’s merely part of a short-term market variation, perhaps driven by market sentiment or other economic factors.

Knowing the Specifics

If you’re learning how to invest in stocks or invest online, bear in mind that a dead cat bounce is not used to describe the ups and downs of a typical trading day — it refers to a longer-term drop, rebound, and continued drop. The term wouldn’t apply to a security that’s continuing to grow in value. The spike must be brief, before the price continues to fall.

It’s also important to point out that this financial phenomenon can pertain to individual securities such as stocks or bonds, to stock trading as a whole, or to a market.

Why It Helps to Identify This Pattern

Even for experienced traders or short-term investors using sophisticated technical analysis, it can be difficult to identify a dead cat bounce. Sometimes a rally is actually a rally; sometimes a drop indicates a bottom.

The point of trying to distinguish whether the rise in price will continue or reverse is because it can influence your strategy. If you have a short position, and you anticipate that a rally in stock price will end in a reversal, you may want to hold steady.

But if you think the rally will continue, you may want to exit a short position.

Example of a Dead Cat Bounce

To illustrate a dead cat bounce, let’s suppose company ABC trades for $70 on June 5, then drops in value to $50 per share over the next four months. Between Oct. 7 and Oct. 14, the price suddenly rises to $65 per share — but then starts to rapidly decline again on Oct. 15. Finally, ABC’s stock price settles at $30 per share on Oct. 16.

This pattern is how a dead cat bounce might appear in a real-life trading situation. The security quickly paused the decline for a swift revival, but the price recovery was temporary before it started falling again and eventually steadied at an even lower price.

Recommended: How to Invest in Stocks

Historical Dead Cat Bounce Pattern

There are countless examples of the dead cat bounce pattern in stocks and other securities, as well as whole markets. One of the most recent affected the entire stock market during the COVID-19 pandemic.

The U.S. stock market lost about 12% during one week in February 2020, and appeared to revive the following week with a 2% gain. But it turned out to be a false recovery, and the market dipped back down again until later in the summer.

What Causes a Dead Cat Bounce?

A dead cat bounce is often the result of investors believing the market or security in question has hit its low point and they try to buy in to ride the turnaround. It can also occur as a result of investors closing out short positions.

Since these trends aren’t driven by technical factors, that’s why the bounce is typically short-lived — usually lasting a couple of days, or maybe a couple of months.

4 Signs of a Dead Cat Bounce

Although a dead cat bounce is typically not reflective of a stock’s intrinsic value, the dramatic price increase may tempt investors to jump on an investment opportunity before it makes sense to do so.

The following typical sequence of events may help an investor correctly identify a dead cat bounce as it might occur with a specific stock.

1. There is a gap down.

Typically the stock opens lower than the previous close, usually a significant amount like 5% (or perhaps 3% if the stock isn’t prone to volatility).

2. The security’s price steadily declines.

In a true dead-cat-bounce scenario, that initial gap down will be followed by a sustained decline.

3. The price sees a monetary gain for a short time.

At some point during the price drop, there will be a turnaround as the price appears to bounce back, close to its previous high.

4. A security’s price begins to regress again.

The rally is short, however, and the stock completes its dead cat bounce pattern with a final decline in price.

Dead Cat Bounce vs. Other Patterns

How do you know whether the pattern you’re seeing is really a classic dead cat bounce versus other types of movements? Here are some clues.

Dead Cat Bounce or Rally?

One way to assess a dead cat bounce with a particular stock is to consider whether the now-rising stock is still as weak as it was when its price was falling. If there’s no market indicator as to why the stock is rebounding, you might suspect a dead cat bounce.

Dead Cat Bounce or Lowest Price?

Since investors are looking for opportunities to profit, they try to find investment opportunities that allow them to buy low and sell high.

Therefore, when assessing investment opportunities, a successful investor might try to recognize emerging companies, and buy shares of a stock while the price is low, and before other investors get wind of a potential opportunity.

Since companies go through business cycles where stock prices fluctuate, pinpointing the lowest price point might be hard. There’s no way to know if a dead cat bounce is really happening until the prices have resumed their descent.

Dead Cat Bounce or Bear Market Bottom?

Investors may also confuse a dead cat bounce for the actual bottom of a bear market. It’s not uncommon for stocks to significantly rebound after the bear market hits bottom.

History shows that the S&P 500 often sees substantial gains within the first few months of hitting bottom after a bear market. But these rallies have been sustained, and thus are not a dead cat bounce.

Investing Strategies to Avoid a Dead Cat Bounce

For investors who want a more hands-on investing approach — meaning active investing vs. passive — it’s generally better to use investing fundamentals to evaluate a security instead of attempting to time the market (and risk mistaking a dead cat bounce for an opportunity).

Investors who are just starting may want to consider building a portfolio of a dozen or so securities. Picking a few stocks allows investors to monitor performance while giving their portfolio a little diversification. This means the investor distributes their money across several different types of securities instead of investing all of their money in one security, which in turn can help to minimize risk.

Active investors could also consider selecting stocks across varying sectors to give their portfolio even more diversification instead of sticking to one niche.

Investors with restricted funds might consider investing in just a few stocks while offsetting risk by investing in mutual funds or exchange-traded funds (ETFs).

For investors who would prefer not to execute an active investing strategy alone, they can speak with a professional manager. Working with a professional manager may help the investors better navigate the intricacies of various market cycles.

Limitations in Identifying a Dead Cat Bounce

As noted several times here, a dead cat bounce can’t really be identified with 100% certainty until after the fact. While some traders may believe they can predict a dead cat bounce by using certain fundamental or technical analysis tools, it’s impossible to do so every single time.

If there were a way to accurately predict market movements or different patterns, people would always try to time the market. But there are no crystal balls in investing, as they say.

The Takeaway

With 20-20 hindsight, investors and analysts can clearly see that an individual security or market has experienced a steady drop in value, a brief rebound, and then a further drop — a phenomenon known as a dead cat bounce.

Unfortunately, though, it can be too hard for most investors to distinguish between a dead cat bounce and a bona fide rally, or the bottom of a given market or security’s price. Still, knowing what to look for may help investors make more informed choices, especially when it comes to making a choice around keeping or closing out a short position.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

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

SOIN-Q424-022

Mar

2025

What Is a Synthetic CDO?

By Rebecca Lake | invest, Investing | Comments Off

A synthetic CDO is a type of collateralized debt obligation that invests in non-cash derivatives, such as credit swaps, options, and insurance contracts, without owning the underlying assets.

Synthetic CDOs are a type of collateralized debt obligation; both are considered alternative investments and are high-risk due to their complexity. Unlike regular CDOs, which are pooled investments in traditional types of debt, like loans, mortgages, and bonds, synthetic CDOs are invested in non-cash derivatives, which may have a higher risk of default.

Synthetic CDOs are typically not available to retail investors. They are often viewed as controversial, as many have cited them as a contributor to the 2008 financial crisis and subprime mortgage collapse. Here’s a closer look at how synthetic CDOs work and the risks associated with investing in them.

Key Points

• A synthetic CDO invests in credit derivatives, like credit swaps, without owning underlying assets.

• Synthetic CDOs have tranches reflecting different risk levels, with higher ratings indicating lower risk as well as lower returns.

• Due to their complexity and risk, synthetic CDOs are used mainly by institutional investors.

• Synthetic CDO instruments are considered high-risk, in part due to market risk and the potential for the underlying assets to default.

• Synthetic CDOs have been criticized for contributing to the subprime mortgage collapse that led to the 2008 financial crisis.

What Is a Collateralized Debt Obligation (CDO)?

CDO and synthetic CDO are two distinct products. A CDO or collateralized debt obligation is a type of derivative investment, meaning it derives its value from an underlying financial asset or pool of assets. Those assets can include loans, bonds, and other types of debt.

How Does a CDO Work?

Many borrowers may be familiar with the term “collateral”; in finance it refers to the security that lenders typically require in return for offering loan products. With CDOs, the collateral would be the payments from the underlying loans, bonds, and other types of debt.

Because debt payments tend to be predictable, the appeal of CDOs is the potential for cash flow. But the risk in these types of financial assets lies in the potential for default.

CDOs are considered derivatives as their value (and price) derives from the underlying bonds and loans. In essence, a CDO is a bundle of debt that’s sold to investors on the secondary market. Rather than individual investors, CDOs are typically sold to institutional investors, such as insurance companies or investment banks.

Different Categories of CDOs

Collateralized debt obligations are considered a type of alternative asset, in that they’re not part of the world of traditional securities like stocks and bonds.

CDO categories may include:

• Mortgage-backed securities, which are comprised of mortgage loans

• Asset-backed securities, which invest in non-mortgage debt, such as credit cards or car loans

• Collateralized bond obligations, which hold a mix of bonds1

CDOs are assigned a tranche or class which signifies the level of risk and reward. The highest rating is AAA, which signifies the lowest risk but correspondingly, the lowest yields.

CDOs and the Financial Crisis

CDOs contributed to the 2008 financial crisis because many of them concentrated holdings in high-risk assets, namely, subprime mortgages. Banks flocked to CDOs because they offered diversification and generated cash flow, which was used to make new loans.

When the housing bubble burst, however, declining home values led many borrowers to default on their subprime loans. That resulted in a rapid cooling of the CDO market and substantial losses for banks.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Alternative investments,
now for the rest of us.

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

Understanding Synthetic CDOs

Synthetic investments attempt to generate cash flow without ownership of the underlying assets. What is a synthetic CDO? It’s an investment vehicle that offers investors exposure to non-cash credit derivatives, such as credit swaps, insurance contracts, or options.

Like regular CDOs, synthetic CDOs are assigned tranches relative to the level of risk they present. The higher the credit rating, the lower the risk, but the return profile is also lower.

How a Synthetic CDO Works

How does a synthetic CDO work? It depends on the underlying investments but for simplicity’s sake, let’s consider a typical synthetic CDO that invests in credit default swaps. A credit default swap is a contract in which a buyer pays a premium to the seller, and the seller agrees to pay a lump sum to the buyer if the underlying credit instrument defaults.

In this type of arrangement, the seller of the synthetic CDO assumes a long position, betting that the underlying assets will perform as expected. The buyer assumes a short position, betting that the underlying assets will default. If the asset defaults, the buyer is entitled to a payout from the seller.

Recommended: Stock Market Basics

Investing in Synthetic CDOs

Synthetic CDOs are not designed for the everyday investor. If you’re opening a brokerage account, for example, you won’t find them offered alongside individual stocks or exchange-traded funds (ETFs).

More often, synthetic CDOs are the domain of institutional investors like banks or insurance companies. That’s appropriate, given how complex — and often confusing — these products are.

Individual investors who are interested in diversifying their asset allocation with alternative investments can gain exposure to credit default swaps outside of a synthetic CDO. For example, you might invest in an ETF or mutual fund that holds credit default swaps as an underlying asset.

There are, however, some stipulations. Venturing into this type of alternative investment is generally not recommended for investors who don’t fully understand how they work or the risks involved.

What Are Alternative Investments?

Alternative investments, sometimes called alts, refer to non-traditional assets that fall outside the realm of stocks, bonds, and cash. Alts may include commodities, real estate, private equity, hedge funds, and other instruments like CDOs.

Alts typically have little or no correlation with traditional asset classes. Thus they can be appealing to some investors because they may offer some portfolio diversification, and the potential for higher risk-adjusted returns.

That said, alts tend to be illiquid, not transparent, not well-regulated, and high risk.

Risks of Investing in Synthetic CDOs

Like most types of alternative investments, synthetic CDOs carry elevated levels of risk for investors.

Some of the most significant risks include:

• Lack of transparency and limited federal regulation

• Credit risk and the potential for default of underlying assets

• Liquidity risk and the difficulties in buying and selling synthetic CDO positions

• Modeling risk, which can result in incorrect assumptions about the value of underlying assets

• Market risk, or the risk of changes in the value of underlying assets

While the market has changed in the years since the financial crisis, and federal regulations now exist to protect investors from a repeat of those events, the risks of synthetic CDOs and CDOs in general can’t be discounted.

The Takeaway

Synthetic CDOs are a complicated way to build a portfolio. If you’re looking for a way to diversify, you can invest in stocks, ETFs, private credit, commodities, and even IPOs through an online brokerage account.

SoFi does not offer CDO investments at this time, but it does provide access to a range of alternative investment funds. You can choose what to invest in, based on your risk tolerance and goals.

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

What is the main purpose of a synthetic CDO?

The main purpose of a synthetic CDO is to allow investors to gain exposure to an underlying credit asset without owning it. Synthetic CDOs that invest in credit default swaps allow a buyer and seller to take short and long positions respectively to bet on the behavior and performance of an underlying asset.

How do synthetic CDOs differ from traditional CDOs?

Traditional CDOs invest in debt instruments or securities, such as mortgage loans, credit card debt, or auto loans. Synthetic CDOs primarily invest in credit instruments, such as credit default swaps or options.

What are the risks associated with investing in synthetic CDOs?

Synthetic CDOs are subject to credit risk, market risk, and liquidity risk. If the underlying asset doesn’t perform as expected, that can result in losses for the buyer or seller.

About the author

Rebecca Lake

Photo credit: iStock/akinbostanci

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

SOIN-Q324-055

Mar

2025

What Is an Interval Fund?

By Rebecca Lake | invest, Investing, Terminology | Comments Off

Interval funds are closed-end mutual funds that don’t trade publicly on an exchange. These funds are so named because they offer to repurchase a percentage of outstanding shares at periodic intervals.

Investing in interval funds can be attractive since they have the potential to generate higher yields. However, they’re less liquid than other types of funds, owing to the restrictions around when and how you can sell your shares.

Key Points

• Interval funds are closed-end mutual funds that offer to repurchase a percentage of outstanding shares at periodic intervals.

• Investing in interval funds can generate higher yields but they are less liquid compared to other funds.

• Interval funds make periodic repurchase offers to shareholders based on a schedule set in the fund’s prospectus.

• Interval funds may hold a variety of underlying investments such as private credit, real estate, private equity, venture capital, and infrastructure.

• Interval funds differ from closed-end funds and mutual funds in terms of trading on an exchange, initial public offering, and liquidity.

How Do Interval Funds Work?

Interval funds are alternative investments that work by making periodic repurchase offers to shareholders according to a schedule set in the fund’s prospectus.

Shareholders are not obligated to accept the offer but if they do, they receive a share price that’s based on net asset value (NAV). Repurchase intervals may occur quarterly, biannually, or annually.

These funds typically rely on an active management strategy, which is designed to produce returns that outpace the market. But because of the types of investments held by interval funds, as well as the fund’s structure, the trade-offs are potentially higher risk and far less liquidity.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

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

What Types of Assets Do Interval Funds Hold?

Interval funds may hold a variety of underlying investments that are different from what traditional funds may invest in, which is partly why interval funds are considered a form of alternative investing. An interval fund’s prospectus should include a detailed account of its underlying assets to help investors better understand what they’re investing in.

Recommended: Alternative Investment Guide

Private Credit

Private credit refers to lending that occurs outside the scope of traditional banking. Rather than going through a bank for a loan, businesses gain access to the capital they need through private lending arrangements.

Also referred to as direct lending or private debt, private credit helps to fill a void for businesses that have been unable to secure traditional financing. Private credit can also offer investors an opportunity, as private credit generates returns for investors in the form of interest on the loans.

Real Estate

Real estate can be an attractive investment for investors who are seeking an inflationary hedge with low correlation to the stock market. Interval funds may invest in private real estate investment trusts (REITs), private real estate funds, commercial properties, and land. Some real estate interval funds focus on real estate debt investments.

Private Equity

Private equity refers to investments in companies that are not publicly traded on an exchange. Private equity funds pool capital from multiple investors to purchase companies, overhaul them, and sell them at a profit. This type of investment can prove risky, as there are no guarantees that the company’s value will increase but if it does, the rewards for investors can be great.

Venture Capital

Venture capital is a form of private equity in which investors provide funding to startups and early-stage businesses. In exchange, investors receive an equity stake in the company. Venture capitalists have an opportunity to make their money back once the company goes public by selling their shares.

Infrastructure

Infrastructure interval funds invest in the mechanisms, services, and systems that make everyday life possible. Investments are focused on:

• Transportation

• Energy and utilities

• Housing

• Healthcare

• Communications

These types of investments can be attractive as they tend to produce stable cash flow since a significant part of the population relies on them.

How Does the Repurchase Process Work?

An interval fund makes repurchase offers according to the schedule set in the prospectus. Shareholders should be given advance notice of upcoming repurchase offers and the date by which they should accept the offer if they prefer to do so. The fund should also specify the date at which the repurchase will occur.

In terms of the timing, it may look something like this:

• Once shareholders are notified of an upcoming repurchase offer, they have three to six weeks to respond.

• After the acceptance deadline passes, there may be a two-week waiting period for the repurchase to occur.

• Investors who accepted the repurchase offer may have up to a one-week wait to receive proceeds owed to them.

The price shareholders receive is based on the per share NAV at a set date. A typical repurchase offer is 5% to 25% of fund assets. interval funds may collect a redemption fee of up to 2% of repurchase proceedings. This fee is paid to the fund to cover any expenses related to the repurchase.

What’s the Difference Between an Interval Fund and a Closed-End Fund?

Closed-end funds issue a fixed number of shares, with no new shares issued later (even to keep up with demand from investors). An interval fund is categorized as a closed-end fund legally. However, interval funds don’t behave the same way as other closed-end funds. Specifically:

• There’s typically no initial public offering (IPO)

• Interval funds do not trade on an exchange

• Investors can purchase shares at any time

The third point makes interval funds more like open-end funds, but there’s a key difference there as well. Interval funds can hold a much higher percentage of assets in illiquid investments than open-end funds.

What’s the Difference Between an Interval Fund and a Mutual Fund?

Interval funds are different from traditional mutual funds, which are also a type of pooled investment. With a mutual fund, investors can buy shares to gain exposure to a wide variety of underlying assets. The fund may pay out dividends to investors or offer the benefit of long-term capital appreciation.

Investors can buy mutual fund shares at any time, but unlike an interval fund, these shares trade on a stock exchange. The fund’s share price is set at the end of the trading day. Mutual funds can offer greater liquidity to investors since you can buy shares one day and sell them the next day or even the same day.

Interval funds don’t offer that benefit as you must wait until the next repurchase date to sell your shares. An interval fund may also be more expensive to own compared to a mutual fund, as there are often additional costs that apply.

Investor Considerations

If you’re interested in alternative investments and you’re considering interval funds, there are some important things to keep in mind.

• What is the minimum investment required and can you meet it?

• How does your risk tolerance align with the risk profile of the fund you’re weighing?

• What is the schedule for repurchase offers and how does that align with your liquidity needs?

• How much will you pay to invest in the fund?

• What is your target range for returns?

Due to their illiquid nature, it may not make sense for the average investor to tie up a large part of their portfolio in interval funds. It’s also important to keep in mind that the minimum investment may be in the five-figure range, which is often well above the minimum needed to trade mutual fund shares.

Potential Upside

The potential upside of interval funds is the possibility of earning returns that beat the average return of the stock market. Depending on the fund’s strategy and underlying investments, it’s possible to realize returns that are substantially higher than what you might get with a traditional open-end mutual fund.

Interval funds can add diversification to a portfolio and give you access to illiquid investments that might otherwise be closed off to you. While there are risks involved, interval funds may be less susceptible to market volatility as they have a lower correlation to stocks overall.

Although lack of liquidity may be problematic for some investors, it can benefit others who may be tempted to give in to investing biases. Since you can’t easily sell your shares, interval funds can prevent you from making panic-driven decisions with this segment of your portfolio.

Recommended: Why Portfolio Diversification Matters

Possible Risks

Much of the risk associated with interval funds lies in their underlying investments. If a fund is investing in private credit or venture capital, for example, and the companies the fund backs fail to become profitable, that can directly impact the returns you realize as an investor.

As mentioned, liquidity risk can also be an issue for investors who don’t want to feel locked into their investments. Even if you’re comfortable with only being able to redeem shares at certain times, there’s always market risk which could negatively affect the NAV share price you’re offered.

The Takeaway

Interval funds can be rewarding to investors, but they’re more complex than other types of mutual funds or exchange-traded funds. Weighing the pros and cons is an important step in deciding whether to invest. You may also consider talking it over with a financial advisor before adding interval funds to your portfolio.

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

FAQ

Are interval funds a good investment?

Interval funds may be a good investment for investors who are comfortable with higher risk exposure given the potential to earn higher rewards. The complexity of these alternative investments may make them less suitable for individuals who are just getting started with building a portfolio.

What’s the difference between an interval fund and an ETF?

An exchange-traded fund (ETF) is a type of mutual fund that trades on an exchange like a stock; an interval fund is a closed-end fund that doesn’t trade on an exchange. ETFs can offer exposure to a pool of different investments, including some of the same illiquid investments that an interval fund may hold. But whereas the majority of ETFs are passively managed, most interval funds have an active portfolio manager.

Do interval funds pay dividends?

Interval funds can pay dividends though they’re not required to do so. When collecting dividends from an interval fund or any other type of mutual fund, it’s important to understand how that income will be treated for tax purposes.

About the author

Rebecca Lake

Photo credit: iStock/sofirinaja

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

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.

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.

SOIN0224012

Mar

2025

What Is Carried Interest?

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

Carried interest is a compensation arrangement commonly used in private equity, hedge funds, and venture capital investments. General partners or GPs may receive a percentage of investment profits in the form of carried interest. This is similar to the way that certain stocks pay out profits to shareholders as dividends.

If you’re considering an investment in private equity, a hedge fund, or venture capital, it’s important to understand how carried interest works and what it means for you.

Key Points

• Carried interest is a compensation arrangement where general partners receive a percentage of investment profits, typically around 20%, incentivizing them to achieve strong fund performance.

• Before general partners receive carried interest, limited partners must first get back their original capital, and the fund may need to meet a minimum hurdle rate.

• Carried interest is taxed at the long-term capital gains rate if held for more than three years, which can be controversial due to perceived tax advantages.

• Understanding carried interest is crucial for investors in private equity, hedge funds, or venture capital, as it affects expected returns and highlights the importance of fund performance.

• In venture capital, carried interest tends to involve longer investment periods, with returns realized through company exits like IPOs, mergers, or acquisitions.

Carried Interest Explained

Carried interest is one of several ways that a general partner may be compensated. General partners are individuals or entities that have a say in how investment funds are managed.

Private equity funds, hedge funds, real estate funds, and venture capital funds can have multiple general partners, each of whom is entitled to a share of the fund’s profits. These profits may be paid out in the form of royalties, capital gains, dividends, or carried interest.

There’s no universal carried interest definition; it’s simply a performance-based fee that’s used to incentivize the fund’s general partners or money managers. Generally, the higher the fund’s profits, the more carried interest the general partners collect.

How Carried Interest Works

Carried interest, often simply called “carry,” works by rewarding an investment fund’s general partners for strong performance.

A typical payout structure is 20% of a fund’s returns, though compensation can vary from one fund to another. Market trends can push payouts higher or lower at any given time. General partners can also collect an annual management fee. For instance, the fee may be 2% of the fund’s assets under management (AUM).

There are some rules to know about when and how carried interest is paid to GPs:

• For general partners to receive carried interest, fund investors must first receive back the amount of capital they put in. These investors are referred to as limited partners or LPs and how they’re paid depends on the fund’s structure.

• The fund may need to achieve a minimum rate of return called a “hurdle rate” before any carried interest is paid out to GPs.

• Carried interest may be withdrawn if a fund underperforms. This may happen if LPs do not receive back the amount of capital they put in.

Here’s what investors should know about carried interest, in a nutshell: When they invest in a private equity fund, hedge fund, or venture capital fund, they (altogether) typically get ~80% of the profits and the GPs get the rest. Knowing how to define carried interest matters if you plan to explore these types of alternative investments for your portfolio.

Tax Treatment of Carried Interest

Taxes on investments affect the level of returns you get to keep. Taxing carried interest is a controversial topic, thanks to a loophole in the Internal Revenue Code (IRC). Section 1061 allows for carried interest held for longer than three years to be taxed at the long-term capital gains rate.

Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income and household size. Short-term capital gains, meanwhile, are taxed at ordinary income tax rates. For the 2024 tax year, the maximum income tax rate for the highest earners was 37%. Additionally, that will remain the same for the 2025 tax year.

Lawmakers have argued that the current tax rules regarding carried interest allow wealthier taxpayers to sidestep higher tax rates by holding carried interest for longer than three years. Proposed legislation, such as the Carried Interest Fairness Act of 2024, has been pieced together in an attempt to close the loophole and apply ordinary income tax rates on carried interest. But despite being introduced, that particular piece of legislation has (at the time of publication) not advanced.

Carried Interest in Different Contexts

How does carried interest work in different investment settings? How GPs and LPs receive payouts can depend on the type of investment involved.

Private Equity

Private equity refers to an investment in a company that is not publicly listed or traded on a stock exchange. Private equity funds can hold numerous investments in a single basket, offering investors exposure to a range of different companies, including ones that have been delisted from an exchange and ones that have yet to launch an initial public offering (IPO).

In a private equity arrangement, GPs can be compensated with carried interest. Limited partners receive the original capital they invested, along with a share of the profits as dividends, less any fees they pay to own the fund.

Hedge Funds

Hedge funds pool money from multiple investors to make investments. These funds can hold a range of different investments, including stocks, bonds, commodities, real estate, derivatives, land, and foreign currency. Risk is typically higher with a hedge fund, but investors may earn a higher rate of return.

Hedge fund payouts generally follow the same pattern as private equity funds. The GPs receive ~20% of the profits as carried interest, once the fund reaches the minimum hurdle rate. The remaining profits are paid to limited partners as dividends, along with the return of their original capital investment, which they receive first.

Venture Capital

Venture capital funds pool money from multiple investors to fund startups and early-stage companies. This is essentially a form of private equity investment, with some differences.

Investment holding periods may be longer compared to private equity funds and returns are not realized until a company within the fund exits. That can happen if the company decides to go public with an IPO, merges with another company, or is acquired.

Investors can receive the proceeds of an exit as compensation, along with the return of their original capital. General partners receive carried interest, which is again around 20%, but may be higher or lower based on the fund’s performance and its hurdle rate.

Future of Carried Interest

Carried interest has received significant attention from lawmakers and the executive office. Some policymakers have discussed taxing carried interest as ordinary income for those making $400,000 or more, while others would like the loophole closed altogether. Closing the loophole could cut down on tax avoidance among some taxpayers, allowing the federal government to recoup more tax dollars.

HOwever, whether any major changes will be implemented remains to be seen.

What is an alternative to carried interest? One option proposed in the UK is growth shares. Growth shares entitle the shareholder to returns based on future growth. However, this strategy seems on the surface to be very similar to carried interest in terms of the tax benefits it delivers to GPs.

The Takeaway

Carried interest, meaning how general partners get paid, is an important consideration when determining which alternative investments to include in your portfolio. Carried interest is a compensation arrangement under which general partners receive a portion of investment profits, and that’s typically around 20%. This can be a fairly high-level way to invest, of course, so it may be a good idea to get your toes wet with a simple brokerage account before worrying about carried interest. If you have yet to start investing, it’s easy to open a brokerage account online.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

Why is carried interest controversial?

Carried interest is controversial because some critics have argued that it allows wealthier taxpayers to benefit from a tax loophole.

How much is carried interest taxed?

In the U.S., carried interest is taxed at the capital gains tax rate. Short-term capital gains are taxed at ordinary income tax rates. Carried interest held for more than three years, however, is subject to the lower long-term capital gains tax rate.

What is the average carried interest?

A typical carried interest payout for general partners is 20% of the fund’s profits. This is paid in addition to a 2% annual management fee. Funds may need to achieve a minimum rate of return before carried interest can be paid out.

About the author

Rebecca Lake

Photo credit: iStock/Andrii Yalanskyi

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

SOIN-Q324-037

What Are Discount Brokers? What to Look for in a Broker

What Is a Discount Broker?

History of Discount Brokers

How Do Discount Brokerages Work?

Full-Service Brokers vs Discount Brokers: Key Differences

Full-service Brokerages

Discount Brokerages

Pros and Cons of Working With a Discount Stock Broker

Pros of Using a Discount Broker

Cons of Using a Discount Broker

What to Look for When Choosing a Discount Brokerage to Work With

Discount Brokers Make Investing Affordable

What Is a Dead Cat Bounce and How Can You Spot It?

What Is a Dead Cat Bounce?

Knowing the Specifics

Why It Helps to Identify This Pattern

Example of a Dead Cat Bounce

Historical Dead Cat Bounce Pattern

What Causes a Dead Cat Bounce?

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4 Signs of a Dead Cat Bounce

1. There is a gap down.

2. The security’s price steadily declines.

3. The price sees a monetary gain for a short time.

4. A security’s price begins to regress again.

Dead Cat Bounce vs. Other Patterns

Dead Cat Bounce or Rally?

Dead Cat Bounce or Lowest Price?

Dead Cat Bounce or Bear Market Bottom?

Investing Strategies to Avoid a Dead Cat Bounce

Limitations in Identifying a Dead Cat Bounce

The Takeaway

What Is a Synthetic CDO?

What Is a Collateralized Debt Obligation (CDO)?

How Does a CDO Work?

Different Categories of CDOs

CDOs and the Financial Crisis

Alternative investments, now for the rest of us.

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

Understanding Synthetic CDOs

How a Synthetic CDO Works

Investing in Synthetic CDOs

What Are Alternative Investments?

Risks of Investing in Synthetic CDOs

The Takeaway

FAQ

What is the main purpose of a synthetic CDO?

How do synthetic CDOs differ from traditional CDOs?

What are the risks associated with investing in synthetic CDOs?

What Is an Interval Fund?

How Do Interval Funds Work?

Alternative investments, now for the rest of us.

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

What Types of Assets Do Interval Funds Hold?

Private Credit

Real Estate

Private Equity

Venture Capital

Infrastructure

How Does the Repurchase Process Work?

What’s the Difference Between an Interval Fund and a Closed-End Fund?

What’s the Difference Between an Interval Fund and a Mutual Fund?

Investor Considerations

Potential Upside

Possible Risks

The Takeaway

FAQ

Are interval funds a good investment?

What’s the difference between an interval fund and an ETF?

Do interval funds pay dividends?

What Is Carried Interest?

Carried Interest Explained

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How Carried Interest Works

Tax Treatment of Carried Interest

Carried Interest in Different Contexts

Private Equity

Hedge Funds

Alternative investments,
now for the rest of us.

Alternative investments,
now for the rest of us.

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