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Feb

2025

What Is Dividend Yield?

By AJ Smith | Growing Wealth, invest, Investing, Terminology | Comments Off

Dividend yield concerns how much an investor realizes from their investments over the course of a year as a result of dividends. Dividends, which are payouts to investors as a share of a company’s overall profit, can help investors generate bigger returns, and some investors even formulate entire strategies around maximizing dividends.

But it’s important to have a good understanding of dividends, dividend yields, and other related concepts before going too far into the weeds.

Key Points

• Dividend yield represents the annual dividend paid to shareholders relative to the stock price, expressed as a percentage, which helps investors assess potential returns.

• Investors can calculate dividend yield by dividing the annual dividend per share by the stock’s current price, providing insight into a company’s attractiveness as an investment.

• A higher dividend yield may signal an established company, but it can also indicate slower growth or potential financial troubles, requiring careful evaluation.

• Considering the history of dividend growth and the dividend payout ratio can provide additional insights into a company’s financial health and dividend sustainability.

• Understanding the difference between dividend yield and dividend rate is essential, as dividend yield is a ratio while dividend rate is expressed in dollar amounts.

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a financial ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

How Does Dividend Yield Differ From Dividends?

It’s important to really drive home the difference between dividend yield and dividends in general.

Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

Dividend yield, on the other hand, refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

How to Calculate Dividend Yield

Calculating the dividend yield of an investment is useful for investors who want to compare companies and the dividends they pay. For investors looking for investments to help supplement their cash flow, or even to possibly live off dividend income, a higher dividend yield on a stock would be more attractive than a lower one.

What Is the Dividend Yield Formula?

The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price:

Annual dividend / stock price = Dividend yield (%)

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

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Dividend Yield: Pros and Cons

Pros	Cons
Can help with company valuation.	Dividend yield can indicate a more established, but slower-growing company.
May indicate how much income investors can expect.	Higher yield may mask deeper problems.
	Yield doesn’t tell investors the type of dividend (ordinary vs. qualified), which can impact taxes.

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

• From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

• For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

• Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

• A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

• Investors need to look beyond yield to the type of dividend they might get. An investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

dividend yield of sp500 vs dividend aristocrats

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

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Test your understanding of what you just read.

The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount. The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments.

Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

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Feb

2025

Comparing Stock Warrants vs Stock Options

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

Stock warrants give the holder the right to buy shares of stock at a set price on a set date directly from the public company that issues them, whereas stock options convey the right to buy or sell shares on or before a specific date at a specific price.

The chief difference between stock warrants and stock options is that warrants are issued directly by a company that’s seeking to raise capital. Stock options are derivative contracts that investors can trade, in order to take advantage of price fluctuations in the underlying security.

Key Points

• Stock warrants allow investors to buy shares at a specified price on a set date, directly from the issuing company, while stock options are derivative contracts traded among investors.

• Companies typically issue stock warrants to raise capital, whereas stock options are created and traded by investors, allowing for more flexibility in trading.

• Exercising a warrant results in the issuance of new shares, which can lead to dilution, while exercising options does not create new shares and is settled between traders.

• Both stock warrants and options provide speculative opportunities but differ in terms of issuance, market trading, and potential dilution effects.

• Understanding the differences between stock warrants and options is crucial for investors, as each serves distinct purposes and carries unique risks and benefits.

What Are Stock Warrants?

A stock warrant is a contract that allows the holder the right to buy shares of stock at a future date at a specified price. The wording in a stock warrant typically allows the holder to purchase shares at a premium to the stock’s price at the time of issue.

Companies issue stock warrants directly to investors. The companies set the terms of the warrant, including the stock’s purchase price and the final date by which the investor can exercise the warrant. Warrant holders do not have an obligation to buy the shares, but if they decide to do so they would exercise the warrants via their brokerage account.

Public companies may issue stock warrants as a means of raising capital to fund new expansion projects. A company may also issue stock warrants to investors if it faces financial trouble and needs to raise funds to avoid a bankruptcy filing.

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What Are Stock Options?

A stock option is a contract that gives holders the right — not the obligation — to buy or that represents the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put option) an underlying security on or before a specified date at a specified price. With stock options, holders of the contract do not have to buy the underlying shares, but they have the right to do so.

Again, the options holder does not have to buy; they simply have the right to do so. Exercising options means you agree to buy the shares If an investor chooses not to exercise the option, it expires worthless. Investors can trade some options on a public exchange alongside stocks and other securities.

Recommended: How to Trade Options: An In-Depth Guide

Similarities and Differences Between Warrants and Options

Warrants and options sound alike and at first glance, they seem to imply the same thing: A right to trade shares of a particular stock. But there are also important differences between these two contracts that investors need to understand.

Similarities

Warrants and options both offer investors an opportunity to gain exposure to a particular stock without requiring them to purchase shares.

With both warrants and options, the investor must exercise the security to actually acquire shares. Both have specific guidelines with regard to the price at which investors can purchase (or sell in the case of put options) their shares and the deadline for exercising them.

Warrants and options are both speculative in nature, since investors are essentially betting on which way the underlying asset’s price will move. Investors can use different strategies when trading options or exercising warrants to maximize profitability while minimizing losses.

Differences

Warrants and options also have important differences. While companies issue stock warrants, traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not cause any dilution.

When investors exercise a warrant, they receive the stock directly from the company, while options are settled between traders.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Stock Warrants vs Stock Options: A Summary

Here’s a closer look at options vs. warrants.

Stock Warrants	Stock Options
Confers the right to purchase shares of stock at a specified price on a specified date.	Confers the right to buy (in the case of a call) or sell (in the case of a put) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract.
Warrants create new shares, which can result in dilution.	Options do not create new shares so there’s no dilution.
Issued by the company directly to investors.	Issued by traders who write call or put options.
Original issue warrants are not listed on exchanges, but there is a secondary market for the securities.	Options can be traded on public exchanges alongside other securities.
Used to raise capital for the company.	Traders can write options to maximize profits based on price movements.
Warrant holders may have a decade or more in which to exercise their right to buy shares.	Options tend to be shorter-term in nature, with expiration periods lasting anywhere from a few days up to 18 months.
Less commonly used in the U.S.	Options are regularly traded on public exchanges in the U.S.

Pros and Cons of Warrants

If you’re considering warrants versus options, it’s helpful to understand the advantages and disadvantages of each.

Stock warrants can offer both advantages and disadvantages to investors. Whether it makes sense to include stock warrants in a portfolio can depend on your individual goals, time horizon for investing and risk tolerance.

Stock Warrant Pros	Stock Warrant Cons
Warrant holders have the right to purchase shares of stock but are not required to do so.	Price volatility can diminish the value of stock warrants over time.
Stocks may be offered to investors at a premium price to the current market price.	When warrants are exercised, new shares are issued which can result in dilution.

Pros and Cons of Options

Like stock warrants, there trading stock options has both upsides and potential downsides. Beginning traders may benefit from having a guide to options exercising to help them understand the complexities and risks involved. Here are some of the key points to know about trading options.

Stock Option Pros	Stock Option Cons
Higher return potential compared to trading individual shares of stock.	Stock options are more sensitive to volatility which can mean higher risk for investors.
May be suited to active day traders who are hoping to capitalize on short-term price movements.	Frequent options trades can mean paying more in commissions, detracting from overall returns.
Traders can use options as a hedging tool to manage risk in uncertain market environments.	Time value constantly decays the value of options.

Test your understanding of what you just read.

The Takeaway

Understanding the difference between options and warrants matters if you’re considering either of these types of securities. While the language of stock warrants may sound similar to some of the terms used in options trading, these are really two different instruments.

Companies issue stock warrants largely to raise capital, whereas traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not cause any dilution.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

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FAQ

Is a warrant the same thing as an option?

No. Warrants and options are not the same thing. Companies issue stock warrants to give investors the right to buy shares of stock at a specified price on a specified date. Stock warrants can allow investors to purchase shares of stock at a premium while giving them plenty of time in which to decide whether to exercise the warrant.

Options are derivatives contracts that give buyers the right, but not the obligation to buy (in the case of a call) or sell (in the case of a put) an asset at a specific price within a certain period of time.

Can warrants exist in a SPAC?

Yes. A Special Purpose Acquisition Company, SPACs, are typically created for the purpose of acquiring or merging with an existing company. This type of arrangement allows private companies to circumvent the traditional IPO process. A SPAC may use warrants to raise capital from investors. These warrants are generally good for up to five years following the completion of a merger or acquisition.

About the author

Rebecca Lake

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

You may also be interested in:

What Is a Stock Warrant? Guide to Exercising Stock Warrants

A Beginner’s Guide to Options Trading

Call vs Put Option: The Differences

Photo credit: iStock/Inside Creative House

SoFi Invest®

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

Feb

2025

Guide to the Sectors of the S&P 500 and Their Weights

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

The S&P sectors represent the different categories that the index uses to sort the companies it follows. There are 11 sectors that make up the S&P 500, and they include health care, technology, energy, real estate, and more.

Understanding how the S&P sectors work and break down further can help both institutional and retail investors manage risk through different economic cycles by allocating their portfolio across multiple sectors. For example, cyclical stocks and cyclical sectors tend to fare well when the economy booms. During a recession, however, defensive stocks may outperform them. However, it’s also possible for all 11 sectors to trend in the same direction.

Key Points

• The S&P 500 is divided into 11 sectors, including technology, healthcare, and financials, which help categorize the largest U.S. companies.

• Technology is the largest sector, reflecting significant growth and market influence from major companies like Apple and Microsoft.

• Utilities is the smallest sector, comprising just over 2% of the index, highlighting its smaller market impact compared to other areas.

• Sector weighting in the S&P 500 is dynamic, changing with the economic influence and size of constituent companies.

• Understanding these sectors aids investors in diversifying portfolios and strategizing investments based on economic conditions and market trends.

What Is the S&P 500

“S&P” refers to Standard & Poor, and the S&P 500 index tracks the movements of 500 large-cap U.S. companies. A number of mutual funds and exchange-traded funds (ETFs) use this index as a benchmark.

Many investors use the S&P 500 as a stand-in for the entire market when it comes to investing, particularly index investing. But again, the S&P 500 can be broken down into specific sectors in which companies of particular types are concentrated — allowing investors to get more granular, if they wish, with their investment strategies.

💡 Quick Tip: For investors who want a diversified portfolio without having to manage it themselves, automated investing could be a solution (although robo advisors typically have more limited options and higher costs). The algorithmic design helps minimize human errors, to keep your investments allocated correctly.

Examining the 11 Sectors of the S&P

The Global Industry Classification System (GICS) has 11 stock market sectors in its taxonomy. It further breaks down these 11 sectors into 24 industry groups, 74 industries, and 163 sub-industries. Here’s a look at the S&P Sector list, by size:

Technology
Health Care
Financials
Real Estate
Energy
Materials
Consumer Discretionary
Industrials
Utilities
Consumer Staples
Communications

1. Technology

Technology is the largest sector of the S&P 500. This sector includes companies involved in the development, manufacturing, or distribution of tech-related products and services. For example, companies in the technology sector may produce computer software programs or electronics hardware, or research and develop new technologies.

Tech stock investments are typically cyclical, in that they usually perform better during economic expansions. The technology sector includes a number of growth stocks, which are companies that reinvest most or all of their profits in expansion versus paying dividends. Examples of some popular tech stocks include:

• Facebook (META)

• Apple (AAPL)

• Microsoft (MSFT)

• Alphabet (GOOG)

• IBM (IBM)

2. Financials

The financials sector covers a variety of industries, including banking and investing. Banks, credit unions, mortgage companies, wealth management firms, credit card companies and insurance companies are all part of the financial sector.

Financial services companies are usually categorized as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or can not keep up with credit card payments. But this can be subjective, as mortgage companies may benefit during recessionary periods if lower interest rates spur home-buying activity.

Some of the biggest names in the financial sector include:

• Visa (V)

• JPMorgan Chase (JPM)

• Bank of America (BAC)

• PayPal Holdings (PYPL)

• Mastercard (MA)

3. Health Care

The next largest of the S&P sectors is health care. This sector includes pharmaceutical companies, companies that produce or distribute medical equipment, and supplies and companies that conduct health care-related research.

The health care sector also includes alternative health companies, including companies that use cannabis as a part of their medical research and product development.

Recommended: Cannabis Investing 101

More traditional examples of healthcare sector companies include:

• CVS (CVS)

• Johnson & Johnson (JNJ)

• UnitedHealth Group (UNH)

• Thermo Fisher Scientific (TMO)

• Regeneron (REGN)

Health care stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.

4. Consumer Discretionary

The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers.

Examples of stocks that fit into the consumer discretionary sector are:

• Starbucks (SBUX)

• AMC (AMC)

• Best Buy (BBY)

• Home Depot (HD)

• Nike (NKE)

Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. That’s why they’re considered cyclical in nature.

5. Communications Services

This sector spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also includes companies responsible for producing movies and television shows.

The communications sector can be hard to pin down in terms of whether it’s cyclical or defensive. In a down economy, for example, people may continue to spend money on phone and internet services but cut back on streaming services. So there’s an argument to be made that the communication sector is a little of both.

Companies that belong to this sector include:

• Comcast (CMCSA)

• AT&T (T)

• Dish Network (DISH)

• Discovery Communications (WBD)

• Activision Blizzard (ATVI)

6. Industrials

The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. For example:

• Honeywell (HON)

• 3M (MMM)

• Stanley Black & Decker (SWK)

• Delta Airlines (DAL)

• Boeing (BA)

Industrials are often considered to be cyclical stocks, again because of how they react to changes in supply and demand. The airline industry, for example, saw a steep decline in 2020 as air travel was curtailed due to the coronavirus pandemic.

7. Consumer Staples

Consumer staples stocks represent things consumers regularly spend money on. That includes groceries, household products and personal hygiene products. The consumer staples sector is also a defensive sector because even when the economy hits a rough spot, consumers will continue spending money on these things.

From an investment perspective, consumer staples stocks may not yield the same return profile as other sectors. But they may provide some stability in a portfolio when the market gets shaky.

Companies that are recognized as some of the top consumer staples stocks include:

• General Mills (GIS)

• Coca-Cola (KO)

• Procter & Gamble (PG)

• Conagra Brands (CAG)

• Costco Wholesale (COST)

8. Energy

The energy sector includes companies that participate in the production and/or distribution of energy. That includes the oil and gas industry as well as companies connected to the development or distribution of renewable energy sources.

Energy stock investments can be more sensitive to economic movements and supply-demand trends compared to other sectors.

Some of the biggest energy sector companies include:

• Exxon Mobil (XOM)

• Royal Dutch Shell (SHEL)

• Chevron (CVX)

• Conocophillips (COP)

• Halliburton (HAL)

9. Real Estate

This sector includes real estate investment trusts (REITs) as well as realtors, developers and property management companies. REITs invest in income-producing properties and may pay out as much as 90% of profits out to investors as dividends.

Investing in real estate can be a defensive move as this sector is largely uncorrelated with stocks. So if stock prices fall, for example, investors may not see a correlating drop in real estate investments as property generally tends to appreciate over time.

Examples of real estate companies in the S&P 500 include:

• Digital Realty (DLR)

• American Tower (AMT)

• Prologis (PLD)

• Simon Property Group (SPG)

• Boston Properties (BXP)

10. Materials

The materials sector includes companies connected to the sourcing, processing or distribution of raw materials. That includes things like lumber, concrete, glass, and other building materials.

Materials is one of the cyclical S&P sectors, as it can be driven largely by supply and demand. During a housing boom, for example, the materials sector may benefit from increased demand for lumber, plywood and other construction materials.

Material stocks in the S&P 500 include:

• Dupont (DD)

• Celanese (CE)

• Sherwin Williams (SHW)

• Air Products & Chemicals (APD)

• Eastman Chemical (EMN)

11. Utilities

Utilities represent one of the core defensive S&P sectors. This sector includes companies that provide gas, electricity, water, and other utilities to households, businesses, farms, and other entities.

Since these are essentials that people typically can’t do without, they’re generally less sensitive to major shifts in the economic cycle. They also often pay dividends to their investors.

Examples of utilities stocks include:

• AES (AES)

• UGI (UGI)

• CenterPoint Energy (CNP)

• Duke Energy (DUK)

• Dominion Energy (D)

Recommended: How to Invest in Utilities

How Are the Sectors of the S&P 500 Weighted?

Given that the S&P 500 is composed mostly of the largest companies, its weighting is relative to the size of those companies and their respective industries. As such, that’s why technology, health care, and financials are relatively large compared to other sectors.

It’s also important to understand that things change over time — in terms of company and industry size and influence on the overall economy. Accordingly, the index itself changes, and weighting of specific sectors and companies changes as well.

Which Is the Largest S&P 500 Sector?

As discussed, technology, or information and technology, is currently the largest sector in the S&P 500. That’s in large part due to the tech sector’s growth over the past couple of decades, and certain companies within the sector becoming larger with massive market caps — companies such as Apple, Microsoft, Alphabet, Meta, Netflix, and others.

Which Is the Smallest S&P 500 Sector?

As of March 2024, utilities is the smallest S&P 500 sector, comprising a little more than 2% of the overall index. But the materials and real estate sectors are not much bigger.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

What Can You Do As an Investor With This Information?

Investors can tap their knowledge of the S&P 500 sectors to help inform their investing strategy and plan. As discussed, while some sectors tend to be a bit more volatile, investors may look at specific and strategic allocations in other sectors to help “smooth” things out during times of volatility in the market.

Further, sector investing can help investors diversify their portfolios, or find additional opportunities to invest.

Test your understanding of what you just read.

The Takeaway

Knowing what the S&P sectors are and which types of industries or sub-industries they represent can help investors achieve diversification through different types of investments. While some financial experts liken the sectors to a pie, with several individual slices, it may be more helpful to think of them as a buffet from which investors can pick and choose.

You can either purchase stocks within or across sectors, or look for funds that can provide that diversification for you. It’ll all depend on your overall financial plan and investment strategy. If you need help honing that in, it may be beneficial to speak with a financial professional.

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 S&P 500 sector weights?

As of March 2024, information technology is the largest sector in the S&P 500, comprising nearly 30% of the overall index. It’s followed by financials at 13%, health care at 12.5%, and consumer discretionary at 10.6%.

What is the sector breakdown of the S&P 500?

The eleven sectors of the S&P 500 are information technology, financials, health care, consumer discretionary, communication services, industrials, consumer staples, energy, real estate, materials, and utilities.

What is the smallest sector of the S&P 500?

As of March 2024, utilities is the smallest sector of the S&P 500, comprising 2.1% of the overall index.

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

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

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Feb

2025

What Is Spoofing in Trading?

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

In the financial space, the term “spoofing” refers to an illegal form of stock market and exchange trickery that is often used to change asset prices. Given that the stock markets are a wild place, and everyone is trying to gain an advantage, spoofing is one way in which some traders bend the rules to try and gain an advantage.

Spoofing is also something that traders and investors should be aware of. This tactic is sometimes used to change asset prices — whether stocks, bonds, or cryptocurrencies.

Key Points

• Spoofing is an illegal trading tactic where traders place and cancel orders to manipulate asset prices, influencing market supply and demand dynamics.

• Traders often use algorithms to execute high volumes of fake orders, creating a false perception of demand that can inflate or deflate security prices.

• The practice of spoofing is a criminal offense in the U.S., established under the Dodd-Frank Act, with serious penalties for those caught engaging in it.

• Significant fines have been imposed on both institutions and individual traders for spoofing, highlighting the risks of detection and legal consequences.

• Investors should remain vigilant against spoofing, as it can distort market activity and impact trading strategies, particularly for active traders and day traders.

What Is Spoofing?

Spoofing is when traders place market orders — either buying or selling securities — and then cancel them before the order is ever fulfilled. In a sense, it’s the practice of initiating fake orders, with no intention of ever seeing them executed.

Spoofing means that someone or something is effectively spamming the markets with orders, in an attempt to move security prices.

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What’s the Point of Spoofing?

Because stock market prices are determined by supply and demand — for instance, the more demand there is for Stock A, the higher Stock A’s price is likely to go, and vice versa — they can be manipulated to gain an advantage. That’s where spoofing comes in.

By using bots or an algorithm to make a high number of trades and then cancel them before they go through, it’s possible for spoofers to manipulate security prices. For a trader looking to buy or sell a certain security, those valuations may be moved enough to increase the profitability of a trade.

Spamming the markets with orders creates the illusion that demand for a security is either up or down, which is then reflected in the security’s price. Because it would require an awful lot of “spoofed” orders to move valuations, spoofers might rely on an algorithm to place and cancel orders for them, rather than handle it manually. For that reason, spoofing is typically associated with high-frequency trading (HFT).

Is Spoofing Illegal?

If it sounds like spoofing is essentially cheating the system, that’s because it is. In the United States, spoofing is illegal, and is a criminal offense. Spoofing was made illegal as a part of the Dodd-Frank Act, which was signed into law in 2010. Specifically, spoofing is described as a “disruptive practice” in the legislation, straight from the U.S. Commodity Futures Trading Commission (CFTC), which is the independent agency responsible for overseeing and policing spoofing on the markets:

Dodd-Frank section 747 amends section 4c(a) of the CEA to make it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that —

(A) violates bids or offers;

(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or

(C) is, is of the character of, or is commonly known to the trade as ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).

Additionally, there are laws and rules related to spoofing under rules from the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), too.

Example of Spoofing

A hypothetical spoofing scenario isn’t too difficult to dream up. For instance, let’s say Mike, a trader, has 100,000 shares of Firm Y stock, and he wants to sell it. Mike uses an algorithm to place hundreds of “buy” orders for Firm Y shares — an algorithm that will also cancel those orders before they’re executed, so that no money is actually spent.

The influx of orders is read by the market as an increase in demand for Firm Y stock, and the price starts to increase. Mike then sells his 100,000 shares at an inflated price — an artificially inflated price, since Mike effectively manipulated the market to increase his profits.

Consequences of Spoofing

Because spoofing is a relatively easy way to manipulate markets and potentially increase profits, it’s also a fairly common practice for some traders and firms, despite being against the law. That transgression can cost spoofers if and when they’re caught.

For example, one financial institution was fined nearly $1 billion by the SEC during the fall of 2020 after the company was caught conducting spoofing activity in the precious metals market.

But it’s not just the big players that can be on the receiving end of a smack down by the authorities. During August of 2020, an individual day trader was caught manipulating the markets through spoofing activity — actions that netted the trader roughly $140,000 in profits. The trader was ultimately ordered by the CFTC to pay a fine of more than $200,000.

Despite the cases that make headlines, it’s generally hard to identify and catch spoofers. With so many orders being placed and executed at once (especially with algorithmic or computer aid) it’s difficult to identify fake market orders in real time.

How to Protect Against Spoofing

There are a number of parties that are constantly and consistently trying to gain an edge in the markets, be it through spoofing or other means. For investors, it’s worth keeping that in mind while sticking to an investing strategy that works for you, rather than investing with your emotions or getting caught up in the news cycle.

In a time when a single social media post or errant comment on TV can send stock prices soaring or into the gutter, it’s critical for investors to understand what’s driving market activity.

Test your understanding of what you just read.

The Takeaway

Spoofing is meant to gain advantage in the markets, but as such it’s illegal and penalties can be steep. Beyond the spoofers trying to manipulate the market, spoofing has the potential to affect all investors.

If spoofers are manipulating prices for their own gain, that can cause traders and investors to react, not realizing what is going on behind the scenes. While this is more of an issue for active investors or day traders, it’s something to be aware of.

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.

You may also be interested in:

Market Manipulation: An Overview for Retail Investors

Wash Trading: What Is It and How Does It Work?

What Is a Dark Pool in Trading?

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SoFi Invest®

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

Feb

2025

What Does It Mean If the Fed Is Hawkish or Dovish?

By Kim Franke-Folstad | Financial Independence, invest, Terminology | Comments Off

Table of Contents

Who Decides Monetary Policy?
Why Would the Fed Take a Hawkish Stance?
Why Would the Fed Take a Dovish Stance?
Is It Possible to Be Both Hawkish and Dovish?
How Do Hawkish vs Dovish Policies Affect Savers, Spenders, and Investors?

The Federal Reserve has two primary long-range goals: controlling inflation (hawkish) and maximizing employment (dovish). But these two aims can be at odds, and thus the Fed is often called hawkish or dovish.

While you may be thinking that monetary policy is for the birds, the Fed’s posturing, be it hawkish or dovish at any given time, is incredibly important for setting expectations and determining economic outcomes. That’s critical for investors to understand.

Key Points

• The Federal Reserve has two primary goals: controlling inflation (hawkish) and maximizing employment (dovish).

• Monetary policy decisions are made by the Federal Reserve, which can take a hawkish or dovish stance based on its goals.

• Hawkish monetary policy focuses on low inflation and may involve raising interest rates, while dovish policy prioritizes low unemployment and may involve lowering rates.

• The Federal Open Market Committee (FOMC), consisting of 12 members, is responsible for deciding monetary policy.

• Hawkish and dovish policies can impact savers, spenders, and investors through changes in interest rates and economic outcomes.

Who Decides Monetary Policy?

The Federal Reserve, the central bank of the United States, decides monetary policy. And, as mentioned, it can take different postures in achieving its goals. In fact, the Fed is striving to balance what can seem like opposing scenarios. For example:

• A monetary hawk is someone for whom keeping inflation low is the top concern. So if the Federal Reserve seems to be embracing a hawkish monetary policy, it might be because it’s considering raising interest rates to control pricing and fight inflation.

• A dove is someone who prioritizes other issues — especially low unemployment over low inflation. If the Fed seems to tilt toward a dovish monetary policy, it could signify that it plans to keep rates where they are — at least for the time being — because growth and employment are doing fine. Or it may plan to lower rates to stimulate the economy and add jobs.

It’s important to note that the Federal Reserve’s decisions on monetary policy aren’t left to just one person.

People often blame the sitting president or the chairman of the Federal Reserve if they don’t like the way interest rates are going — whether that’s up or down. But the Fed’s direction is determined by a group of central bankers, not by the Fed chair alone.

The 12 members of the Federal Open Market Committee (FOMC), who typically meet eight times a year to review economic conditions and vote on the federal funds rate, are responsible for deciding the country’s monetary policy. And they may have varying opinions about what the economy needs. So you might hear that the Fed is hawkish or dovish, or you may hear that an individual policymaker — or policy influencer — is a hawk while another is a dove.

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Why Would the Fed Take a Hawkish Stance?

fed hawkish stance

When fiscal policy advisors in the government or banking industry are described as favoring a hawkish or “contractionary” monetary policy, it’s usually because they want to tighten the money supply to protect the economy from inflation and promote price stability.

If the price of goods and services rises due to inflation, consumers can lose their purchasing power. A moderate inflation rate is considered healthy for the economy. It encourages people to spend or invest their money today, rather than sock it away in a low-interest savings account where it could slowly lose value. The FOMC has determined that an inflation rate of around 2% is optimal for employment and price stability.

If inflation rises above that level for a prolonged period of time, the Fed may decide to pump the brakes to control inflation and keep the U.S. economy on track.

The Fed has several tools for controlling inflation, including raising its federal funds rate and discount rate, selling government bonds, and increasing the reserve requirements for banks. When access to money gets more expensive, consumers and businesses typically borrow less and save more, economic activity slows, and inflation stays at a more comfortable level.

Why Would the Fed Take a Dovish Stance?

A dovish or expansionary monetary policy is the opposite of hawkish monetary policy.

If the Fed is worried about the economy’s growth, it may decide to give it a boost by lowering interest rates, purchasing government securities by central banks, and lowering the reserve requirements for banks. Or, if it thinks employment and growth are on track, it might keep interest rates the same.

With lower interest rates, businesses can borrow more money to expand and potentially hire more workers or raise wages. And when consumers are in a low-interest rate environment created by a dovish monetary policy, they may be more likely to borrow money for big-ticket items like cars, homes, home improvements, and vacations. That increased consumption can also create more jobs. And doves tend to prefer low unemployment over low inflation.

Is It Possible to Be Both Hawkish and Dovish?

Yes. Some economists (and FOMC members) don’t take a completely hawkish or dovish attitude toward monetary policy. They are sometimes referred to as neutral or “centrists,” because they don’t appear to prioritize one economic goal over another. Fed Chair Jerome Powell, for example, has been called a hawk, a dove, a “cautious hawk,” a “cautious dove,” neutral, and centrist in various media reports.

And the media frequently pondered where Powell’s predecessor, U.S. Treasury Secretary Janet Yellen, stood on the hawk-dove continuum.

The current (as of 2023) FOMC includes members who have been identified as hawkish, dovish, and neutral. That mix of viewpoints can make it difficult to guess the group’s next move — so anxious investors are keeping a close eye out for clues as to what could happen next.

How Do Hawkish vs Dovish Policies Affect Savers, Spenders, and Investors?

Interest rates frequently rise and fall as the economy cycles through periods of growth and stagnation, and those fluctuations impact everyone. Whether you’re a saver, spender, or investor — or, like most people, all three — you can expect those rate changes to eventually impact your bottom line.

For Savers

Savings account rates are loosely connected to the interest rates the Fed sets, so you might not see a difference right away if there’s a cut or a hike.

When the Fed lowers the federal funds rate, however, financial institutions may move to protect their profits by lowering the interest paid on high-yield savings accounts, money market accounts, and certificates of deposit (CDs). That can be frustrating, and it may be tempting to give up on saving or move money to riskier investments. But specialists generally recommend keeping an emergency fund with at least three to six months’ worth of living expenses stashed in a low-risk account that’s easy to access and isn’t tied to the markets.

Savers may want to check out the more competitive rates offered by online accounts. Because online-only financial institutions have a lower overhead, they typically out-yield brick-and-mortar banks’ savings accounts, regardless of what the Fed is doing with its rates.

For Spenders

An increase or decrease in the federal funds rate can indirectly affect the prime rate banks offer their most credit-worthy customers. And it is often used as a reference rate, or base rate, for other financial products, including car loans, mortgages, home equity lines of credit, personal loans, and credit cards.

If interest rates go down, and borrowing gets cheaper, it can encourage consumers to go out and make those purchases — both big and small — that they’ve been wanting to make.

If those interest rates go up, on the other hand, consumers tend to be deterred from borrowing and spending. They might decide to wait for rates to drop before financing a house, a car, or an expensive purchase like an appliance or home renovation.

Impulse spending also can be affected. Spenders might choose to save their money instead — especially if the interest rate goes up on CDs, money market accounts, and other savings vehicles. Or consumers may focus on paying down credit card debt and other loans to avoid paying high interest on big balances, especially if those obligations carry a variable interest rate.

For Investors

There are no guarantees as to how any investment will react to changes in interest rates made by the Fed. Some assets (like bonds) can be more directly impacted than others. But nearly every type of investment you might have could be affected.

One way to reduce your risk exposure is to create a diversified portfolio, with a mix of assets — from stocks and bonds to real estate and commodities, and so on — that won’t necessarily react in the same way to changes in the interest rate (or other economic factors). If your investments all trend up or down together, your portfolio isn’t properly diversified.

💡 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.

Test your understanding of what you just read.

The Takeaway

The Federal Reserve has two primary goals: overseeing U.S. monetary policy in order to stabilize prices and control inflation — a stance that’s considered hawkish or contractionary — and maximizing employment, which is considered dovish. While these two aims can seem at odds, the Fed has been striving to take a mostly dovish or neutral stance in recent years.

A recent bout of inflation, however, forced the Fed to change its stance in 2022 and raise interest rates. It’ll likely change its stance again when inflation cools. It’s a never-ending game of posturing, all with the goal of maintaining low unemployment and stable prices.

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

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SoFi Invest®

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

What Is Dividend Yield?

How Does Dividend Yield Differ From Dividends?

How to Calculate Dividend Yield

What Is the Dividend Yield Formula?

How to Calculate Annual Dividends

Example of Dividend Yield

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Dividend Yield: Pros and Cons

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The Difference Between Dividend Yield and Dividend Rate

What Is a Good Dividend Yield?

A History of Dividend Growth

The Dividend Aristocracy

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The Takeaway

What Are Stock Warrants?

What Are Stock Options?

Similarities and Differences Between Warrants and Options

Similarities

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Stock Warrants vs Stock Options: A Summary

Pros and Cons of Warrants

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The Takeaway

FAQ

Is a warrant the same thing as an option?

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What Is the S&P 500

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1. Technology

2. Financials

3. Health Care

4. Consumer Discretionary

5. Communications Services

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6. Industrials

7. Consumer Staples

8. Energy

9. Real Estate

10. Materials

11. Utilities

How Are the Sectors of the S&P 500 Weighted?

Which Is the Largest S&P 500 Sector?

Which Is the Smallest S&P 500 Sector?

What Can You Do As an Investor With This Information?

The Takeaway

FAQ

What are the S&P 500 sector weights?

What is the sector breakdown of the S&P 500?

What is the smallest sector of the S&P 500?

What Is Spoofing?

What’s the Point of Spoofing?

Is Spoofing Illegal?

Example of Spoofing

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Consequences of Spoofing

How to Protect Against Spoofing

The Takeaway

You may also be interested in:

Who Decides Monetary Policy?

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Why Would the Fed Take a Hawkish Stance?

Why Would the Fed Take a Dovish Stance?

Is It Possible to Be Both Hawkish and Dovish?

How Do Hawkish vs Dovish Policies Affect Savers, Spenders, and Investors?

For Savers

For Spenders

For Investors

The Takeaway

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