Apr
30
2024
Having a Savings Accounts on Social Security Disability

Are You Allowed to Have a Savings Account While on Social Security Disability?

By | Budgeting & Goals, Family Finances, money | Comments Off on Are You Allowed to Have a Savings Account While on Social Security Disability?

If someone is applying for disability benefits, they may be relieved to learn that, yes, you can have a savings account while on Social Security disability. While there are certain financial factors that can disqualify someone from Social Security eligibility, having a savings account is not one of those factors.

But of course, there are some subtleties to be aware of with any benefits matter, so it’s important to take a closer look. Among the points to learn are the difference between SSDI (Social Security Disability Insurance) and SSI (Supplemental Security Income), who is eligible for Social Security disability benefits, and what the guidelines are for having a savings account while receiving benefits.

What Is Social Security?

There’s a reason the Social Security program is so well known: It has been providing financial support to Americans for many decades. Social Security benefits are designed to help maintain the basic well-being and protection of the American people. These benefits have been around since the 1930’s in response to the economic crisis caused by the Great Depression.

Today, one in five Americans currently receive some form of Social Security benefits — one third of those are disabled, dependents, or survivors of deceased workers. More than 10 million Americans are either disabled workers or their dependents.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

Can I Get Social Security Disability Insurance or Supplemental Security Income with a Savings Account?

You may be thinking you can’t have that kind of asset if you want to qualify for Social Security Disability funds. However, it is indeed possible to receive Social Security Disability Insurance (SSDI) or supplemental security income if you have a checking or a savings account.

Even better, it doesn’t matter how much money is held in that account. There are other program requirements that must be met to qualify for SSDI, but how much money someone has or doesn’t have in the bank isn’t one of them.

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Eligibility for SSDI

In order to be eligible for SSDI benefits, the individual must have worked in a job or jobs that were covered by Social Security and have a current medical condition that meets Social Security’s definition of disability. Generally, this program can benefit those who are unable to work for a year or more due to a disability.

It provides monthly benefits until the individual is able to work again on a regular basis. If someone reaches full retirement age while receiving SSDI benefits, those benefits will automatically convert to retirement benefits maintaining the same amount of financial support.

Eligibility for SSI

If you receive Supplemental Security Income (SSI), however, there is a limit on how much you can have in savings. SSI is a federal support program that receives funding from the type of taxes known as general tax revenue, not Social Security taxes.

This program provides financial support to help recipients cover basic needs such as clothing, shelter, and food. It provides aid to those who are aged (65 or older), blind, and disabled people who have little or no income (or limited resources). To qualify, participants must be a U.S. citizen or national, or qualify as one of certain categories of noncitizens.

What You Have to Tell SS about Your Assets if You Want Benefits

There are certain assets (in this case, they’re known as resources) that must be disclosed in order to qualify for benefits through the SSI program. Typically, to receive benefits, one can’t own more than $2,000 as an individual or $3,000 as a couple in what the SSA deems “countable resources.” However, there aren’t any such limits in place for the SSDI program.

The value of someone’s resources (aka their financial assets) can help determine if they are eligible for Social Security benefits. If a recipient has more resources than allowed by the limit at the beginning of the month (when resources are counted), they won’t receive benefits for that month. They can be eligible again the next month if they use up or sell enough resources to fall below the limit.

Eligible resources can include:

•   Cash

•   Bank accounts (checking account, regular savings account, growth savings account; whatever you have)

•   Stocks, mutual funds, and U.S. savings bonds

•   Land

•   Life insurance

•   Personal property

•   Vehicles

•   Anything that can be changed to cash (and can be used for food and shelter)

•   Deemed resources

The term “deemed resources” refers to the resources of a spouse, parent, parent’s spouse, sponsor of a noncitizen, or sponsor’s spouse of the Social Security benefits applicant.

A certain amount of these deemed resources are subtracted from the overall limit. For example, if a child under 18 lives with only one parent, $2,000 worth of deemed resources won’t count towards the limit. If they live with two parents, that amount rises to $3,000.

Recommended: What are the Different Types of Savings Accounts?

How Much Can I Have in My Savings Account and Receive SSI or SSDI?

For the SSI program, the total resource limit (which includes what’s in a checking account) can not be more than $2,000 for an individual or $3,000 for a couple. Again, there are no asset limits when it comes to the SSDI program. If someone is applying for the SSDI program, they can surpass that $3,000 limit, and it won’t matter as it doesn’t apply to them.

SSA Exceptions and Programs

Not every asset someone owns will count towards the SSI resource limit (remember, there is no such limit for the SSDI program). For the SSI program, there are some exceptions regarding what counts as a resource. The following assets aren’t taken into consideration:

•   The home the applicant lives in and the land they live on

•   One vehicle—regardless of value—if the applicant or a member of their household use it for transportation

•   Household goods and personal effects

•   Life insurance policies (with a combined face value of $1,500 or less)

•   Burial spaces for them or their immediate family

•   Burial funds for them and their spouse (each valued at $1,500 or less)

•   Property they or their spouse use in a trade or business or to do their job

•   If blind or disabled, any money they set aside under a Plan to Achieve Self-Support

•   Up to $100,000 of funds in an Achieving a Better Life Experience account established through a State ABLE program

The Takeaway

When applying for Social Security benefits, having a savings account may or may not impact your eligibility. It depends on which program you are applying for. It is possible to have a savings account while receiving SSDI benefits. It’s also possible to have a savings account while receiving SSI, but there are limits regarding how much the value of the applicant’s assets (including what’s in their savings accounts) can be worth to qualify for support.

If you happen to be in the market for a savings account, take a look at your options.

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.

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FAQ

How much money can I have in a savings account while on Social Security?

Personal assets aren’t taken into account, including savings, when applying for the SSDI program. For SSI, however, countable resources (including savings accounts) are capped at $2,000 for individuals and $3,000 for couples.

Does Social Security look at your bank account?

That depends. If someone is applying for Supplemental Social Security Income (SSI) benefits, their personal assets are taken into consideration when it comes to eligibility. With Social Security Disability Insurance (SSDI), applicant assets aren’t taken into consideration.

What happens if you have more than $2,000 in the bank on SSI?

If you have more than $2,000 in the bank and are on SSI as an individual (more than $3,000 if you are part of a couple), you will not receive benefits for that month. Your finances will be evaluated the following month to see if your assets have fallen and you therefore qualify.

Does Social Security check your bank account every month?

Money in the bank doesn’t affect Social Security disability benefits. However, there is a $2,000 to $3,000 limit (varies by household) for the SSI program.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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.

This article is not intended to be legal advice. Please consult an attorney for advice.


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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Feb
16
2024
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9 Golden Rules of Investing

By | Growing Wealth, invest, Investing | Comments Off on 9 Golden Rules of Investing

While each investor may have their own approach to investing, there are some best practices that have been honed over time by those with years of experience.

That’s not to say that one investing strategy is right and another is wrong, or that any strategy is more likely to succeed than another. When it comes to putting your money in the market, there are no guarantees and no crystal balls. But understanding some basic guidelines that have stood the test of time can be beneficial.

Basic Investing Principles

Following are a few fundamentals that hold true for many people in many situations. Bearing these in mind won’t guarantee any outcomes, but they can help you manage risk, investing costs, and your own emotions.

1. The Sooner You Start, the Better

In general, the longer your investments remain in the market, the greater the odds are that you might see positive returns. That’s because long-term investments benefit from time in the market, not timing the market.

Meaning: The markets inevitably rise and fall. So the sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.

In addition, if your investments do see a gain, those earnings generate additional earnings over time, and then those earnings generate earnings, potentially increasing your returns. This is similar to the principle of compound interest.

2. Make It Automatic

One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.

Investing in this way also allows you to take advantage of a strategy called dollar-cost averaging, which helps reduce your exposure to volatility. Dollar cost averaging is when you buy a fixed dollar amount of an investment on a regular cadence (e.g. weekly or monthly).

The goal is not to invest when prices are high or low, but rather to keep your investment steady, and thereby avoid the temptation to time the market. That’s because with dollar cost averaging (DCA) you invest the same dollar amount each time, so that when prices are lower, you buy more; when prices are higher, you buy less.

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

3. Take Advantage of Free Money

If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match. That’s a risk-free return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.

Recommended: Investing 101 Guide

4. Build a Diversified Portfolio

By creating a diversified portfolio with a variety of types of investments across a range of asset classes, you may be able to reduce some of your investment risk.

Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.

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5. Reduce the Fees You Pay

No matter whether you’re taking an active, passive, or automatic approach to investing, you’re going to have to pay some fees to managers or brokers. For example, if you buy mutual or exchange-traded funds, you will typically pay an annual fee based on that fund’s expense ratio.

Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.

6. Stick with Your Plan

When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like How can investments lose so much value so quickly? Will they ever go back up? What should I do?

During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.

The takeaway? Investments fluctuate over time and managing your emotions is as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, and don’t impulsively buy or sell just because the weather changes, so to say.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

7. Maximize Tax-Advantaged Accounts

Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or eliminate them entirely, are so valuable to investors.

The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:

•   Workplace retirement accounts such as 401(k), 403(b), etc.

•   Health Savings Accounts (HSAs)

•   Individual Retirement Accounts (IRAs), including Roth IRAs, SEP IRAs, SIMPLE IRAs, etc.

•   529 Accounts (college savings accounts)

Recommended: Benefits of Health Savings Accounts

8. Rebalance Regularly

Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.

To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.

9. Understand Your Personal Risk Tolerance

While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions – then you might want to tilt your portfolio more conservatively.

Ideally, you’ll land on an asset allocation that takes into account both your risk tolerance and the amount of risk that you need (and are able) to take in order to meet your investment goals.

If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses), you might consider taking a more aggressive approach to investing.

The Takeaway

The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

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


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

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Feb
08
2024

What Are the Different Types of Stocks?

By | Growing Wealth, invest, Investing | Comments Off on What Are the Different Types of Stocks?

There are numerous types of stocks, categorized by company characteristics, size, region, sector, and more. Equipped with an understanding of different stock types, an investor can start building a diversified portfolio. Though all stocks can experience volatility and potentially lose value, holding a mix of different types of shares can mitigate the risk of being too heavily invested in any one category.

An Overview Of Stocks

A stock represents a percentage of ownership in a publicly traded company. So essentially, investors can own small pieces or “shares” of companies.

Generating returns via the stock market can usually happen in one of two ways. First, the value of the stock can increase over time, something known as capital appreciation. The second is through dividend payments, where companies make cash payouts periodically to all owners of that company’s stock. Some people make investments based on a company’s ability to pay consistent dividends, or “income.” Utility and telephone companies often fit into this bucket.

When you own a stock, you hold equity (or ownership) in that company. That’s why stocks are sometimes referred to as equities. Each individual share represents an equal proportion of ownership. Owners of stocks are often referred to as stockholders or shareholders.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Categories of Stocks

There are several ways that different stocks are categorized, which is important to know if you’re brushing up on the stock market basics. Stocks are also sometimes classified by styles of investing. These categories often have to do with how that company makes money and how the stock is valued. You may often hear this associated when discussing value vs. growth stocks.

Value Stocks

Value stocks are stocks that are considered to be trading below their actual worth, and are a key component in value investing. Investors hope that by buying companies that are priced below their “true” value, they can profit as the gap narrows over time.

Growth Stocks

Growth stocks are companies that are growing at a fast pace or those that are expected to continue growing at a faster rate than other stocks or competitors. Investors can encounter higher valuations in growth investing.

Common Stock

Common stock represents shares of ownership in a corporation. When an investor receives common shares, they are typically also granted voting rights to the company and can participate in shareholder voting processes — usually one vote for each share. For investors, it can be helpful to understand the differences between common versus preferred stock.

Preferred Stocks

Preferred stocks make regular dividend payments, but holders of preferred shares often have zero or limited voting rights. If a company becomes financially insolvent however, preferred stockholders have a claim on assets before common shareholders do.

Exchange-traded Funds (ETFs)

Exchange-traded funds, or ETFs, group multiple securities into a single share. For instance, a stock ETF will hold numerous companies, while a bond ETF can hold many individual bonds, whether it’s a collection of Treasurys or high-yield debt. ETFs are popular because of the cheap, instant diversification they offer.

There are many types of ETFs, too, including low cost ETFs, and ETFs with their holdings concentrated in certain sectors.

Initial Public Offerings (IPOs)

An initial public offering (IPO) is the process of a private company listing and debuting on a public stock exchange. Investors can buy IPO shares on their first day of trading.

Special Purpose Acquisition Companies (SPACs)

SPACs are shell companies that go public on the stock exchange, and then try to find a private operating business to purchase.

Real Estate Investment Trusts (REITs)

REITs are companies that own and operate real estate, usually focusing on one type of property, such as warehouses, hotels or office buildings. There are pros & cons to investing in REITs. For example, one pro is that they tend to pay consistent dividends. Cons include sensitivity to interest rates, and taxed dividends.

Blue-Chip Stocks

Blue-chip stocks are stocks that large, well-established companies issue and usually have a long-standing history of growth. They’re generally considered to be financially sound, and may be considered lower-risk than other stocks.

Cyclical and Non-Cyclical Stocks

Cyclical investing concerns making stock selections surrounding economic changes, and cyclical stocks are those that may see their performance closely align with larger economic shifts. Non-cyclical stocks, on the other hand, do not see their performance tied to larger economic changes.

Defensive Stocks

Defensive stocks may be used as a part of a defensive investing strategy, and usually involves investing in stocks that may be seen as lower-risk. This can include blue-chip stocks, or stocks from sectories like utilities and consumer staples.

Penny Stocks

Penny stocks are low-priced stocks that generally trade for less than $5 per share, and many trade for less than $1. They’re usually risky, and highly-speculative stocks.

Income Stocks

Income stocks are a category of stocks that tend to offer regular, steady income to investors. That income generally comes in the form of dividends.

Environmental, Social, and Corporate Governance (ESG)

ESG stocks are those that may have certain non-financial criteria that appeal to certain investors. ESG stocks are shares of companies that are socially and environmentally responsible, though there is no universally-shared or accepted set of ESG criteria.

Different Market Caps

The sizes of stocks are classified by the market capitalization of the company’s publicly traded stock. Market cap is calculated by multiplying the stock price by the total number of outstanding shares.

Generally speaking, larger companies tend to be older, more established, and have greater international exposure — so a higher percentage of a large-cap company’s revenue comes from overseas. Meanwhile, smaller-cap stocks tend to be newer, less established and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.

Similarly, if you’re interested in buying mid-cap stocks, that means you’re investing in mid-sized companies — generally speaking.

stock market caps

While the market-caps that determine which companies are small or large can shift, here’s a breakdown that gives some rough parameters.

   Micro-Cap: $50 million to $300 million

   Small-Cap: $300 million to $2 billion

   Mid-Cap: $2 billion to $10 billion

   Large-Cap: $10 billion or higher

   Mega-Cap: $200 billion or higher

Types of Stock Classes

There are also stock classes that investors should be aware of, and those generally involve Class A, Class B, and Class C shares, which all may be issued by the same company. The specifics of each category will vary from company to company, too.

For some rough guidelines, though, Class A shares tend to have more voting power and higher priority for dividends. Class B shares may have lesser voting power than Class A shares, but no preferential treatment for dividends. Class C shares are often given to employees as a part of a compensation package, and may have associated trading restrictions.

💡 Quick Tip: What makes a robo advisor effective? Typically these automated investing services offer automatic deposits, a diversified portfolio of low-cost ETFs, and automatic rebalancing — all of which are designed to help you reach a specific goal. They can be less flexible and cost more than some other options, however.

Stocks By Sector

stock sectors

Additionally, stocks are often grouped by the industry that that company works within. According to the Global Industry Classification Standard (GICS), there are 11 recognized sectors, with numerous industries within those sectors. They include (but are not limited to):

   Energy: Energy equipment and services, oil, gas, and consumable fuels. If you want to invest in energy stocks, this is the category to look at.

   Materials: Chemicals, construction materials, containers and packaging, metals and mining

   Industrials: Aerospace and defense, building products, machinery, construction and engineering, electrical equipment, industrial conglomerates

   Consumer Discretionary: Automobiles, automobile components, household durables, leisure products

   Consumer Staples: Food products, beverage, tobacco, household products

   Health Care: Health care equipment and services, pharmaceuticals, biotechnology, life sciences

   Financials: Banks, insurance, consumer finance, capital markets, financial services

   Information Technology: IT services, software, communications equipment

   Communication Services: Diversified telecommunication services, media, entertainment

   Utilities: Electric utilities, gas utilities, water utilities, independent power and renewable electricity producers

   Real Estate: Real estate management and development, various REITs (retail, residential, office, etc.)

Again, these categories can be helpful to investors looking to diversify their portfolios. If you want to add some real estate stocks, or even invest in tech stocks, sector investing may be something to research further.

Note, too, that there may be other categories or sectors of stocks not listed above, such as retail stocks.

Stocks by Country

Different overseas stocks can be classified by the country or region in which they’re headquartered, even if the company’s operations are global. Individuals looking to invest in international stocks have found that they can do so easily with ETFs, which hold numerous foreign companies within a single share.

Regions that are commonly used in the world of stock investing are:

EAFE is an acronym which stands for Europe, Australasia, and the Far East. Investors may see this used when making investment choices, as the MSCI EAFE is a common index used for international stock funds. These countries are all “developed” nations, which means they have established financial markets, stable political climates, and mature economies.

Emerging-market stocks, which stocks with companies based out of countries whose economies are described as developing. Brazil, Russia, Mexico, China, and India are just a few emerging markets. Emerging markets may be riskier to invest in but may pose an opportunity for high rates of growth.

The Takeaway

There are numerous types of stocks on the market, and it can be important for investors to understand the differences between them. The stock market can be volatile and prone to dramatic declines, but in order to shield themselves from the risks, investors often create diversified portfolios by stocking their holdings through various different stock types.

Diversification is easier to do if an investor understands the different types of stocks that exist in the U.S. equity market. From mega-cap stocks to ETFs to emerging-market companies, there are a myriad of investing opportunities in the equity market.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

FAQ

What are the benefits of investing in different types of stocks?

Investing in different types of stocks can be beneficial to investors as it can diversify their portfolio, which may help reduce investing risk as the market fluctuates.

What is the riskiest type of stock?

Penny stocks are likely the riskiest type of stock, as they are shares of companies that are new, unproven, and highly volatile. While there’s a big potential upside to investing in penny stocks, the risks are significant.

What stocks are best for beginners?

While it’ll depend on the individual investor, beginner investors may want to look at investing in blue chip stocks, ETFs, or other stocks that have either built-in diversification, or a long track record of viability, which can be a sign of lower associated risks.

What are the risks and opportunities of investing in emerging markets?

Emerging markets can be volatile or unstable, and there may be political, monetary, and economic risks that investors are unaware of in those markets.

SoFi Invest®

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

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

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.

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Jan
03
2024

What Is an ETF? ETF Trading & Investing Guide

By | Growing Wealth, invest, Investing | No Comments

An exchange-traded fund, or ETF, bundles many investments together in one package so it can be sold as shares and traded on an exchange. The purchase of one ETF provides exposure to dozens or even hundreds of different investments at once, and there are numerous types of ETFs on the market.

ETFs are generally passive investments, i.e. they don’t have active managers overseeing the fund’s portfolio. Rather most ETFs track an index like the S&P 500, the Russell 2000, and so forth.

ETFs are an investment vehicle that allows even small and less-established investors to build diversified portfolios, and to do so at a relatively low cost. But before you start buying ETFs, it’s important to understand how they work, the risks of investing in ETFs, as well as other pros and cons.

What Is an ETF?

An ETF is a type of pooled investment fund that bundles together different assets, such as stocks, bonds, commodities, or currencies, and then divides the ownership of the fund into shares. Unlike mutual funds, ETFs give investors the ability to trade shares on an exchange throughout the day, similar to a stock.

Unlike investing in a single stock, however, it’s possible to buy shares of a single ETF that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand: Just like a mutual fund, an ETF is the suitcase that packs investments together. For example, if you are invested in a stock ETF, you are invested in the underlying stocks. If you are invested in a bond ETF, you are invested in the underlying bonds. Thus you are exposed to the same risk levels of those specific markets.

Recommended: Active vs Passive Investing

Passive vs Active ETFs

Most ETFs are passive, which means to track a market index. Their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a person or group makes decisions about what securities to buy and sell within the fund. Generally, active funds charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.


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

How Do ETFs Work?

As discussed, most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index measures the performance of 500 of the biggest companies in the United States.

Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

What Is the Difference Between an ETF and a Mutual Fund?

ETFs are similar to mutual funds. Both provide access to a wide variety of investments through the purchase of just one fund. But there are also key differences between ETFs and mutual funds, as well as different risks that investors must bear in mind.

•   ETFs and mutual funds have different structures. A mutual fund is fairly straightforward: Investors use cash to buy shares, which the fund manager, in turn, uses to buy more securities. By contrast, an ETF relies on a complex system whereby shares are created and redeemed, based on underlying securities that are held in a trust.

•   ETFs trade on an open market exchange (such as the New York Stock Exchange) just as a stock does, so it is possible to buy and sell ETFs throughout the day. Mutual funds trade only once a day, after the market is closed.

•   ETF investors buy and sell ETFs with other ETF investors, not the fund itself, as you would with a mutual fund.

•   ETFs are typically “passive” investments, which means that there’s no investment manager making decisions about what should or should not be held in the fund, as with many mutual funds. Instead, passive ETFs aim to provide the same return for the benchmark index they track. For example, an ETF for environmental stocks would mimic the returns of green stocks overall.

What Are the Advantages of ETFs?

There are a number of benefits of holding ETFs in an investment portfolio, including:

•   Ease of trading

•   Lower fees

•   Diversification

•   Liquidity

Trading

ETFs are traded on the stock market, with prices updated by the minute, making it easy to buy and sell them throughout the day. Trades can be made through the same broker an investor trades stocks with. In addition to the ease of trading, investors are able to place special orders (such as limit orders) as they could with a stock.

Fees

ETFs often have lower annual fees (called an expense ratio) — typically lower than that of mutual funds — and no sales loads. Brokerage commissions, which are the costs of buying and selling securities within a brokerage account, may apply.

Diversification

Using ETFs is one way to achieve relatively cheap and easy diversification within an investment strategy. With the click of a button, an investor can own hundreds of investments in their portfolio. ETFs can include stocks, bonds, commodities, real estate, and even hybrid funds that offer a mix of securities.

Liquidity

Thanks to the way ETFs are structured, ETF shares are considered more liquid than mutual fund shares.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What Are the Disadvantages of ETFs

There are some potential downsides to trading ETFs, too, including:

Trading Might Be Too Easy

With pricing updated instantaneously, the ease of ETF trading can encourage investors to get out of an investment that may be designed to be long term.

Understanding ETF Costs

Even if ETFs average lower fees than mutual funds, a brokerage might still charge commissions on trades. Commission fees, plus fund management fees, can potentially make trading ETFs pricier than trading standalone stocks.

In addition, some ETFs can come with higher bid/ask spreads (depending on trading volume and liquidity), which can increase the cost of trading those funds.

Lower Yield

ETFs can be great for investors looking for exposure to a broad market, index, or sector. But for an investor with a strong conviction about a particular asset, investing in an ETF that includes that asset will only give them indirect exposure to it — and dilute the gains if it shoots up in price relative to its comparable assets or the markets as a whole.

What Are Common Types of ETFs?

The ETF market is quite varied today, but much of it reflects its roots in the equities market. The first U.S. ETF was the Standard & Poor’s Depository Receipt, known today as the SPDR. It was launched on the American Stock Exchange in 1993. Today, ETFs that cover the S&P 500 are one of the most common types of ETFs.

Since the SPDR first debuted, the universe of exchange-traded funds has greatly expanded, and ETF trading and investing has become more popular with individual investors and institutions. Although index ETFs — those that passively track an index — are still the most common type of fund, ETFs can be actively managed. In addition, these funds come in a range of different flavors, or styles.

Because of the way these funds are structured, ETFs come with a specific set of risk factors and costs — not all of which are obvious to investors. So, in addition to the risk of loss if a fund underperforms (i.e., general market risk), investors need to bear in mind that some ETFs might get different tax treatment; could be shut down (dozens of ETFs close each year); and the investor may pay a higher bid/ask spread to trade ETFs, as noted above.

With that in mind, ETFs can offer an inexpensive way to add diversification to your portfolio. Here are some common types of ETFs.

Index ETFs

These provide exposure to a representative sample of the stock market, often by tracking a major index. An index, like the S&P 500, is simply a measure of the average of the market it is attempting to track.

Sector ETFs

These ETFs track a sector or industry in the stock market, such as healthcare stocks or energy stocks.

Style ETFs

These track a particular investment style in the stock market, such as a company’s market capitalization (large cap, small cap, etc.) or whether it is considered a value or growth stock.

Bond ETFs

Bond ETFs provide exposure to bonds, such as treasury, corporate, municipal, international, and high-yield.

Caveats for Certain ETFs

A handful of ETFs may require special attention, as they may incur higher taxes, costs, or expose investors to other risks.

Foreign Market ETFs

These ETFs provide exposure to international markets, both by individual countries (for example, Japan) and by larger regions (such as Europe or all developed countries, except the United States). Note that ETFs invested in foreign markets are subject to risk factors in those markets, which may not be obvious to domestic investors, so be sure to do your homework.

Commodity ETFs

Commodity ETFs track the price of a commodity, such as a precious metal (like gold), oil, or another basic good. Commodity ETFs are governed by a special set of tax rules, so be sure to understand the implications.

Real Estate ETFs

Real estate ETFs provide exposure to real estate markets, often through what are called Real Estate Investment Trusts (REITS). Dividends from REITs also receive a different tax treatment, even when held within the wrapper of a fund.

Additional ETFs

In addition, there are inverse ETFs, currency ETFs, ETFs for alternative investments, and actively managed ETFs. (While most ETFs are passive and track an index, there are a growing number of managed ETFs.) These instruments are typically more complicated than your standard stock or bond ETF, so do your due diligence.

What Is ETF Trading?

ETF trading is the buying and selling of ETFs. To trade ETFs, it helps to understand how stocks are traded because ETF trades are similar to stock trades in some ways, but not in others.

Stocks trade in a marketplace called an “exchange,” open during weekday business hours, and so do ETFs. It is possible to buy and sell ETFs as rarely or as frequently as you could a stock. You’ll be able to buy ETFs through whomever you buy or sell stocks from, typically a brokerage.

That said, many investors will not want to trade ETFs frequently. The bid-ask spread — the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept — can add to the cost of every trade.

A simple ETF trading strategy is to buy and hold ETFs for the purpose of long-term growth. Whether you choose a buy and hold strategy or decide to trade more often, the ease of trading ETFs makes it possible to build a broad, diversified portfolio that’s easy to update and change.

Risks of Trading ETFs

As noted in the discussion about common types of ETFs, it bears repeating that some ETFs can expose investors to more risk — but all exchange-traded funds come with some degree of risk. For example, investing in one of the most common types of ETFs, an S&P 500 ETF which tracks that index, still comes with the same risk of loss as that part of the market.

If large-cap U.S. stocks suddenly lose 30%, the ETF will also likely drop significantly.

This caveat applies to other asset classes and sectors as well.

3 Steps to Invest in ETFs

If you want to start investing in ETFs, there are a few simple steps to follow.

1. Do Your Research

Are you looking to get exposure to an entire index like the S&P 500? Or a sector like technology that may have a different set of prospects for growth and returns than the market as a whole? Those decisions will help narrow your search.

2. Choose an ETF

For any given market, sector, or theme you want exposure to, there is likely to be more than one ETF available. One consideration for investors is the fees involved with each ETF.

3. Find a Broker

If you’re already trading stocks, you’ll already have an investment broker that can execute your ETF trades. If you don’t have a broker, finding one should be relatively painless, as there are many options on the market. Once your account is funded, you can start trading stocks and ETFs.

How to Build an ETF Portfolio

Are you willing to take on more investment risk to see more growth? Would you prefer less risk, even if it means potentially lower returns? How will you handle market volatility? Understanding your personal risk tolerance can help you choose ETFs for your portfolio that round out your asset allocation.

For example, if you decide that you would like to invest in a traditional mix of stocks and bonds at a ratio of 70% to 30%, you could buy one or several stock ETFs to gain exposure to the stock market with 70% of your money and some ETFs to fulfill your 30% exposure to the bond market.

The risk factors of equity and bond ETFs are relatively easy to anticipate, but if you venture into foreign stock ETFs, emerging markets, or gold and other commodities, it’s wise to consider the additional risk factors and tax implications of those markets and asset classes.

Once you’ve determined your desired allocation strategy and purchased the appropriate ETFs, you may want to take a hands-on approach when managing your portfolio throughout the year. This could mean rebalancing your portfolio once a year, or utilizing a more active approach.

The Takeaway

ETFs bundle different investments together, offering exposure to a host of different underlying securities in one package. There’s likely an ETF out there for every type of investor, whether you’re looking at a particular market, sector, or theme. ETFs offer the bundling of a mutual fund, with the trading ease of stocks, although the total costs and tax treatment of ETFs require some vigilance on the part of investors.

Though a DIY approach to investing using ETFs is doable, many investors prefer to have the help of a professional who can provide guidance throughout the investment process.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®

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

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

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.

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.


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

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

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