InvestUn Archives | Page 3 of 17

Oct

2024

What Is Risk Tolerance and How to Determine Yours

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

Risk tolerance refers to the level of risk an investor is willing or able to assume as a part of their investment strategy. Knowing yourself and your risk tolerance is an essential part of investing. Of course, it’s good to have a diversified portfolio built with your financial goals in mind.

Still, the products and strategies you use should ideally fall within guidelines that make you feel comfortable — emotionally and financially — when things get rough. Otherwise, you might resort to knee-jerk decisions, such as selling at a loss or abandoning your plan to save, which could cost you even more.

Key Points

• Risk tolerance is the level of risk an investor is willing to assume to achieve financial goals.

• Factors that influence risk tolerance may include risk capacity, need, and emotional risk.

• Investors tend to fall within or between three main categories of risk tolerance: conservative, moderate, and aggressive.

• Someone with a conservative risk tolerance may focus on preserving capital, as opposed to maximizing potential returns.

• Diversifying investments into different risk buckets can align your risk tolerance with your personal goals and timelines.

What Is Risk Tolerance?

As noted, risk tolerance is the amount of risk an investor is willing to take to achieve their financial goals when investing — whether through online investing or any other type of investing. In a broad sense, an investor’s risk tolerance level comprises three different factors: risk capacity, need, and emotional risk.

Risk Capacity

Risk capacity is the ability to handle financial risk. While it’s similar to risk tolerance, and can certainly influence it, it’s not the same thing. Unlike your emotional attitude about risk, which might not change as long as you live, your risk capacity can vary based on your age, your personal financial goals, and your timeline for reaching those goals. To determine your risk capacity, you need to determine how much you can afford to lose without affecting your financial security.

For example, if you’re young and have plenty of time to recover from a significant market downturn, you may decide to be aggressive with your asset allocation; you may invest in riskier assets like stocks with high volatility or cryptocurrency. Your risk capacity might be larger than if you were older and close to retirement.

For an older investor nearing retirement, you might be more inclined to protect the assets that soon will become part of your retirement income. You would have a lower risk capacity.

Additionally, a person with a low risk capacity may have serious financial obligations (a mortgage, your own business, a wedding to pay for, or kids who will have college tuition). In that case, you may not be in a position to ride out a bear market with risky investments. As such, you may use less-risky investments, like bonds or dividend stocks, to balance your portfolio.

On the other hand, if you have additional assets (such as a home or inheritance) or another source of income (such as rental properties or a pension), you might be able to take on more risk because you have something else to fall back on.

Need

The next thing to look at is your need. When determining risk tolerance, it’s important to understand your financial and lifestyle goals and how much your investments will need to earn to get you where you want to be.

The balance in any investment strategy includes deciding an appropriate amount of risk to meet your goals. For example, if you have $100 million and expect that to support your goals comfortably, you may not feel the need to take huge risks. When looking at particular investments, it can be helpful to calculate the risk-reward ratio.

But there is rarely one correct answer. Following the example above, it may seem like a good idea to take risks with your $100 million because of opportunity costs — what might you lose out on by not choosing a particular investment.

Emotional Risk

Your feelings about the ups and downs of the market are probably the most important factor to look at in risk tolerance. This isn’t about what you can afford financially — it’s about your disposition and how you make choices between certainty and chance when it comes to your money.

Conventional wisdom may suggest “buy low, sell high,” but emotions aren’t necessarily rational. For some investors, the first time their investments take a hit, fear might make them act impulsively. They may lose sleep or be tempted to sell low and put all their remaining cash in a savings account or certificate of deposit (CD).

On the flip side, when the market is doing well, investors may get greedy and decide to buy high or move their less-risky investments to something much more aggressive. Whether it’s FOMO trading, fear, greed, or something else, emotions can cause any investor to make serious mistakes that can blow up their plan and forestall or destroy their objectives. A volatile market is a risk for investors, but so is abandoning a plan that aligns with your goals.

And here’s the hard part: it’s difficult to know how you’ll feel about a change in the market — especially a loss — until it happens.

The Levels of Risk Tolerance

Generally, it’s possible to silo investors’ risk tolerances into a few key categories: aggressive, moderate, and conservative. But those terms are subjective, and depending on the institution they can be broadened to include other levels of risk tolerance (for example, a moderate-aggressive level). But because risk tolerance is subjective, the percentages of different assets is hypothetical, and ultimately an investor’s portfolio allocation would be determined by the individual investor themselves.

Again: the hypothetical allocation or investment mix, as it relates to any individual investor’s risk tolerance or risk profile, is not set in stone. You can read more about conservative, moderate, and aggressive risk tolerances below, but first, to help you get an idea of what the investment mix or allocation might look like for a broader range of risk tolerance profiles, here’s a hypothetical rundown of how an investor from each category might allocate their portfolio:

Risk Tolerance Level and Hypothetical Investment Mix
	Bonds, Cash, Cash Equivalents	Stocks
Conservative	70%	30%
Moderately Conservative	55%	45%
Moderate	40%	60%
Moderately Aggressive	27%	73%
Aggressive	13%	87%

And, as promised, here’s a bit more about what the three main risk tolerance categories could entail for investors:

Conservative Risk Tolerance

A person with conservative risk tolerance is usually willing to accept a relatively small amount of risk, but they truly focus on preserving capital. Overall, the goal is to minimize risk and principal loss, with the person agreeable to receiving lower returns in exchange.

Moderate Risk Tolerance

An investor with a moderate risk tolerance balances the potential risk of investments with potential reward, wanting to reduce the former as much as possible while enhancing the latter. This investor is often comfortable with short-term principal losses if the long-term results are promising.

Aggressive Risk Tolerance

People with aggressive risk tolerance tend to focus on maximizing returns, believing that getting the largest long-term return is more important than limiting short-term market fluctuations. If you follow this philosophy, you will likely see periods of significant investment success that are, at some point, followed by substantial losses. In other words, you’re likely to ride the full rollercoaster of market volatility.

How to Determine Your Own Risk Tolerance

There are steps you can take and questions to ask yourself to determine your risk tolerance for investing. Once you know your risk preference, you should be able to open a retirement account with more confidence. Both low risk tolerance and high risk tolerance investors may want to walk through these steps to ensure they know what investment style is right. Matching your specific risk tolerance to your personality traits can help you stick to your strategy over the long haul.

Consider the following questions, especially as they relate to your post-retirement life – or, what your life might look like once you reach your financial goals (which, for many people, is retirement!).

1. What will your income be? If you expect your salary to ratchet higher over the coming years, then you may want to have a higher investment risk level, as time in the market can help you recover from any losses. If you are in your peak-earning years and will retire soon, then toning down your risk could be a prudent move, since you don’t want to risk your savings this close to retirement.

2. What will your expenses look like? If you anticipate higher expenses in retirement, that might warrant a lower risk level since a sharp drop in your assets could result in financial hardship. If your expenses will likely be low (and your savings rate is high), then perhaps you can afford to take on more retirement investing risk.

3. Do you get nervous about the stock market? Those who cannot rest easy when stocks are volatile are likely in a lower-risk, likely lower-return group. But if you don’t pay much attention to the swings of the market, you might be just fine owning higher-risk, (potentially) higher-return stocks.

4. When do you want to retire? Your time horizon is a major retirement investing factor. The more time you have to be in the market, the more you should consider owning an aggressive portfolio. Those in retirement and who draw income from a portfolio are likely in the low risk-tolerance bucket, since their time horizon is shorter.

The Takeaway

Risk tolerance refers to an investor’s comfort with varying levels of investment risk. Each investor may have a unique level of risk tolerance, though generally, the levels are broken down into conservative, moderate, and aggressive. The fact is, all investments come with some degree of risk — some greater than others. No matter your risk tolerance, it can be helpful to be clear about your investment goals and understand the degree of risk tolerance required to help meet those goals.

Investors may diversify their investments into buckets — some less-risky assets, some intermediate-term assets, and some for long-term growth — based on their personal goals and timelines.

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.

SoFi Invest®

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

SOIN-Q324-048

Oct

2024

6 Examples of When to Use Your Emergency Fund

By Jacqueline DeMarco | Budgeting & Goals, Family Finances, money | Comments Off

There are times when urgent, vital expenses pop up that lead you to dip into your emergency fund. Maybe you were laid off and rent is due, or you get into an accident and wind up with a pile of medical bills.

But at other times, it can be hard to know what exactly qualifies as a rainy day and gives you license to dip into your emergency savings. What about a great deal on a used car, which you could really use? Or the opportunity to replace your old fridge at a steep discount? Do those qualify as reasons to dip into your savings? Learn more here.

What Are Things to Avoid Spending My Emergency Savings on?

If you’ve done a good job stashing cash in an emergency fund, you likely want to know what types of expenses are valid uses of the money sitting in your savings account. Here are examples of when not to withdraw funds:

• Fun purchases. If you want but don’t need something and it isn’t in your budget, don’t pull from your emergency fund. Entertainment, dining out, tech gadgets, and designer clothes (even if on final sale) are all examples of wants, not needs. Set aside some funds for such buys if you like, but don’t deplete your emergency fund savings. It’s always best to ask questions before making an impulse buy. Spend time thinking about a purchase carefully before making it. You may find that new bike you thought you desperately needed doesn’t seem so vital a day or two later.

• Vacations. It’s very tempting to get away for a little R&R when things get tough, but a vacation isn’t a worthwhile emergency fund expense. If you want to have that week at the beach, go ahead and create a savings plan and a separate savings account to make it a reality. But it’s not a wise spending strategy to pull the money out of your rainy day funds.

• Debt. Paying down debt is a great goal. It’s also a smart use of any extra money you may have, but not at the expense of draining an emergency fund completely. If you’re chipping away at debt, keep at it but continue to keep some emergency funds aside. If you lose your job or an unexpected expense hits and you don’t have emergency savings, you might end up turning to more expensive forms of credit as a result. This underscores the importance of having an emergency fund.

How to Know When an Expense Counts as an Emergency

Now, it’s time to consider when to go ahead and use that money you saved for a rainy day. If you’re on the fence about whether an expense counts as an emergency, ask yourself the following six questions to determine if you should tap your emergency funds.

1. Is This Absolutely Necessary?

There’s a difference between things you want and things you need. If you start a new job and have to buy a uniform for it, that’s a necessity. If, however, you begin a new job and simply want some new outfits, that isn’t a necessity. Similarly, pining for a new stove with a commercial-style cooktop is a want; replacing a stove that conked out is a necessity.

2. Is This the Only Way That I Can Pay for This?

Before pulling money from this account, consider if the emergency fund is the only source of money that can cover this expense. Would it be possible to wait a week until payday and use your income instead? Gift cards, coupons, and sale discount codes can make it easier to pay for purchases without draining your emergency fund.

Your goal here is to determine the lowest possible price for a purchase and then see if there’s another (non-emergency fund) way to pay for it.

3. Is This an Unexpected Event?

Emergency funds can be a great way to cover unexpected and necessary purchases, but they aren’t supposed to replace poor planning. If you know a major expense is coming your way (say, the hot-water heater is coming to the end of its lifespan), it’s best to save for it instead of reaching into your rainy day fund.

4. Is This Urgent or Can It Wait?

Even if an expense feels like something that must be dealt with at the moment, there’s a good chance it can be put off. Ask yourself if it can wait until you have saved enough money to pay for it without accessing emergency funds.

5. How Much of My Emergency Fund Will I Be Using?

An emergency fund exists as a safety valve when you unexpectedly need funds. However, before pulling money from an emergency fund, it can be helpful to consider just how much of the emergency fund the purchase will take up. If it’s going to drain the fund and the purchase can wait, it’s likely best to wait. Or maybe you can buy a less pricey version of the item in question.

6. How Long Will It Take To Rebuild My Savings?

If the purchase will take up a big chunk of the emergency savings fund, it can be a good idea to map out how long it will take to rebuild those savings. If it will take more than six months, then it may be best to hold off on making that purchase until the emergency fund is more substantial. It may be better to cut back on spending to cover this expense now without having to touch emergency savings.

Of course, sometimes an emergency is really an emergency, and you can’t hold off. If you are hit with, say, a major medical bill, you may have to use up that emergency fund and work hard to rebuild it later. But it will have done its job and seen you through a tough time.

Recommended: Emergency Fund Calculator

The Takeaway

Before pulling savings from an emergency fund, it’s important to determine if the purchase is truly urgent or simply something you really want. Sometimes, real emergencies do crop up, and you’ll be glad you have money saved. Other times, you may realize that the expense isn’t really so vital. Emergency savings can be a real lifesaver, so you want to protect those funds and make sure you use them properly.

One way to build up an emergency fund faster is to put your money in a savings account that earns a competitive interest rate.

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

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

FAQ

What should you ask yourself before using your emergency fund?

Before you pull money from an emergency fund, ask yourself questions like, Is this expense absolutely necessary? Is this the only way I can pay for it? Is it urgent or can it wait? How much of my emergency savings will I be using up? The answers should guide you towards whether or not it’s worth tapping into your emergency fund.

What should you spend your emergency fund on?

What constitutes an emergency purchase for one person may look quite different for another. That being said, it’s usually best to only spend emergency fund savings on necessities, not wants. Financial emergencies are usually unexpected and may include home repairs, medical bills, and car repairs — or day-to-day expenses after, say, a job loss.

What should you not put in your emergency fund?

While it’s a good idea to put extra money towards an emergency fund instead of spending it frivolously, there are some types of savings it’s best to leave out of an emergency fund. For example, it’s not a good idea to use 401(k) contributions or other retirement savings to build an emergency fund. Saving for retirement is crucial, and employers may match 401(k) contributions, which is basically like getting free money. In this scenario, it may be wise to focus on maxing out retirement contributions before building an emergency fund.

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

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

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

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

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

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

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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.

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Oct

2024

How to Invest in Stocks: A Beginner’s Guide

By Krystal Etienne | Growing Wealth, invest, Investing | Comments Off

Table of Contents

How to Start Investing in Stocks: 5 Steps
Step 1: Determine Your Investing Approach
Step 2: Decide How Much You Want to Invest in Stocks
Step 3: Open an Investment Account
Step 4: Choose Your Stocks
Step 5: Continue Building Your Portfolio
Stock Tips for Beginners
FAQ

Stocks are shares of ownership in a company. To start investing in stocks, you would find a company that you believe may grow or appreciate in value over time, then purchase its stock through a brokerage account. If the stock price rises, you could sell your shares and potentially make a profit — or suffer a loss, if share prices decline.

Of course, when it comes to investing in stocks as a beginner, you’ll want to learn the basics so that you’re confident and comfortable with the decisions you make. Here is a step-by-step guide for those who want to start investing in stocks now.

Key Points

• Stocks represent shares of ownership in a company and can be purchased through a brokerage account.

• Before investing in stocks, it may be wise to determine your investing approach and consider your time horizon.

• Different ways to invest in stocks include self-managed investing, using a financial advisor, or utilizing robo-advisors.

• The amount you invest in stocks will likely depend on your budget and financial goals.

• Investors may want to choose stocks based on thorough research, including analyzing a company’s financial statements and valuation metrics.

How to Start Investing in Stocks: 5 Steps

It’s not terribly difficult to start investing in stocks or other securities. But it may be a good idea to sit down and think through your approach, strategy, goals, and more, before actually throwing some money into the markets. Here is a broad, basic rundown of how to start investing in stocks:

▶️ Watch the video: How to Trade Stocks

1. Determine Your Investing Approach

As noted, before you get started investing in stocks, you need to determine your investing approach. Because every person has unique financial goals and risk tolerances, there is no one-size-fits-all strategy to begin investing in the stock market.

Most people will need to decide whether they want a hands-on approach to investing or whether they’d like to outsource their wealth building to some sort of financial professional, or service.

Additionally, investors need to consider their time horizons before investing in stocks. Some investors want to invest long-term — buying and holding assets to build wealth for retirement. In contrast, other investors are more interested in short-term trading, buying and selling stocks daily or weekly to try and make a quick profit. The type of investor you want to be will help determine what kind of stocks you should buy and your investing approach.

2. Decide How Much You Want to Invest in Stocks

How much you invest will likely depend on your budget and financial goals. You may decide to invest with whatever you can comfortably afford, even if that doesn’t amount to much.

Fortunately, it’s fairly easy to start investing even with relatively little money. Many brokerage firms offer low or no trading fees or commissions, so you can make stock trades without worrying about investment fees eating into the money you decide to invest.

Additionally, many brokerage firms offer fractional share investing, which allows 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 fractional investing to use whatever dollar amount they have available to purchase stocks.

For example, if you only have $50 available to invest and want to buy stock XYZ trading at $500 per share, fractional share investing allows you to buy 10% of XYZ for $50.

3. Open an Investment Account

Once you’ve determined your investing approach and how much money you can invest, you’ll need to open a brokerage account to buy and sell stocks and other securities.

Several investment accounts might make sense for you, depending on your comfort level in managing your investments and your long-term financial goals. But in a general sense, there are a few options for investors: Full-service brokerages, online brokerages, and robo-advisors. But you can also invest using a retirement account, too.

Full-service brokerages

Many investors may use traditional brokerage firms, also known as full-service brokerages, to buy and sell stocks and other securities. A full-service brokerage offers additional services beyond just buying and selling stocks, such as investment advice, wealth management, and estate planning. Typically, full-service brokerages provide these services at high overall costs, while discount and online brokerages maintain scaled-down services with lower overall costs.

A full-service brokerage account may not be the best option for investors just getting started investing in stocks. These firms often require substantial account minimum balances to open an account. This option may be out of reach for most in the early stages of their investing journey.

Online brokerage

An online brokerage account may be ideal for most beginning investors looking to have a hands-on approach to trading stocks and building a financial portfolio. Many online brokers offer services with the convenience of an app, which can make investing more streamlined. If you feel confident or curious about how to start investing at a lower cost than a full-service brokerage firm, opening an account with an online broker could be a great place to start.

Robo-advisor

If you’re interested in investing but want some help setting up a basic portfolio, opening an investment account with a robo-advisor might be best for you. A robo-advisor uses a sophisticated computer algorithm to help you pick and manage investments. These automated accounts generally don’t offer individual stocks; instead, they build a portfolio with a mix of exchange-traded funds (ETFs). Nonetheless, it’s a way to become more familiar with investing.

Retirement option: 401(k) and IRAs

Retirement accounts like employer-sponsored 401(k)s or individual retirement accounts (IRAs) are tax-advantaged investment accounts that can be great for the beginning investor trying to build a retirement nest egg. These accounts offer investors a range of investment choices, including individual stocks. You may also have access to tutorials, advisors, or other resources to help you learn how to start investing in these accounts.

💡 Ready to start retirement investing? Consider opening an IRA online.

4. Choose Your Stocks

Deciding what individual stocks to invest in can be challenging for most investors. There are countless ways to evaluate stocks before you buy.

Before choosing your stocks, you generally want to do some homework into a company’s inner workings to understand the company’s overall valuation and the stock’s share price.

As a beginning investor, you want to get comfortable reading a company’s balance sheet and other financial statements. All publicly-traded companies must file this information with the Securities and Exchange Commission (SEC), so it shouldn’t be difficult to track those statements and filings down.

One of the most fundamental metrics for understanding a stock’s value compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.

These metrics, and other financial ratios, may help you determine what stocks to buy. And the advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow based on your research. The downside, of course, is that investing doesn’t come with guarantees, and your stock’s value could decline.

💡 Recommended: 7 Technical Indicators for Stock Trading

5. Continue Building Your Portfolio

After you’ve decided what stocks to invest in, you generally want to continue building a portfolio that will help you meet your financial goals.

One way to bolster your portfolio is by buying mutual funds and ETFs, rather than individual stocks. A potential benefit to investing in funds that hold stocks is that you may avoid some of the risks of being invested in individual stocks that may not perform well.

Whether investing in individual stocks or funds, you may want to consider the level of diversification in your portfolio that feels right for you. There is no consensus about the right way to diversify investments. For one person, ideal diversification could mean owning 20 stocks in different industries. For another, it could mean owning the “whole” market via a handful of mutual funds.

Once you get more comfortable investing in stocks and funds, you may employ other investing strategies.

Stock Tips for Beginners

As you wade into the markets, it can be a good idea to keep a few things in mind.

• Consider Your Approach Carefully: As mentioned, some investors like to have a hands-on approach to investing (active), while others prefer a more passive approach. Active investors want to make decisions on their own, picking what stocks are right for them and building a portfolio from the ground up. This self-managed strategy can be time-consuming but an excellent option for investors who have a general understanding of the markets or would like to learn more about them. Take some time to think about the pros and cons of each approach.

• Think About Asset Allocation: Asset allocation involves spreading your money across different types of investments, like stock, bonds, and cash, in order to balance risk and reward. Determining a portfolio’s asset allocation can vary from person to person, based on financial goals and risk tolerance.

• Compare Account Costs and Features: No matter where you decide to open your investment account, be sure to research and compare costs and features within the account. For example, many brokerage accounts charge investment fees and commissions for making trades, while some do not, though other fees may apply. You should check with your brokerage’s fee schedule to get a good idea of what costs may be applicable.

Test your understanding of what you just read.

The Takeaway

Historically, investing in the stock market has been a way for some individuals to build personal wealth. These days, it’s never been easier for new investors considering getting into stocks to start. Whether you choose to work with a financial advisor or use an online broker or app, there are several ways to find a method that makes stock investing approachable, fun, and potentially profitable.

Of course, there are no guarantees, so it’s wise to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.

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

Do you need a lot of money to start investing in stocks?

You don’t need a lot of money to start investing in stocks. Many brokerages allow investors to start investing with relatively little money, and many also offer fractional investing features and options.

Are there fees when investing in stocks?

There may be fees involved with investing in stocks, such as commissions or trading fees. Whether an investor is charged a fee will ultimately come down to the specific brokerage or platform they’re using to invest.

Is stock trading good for a beginner?

Stock trading, or day-trading, is generally for more advanced investors. But stock trading over longer periods of time may be good for investors to learn to get a hang of the markets. Beginners who are interested in stock trading may want to consult with a financial professional to get a better idea of a suitable trading strategy.

Should beginner investors buy individual stocks or stock funds?

Many financial professionals would likely recommend that beginner investors buy funds rather than individual stocks, as they offer some built-in diversification, in many cases. That said, what an investor ultimately decides to do should be dictated by their overall strategy and goals.

Is stock investing safe for beginners?

Stock investing is not necessarily safe for beginners or veteran investors. Investing has its risks, and there are investment types with different levels of risk that investors should familiarize themselves with.

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SoFi Invest®

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

SOIN-Q324-043

Oct

2024

What Are Index Funds, and How to Invest in Them

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

Index investing is a passive investment strategy in which you buy shares of an index fund that mirrors the composition and performance of a market index like the S&P 500.

Index investing is considered passive because index funds are formulated to follow the index and thus deliver market returns. There is no portfolio manager to oversee the fund or execute trades as there is with actively managed funds. Index funds can include mutual funds as well as exchange-traded funds (ETFs).

While index funds were once considered somewhat unsophisticated, a growing number of investors have come to embrace passive strategies in the last several years: In 2010, about 19% of total assets under management with U.S. investment firms were in passive funds. By 2023, passive strategies accounted for 48%.

Although index funds are considered passive, that doesn’t mean they are risk free; there are specific concerns for investors to bear in mind when considering index investing.

Key Points

• Index funds are mutual funds that try to replicate the benchmark index for a market segment or sector.

• Because index funds are passively managed and have low turnover, which helps keep costs lower than an actively managed fund.

• Indexes — and the index funds that track them — may be weighted by market cap, price, or fundamentals.

• Passive investing in index funds may help restrain investors’ emotional impulses and improve long-term returns.

• Index investing offers diversification and cost efficiency, but lacks downside protection and flexibility.

What Are Index Funds?

An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a market segment — like large-cap companies — or a sector like technology, by following the benchmark index for that sector.

Index funds typically hold a portfolio of securities — e.g., stocks, bonds, or other assets — that are identical or nearly identical to those in the relevant index. The idea is to try to replicate the chosen benchmark’s performance as closely as possible.

Unlike actively managed funds, which employ a portfolio manager that seeks to outperform the benchmark by actively trading securities within the fund, index funds aim to provide returns based solely on the performance of that particular market or sector.

There is an ongoing debate about the merits of pursuing active vs. passive strategies. In 2023, passive investments tended to outperform their active counterparts, according to industry data analyzed by Morningstar. That said, active strategies outperformed under certain conditions, and for specific markets.

There are index funds for the U.S. bond market, the U.S. stock market, international markets, and countless others represented by various market indexes like the Russell 2000 index of small-cap companies, the Nasdaq 100 index of tech companies, and so on.

How Do Index Funds Work?

When you buy shares of an index fund — typically a mutual fund or ETF — your money is effectively invested in the many stocks or bonds that make up the particular index. This helps add some diversification to your portfolio, potentially more so than if you were buying individual securities.

In addition, index funds tend to be lower cost than active funds, because passive funds don’t require a live portfolio management team.

Passive investing comes with certain risks, however, chiefly the risk of being tied to the ups and downs of a specific market. Without an active manager at the helm, an index fund can only deliver market returns.

Why Index Funds Typically Cost Less

Because index funds are designed to track the securities in a given market index, an index fund’s portfolio is typically updated only when the constituents in the index itself change. Thus, there is typically low turnover in these funds, which helps keep overall costs low.

By contrast, actively managed funds typically employ a more frequent trading strategy in a quest for outperformance, which can add to the cost of the fund. In addition, active funds have a live portfolio manager and thus tend to charge higher fees.

Understanding the impact of investment fees is important to long-term performance, as many investors know.

How an Index Is Weighted

Some indexes give more weight to companies with a bigger market capitalization; these are market-cap-weighted indexes. This means index funds that track a weighted index, like the S&P 500, likewise allocate a higher percentage to those bigger companies — and those companies influence the performance of the index.

Indexes can also be weighted by price (with higher priced companies making up a higher proportion of the index) or by company fundamentals. While the weighting structure of the index may not matter to individual investors at first, it ultimately influences the holdings of any related index funds or ETFs, and may be something to bear in mind when selecting an index fund.

Well-Known Big Market Indexes

There are thousands of indexes in the U.S. alone, each one designed to reflect how a certain aspect of the market is doing. Some of the biggest indexes include:

• S&P 500 Index — Standard & Poor’s 500 tracks the 500 largest companies in the U.S. by market capitalization.

• Dow Jones Industrial Average (DIJA) — The Dow tracks 30 blue-chip companies; this is a price-weighted index.

• Nasdaq Composite Index — The Nasdaq Composite tracks all of the tech companies listed in the Nasdaq stock exchange (one of the major U.S. exchanges); this is a price-weighted index.

• Wilshire 5000 Index — The Wilshire 5000 is a market-cap-weighted index, and it’s considered a total market index because it tracks all publicly traded companies with headquarters in the United States.

• Bloomberg Barclays Aggregate Bond Index — Nicknamed the “Agg,” this index tracks over $50 trillion in fixed-income securities, and is often considered an indicator of the economy’s health.

Top 10 Equity Index Funds

While the above list reflects some of the larger market indexes, these don’t dictate what the most popular index funds may be. Some index funds are more cost efficient or do a better job of tracking their benchmark than others.

Following are the top 10 low-cost U.S. equity index mutual funds and ETFs in 2024, according to Morningstar, Inc., the industry ratings and research company.

1. DFA US Large Company (DFUSX)

2. Fidelity 500 Index (FXAIX)

3. Fidelity Mid Cap Index (FSMDX)

4. Fidelity Total Market Index (FSKAX)

5. Fidelity ZERO Large Cap Index (FNILX)

6. iShares Core S&P 500 ETF (IVV)

7. iShares Core S&P Total US Stock Market ETF (ITOT)

8. iShares S&P 500 Index (WFSPX)

9. Schwab US Mid-Cap Index (SWMCX)

10. Schwab Total Stock Market Index (SWTSX)

How to Invest in Index Funds: Step by Step

Investing in index funds requires as much due diligence as investing in any single security. Here’s how to start.

Step 1: Determine Your Goals, Time Horizon, and Risk Tolerance

You may want to consider some of the basic tenets of investing as you select your index fund or funds. Will you be adding an index fund to an existing portfolio? Are you starting a taxable account? Is this for retirement?

Knowing your goals, your time frame, and how much risk you feel comfortable with will inform the funds you choose.

Step 2: Choose an Index Fund

The name of a particular index fund may catch your eye, but it’s essential to examine what’s inside an index fund’s portfolio before investing in it. Some index funds track a larger market, such as the S&P 500 or Russell 3000. Others track a more narrow or even niche sector of the market.

Determine what your short- and long-term goals are, and what markets you are interested in. You may want to start with a broad market index fund focused on equities or bonds. Or you may want to target certain sectors like technology, sustainability, or health care.

Step 3: Open a Brokerage Account

Open and fund a brokerage account or online brokerage account, and explore the index fund options available. Be sure to check potential fees and trading costs, as well as account minimums and cost per share. The price per share can vary widely.

Step 4: Buy Shares of an Index Fund

Once you’ve selected the fund(s) you want, execute the trade. Decide whether to create an automatic investment (e.g. every month) to support your goals.

Step 5: Consider Your Index Strategy

While it’s possible to simply add one index fund to your portfolio, it’s also possible to populate your entire portfolio using only index funds. Again, bear in mind the pros and cons of index strategies in light of your current and long-term goals for this investment, as well as your risk tolerance.

Potential Advantages of Index Investing

Index investing has a number of merits to consider. As noted above, index investing tends to be cost efficient, and may offer some portfolio diversification. In addition, investors may benefit from other aspects of passive strategies.

Easier to Manage

It might seem as if active investors could have a better chance at seeing significant returns versus index investors, but this isn’t necessarily the case. Day trading and timing the market can be difficult, and may result in big losses or underperformance. After all, few individual investors have the time to master the ins and outs of financial markets.

Index investing offers a lower-cost, lower-maintenance alternative. Because index funds simply track different benchmarks, individual investors don’t have to concern themselves with the success or failure of an active portfolio manager. Also, index investing doesn’t necessarily require a wealth manager or advisor — you can assemble a portfolio of index funds on your own.

Behavioral Guardrails

Investors who pursue active strategies may succumb to emotional impulses, like timing the market, which can impact their portfolio’s performance. Investing in index funds, which takes a more hands-off approach, may help restrain investor behavior — which may help portfolio returns over time.

According to the 30th annual Quantitative Analysis of Investor Behavior (QAIB) report by DALBAR, the market research firm, equity investors typically underperform the S&P 500 over time.

The QAIB report is based on data from Bloomberg Barclays indices, the Investment Company Institute (ICI), and Standard and Poor’s, as well as proprietary sources. The study examined mutual fund sales, redemptions, and exchanges each month, from Jan. 1, 1985 to December 31, 2023, in order to measure investor behavior, and then compared investor returns to a relevant set of indices.

In 2023, the average equity investor earned 5.50% less than the return of the S&P 500 for that year — a common pattern, as DALBAR research shows.

Potential Disadvantages of Index Investing

The potential upsides of passive strategies have to be weighed against the potential risks.

No Downside Protection

Index funds track the market they’re based on, whether that’s small-cap stocks or corporate bonds. So, if the market drops, so does the index fund that’s trying to replicate that market’s performance. There is no live manager who can try to offset losses; index investors have to ride out any volatility on their own.

No Choice About Investments

Individual investors themselves typically can’t change the securities in any mutual fund or ETF, whether passive or active. But whereas active strategies are based on trading securities within the fund, index funds rarely change up their portfolios — unless the index itself changes constituents (which does happen).

Index Investing: a Long-Term Strategy

Some investors may try to time the market: meaning, they try to buy high and sell low. Investing in index funds tends to work when you hold your money in the fund for a longer period of time; or if you rely on 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. Generally speaking, this strategy tends to lower the average cost of your investments over time, which may support returns. But dollar-cost averaging can be inflexible, and limit an investor’s ability to respond to certain market conditions.

The Takeaway

Index investing is considered a passive strategy because index funds track a benchmark that reflects a certain part of the market: e.g. large-cap stocks or tech stocks or green bonds. Indexing is considered a low-cost way to gain broad market exposure. But index funds are not without risks, and it’s wise to consider index funds in light of your long-term goals.

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FAQ

What happens when you invest in an index?

You can’t invest in an index, per se, but you can invest in a fund that tracks a specific market index. When you invest in an index fund, you’re investing in not one stock, but in numerous stocks (or other securities, like bonds) that match that benchmark. A large-cap index fund would track big U.S. companies; an emerging market index fund would track emerging markets.

How much do index funds cost?

Index funds tend to have a lower annual expense ratio than actively managed funds, often under 0.05%. That said, investment fees can vary widely, and it’s essential to check a fund’s all-in costs.

Are index funds safe?

Investing in the capital markets always entails risk — no investment is 100% safe. That said, investing in an index fund may involve less risk than owning a single stock, because the range of securities in the fund’s portfolio provide some diversification. That doesn’t mean you can’t lose money. Index funds are only as stable as their underlying index.

Is it smart to put all your money in an index fund?

It’s possible to use an index investing strategy for your entire portfolio. Whether this makes sense for you is determined by your goals and risk tolerance. Index investing offers some potential advantages in terms of cost efficiency and broader market exposure, but comes with the risk of being tied to market returns, with no ability to adjust the portfolio allocation.

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

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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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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.

SOIN-Q324-042

Oct

2024

What Are Stocks? Types, Benefits, Risks, Explained

By Inyoung Hwang | Growing Wealth, Investing, Terminology | No Comments

A stock represents a fraction of ownership in a company. Stockowners, also called shareholders, are entitled to a proportional cut of the company’s earnings and assets (and sometimes dividends).

That means that if you own stock in a company, as the company grows and expands you stand to earn a return on your investment as your shares gain value. But you also risk losing all or part of your investment if the company doesn’t prosper.

Key Points

• Stocks represent fractional ownership in a company, offering potential returns through appreciation and dividends.

• Stocks may be either common or preferred, with common stocks being the most common.

• Stock prices are typically determined by supply and demand, influenced by factors such as market conditions and company performance.

• Investing in stocks may help build wealth over time but also carries risks, including potential loss of investment.

• Diversifying a portfolio with various stocks and other assets can help mitigate investment risks.

What Are Stocks?

Stocks are shares of ownership in a company, and they are primarily bought and sold on publicly traded stock exchanges. That means you can open an online brokerage account and become a partial owner of whatever company you choose when you buy shares in that company.

How Do Stocks Work?

Stocks are a type of financial security, or asset, and they are traded on public exchanges. A stock is created when a company goes public, typically through an initial public offering (IPO), and issues shares that investors can buy and sell. Stocks are usually traded on exchanges, like the NYSE or Nasdaq.

Individual investors can open a brokerage account so they can buy and sell the stocks of their choosing on a given exchange. Exchanges list the purchase or bid price, as well as the selling or offer price.

The price of a stock is generally determined by supply and demand via an auction process, where buyers and sellers negotiate a price to make a trade. The buyer makes a bid price, while the seller has an ask price; when these two prices meet, a trade occurs.

The stock market consists of thousands or millions of trades daily, usually through online platforms and between investors and market makers. So, the auction process is not usually completed between investors directly. Rather, prices are determined through electronic trades, often conducted in fractions of a second.

When a stock’s prospects are high and it’s in high demand, the company’s share price could increase. In contrast, when investors sour on a company and want to sell en masse, the price of a stock will likely decline.

Types of Stocks

Stocks generally fit into two categories: common stock and preferred stock.

• Common stocks are the most common type of stock. Along with proportional ownership of the company, common stocks also give stockholders voting rights, allowing them to have voice when it comes to things like management elections or structural business changes. Most individual investors own common stock.

• Preferred stocks don’t come with voting rights, but they are given “preferred” status in that earnings are paid to preferred stockholders first. That makes this kind of stock a slightly less risky asset. If the company goes under and its assets are liquidated to repay investors, the preferred stockholders are less likely to lose everything, since they’ll be paid their share before common stockholders.
Most individual investors own common stock.

Benefits of Stocks

For investors, the primary benefit of owning stocks is that they present the opportunity to generate a return. While stocks do have risks, by and large, the stock market tends to rise over time, meaning that an investor owning a diversified stock portfolio could benefit from the market’s gains over time, too. Though there are no guarantees.

Further, stocks allow investors to diversify their portfolios to a good degree. Diversifying your portfolio — buying a variety of different stocks as well as other assets like bonds and cash equivalents — is one way to help mitigate the risks of investing.

Again, it’s important to understand that it is possible (and even likely) that you may lose money you have invested when a company’s stock or the market takes a downturn. It’s also important to remember that a certain amount of market fluctuation is absolutely normal — and, in fact, an indicator that the market is healthy and functioning.

Risks of Stocks

As discussed, owning or investing in stocks has its risks, too. Though buying stocks can sometimes result in a positive return, it’s also possible to see significant losses — or even to lose everything you’ve invested.

Stocks might lose value under the following circumstances (though there could be many others):

• The market as a whole experiences losses, due to wide-reaching occurrences like economic recessions, war, or political changes.

• The issuing company falters or goes under, in which case individual shares can drop in price and the company may forgo paying dividends. This is also known as “specific” or “unsystematic risk,” and may be slightly mitigated by having a diversified portfolio.

• A lackluster financial report, such as a quarterly earnings report showing declining sales, could lead to a stock’s value declining.

How to Buy Stocks

If you decide that investing in the stock market is the right move to help you reach your financial goals, you’ve got a variety of ways to get started. For most investors, there are two main account types through which they might buy stocks: tax-deferred retirement accounts and taxable brokerage accounts. There are also accounts that allow for automated investing.

Before you even sit down to choose your first stock (or learn to evaluate stocks in general), you’ll need to decide what kind of investment account you’ll use.

Tax-Deferred Accounts

These accounts are typically used for retirement-saving or planning purposes because they offer certain tax advantages to investors (along with some restrictions). Generally, investors contribute pre-tax money to these accounts — meaning contributions are tax deductible — and pay taxes when they withdraw funds in retirement.

• A 401(k): The 401(k) plan is commonly offered to W-2 employees as part of their benefits package. Contributions are taken directly from your paycheck, pre-tax, for this retirement account. In most cases, taxation is deferred until you take the funds out at retirement.

• IRAs: Individual retirement accounts, or IRAs, may be useful investment vehicles for the self-employed and others who don’t have access to an employer-sponsored retirement account. There are a number of different types of IRAs – two of the most common are the traditional and the Roth IRA, though typically only the traditional IRA is tax-deferred. Roth IRA account holders contribute after tax-dollars, which grow tax-free. Each type of IRA offers unique benefits and limitations.

Taxable Accounts

You can also open a brokerage account, which allows you to buy and sell assets pretty much at will. However, there are no tax deductions for investing through a brokerage account.

Also, the dividends you earn are subject to taxes in the year you earn them, and you may incur taxes when you sell an investment. Tax rates are usually lower for “long-term” assets, or those held for a year or longer; taxes on “short-term” capital gains (on securities held for less than a year) tend to be higher.

Different brokers assess different maintenance and trading fees, so it’s important to shop around for the most cost-effective option.

Automated Investment Options

If all that footwork sounds exhausting, that doesn’t necessarily mean investment isn’t right for you. You might consider an automated investing option (also known as a “robo-advisor”), which offer pre-built investment portfolios based on your goals and timelines. It’s similar to a pre-built house: there are some adjustments you can make, and different models to choose from, but your choices are limited.

That said, many investors choose automated options because the algorithm on the back-end takes care of most of the basic maintenance for your portfolio. Also, robo advisors can help you get started with a minimal amount of research and effort.

The programs may charge a small fee in exchange for creating, maintaining, and rebalancing a portfolio. Some may also allow you to choose specific stocks or themed ETFs, which can help you support companies or industries that share your values and vision.

Stock Terms to Get Familiar With

The stock market is chock full of unique jargon and terminology. As such, it can be helpful to learn some of the lingo so you better understand what’s going on, and what you’re doing.

Stocks and Shares

What is the difference between a stock vs. a share? A share of stock is the unit you purchase. “Stock” is a shorthand way of referring to the company that is selling its shares.

So: You might buy 100 shares of a company. If you owned 100 stocks, however, that means you own shares of 100 different companies.

Further, trading equities is the same as trading stocks. Equities or equity shares, is another way of talking about stocks as an asset class. You’re not likely to say you bought equity in a company. But your portfolio may have different asset classes that include equities, fixed income, commodities, and so on.

It’s also possible to own a fraction of a share of stock (called fractional shares), for those who can’t afford to buy a single share (which can happen with very large or popular companies).

Dividends

A dividend payment is a portion of a company’s earnings paid out to shareholders. For every share of stock an investor owns, they get paid an amount of the company’s profits. Companies can pay out dividends in cash, called a cash dividend, or additional stock, known as a stock dividend.

Growth stocks

Growth stocks are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price

Market capitalization

To figure out a company’s market cap, multiply the number of outstanding shares by the current price per share. A company with 10 million outstanding shares of stock selling at $30 per share, has a market cap of $300 million.

Spread

Spread is the difference between two financial measurements; in finance there are a variety of different spreads. When talking specifically about a stock spread, it is the difference between the bid price and the ask price — or the bid-ask spread.

The bid price is the highest price a buyer will pay to purchase one or more shares of a specific stock. The ask price is the lowest price at which a seller will agree to sell shares of that stock. The spread represents the difference between the bid price and the ask price.

Stock split

A company usually initiates a stock split when its stock price gets too high. A stock split lowers the price per share, but maintains the company’s market cap.

A 10-for-1 stock split of a stock selling for $1,000 per share, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100.

Value stock

Value stocks are shares of companies that have fallen out of favor and are valued less than their actual worth.

Volatility

Volatility in the stock market occurs when there are big swings in share prices, which is why volatility is often synonymous with risk for investors. While volatility usually describes significant declines in share prices, it can also describe price surges.

Thus, volatility in the equity market can also represent significant opportunities for investors. For instance, investors might take advantage of volatility to buy the dip, purchasing shares when prices are momentarily lower.

Should You Invest in Stocks?

When you consider the average return of the stock market over time, including boom and bust cycles, the stock market can offer investors the prospect of generating returns — but not a guarantee of such returns.

The difficulty with stocks is that they also come with a degree of risk; some are riskier than others. There are different ways to invest in stocks that can help mitigate some of that risk.

Ultimately, the choice to invest in stocks — and which specific stocks — will come down to the individual investor, their risk tolerance, and goals. It may be helpful to speak with a financial professional for guidance, too.

The Takeaway

Stocks, also known as “shares” or “equity investments,” are small pieces of ownership of a larger company. Stocks come in both common and preferred varieties, which offer stockholders different benefits and risks. Although relatively risky, stocks tend to offer better return-generating potential than other asset classes like bonds or long-term savings accounts.

Even taking major financial crises into consideration, the market’s overall trend over the last 100 years has been toward growth. But again, there are no guarantees, and you should always do your research before investing in a stock or other asset.

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

How do stocks make money?

Stocks can earn investors returns primarily through appreciation — meaning that they gain value, and investors sell them for more than they purchased them for — or by paying out dividends.

How are stock prices determined?

Stock prices are mostly determined by supply and demand among traders and investors. When a specific stock is in demand, values might rise — conversely, when many investors are selling a stock, its value might fall.

What is shareholder ownership?

Shareholder ownership is specifically based on your ownership of shares in the company. If you own 20% of a company’s shares, you don’t own 20% of the company — you own 20% of the shares.

SoFi Invest®

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

SOIN-Q324-046

What Is Risk Tolerance and How to Determine Yours

What Is Risk Tolerance?

Risk Capacity

Need

Emotional Risk

The Levels of Risk Tolerance

Conservative Risk Tolerance

Moderate Risk Tolerance

Aggressive Risk Tolerance

How to Determine Your Own Risk Tolerance

Risk Tolerance Quiz

The Takeaway

6 Examples of When to Use Your Emergency Fund

What Are Things to Avoid Spending My Emergency Savings on?

Earn up to 4.00% APY with a high-yield savings account from SoFi.

How to Know When an Expense Counts as an Emergency

1. Is This Absolutely Necessary?

2. Is This the Only Way That I Can Pay for This?

3. Is This an Unexpected Event?

4. Is This Urgent or Can It Wait?

5. How Much of My Emergency Fund Will I Be Using?

6. How Long Will It Take To Rebuild My Savings?

The Takeaway

FAQ

What should you ask yourself before using your emergency fund?

What should you spend your emergency fund on?

What should you not put in your emergency fund?

How to Invest in Stocks: A Beginner’s Guide

How to Start Investing in Stocks: 5 Steps

1. Determine Your Investing Approach

2. Decide How Much You Want to Invest in Stocks

3. Open an Investment Account

Full-service brokerages

Online brokerage

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

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

Robo-advisor

Retirement option: 401(k) and IRAs

4. Choose Your Stocks

5. Continue Building Your Portfolio

Stock Tips for Beginners

The Takeaway

FAQ

Do you need a lot of money to start investing in stocks?

Are there fees when investing in stocks?

Is stock trading good for a beginner?

Should beginner investors buy individual stocks or stock funds?

Is stock investing safe for beginners?

What Are Index Funds, and How to Invest in Them

What Are Index Funds?

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

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

How Do Index Funds Work?

Why Index Funds Typically Cost Less

How an Index Is Weighted

Well-Known Big Market Indexes

Top 10 Equity Index Funds

How to Invest in Index Funds: Step by Step

Step 1: Determine Your Goals, Time Horizon, and Risk Tolerance

Step 2: Choose an Index Fund

Step 3: Open a Brokerage Account

Step 4: Buy Shares of an Index Fund

Step 5: Consider Your Index Strategy

Potential Advantages of Index Investing

Easier to Manage

Behavioral Guardrails

Potential Disadvantages of Index Investing

No Downside Protection

No Choice About Investments

Index Investing: a Long-Term Strategy

The Takeaway

FAQ

What happens when you invest in an index?

How much do index funds cost?

Are index funds safe?

Is it smart to put all your money in an index fund?

What Are Stocks? Types, Benefits, Risks, Explained

What Are Stocks?

How Do Stocks Work?

Types of Stocks

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