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Q: What Is the January Effect?

The January Effect is a phenomenon in which stocks supposedly perform well during the first month of the year. The theory is that many investors sell holdings and take gains from the previous year in December, which can push prices down.

Dec

2024

What Is the January Effect and Is It Good For Investors?

January Effect: What It Is and Is It Good for Investors?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

The January Effect is a term that some financial market analysts use to classify the first month as one of the best-performing months, stock-wise, during the year. Analysts and investors who believe in this phenomenon claim that stocks have large price increases in the first month of the year, primarily due to a decline in share prices in December. Theoretically, following the dip in December, investors pour into stocks, which may boost prices in January.

However, many analysts claim that the January Effect and other seasonal anomalies are nothing more than market myths, with little evidence to prove the phenomenon definitively. Nonetheless, it may be helpful for investors to understand the history and possible causes behind the January Effect.

Key Points

• January Effect suggests stocks rise in January due to December price dips, which creates buying opportunities.

• Small-cap stocks benefit most from the January Effect due to liquidity.

• Tax-loss harvesting during the month of December may lower stock prices.

• Investors then buy in January, boosting stock prices.

• January Effect’s impact is debated; It’s either attributed to market myths or real behavior.

What Is the January Effect?

As noted above, the January Effect is a phenomenon in which stocks supposedly see rising valuations during the first month of the year. The theory is that many investors sell holdings and take gains from the previous year in December, which can push prices down. This dip supposedly creates buying opportunities in the first month of the new year as investors return from the holidays. This buying can drive prices up, creating a “January Effect.”

Believers of the January Effect say it typically occurs in the first week of trading after the New Year and can last for a few weeks. Additionally, the January Effect primarily affects small-cap stocks more than larger stocks because they are less liquid.

To take advantage of the January Effect, investors who are online investing or otherwise can either buy stocks in December that are expected to benefit from the January Effect or buy stocks in January when prices are expected to be higher due to the effect. Investors can also look for stocks with low prices in December, but have historically experienced a surge in January, and buy those stocks before the increase.

What Causes the January Effect?

Here are a few reasons why stocks may rise in the first month of the year.

Tax-Loss Harvesting

Stock prices supposedly decline in December, when many investors sell certain holdings to lock in gains or losses to take advantage of year-end tax strategies, like tax-loss harvesting.

With tax-loss harvesting, investors can lower their taxable income by writing off their annual losses, with the tax timetable ending on December 31. According to U.S. tax law, an investor only needs to pay capital gains taxes on their investments’ total realized gains (or losses).

For example, suppose an investor owned shares in three companies for the year and sold the stocks in December. The total value of the profit and loss winds up being taxed.

Company A: $20,000 profit
Company B: $10,000 profit
Company C: $15,000 loss

For tax purposes, the investor can tally up the total investment value of all three stocks in a portfolio — in this case, that figure is $15,000 ($20,000 + $10,000 – $15,000). Consequently, the investor would only have to pay capital gains taxes on $15,000 for the year rather than the $30,000 in profits.

If the investor still believes in Company C and only sold the stock to benefit from tax-loss harvesting, they can repurchase the stock 30 days after the sale to avoid the wash-sale rule. The wash-sale rule prevents investors from benefiting from selling a security at a loss and then buying a substantially identical security within the next 30 days.

Recommended: Tax Loss Carryforward

A Clean Slate for Consumers

U.S. consumers, who play a critical role in the U.S. economy, traditionally view January as a fresh start. Adding stocks to their portfolios or existing equity positions is a way consumers hit the New Year’s Day “reset” button. If retail investors buy stocks in the new year, it can result in a rally for stocks to start the year.

Moreover, many workers may receive bonus pay in December or January may use this windfall to buy stocks in the first month of the year, adding to the January Effect.

Portfolio Managers May Buy In January

Like consumers, January may give mutual fund portfolio managers a chance to start the year fresh and buy new stocks, bonds, and commodities. That puts managers in a position to get a head start on building a portfolio with a good yearly-performance figure, thus adding more investors to their funds.

Additionally, portfolio managers may have sold losing stocks in December as a way to clean up their end-of-year reports, a practice known as “window dressing.” With portfolio managers selling in December and buying in January, it could boost stock prices at the beginning of the year.

Is the January Effect Real?

The January Effect has been studied extensively, and there is evidence to suggest that it is somewhat real. Studies have found that small- and mid-cap stocks tend to outperform the market during January because they are less liquid.

But some analysts note that the effect has become less pronounced in recent years due to the rise of tax-advantaged investing accounts, like 401(k)s and individual retirement accounts (IRAs). Investors who use these accounts may not have a reason to sell in December to benefit from tax-loss harvesting. Therefore, while the January Effect may be somewhat real, its impact may be more muted than in the past.

January Effect and Efficient Markets

However, many investors claim that the January Effect is not real because it is at odds with the efficient markets hypothesis. An efficient market is where the market price of securities represents an unbiased estimate of the investment’s actual value.

Efficient market backers say that external factors — like the January Effect or any non-disciplined investment strategy — aren’t effective in portfolio management. Since all investors have access to the same information that a calendar-based anomaly may occur, it’s impossible for investors to time the stock market to take advantage of the effect. Efficient market theorists don’t believe that calendar-based market movements affect market outcomes.

The best strategy, according to efficient market backers, is to buy stocks based on the stock’s underlying value — and not based upon dates in the yearly calendar.

History of the January Effect

The phrase “January Effect” is primarily credited to Sydney Wachtel, an investment banker who coined the term in 1942. Wachtel observed that many small-cap stocks had significantly higher returns in January than the rest of the year, a trend he first noticed in 1925.

He attributed this to the “year-end tax-loss selling” that occurred in December, which caused small-cap stocks to become undervalued. Wachtel argued that investors had an opportunity to capitalize on this by buying small-cap stocks during the month of January.

However, it wasn’t until the 1970s that the notion of a stock rally in January earned mainstream acceptance, as analysts and academics began rolling out research papers on the topic.

The January Effect has been studied extensively since then, and many theories have been proposed as to why the phenomenon may occur. These include ideas discussed above, like tax-loss harvesting, investor psychology, window-dressing by portfolio managers, and liquidity effects in stocks. Despite these theories, the January Effect remains an unexplained phenomenon, and there is a debate about whether following the strategy is beneficial.

The Takeaway

Like other market anomalies and calendar effects, the January Effect is considered by some to be evidence against the efficient markets hypothesis. Nevertheless, there is evidence that the stock market does perform better in January, especially with small-cap stocks. Whether one believes in the January Effect or not, it’s always a good idea for investors to use strategies that can best help them meet their long-term goals.

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Dec

2024

What To Do if Someone Opened a Credit Card in Your Name

By Timothy Moore | Credit, credit card, Family Finances | Comments Off

If someone has opened a credit card in your name, it’s important to act fast. There are clear steps you can take to stop the fraudster in their tracks and avoid any harm to your credit score and bank account.

Read on to learn what is likely happening and how to protect yourself.

Key Points

• Act quickly by filing reports with the credit card issuer, FTC, police, and credit bureaus if someone opens a credit card in your name.

• Consider placing fraud alerts or freezing your credit to prevent further unauthorized activity.

• Regularly monitor your credit report and bank activity to detect any signs of identity theft early.

• Family members can also commit identity theft; it can be important to address the issue even if it involves a relative.

• Taking swift action can help avoid long-term financial damage and protect your credit score.

Finding Out That Someone Opened a Credit Card in Your Name

You won’t always immediately know that someone has stolen your identity. However, there are several ways to stay on top of potential identity theft and keep it from getting out of control.

Watch out for some of these common signs of credit card fraud:

• Bills in the mail for an unfamiliar account in your name

• Email or text notifications for a new account opening that you did not initiate

• Notification that an account in your name has gone to a debt collections agency

• Notification from an identity monitoring service or free credit monitoring service that a new account has been opened

• Unfamiliar activity while reviewing your free credit report

• An unexplained drop in your credit score

• Credit application rejection because of a drop in your score

These signals can indicate that a form of bank fraud is underway.

Recommended: Credit Card Scams You Should Know About

7 Steps to Take When Someone Opens a Credit Card in Your Name

If someone opens a credit card in your name, know that it can happen to anyone. In 2023, the Federal Trade Commission (FTC) received 2.6 million fraud reports from consumers, though it’s likely that many more cases of fraud went unreported.

If your identity has been stolen, it’s important to take a breath but remain focused. Knowing what to do if someone applies for a credit card in your name allows you to act quickly. That’s why we’ve put together seven steps to take as soon as you realize someone has opened a credit card in your name.

1. Contact the Bank or Card Issuer

You may not be a customer of the specific financial institution where the credit card was opened, but that doesn’t mean you can’t call them. In fact, the first thing you should do is contact the credit card issuer’s fraud department and file a report. You can usually find the bank’s customer service information online.

The credit card issuer should be able to close the account during the fraud investigation. But if they won’t, you can ask them to freeze the account until the investigation is complete.

Just in case, it’s a good idea to change the username and password of major online accounts, including your email and online bank logins.

2. Report the Identity Theft to the FTC

The report you file with the credit card issuer is the first of many. Next, file an identity theft report with the FTC at IdentityTheft.gov . The FTC will create a recovery plan and issue you an Identity Theft Report, which you may need when working with the credit card issuer and credit bureaus. When you file the report online, you’ll even be able to access form letters to send to creditors about the fraud.

3. File a Police Report

The FTC also recommends filing a police report any time your identity is stolen. The police can provide you with a copy of the report, which may be helpful in closing new accounts, disputing fraudulent charges, and working with credit bureaus to repair your credit report.

Recommended: What Is a Charge Card?

4. Consider a Fraud Alert or Credit Freeze

To further protect your identity, the FTC recommends that you place a free, one-year fraud alert on your credit report or a credit freeze. You should only have to contact one of the three credit bureaus — Equifax®, Experian®, and TransUnion® — and that bureau must coordinate with the other two. Such alerts ensure that lenders are more thorough in verifying your identity before awarding a line of credit in your name.

Victims of identity fraud can choose between two fraud alerts: initial and extended.

• Initial fraud alerts last one year but don’t require evidence of identity theft; these alert periods are renewable.

• Extended fraud alerts require the FTC Identity Theft Report and last for seven years. They also remove you from any credit card and insurance offers for the next five years.

You may also want to freeze your credit report with each of the three credit bureaus. To do so, you’ll need to contact each bureau independently. When you freeze your credit report, creditors won’t be able to access it unless you temporarily unfreeze it. This prevents fraudsters from opening credit in your name.

5. Check Your Credit Reports in Detail

As a consumer, you have access to a free credit report every year from AnnualCreditReport.com , and that increases to two a year if you have an extended fraud alert. Creating accounts with individual credit bureaus may also get you access to free credit reports.

It’s important to comb through your credit report upon becoming a victim of credit card fraud. Doing so allows you to identify any other fraudulent accounts or activity you may not yet be aware of.

6. Dispute Fraud with Credit Bureaus

To protect your credit score and remove fraudulent activity found in your report, you’ll need to contact the credit bureaus. You can dispute the fraud online with all three bureaus:

• Dispute fraud at Experian

• Dispute fraud at Equifax

• Dispute fraud at TransUnion

You’ll need a valid copy of your FTC Identity Theft Report for this process, as well as proof of identity and a letter that details which information on the report is fraudulent. Credit bureaus can then work with creditors on any fraudulent account and block them from sending your information to debt collectors.

7. Remove Charges and Close the Account

Some credit card issuers and banks will immediately remove false charges and close the fraudulent account when you contact them in step one. However, if they could not do that when you first filed, it’s a good idea to get back in touch with them now that you have reports from the FTC and local police.

At this point, you should be able to close the fraudulent account and remove any fraudulent charges.

What If a Relative Opens the Card in Your Name?

Because of their close proximity to personal information, family members can more easily commit identity fraud. While it may be hard to believe, family members do occasionally steal relatives’ identity, especially those of children and seniors.

In fact, around 75% of child identity fraud is committed by a friend or family member with access to the child’s information. Identity theft is also a form of elder abuse. Overall, about 72% of the funds lost by those over age 60 involves a person known to the elder, whether a family member, friend, or caregiver.

You now know what to do when someone opens a credit card in your name. But what about when it’s a family member you care about? While it’s ultimately your decision, you risk significant damage to your financial future by not taking action.

Not only will you be on the hook for any expenses in your name and damage done to your credit score, but you’ll also face other future barriers:

• Your lower credit score may make it more difficult to rent an apartment, get utilities turned on, or find discounts on auto insurance.

• You may have issues with government support, student loans, and even tax returns if the family member is using your identity in more than one way.

• You could obtain a criminal record if the family member uses your identity when/if arrested. You also risk being complicit in a crime if you do not report the family member who is committing identity theft.

Ultimately, the steps are the same when reporting a friend or family member, whether it’s a spouse (or an ex), sibling, parent, child, or another relative. You may face one additional task — and that’s confronting the family member before filing your reports.

The Takeaway

When someone opens a credit card in your name, that can indicate identity theft. It’s crucial that you stay calm and act quickly by filing reports with the credit card issuer, FTC, police, and credit bureaus. You may also want to add alerts to or freeze your credit. By taking swift action, you may be able to avoid long-term damage to your finances.

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

FAQ

What happens if someone applies for a credit card in your name?

If someone applies for a credit card in your name, it’s important to remain calm and act fast. You’ll need to file reports with the credit card issuer, FTC, local police, and credit bureaus. You may want to put fraud alerts and/or freezes on your credit report and work closely with the credit card issuer to remove any fraudulent charges and close the account.

How do I stop someone from opening a credit card in my name?

While identity theft can happen to anyone, you can make it more difficult for fraudsters to open a credit card in your name by freezing your credit report. You can also put a fraud alert on your account and use credit and identity monitoring services to get notifications about any suspicious activity. Reviewing your bills, bank activity, credit score, and credit report regularly are all helpful ways to detect fraud.

Can someone open a credit card with my Social Security number?

It is possible for a person to use your Social Security number to open a credit card in your name. Thus, keeping your Social Security number private and secure is important for protecting your identity.

Photo credit: iStock/Prostock-Studio
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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Dec

2024

How Long Does It Take to Build Credit?

By Dan Miller | Credit, credit card, Financial Independence | Comments Off

Building good credit (or any credit at all) doesn’t happen overnight. Instead, if you’re starting from scratch, you may need to have an open credit account for around three to six months before you first get a credit score.

From there, a good credit profile and good credit score can take a while to build. In reality, it can be much faster and easier to lower your credit score, which is why it’s vital to aim to make solid financial choices, like consistently paying your bills on time. Building and maintaining good credit isn’t always easy, but by following a few simple steps, you can improve your standing.

Key Points

• Establishing a credit score takes three to six months after opening a credit account.

• On-time payments are essential for a good credit score.

• Credit scores depend on payment history, credit utilization, account types, age of accounts, and inquiries into accessing credit.

• Opening too many accounts at once can harm credit scores.

• Beware of scams promising quick credit improvement; building credit is gradual.

How Long It Can Take to Build Credit From Scratch?

The exact length of time it takes to build credit from scratch varies. That being said, it’s usually around three to six months from the time you first open a credit account.

Even though establishing and building credit can take time, it’s worth it as a way to improve your overall financial situation. Having good credit can make it easier to get approved for loans and secure lower interest rates.

Recommended: How to Avoid Interest on a Credit Card

4 Ways to Build Credit

If you’re hoping to begin building credit, here are some tactics you might consider.

Become An Authorized User

One way to help build your credit is by becoming an authorized user on an account of someone who already has good credit. This might be a trusted friend or family member. As they manage the account responsibly, that can have a positive impact on your credit score as well. Just know that if they miss or make late payments, that can also negatively impact your credit.

Recommended: When Are Credit Card Payments Due?

Apply For a Credit Card

If you’re getting a credit card for the first time, know that it is possible to apply for and get approved for a credit card with no existing credit history. However, you do need to be selective about which card you apply for.

You’re unlikely to get approved for, say, a rewards credit card if you don’t already have excellent credit. Still, there are credit cards that are marketed toward those who have no credit or a limited credit history. You might also consider a secured credit card, where you put down a refundable deposit that then serves as your credit limit.

If you can get approved for a credit card, and then use your credit card responsibly, such as by making on-time payments, can help you build up your credit.

Get a Cosigner

If you aren’t able to get approved for a loan on your own, you might consider applying for credit with a cosigner. Using a cosigner with good credit can help improve your chances of getting approved for a loan.

Then, your loan payments will be reported to the major credit bureaus and hopefully help you start building your credit score. Of course, that depends on your making those payments on time.

Maintain Good Credit Habits

Once you have opened a credit account like a loan or credit card, it’s important to practice good credit habits. This includes paying your statement off in full, each and every month. Demonstrating a pattern of reliably paying your bills over time shows potential lenders that you’re likely to repay your debts.

Factors That Affect Credit Score Calculations

There are five major factors that affect your credit score:

• Credit utilization: Your credit utilization is the amount of the credit you’ve used compared to your total available credit. It’s recommended to keep this ratio to 30% or less.

• Payment history: This indicates how reliably you make payments on your existing accounts.

• Types of credit accounts: Having a good mix of different types of credit accounts has a positive impact on your credit score, as it indicates to lenders that manage multiple types of accounts.

• Your average age of accounts: Having a lengthy credit history is a positive sign. This shows you have experience in responsibly managing accounts.

• New credit: Opening a number of accounts or making a number of hard inquiries in quick succession can suggest to lenders that you’ve overextended yourself and are in need of funding to bail you out.

Recommended: Starting Credit Score for 18-Year-Olds

Things to Keep in Mind Before Building Credit

If you’re looking to build good credit, here are some tips on establishing credit to keep in mind.

Have a Solid Financial Plan

The first thing you’ll want to do is make a budget. Getting a new credit card should not be viewed as a way to fix your budget or dig yourself out of a financial hole. Instead, the best way to use a credit card is as a tool of convenience for money that you already have. Make sure that you have the financial ability and discipline to pay your bills in full, each and every month.

Watch Out For Scams

Usually building credit is something that you do over a period of several months or years. If someone tells you that they can build or repair your credit quickly, it could be a sign of a credit card scam. There aren’t many shortcuts to the simple rules noted above, like regularly paying your bills on time.

Don’t Open Too Many Accounts At Once

You might think that since opening a credit account can help build credit, opening many accounts will help build credit even faster. However, that is usually not the case. Many lenders view a high number of credit inquiries in a short period of time as a negative indicator. They may see it as a potential red flag that someone is in a bad financial situation.

The Takeaway

If you’re just starting out and have no credit history at all, you generally start without an actual credit score. It can take a few months after you open a credit account to start establishing a score. As you continue to show that you’re responsible for the credit you have, your score will likely increase. Building credit can take time, and you should be skeptical of any people or programs that say they can build your credit fast.

FAQ

What credit score do you start with?

There isn’t a starting credit score for those without any credit history. While you might think that you start with the lowest possible credit score (like 300) and have to build your way up, you actually don’t start with any credit score at all. As you open credit cards or other accounts, you’ll start to establish a credit history and score.

How long does it take to build a good credit score?

It usually takes anywhere from three to six months to start building a credit score after you’ve opened your first credit account. You’ll then continue to build and improve your credit by continually making on-time payments. You can always check your credit score periodically to see where you’re at on your credit journey.

How long does it take to recover from a hard inquiry on your credit?

Usually when you apply for a new credit card or other loan, your potential lender will pull your credit file. This is known as a hard inquiry. Since the number of recent hard inquiries is one factor in determining your credit score, applying for credit cards can lower your credit score. However, these inquiries typically only lower your score by a few points and drop off your report after a few months.

How fast can you build your credit in 3 months?

How fast you can build your credit depends on a number of factors. Generally, it takes a few months after you’ve opened a credit account to even establish any credit. Your credit score will improve as you continue to use your credit responsibly. It’s best to think about building credit as more of a marathon than a sprint.

Photo credit: iStock/YakobchukOlena

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Dec

2024

Rate of Return (RoR): Formula and Calculation Examples

By Kenny Zhu | Growing Wealth, invest, Investing | Comments Off

Calculating rate of return, as it relates to investing, is a way for investors or traders to get a sense of how much money they stand to gain or lose from their investments. It’s a relatively simple formula and calculation, and can help investors evaluate their overall performance in the markets. It does have some shortcomings, however, such as not accounting for the time value of money or the timing of cash flows. So, there are alternative calculations out there to help get even more accurate results.

Key Points

• The Rate of Return (RoR) measures an investment’s gain or loss as a percentage of its initial value over a specific period.

• Calculating RoR involves identifying the initial and end values, applying the formula, and can be done manually or using tools like Excel.

• RoR helps investors evaluate investment performance, compare different investments, and make informed decisions about resource allocation.

• Understanding RoR is crucial for assessing investment performance, aligning with financial goals, and determining market performance relative to other opportunities.

What Is Rate of Return?

Rate of return (RoR) is a measure of an investment’s gain or loss, expressed as a percentage of its initial value, over a given period of time. If calculated correctly, your rate of return will be expressed as a percentage of your initial investment. Positive rate of return calculations indicate a net gain on your investment, while negative results will indicate a loss.

Don’t confuse this with the expected rate of return, which forecasts your expected returns using probability and historical performance.

When using the rate of return formula, your chosen time period is referred to as your “holding period.” Regardless of whether your holding period lasts days, months, or even years. It’s important that you keep the time periods consistent when comparing investment performance.

How to Calculate Rate of Return

You can calculate the rate of return on your online investing or other type of investing activity by comparing the difference between its current value and its initial value, and then dividing the result by its initial value.

Multiplying the result of that rate of return formula by 100 will net you your rate of return as a percentage. You’ll know whether you made money on your investment depending on whether your result comes in as positive or negative.

Rate of Return Formula

The standard rate of return formula can be represented as follows:

R = [ ( Ve – Vb ) / Vb ] x 100

In this equation:

R = Rate of return

Ve = End of period value

Vb = Beginning of period value

The aforementioned formula can be applied to any holding period to find your rate of return “R” over that timespan.

“Ve,” your end of period value, should represent the value of your investment, including any interest or dividends earned over your holding period.

Finally “Vb” should represent the value of your initial investment. It will be used as the relative basis on which your investment returns are calculated.

Example of Calculating Rate of Return

To help you understand how to calculate the rate of return, we’ll walk you through an example. Again, here’s the formula:

R = [ ( Ve – Vb ) / Vb ] x 100

Let’s say an investor buys an investment for $125 a share which pays no dividends. This $125 investment will be your beginning of period value (“Vb”).

After one year, the value of the investment rises to $150 and the investor chooses to sell it. Given that $150 represents the value of the investment at the end of the holding period, $150 will be your end of period value (“Ve”).

To calculate the rate of return, enter the values for Vb and Ve into the rate of return formula. With the correct values in place, your equation should look like this:

R = [ ( $150 – $125 ) / $125 ] X 100

Solving out this formula using order of operations, your calculations should proceed as follows:

R = [ $25 / $125 ] X 100

R = 0.2 X 100

R = 20%

If done correctly, the formula should calculate a one year rate of return of 20%, based on the beginning and end of period values provided.

Considerations When Using Rate of Return

The main advantages of the rate of return calculation is that it’s simple and easy to calculate. It gives you a straightforward method to measure the profitability of an investment over any time period.

However, its simplicity does result in some shortcomings, particularly when it comes to more complex investments with numerous cash flows. We dive into these limitations below.

Recommended: What Is a Good Rate of Return?

What are the Limitations of Simple Rate of Return?

The main limitations of the simple rate of return calculation are that it ignores the time value of money and timing of cash flows.

The time value of money is an important concept when it comes to finance, as it explains that money today is always worth more than the same sum of money paid in the future. This is due to the inherent earnings potential of cash held now.

In tandem with the concept above, the simple rate of return calculation also fails to account for the timing of cash flows.

Cash flows are particularly important when dealing with more complex portfolios or investments that might have multiple reinvestment periods over time or multiple dividend payouts.

The simple rate of return calculation, in some ways, oversimplifies the rate of return into a simple accounting measure over an arbitrary amount of time. To address these shortcomings, professionals typically use alternate measures like internal rate of rate (IRR) and annualized rate of return.

Annualized Rate of Return Formula

The annualized rate of return is a slightly more complicated formula that solves the compatibility issues of the simple rate of return calculation by standardizing all calculations over an annual period.

The annualized rate of return formula can be exhibited as follows.

Ra = ( Ve / Vb ) 1 / n – 1 X 100

Where,

Ra = Annualized Rate of Return

Ve = End of period value

Vb = Beginning of period value

n = number of years in holding period

Annualized rate of return (Ra) standardizes your rate of return on an annual basis; this allows you to make fair comparisons with other annualized performance figures.

“Ve,” your end of period value, represents the value of your investment at the end of the holding period, including any interest or dividends earned.

“Vb” represents the value of your initial investment.

Other Types of Return Formulas

There are a multitude of other return metrics that can help you evaluate performance.

While the calculations for these metrics fall outside the scope of this reading, we touch on some of the most commonly used ones and why they’re used.

• Internal Rate of Return (IRR): This represents the expected annual compound growth rate of a specific investment and is usually used to help determine whether an investment is worthwhile.

• Return on Invested Capital (ROIC): Measures a firm’s profitability in relation to the total debt and equity invested by stakeholders.

• Return on Equity (ROE): Measures a firm’s net income in relation to the total value of its shareholder’s equity.

How Investors Can Use Rate of Return

Retail investors, institutional investors, and even corporate decision makers use the rate of return to gauge the performance of their investments over time. It’s useful when compared against a benchmark index, return expectations, or other investment options to gauge how your investment performed on a relative basis.

When comparing investment returns, it’s important to make sure you’re making fair comparisons to ensure you’re making apples-to-apples comparisons. For example, the S&P 500 might not serve as a fair benchmark for a portfolio invested 100% in international equities, as these are substantially different investment types. Benchmark comparisons give meaning to your rate of return and help you evaluate whether you’re outperforming on a relative basis.

The Takeaway

Knowing how to calculate your rate of return gives you a useful tool for evaluating your investments’ performance. The best part about the rate of return calculation is that it can be done over almost any timespan, provided the returns you’re trying to compare have the same holding period.

Investors can calculate rate of return by hand, or by using an online spreadsheet. The same is true for annualized rate of return — which helps to standardize return rates over longer periods. Those are fairly simple ways to gauge investment returns, but there are a number of other metrics that help you assess and compare investment returns, so be sure to use the tool that aligns best with what you need to know.

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

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Nov

2024

Do Wire Transfers Go Through Immediately?

By Kevin Brouillard | money, Money & Life | Comments Off

Typically, domestic wire transfers are available within a business day, while international wire transfers can take up to five days. In other words, whether sending money to relatives or completing a business transaction, wire transfers can quickly move money from one bank account to another, but they usually don’t go through instantly.

Below, you’ll learn the steps for making a wire transfer, how timing can vary, and alternative methods for sending money.

Key Points

• Domestic wire transfers typically complete within one business day; international transfers can take up to five days.

• Factors affecting transfer duration include timing, location, and transfer method.

• Required information includes personal and banking details for both parties involved, and possibly the transfer purpose.

• Steps include verifying funds, choosing a provider, filling out forms, and factoring in and paying fees.

• Expediting transfers may be possible, especially within the same bank, but may incur fees.

Factors That Affect How Long a Wire Transfer Takes

How long it takes to wire money depends on a few factors. Wire transfers exchange funds between two parties, and the timing, where the sender and recipient are located, and how funds are transferred can all influence its duration.

• Timing: While bank holders may have 24/7 access to ATM withdrawals, the same isn’t true for wire transfers. Banks and financial institutions may set cutoff times in the day for processing wire transfers. If a wire transfer is initiated after the cutoff time of the sender’s or recipient’s bank, it will be processed the following day. For this reason, it won’t be available in the recipient’s bank account the same day.

Also, wire transfers may be completed in batches rather than in real time. So even if you submit a wire transfer at 11am, the next batch might not be processed until, say, 3pm. This could delay the arrival of funds to the recipient’s bank.

• Geographic location: Whether you’re sending the money within the U.S. or abroad matters. The Expedited Funds Availability Act requires that wire transfers made within the U.S. are available to recipients within one business day. But in terms of how long it takes for a wire transfer to go through internationally, that usually takes between one and five business days. Such factors as the number of intermediaries, time zone differences, and regulations in the recipient’s country can impact timing.

• Transfer method: There are several ways to wire funds. You can wire money for immediate transfer domestically with the Federal Reserve Wire Network (Fedwire). Another option is the Clearing House Interbank Payments System (CHIPS), which processes transactions in batches, making it cheaper but slower than Fedwire. Though CHIPS can process international transfers, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is often used for making electronic payments abroad. SWIFT transfers undergo anti-fraud and anti-money laundering review processes, adding time to when the funds are available to the recipient.

What Do You Need to Complete a Wire Transfer?

To send funds with a wire transfer, you’ll typically need to provide personal and banking information for yourself and the recipient. These requirements can vary depending on whether you’re transferring funds with a bank or non-bank provider, but may include:

• Your driver’s license, or another valid government-issued photo ID

• Your bank account and routing number, if using a provider other than your bank

• The amount of money being transferred

• Possibly the purpose of the transfer, especially for international wire transfers

• Recipient’s personal information, including their full name, address, and contact information

• Their banking information, including the recipient’s bank account and ABA or routing number, and their bank address and phone number, especially when transferring abroad

• If transferring money outside the U.S., the SWIFT Code or Business Identifier Codes (BIC) and the National ID or IBAN number

Keep in mind that wire transfers are usually irreversible once they’ve cleared, unless a mistake is made by the sending or receiving bank. Double-checking to confirm the details before sending can avoid delays and help ensure the funds are received.

Steps to Making a Wire Transfer

Once you have the required personal and banking information, follow these steps to make a wire transfer.

1. Verify funding availability: Check your bank account to make sure you have enough money for the wire transfer. Funds must be available at the time of authorization to complete the wire transfer.

2. Choose a provider: Senders can opt to wire money with a bank or non-bank transfer service (such as Western Union). The cost of a wire transfer varies by provider, so be sure to compare fees before making a decision.

3. Fill out the forms carefully: To send a wire transfer, you’ll need to provide certain personal and banking information to the provider. Forms may be available online or completed in person. Be sure to double-check the account numbers, spelling of names, and other details before submitting.

4. Factor in fees: Providers can set their own rates for wiring money, with international transfers typically costing more than domestic transfers. Confirm these bank fees upfront and verify your account has sufficient funds to cover them. For outgoing domestic wire transfers, fees are often between $0 and $40, while international wire transfers can be between $0 and $50, depending on your account and other factors.

Keep in mind that the recipient’s bank may charge fees on top of what was paid to wire the money. Depending on the nature of your transaction, the recipient could ask you to cover those fees.

5. Get a receipt: It’s a good idea to keep a record of the transaction. Since wire transfers aren’t always immediate, having the confirmation or tracking number handy is useful for monitoring the payment.

Can You Speed Up a Wire Transfer?

Wire transfers are often used when money needs to be moved quickly. When time is of the essence, it may be possible to expedite the wire transfer. This option depends on the financial institution or provider used. It may be easier to speed up a wire transfer if the transaction is between two accounts held at the same bank. In some cases, a fee may be charged to move the money more quickly.

Being mindful of a provider’s cutoff time for sending and receiving wire transfers can help expedite a wire transfer. The cutoff time may occur before closing hours, and any request received after this time won’t occur until the following business day.

Can You Slow Down a Wire Transfer?

If you’ve made an error and want to pause or recall a wire transfer, it’s important to contact your provider immediately. You could have a window of opportunity to recall or pause the transfer for corrections if a cancellation notice is received before it’s credited to the recipient’s account. Typically, it’s a very small window of time, so act as soon as possible.

Do Wire Transfers Go Through on Holidays?

Wire transfers are typically only processed on business days and prior to a bank’s cutoff hours. If you wire money on a bank holiday or weekend, it likely will be delayed until the next business day.

When sending funds internationally, factoring in holidays and weekends merits additional consideration. For instance, a number of countries in the Middle East observe the weekend on Friday and Saturday, not Sunday.

Alternatives to Wire Transfers

Wire transfers aren’t the only option available for moving money between bank accounts.

Here are a couple alternative ways to send money to someone.

• Automated Clearing House (ACH) transfer: ACH payments allow businesses and individuals to transfer funds between financial institutions, such as banks, through an electronic network. This type of bank-to-bank payment requires an initial setup and takes more time to send funds than wire transfers. Usually, transfers take one to three days, but expedited service may be available. However, ACH fees are typically lower than wire transfer fees, and some banks don’t charge customers for them at all, factoring such costs into their overall fee structure. Check with your financial institution about whether you’ll be assessed a fee.

• Peer-to-peer (P2P) payment: A growing number of apps, such as Apple Pay and PayPal, can facilitate electronic payments between two users. P2P apps can link to a bank account, debit card, or credit card to transfer money quickly. However, transferring the funds from the app to a bank account can take several days or incur a fee for immediate transfer. Also, P2P apps may set limits on transfer amounts and whether you can send money abroad.

Recommended: ACH vs EFT: What Is the Difference?

The Takeaway

Wire transfers do not typically go through immediately. The speed will depend on several factors, including when you initiate the transfer, where it’s being sent, and the transfer method. Domestic transfers are usually completed within one day, while international ones can take between one and five days. In some cases, it may be possible to expedite a wire transfer.

There are multiple ways to transfer and receive money. SoFi currently offers incoming and limited outgoing domestic wire transfers, and our bank accounts have plenty of other features that make managing and sending money easy.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Are wire transfers immediate?

Wire transfers are typically completed within a day for domestic transactions and within one to five days for international ones, though there may be options available to expedite the transfer. Factors that can impact timing include the cutoff hours of financial institutions and whether it’s a business day or a weekend or holiday. In addition, transferring funds between two accounts at the same bank can often move more quickly than transactions between two different banks.

What happens if a wire transfer gets delayed beyond your control?

If a wire transfer is delayed, it can be wise to notify your bank or provider immediately to investigate the claim. They should be able to advise you on what the issue is and what (if anything) can be done to move the payment ahead quickly. You will likely want to let the intended recipient know as well. Keeping the receipt and having the reference number on hand can help you track the transfer.

Do international wire transfers take longer than domestic?

International wire transfers typically take longer than domestic wire transfers. Plan for up to five business days before the funds are available to the recipient. Domestic wire transfers are usually completed within one business day.

Photo credit: iStock/mladenbalinovac

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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

SOBK1222012

January Effect: What It Is and Is It Good for Investors?

What Is the January Effect?

What Causes the January Effect?

Tax-Loss Harvesting

A Clean Slate for Consumers

Portfolio Managers May Buy In January

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Is the January Effect Real?

January Effect and Efficient Markets

History of the January Effect

The Takeaway

What To Do if Someone Opened a Credit Card in Your Name

Finding Out That Someone Opened a Credit Card in Your Name

7 Steps to Take When Someone Opens a Credit Card in Your Name

1. Contact the Bank or Card Issuer

2. Report the Identity Theft to the FTC

3. File a Police Report

4. Consider a Fraud Alert or Credit Freeze

5. Check Your Credit Reports in Detail

6. Dispute Fraud with Credit Bureaus

7. Remove Charges and Close the Account

What If a Relative Opens the Card in Your Name?

The Takeaway

FAQ

What happens if someone applies for a credit card in your name?

How do I stop someone from opening a credit card in my name?

Can someone open a credit card with my Social Security number?

How Long Does It Take to Build Credit?

How Long It Can Take to Build Credit From Scratch?

4 Ways to Build Credit

Become An Authorized User

Apply For a Credit Card

Get a Cosigner

Maintain Good Credit Habits

Factors That Affect Credit Score Calculations

Things to Keep in Mind Before Building Credit

Have a Solid Financial Plan

Watch Out For Scams

Don’t Open Too Many Accounts At Once

The Takeaway

FAQ

What credit score do you start with?

How long does it take to build a good credit score?

How long does it take to recover from a hard inquiry on your credit?

How fast can you build your credit in 3 months?

Rate of Return (RoR): Formula and Calculation Examples

What Is Rate of Return?

How to Calculate Rate of Return

Rate of Return Formula

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Example of Calculating Rate of Return

Considerations When Using Rate of Return

What are the Limitations of Simple Rate of Return?

Annualized Rate of Return Formula

Other Types of Return Formulas

How Investors Can Use Rate of Return

The Takeaway

Do Wire Transfers Go Through Immediately?

Factors That Affect How Long a Wire Transfer Takes

What Do You Need to Complete a Wire Transfer?

Steps to Making a Wire Transfer

Can You Speed Up a Wire Transfer?

Can You Slow Down a Wire Transfer?

Do Wire Transfers Go Through on Holidays?

Alternatives to Wire Transfers

The Takeaway

FAQ

Are wire transfers immediate?

What happens if a wire transfer gets delayed beyond your control?

Do international wire transfers take longer than domestic?

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