InvestLL Archives | Page 67 of 73

Aug

2022

Guide to Buying Stocks With a Credit Card

By Dan Miller | Credit, Growing Wealth, Investing | Comments Off

It is (sometimes) possible to buy stocks with a credit card, but it’s rarely a good idea for most people. Most brokerages do not allow you to directly fund your account with a credit card, and even if you find a brokerage that does, the fees associated with buying stocks with a credit card can outweigh any advantages.

Before you buy stocks with a credit card, make sure you understand the risks as well as the benefits. Investing in the stock market always comes with a degree of risk. If your investments lose money, you may not be able to pay off your credit card statement, which will mean that you’ll have to pay additional interest.

Using Your Credit Card to Buy Stocks

Most brokerages do not allow you to use your credit card to buy stocks. For example, SoFi’s online trading platform does not permit you to fund your account with a credit card. Brokerages generally don’t allow you to buy stocks with a credit card to help comply with the federal regulations governing financial products, such as stocks.

However, while you can’t purchase stocks directly with a credit card, there are still ways you can use your credit card to fund your purchase of stocks. This includes using cash back rewards to fund investments as well as taking out cash advances. Another option is to use a credit card that allows you to transfer funds to a checking account, which you can then move over to your brokerage account.

Benefits of Buying Stocks With a Credit Card

You generally aren’t able to buy shares of stock with a credit card, and even if you find a workaround to do so, the risks mostly outweigh the potential benefits.

Perhaps the main benefit if you’re investing with credit card rewards is that it can offer a way to put the rewards you get from your everyday purchases toward your financial future. While there’s no guarantee of success in investing, it’s possible the rewards points or cash you invest could grow in the stock market.

Risks of Buying Stocks With a Credit Card

Just like buying crypto with a credit card, buying stocks with a credit card comes with considerable risk. If you attempt to do so, take note of the following potential downsides:

• Investments in the stock market may lose value. If this happens, you may have a hard time paying off your monthly credit card statement in full.

• There are fees associated with buying stocks with a credit card. If you can find a brokerage that allows the purchase of stocks with a credit card, you’ll generally pay a fee to do so. Additionally, if you opt for a cash advance to use to buy stocks, you’ll also run into fees, not to mention a higher interest rate. There’s always a chance your investment returns won’t offset these costs.

• High credit utilization could affect your credit score. Making stock purchases with your credit card, taking out sizable cash advances, or racking up spending in order to earn rewards could all drive up your credit utilization, a major factor in determining your credit score. Having a high credit utilization — meaning the percentage of your total credit you’re using — could cause your credit score drop.

• You could get scammed. If you’re getting offers to buy certain shares with your credit card, there’s a chance it’s a scam. Do your own research before making any moves, and be wary before providing any personal information.

Recommended: Can You Buy Crypto With a Credit Card

Factors to Consider Before Buying Stocks With a Credit Card

There are a variety of different factors that you should keep in mind before buying stocks with a credit card.

Investment Fees

If you do find a brokerage that allows you to buy stocks with a credit card, they will likely charge a credit card convenience fee. This fee, which helps the brokerage to offset their costs for credit card processing, usually runs around 3% of the total price of your investment. Starting 3% in the hole makes it very difficult to make profitable investments.

Recommended: What is a Charge Card

Cash Advance Fees

If your brokerage does not support buying stocks with a credit card, you might consider taking out a cash advance from your credit card. Then, you could use the cash to fund your brokerage account.

However, this transfer will often involve a cash advance fee, which typically will run anywhere from 3% to 5% of the amount transferred. Additionally, interest on cash advances starts to accrue immediately, which is different than how credit cards work usually, and often at a higher rate than the standard purchase APR.

Transfer Fees

Another way to use your credit card to purchase stocks is by making a balance transfer. You can transfer funds from your credit card to your checking account, and then move that money again to your brokerage account. In addition to the hassle of moving money around, you’ll likely pay a balance transfer fee, which is often 3% or 5%. Plus, interest will start accruing on balance transfers right away unless you have a 0% APR introductory offer.

Interest

If you’re not able to pay your credit card statement in full (because your investments have decreased in value), your credit card company will charge you interest. With many credit card interest rates often approaching or even exceeding 20% APR, this will very likely swallow up any profits from your short-term investments.

You’ll also want to look out for interest getting charged at a higher rate and starting to accrue immediately if you opt for a cash advance or a balance transfer.

Recommended: How to Avoid Interest On a Credit Card

Avoiding Scams When Buying Stocks With a Credit Card

Because most reputable brokerages don’t allow you to buy stocks with a credit card, there are occasionally scams that you need to be on the lookout for.

Watch out for individuals or lesser-known companies that say you can buy stocks with a credit card through them. Do your own research to make sure it is a legitimate brokerage and offer before using these other companies.

Does Buying Stock With Your Credit Card Affect Your Credit Score?

The act of just buying stock with your credit card won’t affect your credit score any more than any other purchase on a credit card. However, your credit score might be affected if you aren’t able to pay your monthly balance off in full. One of the best ways to improve your credit score is to always make sure that you have the financial ability and discipline to pay off your credit card statement in full, each and every month.

Additionally, your credit score could take a hit if you use too much of your available balance or even max out your credit card with your stock purchases, as this would increase your credit utilization. Also, you might see an impact on your credit if you open a new account to fund your stock purchases. This is because credit card applications trigger a hard inquiry, which will temporarily cause a dip in your score.

Alternatives to Buying Stocks With a Credit Card

As you can see, buying stocks with a credit card generally isn’t a great option — or even possible with most brokerages. If you want to start investing in stocks, you might consider these other ways to do so:

• Cash back rewards: Then, you can take your cash back rewards that you earn and use them to invest in stocks or other investments.

• Employer-sponsored 401(k): A great way to invest is through an employer-sponsored retirement plan like a 401(k). By using a 401(k), you’ll get to invest with pre-tax dollars and defer paying taxes until you make withdrawals in retirement.

• Brokerage margin loans: If you’re looking to borrow money to invest, one option could be a brokerage margin loan. These allow you to borrow money directly from the brokerage, often at a lower rate than what’s offered by most credit cards. Be aware of the risk involved here though — even if your investments don’t pan out, you’ll still have to repay your loan.

The Takeaway

Very few (if any) brokerages allow you to directly buy stocks with a credit card. If you do find a brokerage that allows you to buy stocks with a credit card, note the fees involved, not to mention the risk of loss in investing and the possibility of damaging your credit score. This is why even if you do find a way to do it, it’s rarely a good idea to buy stocks with a credit card for most people.

One alternative is to get a cash back rewards credit card and then use rewards you earn to fund your stock investments.

FAQ

What is credit card arbitrage?

Credit card arbitrage is usually defined as borrowing money at a low interest rate using a credit card and then investing that money, hoping to earn a higher return on investment. This is often done with cards that offer 0% introductory APRs.

What are the risks of credit card arbitrage?

The biggest risk of credit card arbitrage is that your investments will lose money, or they won’t make enough money to repay your credit card balance. This can cost you a significant amount of interest and/or credit card fees. You should also be aware that having a large balance on your credit card (even if it’s at 0% interest) can have a negative effect on your credit score.

Does buying stock with a credit card affect my tax?

Buying and selling stocks does often come with tax consequences, and you should be aware of how your investments affect your tax liability. How you buy stocks (with cash, credit card ,or in other ways) doesn’t affect the amount of taxes you might owe on your stock purchase.

Should I buy stocks with my credit card?

The way that credit cards work is that you borrow money and, if you don’t pay the full amount each month, you’re charged interest. Some brokerages may also charge credit card processing or convenience fees if they allow you to purchase stocks with a credit card. Because of the interest and fees potentially involved, it’s very difficult to come out ahead buying stocks with a credit card. Plus, there’s no guarantee of success when investing.

Is it safe to buy stocks with a credit card?

Because most reputable stockbrokers do not accept credit card payments to fund your account or buy stocks, you’ll want to be careful with any site that says that it will let you buy stocks with a credit card. Follow best practices for internet safety when trying to buy stocks with a credit card, just like you would before making any purchase online.

Do stockbrokers accept credit card payments?

Most stockbrokers do not accept credit card payments to fund your account or to buy stocks. If you want to buy stocks with a credit card, you will need to find a workaround such as taking a cash advance from your credit card and using that to fund your brokerage account. Just be sure that you understand any cash advance fees and the interest rate that come with that type of financial transaction.

Photo credit: iStock/katleho Seisa

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points toward active SoFi accounts, including but not limited to, your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, Student Loan Refinance, or toward SoFi Travel purchases, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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.

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 .

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Jul

2022

A Beginners Guide to Index Fund Investing

By Carla Tardi | Growing Wealth, invest, Investing | Comments Off

Index investing is a passive investment strategy in which, typically, you buy and hold assets for the long term. As such, index investing has become a popular addition to retirement vehicles, like 401(k)s and 403(b)s. With index investing, instead of purchasing individual stocks, you buy an index — an exchanged traded fund (ETF), or a mutual fund that represents a particular market sector (technology, for instance) or a broad benchmark, like the S&P 500 index.

Index investing seeks to replicate the performance of the sector or benchmark it follows. Because this product is already composed of the companies or sectors whose performance it aims to mimic, once you purchase an index fund, there’s not much trading going on; it’s already set up to perform in line with its index. As such, it’s considered passive investing — a buy-and-hold play.

On the other hand, an actively managed fund is guided by a professional portfolio manager (PM), who makes decisions based on their experience and knowledge. Rather than wishing to generate returns in line with a sector or benchmark, actively managed funds seek to beat the market. They appeal to those who want to make a profit in the near term by outperforming the market. In an effort to do so, PMs watch their funds’ underlying assets carefully and may adjust their holdings aggressively, or as needed to beat the market.

We’ll come back to active versus passive investing later.

There are many ways to approach investing. Some require a significant amount of time and involvement, while others need less effort on your part. It’s important to be aware of your objectives and tolerance for risk, so you can choose which types of investments fit with your goals and are in line with your temperament.

In this article, we discuss the nature of index investing, its potential advantages and disadvantages, and how best to use this strategy.

What Are Index Funds?

An index fund is a type of mutual fund or exchange traded fund (ETF) that tries to track the performance of a specific broad sector of the market — like technology — or a market index — like the Standard and Poor’s (S&P) 500. The idea is to try to replicate the chosen benchmark’s performance as closely as possible. Because index funds seek to replicate an index as closely as possible without trying to change it, you may hear people refer to indexing as being passive.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and others. Index investing is the process of investing in these index funds.

How Do Index Funds Work?

An index fund is a mutual fund or ETF that aims to mimic the overall performance of a particular market. The fund includes multiple stocks or bonds and is bought and sold like it’s a single investment. Index funds follow a benchmark index, such as the S&P 500 or the Nasdaq 100.

When you put money in an index fund, that cash is invested in all the companies that make up the particular index, which adds more diversity to your portfolio than if you were buying individual stocks. The S&P 500 is one of the major indexes that tracks the performance of the 500 largest companies in the U.S. Investing in an S&P 500 fund means that your investments are tied to the performance of a wide range of companies.

Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus generally have a lower risk profile than do individual stocks. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, historically, it has historically generated an approximate 10.5% average annual return for investors; from its inception in 1957 through 2021. Just remember that — as with all investments — future returns are not guaranteed.

Index Investing vs Active Investing

Active investing typically involves in-depth research into each stock purchase, as well as regularly watching the market in order to time buys and sells. Passive investing strategies either aim to bring in passive income or to grow a portfolio over time without as much day-to-day involvement. Index investing is a passive strategy which looks to match the returns of the market it seeks to track.

Index investing is a form of passive investing. Index investors don’t need to actively manage the stocks and bonds investment as closely since the fund is simply copying a particular index. This is why index funds are known as passive investing — and it’s what sets them apart from mutual funds.

Mutual funds are actively managed by portfolio managers who choose your investments. The goal with mutual funds is to beat the market, while the goal with index funds is to match the market’s performance. Because index funds don’t require daily human management, they have lower management costs (called expense ratios) than mutual funds. The money saved in fees by investing in an index fund instead of a mutual fund can save you lots of money in the long term and help you to make more money.

A common strategy for many investors who have a long investment horizon is to regularly invest money into an S&P 500 index fund and watch their money grow over time.

Growth of Index Investing

Index investing started in the 1970s, when economist Paul Samuelson claimed that stockpilers should go out of business. Samuelson believed that even the best PMs could not usually outperform the market average. Instead of working with portfolio managers, Samuelson suggested that someone should create a fund that simply tracked the stocks in the S&P 500.

Two years later, struggling firm Vanguard did just that. The fund was not widely accepted, and neither was the concept of index funds. Index investing has only become widely popular in the past two decades as data continues to reaffirm its merits.

Index investing has been gaining in popularity in recent years. Since 2010, actively managed funds have dropped from comprising 75% of all mutual fund assets to just 51%, as passively managed funds have grown to 49%. It’s reached the point where some industry observers may believe that the craze for passively managed index funds could even be dampening capitalism’s greatest innovation driver: competition.

Popular Indexes Include

• S&P 500 Index

• Dow Jones Industrial Average

• Russell 2000 Index

• Wilshire 5000 Total Market Index

• Bloomberg Barclays Aggregate Bond Index

Popular Index Funds Include

• Vanguard S&P 500 (VOO)

• T. Rowe Price Equity Index 500 (PREIX)

• Fidelity ZERO Large Cap Index Fund (FNILX)

• Standard and Poor’s Depository Receipt (SPDR) S&P 500 ETF Trust (SPY)

• iShares Core S&P 500 ETF (IVV)

• Schwab S&P 500 Index Fund (SWPPX)

Potential Advantages of Index Investing

The popularity of index investing is well-founded, as it has a number of benefits.

Can Be Easier to Manage

It might seem as though active investors would have a better chance at seeing significant portfolio growth than index investors, but this isn’t necessarily the reality. Day trading and timing the market can be extremely difficult, and may result in huge losses or underperformance. Active investors might have one very successful year, but the same strategy may not work for them over time.

Some individual investors who are not professionals just don’t have the time to learn the ins and outs of financial markets, let alone stock picking. Further, taking a hands-off approach to investing could eliminate many of the biases and uncertainties that arise in a stock-picking strategy.

Empirical research consistently demonstrates that index investing tends to outperform active management over the long term. Boston financial services market research firm, Dalbar, Inc., confirms that the average investor consistently earns below-average returns. For instance, for the 12-months ended Dec. 31, 2021, the S&P 500 posted a market return of 28.71%, while the average equity fund investor returned 18.39%.

SoFi users can take advantage of index investing by setting up an automated investing strategy to rebalance and diversify portfolios.

Lower Cost of Entry for Multiple Stocks

If you only have a small amount of money to start investing, and you choose to invest in individual stocks, you may only be able to invest in a few companies. With index investing, you gain access to a wide portfolio of stocks with the same amount of money.

Also, index investing doesn’t necessarily require a wealth manager or advisor — you can do it on your own. The taxes and fees tend to be lower for index investing because you make fewer trades, but this is not always the case. Always be sure to look into additional fees and costs before you make an investment.

Portfolio Diversification

One of the key tenets of smart investing is diversifying your portfolio. This means that rather than putting all of your money into a single investment, you divide it up into different investments. By diversifying, you may lower your risk because if one of your investments loses value, you still have others. At the same time, if an investment significantly goes up in value, you still typically benefit.

Index funds give you access to numerous stocks all within a single investment. For example, one share of an index fund based on the S&P 500 can give you exposure to as many as 500 different companies for a relatively small amount of money.

Index Investing Is Fairly Passive

Once you decide which index fund you plan to invest in and how much you will invest, there isn’t much more you need to do. Most index funds are also fairly liquid, meaning you can buy and sell them relatively easily when you choose to.

Potential Disadvantages of Index Investing

Although there can be upsides to investing in index funds, there can also be downsides and risks to be aware of.

Index Funds Follow the Market

Index funds track with the market they follow, whether that’s the U.S. stock market or another market. So, if the market drops, so does the index fund that’s trying to replicate that market’s performance.

Index Funds Don’t Directly Follow Indexes

Although index funds generally follow the trends of the market they track, the way they’re structured means that they don’t always directly track with the index. Because index funds don’t always contain every company that’s in a particular index, this means that when an index goes up or down in value, the index fund doesn’t necessarily act in exactly the same way. This is why it’s important to understand how specific index funds seek to track their underlying index.

Index Investing Is Best as a Long-Term Strategy

Because index funds mostly track the market, they do tend to grow in value over time, but they are certainly not get-rich-quick schemes. Returns can be inconsistent and typically go through upward and downward cycles.

Some investors make the mistake of trying to time the market, meaning they try to buy high and sell low. Investing in index funds tends to work the best when you hold your money in the funds for a longer period of time; or if you engage in as in dollar-cost-averaging. Dollar-cost-averaging is a method of investing the same amount consistently over time to take advantage of both high and low points in market prices.

Choosing an Index to Invest in

The name of a particular index fund may catch your eye, but it’s essential to look at what’s inside an index fund before investing in it. Determine what your short- and long-term goals are and what markets you are interested in being a part of before you begin investing.

There are both traditional funds and niche funds to choose from. Traditional funds follow a larger market, such as the S&P 500 or Russell 3000. Niche markets are more focused and may contain fewer stocks.

They may focus on a particular industry. Typically, a good way to start investing in index funds is to add one or more of the traditional funds first, then add niche funds if you feel strongly about their growth potential.

Index Funds Are Weighted

Depending on which index fund you invest in, it may be weighted. For example, the S&P 500 index is weighted based on market capitalization, meaning larger companies like Amazon and Meta (formerly Facebook) hold more weight than smaller ones.

If Meta’s stock suddenly goes down, it may be enough to affect the entire index. Other indexes are price weighted, which means that companies with a higher price per share will be weighted more heavily in the index. Another form of index weighting could be equal-weight or weights determined by other factors, such as a company’s earnings growth.

Less Flexibility

If you actively invest in individual stocks, you can usually choose exactly how many shares you want to buy in each company. But when you invest in index funds, you have less flexibility. If you’re interested in investing in a particular industry, there may not be an index fund focused solely on that.

How to Get Started With Index Investing

To invest in an index, investors typically purchase exchange traded funds that seek to track an index. Some funds include all the assets in an index, while others only include certain assets.

Prior to investing in any index fund, be sure to look into the details of how the fund works. You can find information about what is contained in the fund, how it is weighted, its fees and quarterly earnings, and other details on the fund’s website. You also can get that data via a financial advisor, or from the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) , which the U.S. Securities and Exchange Commission (SEC) oversees.

Alternatives to Index Investing

Despite the fact that index investing has grown in popularity over the past two decades, some analysts are now bringing up additional downsides and alternatives that investors may want to consider.

The stock market includes companies from many industries, some of which investors are moving away from investing in. Oil and gas companies, pesticide companies, and others — which some people could consider harmful to the environment or human populations — may be included in an index fund. As the economy moves away from these industries, these types of companies may not perform as well, and as an investor you may not want to support them financially.

Some new index funds are being formed around the principles of sustainability and positive social impact. You may also be interested in impact investing and other types of ETFs and mutual funds that focus on specific industries that affect society positively.

Building Your Portfolio

Whether you’re interested in investing in index funds or in hand-selecting each stock, it’s important to keep track of your portfolio and current market trends.

Once you know what your investment goals are, the SoFi Invest online investing platform can be a great tool to build your portfolio and track your finances. And, as we discussed above, with SoFi Automated Investing, you can easily add index fund ETFs to your portfolio, all on your phone if you choose. The automated investments are pre-selected for you, so you simply need to decide which funds to invest in, and how much you want to invest. Or, if you prefer to hand-select each stock in your portfolio, you can use the SoFi Active Investing self-directed brokerage platform.

SoFi has a team of credentialed financial advisors available to answer your questions and help you reach your goals. You only need a $1 to get started.

Find out more about how you can use SoFi Invest to meet your financial goals.

FAQ

What happens when you invest in an index?

When you invest in an index, you’re investing in not one stock, but in a collection of stocks (or other asset types, like bonds). The number of assets in an index can range from the tens to the hundreds. And they usually have something in common, be it their capitalization (large or small cap); their sector (tech or healthcare), and so on.

Are indexes safe investments?

Investing in the capital markets always entails a degree of risk; there are no guarantees, and no investment is 100% safe. That said, investing in an index fund can entail less risk than owning a handful of individual company stocks because index funds are diversified. That doesn’t mean you can’t lose money, but an index generally fluctuates a lot less than an individual stock. Index funds are only as stable as their underlying index.

What does index mean in investing?

In investing, the term “index” refers to the basket of assets (stocks, bonds, etc.) that comprise an index fund.

Photo credit: iStock/PixelsEffect

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.

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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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Jul

2022

Investing for Beginners: Considerations and Ways to Get Started

By Michael Flannelly | Growing Wealth, Investing | No Comments

Investing can be a great way to secure your financial future, but it can also be an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a bank account.

It’s worth understanding what you’re doing before you put your money into the nebulous financial markets. You’ll want to know the basics of investing, from the different types of investments to the various strategies you can make money from them. With this knowledge, you should have a good idea of what sorts of investments are right for you and how to get started.

Table of Contents

Why Is Investing Important?
Things to Consider as a Beginner Investor
How to Start Investing
4 Types of Investments for Beginners
Investment Strategies for Beginners
When Should You Start Investing?
How Much Money Do You Need to Start Investing as a Beginner?
FAQ

Why Is Investing Important?

Investing is important because it helps you build wealth. Investing is simply the process of putting your money into assets that have the potential to grow in value over time. Doing this may increase your wealth and achieve financial goals, like saving for retirement.

You may wonder why you’d want to risk putting your hard-earned money in the financial markets, where it has the chance to decline, rather than simply stashing it in a savings account or even under your mattress. It’s because inflation can eat away at your money’s purchasing power if you don’t invest.

Your money sitting in a savings account earning little interest will eventually decrease in value because of inflation. The money you put into the market may be at risk, but it also has the potential to grow. By investing, you can ensure your money keeps up with inflation or even outpaces it. And historically, the market tends to increase, even accounting for significant stock market crashes like the Great Depression and the 2008 crisis.

💡 Recommended: How to Protect Your Money From Inflation

Of course, that doesn’t mean there’s no place for a healthy savings account, especially for money that you need in the short term.

Many people hold off putting money into the financial markets because they believe common investment myths, like that you have to be an expert or that you need to devote a lot of time to your finances. But even novices can set aside a little time and money to start investing.

Things to Consider as a Beginner Investor

There are a few important pieces of information you want to determine and understand before you begin investing.

Investment Goals

You want to establish your financial goals before you start investing. Since investments have such strong growth potential over time, many people use their portfolio’s gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals, because they’re not the same for everyone.

Time Frame

After establishing your investing goals, you can think about how long it may take you to reach them. For example, investing for your retirement nest egg will likely take longer than investing to save money for a downpayment on a house.

Determining these time horizons for investing involves taking your age into account. A younger investor saving for retirement has a longer runway to achieve their goals and, thus, can take more risks, like investing in stocks or cryptocurrencies, to meet those goals. In contrast, an older investor will likely employ a conservative investment strategy, like investing in low-risk bond funds, to protect their portfolio’s value from declining at a time when they are less able to afford it.

Risk Tolerance

Every investor must determine the amount of investment risk they are willing and able to accept in their investing decisions. This risk tolerance is essentially the loss an investor can withstand in their portfolio. Age, investing goals, and income may contribute to your risk tolerance.

Certain assets, like growth stocks, commodities, and cryptocurrencies, are risky investments, while bonds and blue chip stocks are considered less risky. With increased risk comes the potential for higher returns, albeit with the possibility of significant losses.

Portfolio Diversification

Portfolio diversification involves investing your money across a range of assets, like stocks, bonds, and real estate, rather than concentrating all of it in one area. After all, you don’t want to put all your financial eggs in one basket. By diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

Step 1: Open an Investment Account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, mutual funds, and other securities.

You can also utilize an employer-sponsored retirement plan, like a 401(k), or an individual retirement account to make your investments. One benefit of retirement investment accounts is that they are tax-advantaged, meaning your investments can grow tax-free within the accounts. However, you may have to pay taxes when withdrawing money from the account.

💡 Need more help? Follow our guide on how to open a brokerage account.

Step 2: Do Your Research

It’s important to research different companies, funds, and assets to find a diversified selection of investments that fit your desires and priorities. Diversification will help to reduce your risk and maximize your returns.

Step 3: Invest and Monitor Your Portfolio

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio are performing well based on your investment strategy.

Keep in mind that investing is a long-term game; it’s important to be patient and resist the urge to sell when the markets are down. If you stick to your plan and invest for the long haul, you’ll be more likely to reach your financial goals.

4 Types of Investments for Beginners

There are a wide variety of investment options available to beginner investors. Some people may invest in cryptocurrencies or commodities, while others may be interested in annuities and penny stocks. However, the following assets are generally best suited for the beginning investor.

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly-traded company in units known as shares. Investing in stocks as a beginner can be an ideal way to build wealth.

Investors make money on stocks through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may pay dividends if it distributes part of its profits to its shareholders.

💡 Recommended: How to Invest in Stocks: A Beginner’s Guide

2. Bonds

Bonds are loans you make to a company or a government — federal or local — for a fixed period. In return for loaning them money, they promise to pay you periodic interest and, eventually, your principal at the end of the period.

Bonds are typically backed by the full faith and credit of the government or large companies. They’re often considered lower risk than stocks.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

3. Mutual Funds and ETFs

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Exchange-traded funds (ETFs) are similar to mutual funds, but the main difference is that ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day.

Mutual funds and ETFs allow investors to diversify their holdings in one investment vehicle.

💡 Recommended: ETFs vs. Mutual Funds: Learning the Difference

4. Real Estate

Many initially invest in real estate by purchasing a home or a rental property.

If owning a home is out of reach for you, you can also invest in a real estate investment trust (REIT), a company that operates in the real estate business. You can trade a REIT on a stock exchange like you would a stock. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. There’s less responsibility and pressure on the shareholder when compared to purchasing an investment property.

Investment Strategies for Beginners

An investment strategy is a plan that outlines how you will invest your money. An ideal strategy should consider your financial goals, risk tolerance, and time horizon. Here are two recommended strategies for beginner investors.

Buy and Hold

Investors practicing buy and hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which can boost overall portfolio returns.

A buy and hold strategy can be difficult as you witness the market’s volatility, where the value of your portfolio declines during certain periods. However, market fluctuations are a natural part of the market cycle. Rather than get nervous and be tempted to sell when prices drop, a buy and hold strategy will keep you in the markets if you can afford it. If you sell when prices are low, you may lock in losses and miss out on a likely market rebound.

Dollar-Cost Averaging

Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price.

For example, say you want to invest $1,000 every quarter in stock ABC. Each quarter, the price of that stock will vary — sometimes it will be up, sometimes it will be down. The amount of money you invest remains the same, so you buy fewer shares when prices are high and more shares when prices are low.

A dollar-cost average strategy can help individuals access a lower average share price and help them avoid emotional investing.

When Should You Start Investing?

It’s ideal to start investing as soon as possible, as long as you have established an emergency fund and paid off high interest debts. The earlier you start, the more time your money has to grow. It’s better to start investing when you’re young, setting aside a little bit of money each month toward your portfolio, rather than wait until you’re older and have to invest a more significant portion of your income to meet your goals.

Additionally, when you start investing when you’re young, you can more easily benefit from compounding returns. Compound returns mean any gains you earn are reinvested to earn additional returns.

How Much Money Do You Need to Start Investing as a Beginner?

You can start investing with as much money that fits your budget and financial goals. The amount of money you need to start investing as a beginner can vary depending on the type of investment you want to make. For example, if you want to buy shares of a company, you will need to have enough money to cover the cost of the shares. If you want to invest in a mutual fund, you will need to have enough money to cover the minimum investment amount.

Fortunately, you can invest with only a few bucks at a time these days because many brokerage firms offer fractional share investing, allowing investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize this to use whatever dollar amount they have available to purchase stocks.

The Takeaway

Learning how to invest doesn’t have to be complicated. Like many things in life, it takes time and experience to gain the knowledge to do it successfully. As long as you begin sooner rather than later, you can start building wealth to meet your financial goals.

If you want to learn everything you can about the markets and have control over your portfolio, SoFi’s all-in-one online investing platform might be the choice for you. With SoFi Invest®, you can trade stocks and ETFs with no commissions for as little as $5.

Want to learn more about how SoFi may be able to help you reach your long-term financial goals? Get started with SoFi Invest today.

FAQ

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.

SoFi Invest®

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

Jul

2022

10 Options Trading Strategies for Beginners

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

While the options market is risky and not suitable for everyone, these contracts can be a tool to make a speculative bet or offset risk in another position.

Many option strategies can involve one “leg,” meaning there’s only one contract that’s traded. More sophisticated strategies involve buying or selling multiple options contracts at the same time in order to minimize risk.

Here’s a guide that covers 10 important options trading strategies–from the most basic to the more complex and advanced.

10 Important Options Trading Strategies for Beginners

When trading options, investors can either buy existing contracts, or they can “write” or sell contracts for securities they currently hold. The former is generally used as a means of speculation, while the latter is most often used as a way of generating income.

Here’s a closer look at important options strategies for beginner, intermediate and more advanced investors to know.

Long Calls
Long Puts
Covered Calls
Short Puts
Short Calls or Naked Calls
Straddles and Strangles
Cash-Secured Puts
Bull Put Spreads
Iron Condors
Butterfly Spreads

1. Long Calls

Level of Expertise: Beginner

Being long a call option means an investor has purchased a call option. “Going long” calls are a very traditional way of using options. This strategy is often used when an investor has expectations that the share price of a stock will rise but may not want to outright own the stock. It’s therefore a bullish trading strategy.

Let’s say an investor believes that Retail Stock will climb in one month. Retail Stock is currently trading at $10 a share and the investor believes it will rise above $12. The investor could buy an option with a $12 strike price and with an expiration date at least one month from now. If Retail Stock’s price rises to hit $12 within a month, the value or “premium” of the option would likely rise.

2. Long Puts

Level of Expertise: Beginner

Put options can be used to make a bearish speculative bet, similar to shorting a stock, or they can also function as a hedge. A hedge is something an investor uses to make up for potential losses somewhere else. Here are examples of both uses.

Let’s say Options Trader wants to wager shares of Finance Firm will fall. Options Trader doesn’t want to buy the shares outright so instead purchases puts tied to Finance Firm. If Finance Firm stock falls before the expiration date of the puts, the value of those options will likely rise. And Options Trader can sell them in the market for a profit.

An example of a hedge might be an investor who buys shares of Tech Stock C that are currently trading at $20. But the investor is also nervous about the stock falling, so they buy puts with a strike price of $18 and an expiration two months from now.

One month later, Tech Stock C stock tumbles to $15, and the investor needs to sell their shares for extra cash. But the investor capped their losses because they were able to sell the shares at $18 by exercising their puts.

3. Covered Calls

Level of Expertise: Beginner

The covered call strategy requires an investor to own shares of the underlying stock. They then write a call option on the stock and receive a premium payment.

The tradeoff is that if the stock rises above the strike price of the contract, the stock shares will be called away from them, and the shares (along with any future price rises) will be forfeit. So, this strategy works best when a stock is expected to stay flat or go down slightly.

If the stock price of Company Y stays below the strike price when the option expires, the call writer keeps the shares and the premium and can then write another covered call if desired. If Company Y rises above the strike price when the option expires, the call writer must sell the shares at that price.

4. Short Puts

Level of Expertise: Beginner

Being short a put is similar to being long a call in the sense that both strategies are bullish. However, when shorting a put, investors actually sell the put option, earning a premium through the trade. If the buyer of the put option exercises the contract however, the seller would be obligated to buy those shares.

Here’s an example of a short put: Shares of Transportation Stock are trading at $40 a share. An investor wants to buy the shares at $35. Instead of buying shares however, the investor sells put options with a strike price of $35. If the shares never hit $35, the investor gets to keep the premium they made from the sale of the puts.

Should the options buyer exercise those puts when it hits $35, the investor would have to buy those shares. But remember the investor wanted to buy at that level anyways. Plus by going short put options, they’ve also already collected a nice premium.

5. Short Calls or Naked Calls

Level of Expertise: Intermediate

When an investor is short call options, they are typically bearish or neutral on the underlying stock. The investor typically sells the call option to another person. Should the person who bought the call exercise the option, the original investor needs to deliver the stock.

Short calls are like covered calls, but the investor selling the options don’t already own the underlying shares, hence the phrase “naked calls”. Hence they’re riskier and not for beginner investors.

Here’s a hypothetical case: Investor A sells a call option with a strike price of $100 to Trader B, while the underlying stock of Energy Stock is trading at $90. This means that if Energy Stock never rises to $100 a share, Investor A pockets the premium they earned from selling the call option.

However, if shares of Energy Stock rise above $100 to $115, and Trader B exercises the call option, Investor A is obligated to sell the underlying shares to Trader B. That means Investor A has to buy the shares for $115 each and deliver them to Trader B, who only has to pay $100 per share.

6. Straddles and Strangles

Level of Expertise: Intermediate

With straddles in options trading, investors can profit regardless of the direction the underlying stock or asset makes. In a long straddle, an investor is anticipating higher volatility, so they buy both a call option and a put option at the same time. Short straddles are the opposite–investors sell a call and put at the same time.

Straddles and strangles are used when movement in the underlying asset is expected to be small or neutral.

Let’s look at a hypothetical long straddle. An investor pays $1 for a call contract and $1 for a put contract. Both have strikes of $10. In order for the investor to break even, the stock will have to rise above $12 or fall below $8. This is because we’re taking into account the $2 they spent on the premiums.

In a long strangle, the investor buys a call and put but with different strike prices. This is likely because they believe the stock is more likely to move up than down, or vice versa. In a short strangle, the investor sells a call and put with different strikes.

Here’s an example of a short strangle. An investor sells a call and put on an exchange-traded fund (ETF) for $3 each. The maximum profit the investor can make is $6 — the total from the sales of the call and the put options. The maximum loss the investor can incur is unlimited since the underlying ETF can potentially climb higher forever. Meanwhile, losses would stop when the price hit $0 but still be significant.

7. Cash-Secured Puts

Level of Expertise: Intermediate

The cash-secured put strategy is one that can both provide income and let investors purchase a stock at a lower price than they might have been able to if using a simple market buy order.

Here’s how it works: an investor writes a put option for Miner CC they do not own with a strike price lower than shares are currently trading at. The investor needs to have enough cash in their account to cover the cost of buying 100 shares per contract written, in case the stock trades below the strike price upon expiration (in which case they would be obligated to buy).

This strategy is typically used when the investor has a bullish to neutral outlook on the underlying asset. The option writer receives cheap shares while also holding onto the premium. Alternatively, if the stock trades sideways, the writer will still receive the premium, but no shares.

8. Bull Put Spreads

Level of Expertise: Advanced

A bull put spread involves one long put with a lower strike price and one short put with a higher strike price. Both contracts have the same expiration date and underlying security. This strategy is intended to benefit from a rising stock price. But unlike a regular call option, a bull put spread limits losses and can also profit from time decay.

Let’s say a stock is trading at $150. Trader B buys one put option with a strike of $140 for $3, while selling another put option with a strike of $160 for $4. The maximum profit is $1, or the net earnings from the two options premiums. So $4 minus $3 = $1. The maximum profit can be achieved when the stock price goes above the higher strike, so $160 in this case.

Meanwhile, the maximum loss equals the difference between the two strikes minus the difference of the premiums. So ($160 minus $140 = $20) minus ($4 minus $3 = $1) so $20 minus $1, which equals $19. The maximum loss is achieved if the share price falls below the strike of the put option the investor bought, so $140 in this example.

Recommended: A Guide to Options Spreads

9. Iron Condors

Level of Expertise: Advanced

The iron condor consists of four option legs (two calls and two puts) and is designed to earn a small profit in a low-risk fashion when a stock is thought to have little volatility. Here are the four legs. All four contracts have the same expiration:

1. Buy an out-of-the-money put with a lower strike price

2. Write a put with a strike price closer to the asset’s current price

3. Write an call with a higher strike

4. Buy a call with an even higher out-of-the-money strike.

If an individual makes an iron condor on shares of Widget Maker Inc., the best case scenario for them would be if all the options expire worthless. In that case, the individual would collect the net premium from creating the trade.

Meanwhile, the maximum loss is the difference between the long call and short call strikes, or the long put and short put strikes, after taking into account the premiums from creating the trade.

10. Butterfly Spreads

Level of Expertise: Advanced

A butterfly spread is a combination of a bull spread and a bear spread and can be constructed with either calls or puts. Like the iron condor, the butterfly spread involves four different options legs. This strategy is used when a stock is expected to stay relatively flat until the options expire.

In this example, we’ll look at a long-call butterfly spread. To create a butterfly spread, an investor buys or writes four contracts:

1. Buys one in-the-money call with a lower strike price

2. Writes two at-the-money calls

3. Buys another higher striking out-of-the-money call.

The Takeaway

Options trading strategies offer a way to potentially profit in almost any market situation—whether prices are going up, down, or sideways. The market is complex and highly risky, making it not suitable for everyone, but the guide above lays out different trading strategies based on the level of expertise of the investor.

Investors who are ready to dip their toe into options trading might consider SoFi’s options trading platform, where they’ll have access to a library of educational content about options. Plus, the platform has a user-friendly design.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/Rockaa
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Jul

2022

ETFs vs Index Funds: Differences and Similarities, Explained

By Kim Franke-Folstad | invest, Investing, Terminology | No Comments

While most exchange-traded funds, or ETFs, are passively managed just like index funds (meaning they track a certain market index), these funds have different structures, which can have a significant impact on investors.

Index funds are a type of mutual fund, which means they are less transparent, liquid, and tax efficient compared with ETFs. Exchange-traded funds shares, for example, trade on exchanges throughout the day, similar to stocks — while index funds do not. Owing to disclosure regulations, index ETFs are also more transparent than index mutual funds.

Here’s what else you need to know before you decide whether to invest in an index fund vs. an ETF.

An Overview of Index Funds

In order to understand some of the similarities between index funds and ETFs, both of which adhere to passive investing strategies (though a small fraction of ETFs are actively managed), let’s start with what a market index is and how it works.

What Is an Index?

A market index tracks a representative sample of securities in a particular sector or asset class. For example, the S&P 500 index tracks the performance of the 500 largest companies in the U.S., while the Russell 2000 index tracks small-cap domestic companies. Typically, the index is weighted according to the size of the companies.

Most indices are used as benchmarks to measure the performance of assets in a particular sector. Meaning: large-cap U.S. mutual funds might measure their performance against the S&P 500 index as a benchmark.

You can’t invest in an index, but you can invest in funds that track the index.

So index funds or index ETFs that track the S&P 500 seek to mimic the performance of that benchmark by investing in the same large-cap U.S. companies that are in the index, and giving them a similar weight in the fund.

The same goes for funds that track any other benchmark, whether that’s the Nasdaq 100 Index (which includes 100 of the largest domestic and international non-financial companies), or the MSCI World Index (mid- and large-cap global companies), or one of the many bond indices. Index funds and ETFs simply track the performance of the index, thus they are passively managed.

What Is Passive Investing?

As noted above, an index fund mirrors the performance of its index, which is known as passive investing. An actively managed fund, however, follows the strategy of an active management team. So active investing is a strategy where human portfolio managers pick investments they believe will outperform the market — whereas passive investing relies on a formula to mirror the performance of certain market sectors.

There are thousands of mutual funds available to investors, and the vast majority of them rely on active strategies. In 2021, there were over 6,600 actively managed funds, and about 500 passively managed (index) funds in the U.S., according to Statista.

Even though the number of index funds is much smaller, these funds track a wide range of benchmarks, which naturally has an impact on index fund returns. A fund that tracks a corporate bond index versus a fund that tracks an index of biotech stocks will typically have different returns.

What’s the Differences Between an ETF and Index Fund?

When picking ETFs, however, bear in mind that the world of ETFs is the opposite of mutual funds: the majority of ETFs are passively managed; i.e. they are index ETFs.

Only about 2% of ETFs are actively managed, owing to rules about transparency for these products.

That’s why many actively managed ETFs rely on a certain fund structure that allows for less transparency. These are called active non-transparent or ANT ETFs.

So: ETF vs. index fund, what are the primary differences?

How an Index Fund Works

Index funds are mutual funds. They are a collection of stocks, bonds, or other securities that are bundled together into a single unit (the mutual fund). Some may invest in large-cap stocks; some in ESG companies; some in tech; some in international companies, and so on. Most investors own more than one type of mutual fund in their portfolio, and you can also own more than one type of index fund.

Like any other type of mutual fund, index fund shares can be traded only once per day. You can put in the order in the morning, but it won’t go through until the market closes. This means the price you anticipated when you entered the order to buy or sell isn’t necessarily what you’ll get.

💡 Recommended: Learn what actively managed ETFs are and how they work.

How an ETF Works

An ETF is an exchange-traded fund, so its wrapper — or structure — is not the same as a traditional mutual fund. While an exchange-traded fund is also a basket of securities, shares of these funds can be traded on exchanges throughout the day, just like stocks. As a result, ETF shares are not only more liquid from a cash standpoint, they are also more fluid.

Mutual fund shares vs. ETF shares are relatively fixed. ETFs can generate more shares, depending on investor demand. But because an ETF is listed on a stock exchange, a sale can go through any time the market is open. An investor can get real-time pricing information with relative ease by checking financial websites or calling a broker. That’s a plus for investors and financial professionals who like the idea of making moves based on market conditions.

When trading ETFs, bear in mind that the expense ratio of ETFs is generally lower than most mutual funds. And owing to the way shares are created and redeemed, ETFs can be more tax efficient.

ETFs can offer that flexibility and more transparency: Investors can review holdings daily and monitor portfolio risk exposures more frequently than with indexed mutual funds.

Similarities Between ETFs and Index Funds

As noted above, ETFs and index funds are both pooled investments, like baskets that include dozens, sometimes hundreds of securities in a single package. This helps provide investors with diversification within the fund that can help mitigate risk and may improve performance. In addition, these two fund types share some other similarities.

Cost

ETF vs. index fund — which is cheaper? The cost per share varies widely, of course, but when it comes to expense ratios of these funds the two are increasingly competitive. Time was when ETFs fees were far lower, but now many index funds have ultra-low expense ratios.

Still, many ETFs no longer charge brokerage fees or commissions, which cuts out a cost that many mutual funds still charge. Mutual funds also tend to have higher administrative costs.

Diversification

Both ETFs and index funds can offer investors the potential to add diversification to their portfolios.

ETF vs Index Fund: Pros and Cons of Each

There’s no cut-and-dried answer to whether ETFs are better than index funds, but there are a number of pros and cons to consider for each type of fund.

Transparency

By law, mutual funds are required to disclose their holdings every quarter. This is a stark contrast with ETFs, which disclose their holdings each day.

Transparency may matter less when it comes to index funds, however, because index funds track an index, so the holdings are not in dispute. That said, many investors prefer the transparency of ETFs, whose holdings can be verified day to day.

Pricing

Because a mutual fund’s net asset value (NAV) isn’t determined until markets close, it can be hard to know exactly how much an index fund costs until end of day. That’s partly why mutual funds, including index funds, allow straight dollar amounts to be invested, as well as purchasing shares. If you buy an index fund at noon, you can buy $100 worth, for example, regardless of the share price.

ETF shares, which trade throughout the day like stocks, are priced by the share, so you always know how much you’re paying for an ETF.

This pricing structure also allows investors to use stop order or limit orders to set the price they’re willing to buy or sell.

Taxes

ETFs are generally considered more tax efficient than mutual funds, including index funds.

The way mutual funds are structured, there can be more tax implications as investors buy in and out of an index fund, and the cost of taxes is shared among different investors. ETF shares are redeemed directly for cash, so if there are capital gains, you would only owe them based on your ETF shares.

How Do Investors Find the Right ETF?

Choosing between ETFs vs. index funds typically comes down to cost and flexibility, as well as understanding the tax implications of the two fund types. While both ETFs and index funds are low-cost, passively managed funds — two factors which can provide an upside when it comes to long-term performance — ETFs generally have the upper hand when it comes to taxes.

If taxable gains are a concern for you, ETFs may be a more tax-efficient option vs. index funds, which are structured such that gains are dispersed among shareholders. Also consider the tax structure of the container: i.e. are you holding the fund in a taxable portfolio, or a tax-deferred retirement account?

Once your goals are clear, selecting an ETF is easy when you set up a brokerage account with SoFi Invest. You can explore ETFs from the secure SoFi app at your convenience, and invest in ETFs in a taxable account or an IRA. SoFi also enables you to trade stocks, IPO shares, and more. Whatever your aims are, SoFi can get you started on your investing future.

Download the SoFi app to get started.

FAQ

Is it better to choose an ETF or an index fund?

ETFs and index funds each have their pros and cons. ETFs tend to cost less and be more tax efficient, and you can trade ETFs like stocks throughout the day. If you’re interested in more of a buy-and-hold strategy, an index fund may make more sense.

What are the similarities between an ETF and an index fund?

All index funds, and about 98% of ETFs, are passively managed — meaning, they track a certain market index. In addition, both ETFs and index funds tend to be much cheaper to own, versus their actively managed counterparts.

What are the differences between an ETF and an index fund?

ETFs generally cost less, are more transparent, and more tax efficient compared with index funds.

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

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

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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

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