How Much Does GPA Matter When Applying to College

How Much Does GPA Matter When Applying to College?

When deciding which applicants to accept, colleges and universities typically look for the best of the best. But, that doesn’t always mean the “best” is the person with the highest grades in high school.

Yes, a student’s grade point average, or GPA, is a good metric for measuring just what and how successfully they completed their high school course, but how much does a student’s GPA really matter for college admission? It depends.

Keep reading to find out when it matters, when it doesn’t, and all the other factors college admissions take into account beyond a student’s GPA.

Weighted vs Unweighted GPA

Traditionally, high schools measure a student’s academic performance on an unweighted GPA scale, meaning the number only goes up to a 4.0 for an A in a class. This measurement method does not take into account the difficulty level of classes, so an honors English class will be measured in the same way as a non-honors class.

On the other hand, weighted GPAs do take into account the difficulty level of a student’s coursework. Most weighted GPA scales measure from a 0 to a 5.0. This means, an AP-level or honors level class could earn a student a 5.0, while a lower-level class will only reward A work with a 4.0.

A weighted scale can offer students a little more flexibility when it comes to their overall GPA. Say a student is taking four classes, one is an honors level course and the three others are typical classes. The student receives an A in the honors class, which accounts for a 5.0; an A in two other courses, denoting a 4.0 and a 4.0, and a B in the last, at a 3.0. Despite receiving a B in a course, that would still end up with a weighted 4.0 GPA.


💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

Do Colleges Look at Weighted vs. Unweighted?

For the sake of looking at all applicants equally, colleges generally look at unweighted GPAs. They will typically separately consider how rigorous the coursework was. So, for example, if you took all AP classes and have an unweighted 4.0 GPA, you would be seen as a stronger applicant than someone who took less challenging courses and also got an unweighted 4.0, even though your GPAs are the same.

Colleges also look at unweighted GPAs (as well as standardized test scores and other factors) for merit-based scholarships. The more successful students are more likely to receive tuition funding.

College admissions staff may also look into other things when it comes to a student’s GPA, including grade trends. If a student didn’t start out high school on the best note, but performed well during their junior and senior year with a strong GPA, admissions may see that as excellent growth and perseverance in a student’s academic career.

Recommended: How Do Grades Affect Your Student Loans?

A “Good” GPA

Again, it’s important to remember that your GPA isn’t everything and that college admissions staff will likely look at much more than just your grades. However, it’s also always nice to know where you stand amongst the pack.

The average high school GPA is around 3.0 (or a B), including students who do and don’t apply to college. However, the average GPA for students applying to college is closer to 3.5 to 4.0, and the average for students applying to Ivy League schools can be even higher – 4.00 or close to it.

The average weighted GPA is 4.15 at Harvard and MIT.

While GPA isn’t everything, it’s a good idea to keep it in mind when deciding which schools, or how many, to apply to.

Recommended: How to Get Into College With a GED

What Else Do Colleges Look At?

Yes, colleges will take into account a student’s GPA. However, colleges and universities also take into account a complete picture of who a student is. That means they look into trends in a student’s grades throughout their education and likely look at a student’s test scores on the SAT or ACT.

College admissions officers also look at a student’s involvement in extracurriculars, sports teams, their involvement in their community through organizations and volunteer work, and any relevant work experience.

Admissions staff will also likely weigh a student’s application using their recommendation letters, which speak to a student’s merit far beyond their grades. Admissions will also read a student’s complete application and read any required essays.

Again, a lot goes into the admissions process, and grades aren’t the end all be all. This all means when you are preparing for college, even in your early high school years, you may want to prepare by diversifying your interests and pursuits to ensure they can tell a larger story in their application.

Colleges That Don’t Take GPA Into Account

There are schools out there with low or no minimum GPA requirements for applicants. These include many for-profit schools, as well as community colleges. In fact, if your GPA is on the lower end, you might consider attending a community college for a year or two and then transferring to a four-year university or college.

For example, California Community Colleges do not have a minimum GPA or testing requirements for incoming students. Attending a community college could be a great way for students to learn and grow personally and academically, and to increase their academic performance before transferring.

No Matter a Student’s GPA, It’s Good to Have a Plan

Being financially prepared for college can help take some of the stress away from worrying about how your GPA will affect your chances of admission.

While filling out applications, you may want to also look into all your financial options as well. This begins with filling out the Free Application for Federal Student Aid (FAFSA) to see if you are eligible for federal student aid, which include grants, scholarships, work-study, and federal loans.

If you still have gaps to fill, you may also want to consider a private student loan via a bank, credit union, or private lender. Unlike federal student loans, this involves a credit check. Students who have strong finances (or have a cosigner who does) stand to get lower interest rates and more favorable loan terms. Keep in mind that private student loans don’t come with government protections such as forbearance and forgiveness programs.


💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

The Takeaway

GPA is one factor in the college admissions process. How heavily GPA is weighted as a factor in admissions decisions will vary from school to school. Many schools will list the average GPA of admitted students, which can help give you an idea of how your GPA stacks up to students at that school. Other factors for admission might include a student’s transcript, letters of recommendation, and personal essay.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.



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Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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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Guide to the Dual-Track Process for IPO

Guide to the Dual-Track Process for IPOs

A dual-track initial public offering (IPO) allows companies to explore both going public and a private sale simultaneously.

For the company’s early and initial investors — those who acquired equity during seed funding rounds, for instance — both an IPO and a private sale could present an opportunity to cash out on their investment. Or, to find an exit.

Often the dual-track process may allow investors to get a higher return on their capital, since they can choose to move forward with the method that provides a higher valuation.

Dual-Track IPO Process Explained

For many early-stage investors, be they private equity or venture capital firms, or individuals, the time to execute an exit strategy is often when a company goes public, as an IPO opens up an opportunity for early investors to make an exit.

In a dual-track process, a company works toward both an initial public offering and a private sale through an auction — or an M&A (mergers and acquisitions) process — at the same time. The dual-track process gives investors looking for an exit the potential to fetch a higher valuation for their investment, particularly when market conditions make an IPO less than ideal.

How the Dual-Track Works for IPOs

Investors have an endpoint in mind: An exit and liquidation of their stake in an investment (the company). It only makes sense, then, that they’d want to get the highest possible profit back from their investment, while being aware of the substantial risks involved in the IPO process. That’s the aim of the dual-path IPO.

As such, the process varies — and a lot depends on the goals of the investors. But by exploring both an IPO and a potential M&A deal, companies have options. The process isn’t all that structured, as each company’s circumstances will differ.

But in broad strokes, the process utilizes two teams: One staffed with underwriters to prepare for an IPO, and another with lawyers and advisors who are feeling out potential M&A partners.

While the IPO process proceeds slowly, the M&A team is meeting with investors. When the regulatory approval has been granted for an IPO — a company can look at its options and decide if it wants to go public, or otherwise find a buyer through an M&A deal.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Is the Purpose of the Dual-Track IPO Process?

The goal of the dual-track process is simple: To increase the value of a company before its investors execute their exit.

But the process also provides companies a certain level of flexibility to either go public, or pursue an M&A deal or a private placement. Having options can help investors ultimately reap more gains if one avenue provides a higher valuation.

Recommended: Why Do Companies Go Public?

Benefits of the Dual-Track Process

Though the dual-track process is more resource-intensive than a traditional IPO, there are some clear benefits to engaging in it, including:

•   Flexibility: Utilizing the dual-track process gives companies the chance to either go public or execute a private deal, rather than being bound to one or the other. It gives companies additional options.

•   Maximizes odds of a higher valuation: Additional options means that there can be multiple valuations on the table. For instance, a private deal may value a company more than if it were to IPO. For investors, getting an idea of a company’s ultimate value from more than one source can be illuminating, and they may learn of exit opportunities that they did not previously recognize.

•   Mitigates risks of the market: The market isn’t always going to cooperate when a company plans to IPO. There are a lot of factors that can hurt an IPO, and by having another option (an M&A deal), the dual-track process can help reduce the risks of going public at the wrong time.

Using Dual-Track for an IPO Exit

For investors who want to exit their investment, the dual track IPO provides several options. If the firm IPOs, they can sell their investments (after the lockup period) to the public. If the company goes the M&A route, early investors can sell some or all of their stake in the company to the acquirers.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Is Dual-Track Suitable for Every Company?

No. Given the resources required, not every company should pursue a dual-track IPO. Whether it makes sense for a specific company will depend on the company’s and the investors’ goals.

Some companies might want to go for the private sale route, for example, because they want to avoid the disclosure process in an IPO. On the other hand, some organizations will want to focus on an IPO because there aren’t any appealing potential buyers on the market.

M&A Exit Explained

An M&A exit is a private deal between the company and another company (or companies). Often the two companies have some sort of aligned interest or operate in the same market, and one acquiring the other serves to increase market share or create a more diversified, multi-dimensional company.

And naturally, there are some pros and cons to an M&A, just as there are for an IPO.

Pros of M&A Exit

The biggest benefit of an M&A exit is the prospect of a higher valuation. That can come for a few reasons: A buyer may have an immediate need for the service a company provides, and needs to onboard as soon as possible, for instance, or multiple potential buyers can bid up a company’s value.

Also, the prospect of less disclosure (as opposed to the IPO process) can also be very attractive for some companies — like those in tech.

Cons of M&A Exit

Conversely, there are some potential drawbacks to an M&A exit, particularly for entrepreneurs with an emotional attachment to their business. A buyer may “clean house,” so to speak, and replace employees or company leadership, for one. It may also drastically restructure the business itself.

The Takeaway

A dual-track IPO is a way for companies to explore multiple liquidity events to choose the one that makes the most sense for their organization and their investors. If those companies do choose to go public, retail investors will have an opportunity to purchase shares in them for the first time.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

FAQ

What is an M&A exit?

An M&A (mergers & acquisitions) exit is when one company purchases, or merges with, another company. For investors, a company being acquired by another offers the chance to liquidate their position, as they’re selling their equity to the purchaser.

Is an IPO part of M&A?

No. A company typically either executes an IPO or goes through an M&A deal — investors are looking to exit through one or the other. However, companies that plan on going public or that have gone public can still engage in M&A deals. And an M&A deal may still result in a company staying private, too.

What are M&A deals?

M&A deals can take several forms: Mergers, acquisitions, consolidations, outright purchases, etc. The essence of an M&A deal is that one company, or its assets, is absorbed by another. Two become one.


Photo credit: iStock/kate_sept2004

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.


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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What Causes a Stock Market Bubble?

What Causes a Stock Market Bubble?

What Is a Stock Market Bubble?

A stock market bubble is often caused by speculative investing. As investors bid up the stock price, it becomes detached from its real value. Eventually, the bubble bursts, and investors who bought high and didn’t sell fast enough are left holding shares they overpaid for.

Stock market bubbles are notoriously difficult to spot, but they’re famous for potentially causing large-scale consequences, such as market crashes and recessions.

For investors on an individual level, entering the market in the later stages of a bubble could mean painful losses. But misdiagnosing a stock market bubble or exiting from positions too early can result in an investor missing out on potential gains.

Here’s a deeper dive into what causes stock market bubbles and how they develop.

Five Stages of a Market Bubble

Modern-day investors and market observers typically categorize market bubbles based on the principles of Hyman P. Minsky, a 20th century economist whose financial-instability hypothesis became widely cited after the 2008 financial crisis.

Minsky debunked the notion that markets are always efficient. Instead, he posited that underlying forces in the financial system can push actors–such as bankers, investors and traders–toward making bad decisions.

Minsky’s work discussed how bubbles tend to follow a pattern of human behavior. Below is a closer look at the five stages of a bubble cycle:

1. Displacement

Displacement is the phase during which investors get excited about something — typically a new paradigm such as an invention like the Internet, or a change in economic policy, like the cuts to short-term interest rates during the early 2000s by Federal Reserve Chair Alan Greenspan.

For instance, one example of displacement can be the enthusiasm for cryptocurrencies that picked up in 2017. While the cryptocurrency market technically began back in 2009, mainstream institutional and retail investors started gravitating toward crypto coins and tokens like Bitcoin in a bigger way in 2017.

2. Boom

That excitement for a new paradigm next leads to a boom. Prices for the new paradigm rise, gradually gathering more momentum and speed as more and more participants enter the market. Media attention also rapidly expands about the new investing trend.

This phase captures the initial price increases of any potential bubble. For instance, after Greenspan cut interest rates in the early 2000s, real-estate prices and new construction of homes boomed. Separately, after the advent of the Internet in the 1990s, shares of technology and dot-com companies began to climb.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

3. Euphoria

The boom stage leads to euphoria, which in Minsky’s credit cycle has banks and other commercial lenders extending credit to more dubious borrowers, often creating new financial instruments. In other words, more speculative actions take place as people who are fearful of missing out jump in and fuel the latest craze. This stage is often dubbed as “froth” or as Greenspan called it “irrational exuberance.”

For instance, during the dot com bubble of the late 1990s, companies went public in IPOs even before generating earnings or sales. In 2008, it was the securitization of mortgages that led to bigger systemic risks in the housing market.

4. Profit-Taking

This is the stage in which smart investors or those that are insiders sell stocks. This is the “Minsky Moment,” the point before prices in a bubble collapse even as irrational buying continues.

History books say this took place in 1929, just before the stock market crash that led to the Great Depression. In the decade prior known as the “Roaring 20s,” speculators had made outsized risky bets on the stock market. By 1929, some insiders were said to be selling stocks after shoeshine workers started giving stock tips–which they took to be a sign of overextended exuberance.

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

5. Panic

Panic is the last stage and has historically occurred when monetary tightening or an external shock cause asset values to start to fall. Some firms or companies that borrowed heavily begin to sell their positions, causing greater price dips in markets.

After the Roaring 20s, tech bubble, and housing bubble of the mid-2000s, the stock market experienced steep downturns in each instance–a period in which panic selling among investors ensued.

Recommended: Should I Take My Money Out of the Stock Market?

The Takeaway

One of the prevailing beliefs in the financial world is that markets are efficient. This means that asset prices have already accounted for all the information available. But market bubbles show that sometimes actors can discount or misread signs that asset values have become inflated. This typically happens after long stretches of time during which prices have marched higher.

Stock market bubbles are said to occur when there’s the illusion that share prices can only go higher. While bubbles and boom-and-bust cycles are part of markets, investors should understand that stock volatility is usually inevitable in stock investing.

Investing has historically been an important part of wealth-building for individuals, and the benchmark S&P 500 Index has an average market return of 7% annually after adjusting for inflation.

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


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

Photo credit: iStock/fizkes


SoFi Invest®

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

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


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

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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Stock Warrants: What Are They and How Do I Exercise Them?

What Is a Stock Warrant? Guide to Exercising Stock Warrants

Stock warrants are similar to options: A stock warrant offers investors the right, but not the obligation, to buy or sell a stock at a specific price by a set date.

That said, while it’s fairly easy to come by stock options, stock warrants are less common, especially in the U.S. Some investors may be familiar with stock warrants because they’re typically part of SPAC deals (special purpose acquisition company).

Although warrants and options do have some similarities (e.g. there are put warrants and call warrants), they also have substantial differences. Here’s what you need to know about how stock warrants work.

What Is a Stock Warrant?

Like a stock option, a stock warrant is a derivative contract that gives the holder the right, but not the obligation, to buy or sell the underlying security at the agreed-upon strike price on or before the expiration date of the contract.

Stock warrants are issued by the company that has the stock. They’re typically used as a way to raise capital, because the cost of the warrant (the premium) and the cost per share both flow to the company.

With U.S. warrants, the expiration date is the last date investors can exercise the warrant; with European-style warrants, the expiration date is the only date when investors can exercise their warrants. In the U.S. stock warrants typically don’t expire for a period of several years.

Investors pay a premium per share for the stock warrant (typically a fraction of the share price). Investors generally buy one warrant per one share of stock, but warrants can also be sold at a certain ratio, e.g. 4 to 1 (e.g. four warrants represent one share of the underlying security).

It’s important to know the terms of the warrant, so that you know what you’re buying, how much you’re paying, what it’s worth, and when the warrant expires.

Two Main Types of Warrants

Similar to options trading, investors can buy a call warrant or a put warrant. A call warrant allows investors to purchase shares from the company by the expiration date.

A put warrant allows them to sell the shares back to the company.

Stock warrants in general aren’t common in the U.S., especially with the decline of the SPAC market (more on that below). Put warrants tend to be less common than call warrants.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

The Value of Warrants

Warrants have intrinsic value and time value, similar to options. Intrinsic value is how profitable the stock warrant would be if the investor exercised it now.

The time value of a warrant, put simply, is a function of how volatile the underlying shares are, and how much time is left until expiration. The more time the warrant has until it expires, the more time it has (potentially) to rise in value.

That’s why stock warrants can be traded on the secondary market.

When an investor exercises a stock warrant in order to purchase shares, the company issues new shares, which are dilutive to the existing shareholders.

Pros of Stock Warrants

The primary advantage of stock warrants is that for a relatively small upfront investment, investors have the right to purchase shares of stock — which, if they are lucky, may increase in value and deliver a substantial profit. The downside is that the warrant can expire worthless.

However, there is an advantage in terms of time: Stock warrants are often long-term — some are five, 10, or even 15 years. Ideally then, investors can wait for the best time to exercise their warrants.

Given the longer time horizon before warrants typically expire, investors can trade warrants on the secondary market, assuming the warrant still has value.

Cons of Stock Warrants

The leverage offered by a warrant cuts both ways, giving investors the potential for big gains or big losses — so these contracts can be quite risky.

Also, an investor may be entitled to dividends or have voting rights when they purchase actual shares of stock. That’s not true when investors buy warrants. Warrants don’t pay dividends and don’t offer voting rights.

Profits from selling stock warrants are taxed as ordinary income, which can be a higher tax rate for investors vs. the capital gains rate.

Pros

Cons

The low price of warrants can lead to big gains. Warrants can be risky, and a modest price drop in the underlying stock price can render the warrant worthless.
The longer time horizon gives investors the chance to buy/sell at the right time. Stock warrants don’t pay dividends and don’t come with voting rights.
Investors can trade their warrants on the secondary market before they expire, if they still have value. Profits from selling a stock warrant are taxed as income, not as capital gains.

The Complexity of Stock Warrants

Investors should bear in mind that, above all, stock warrants are not as simple as they can seem at first. In some ways the terms of stock warrants are more opaque than stock options.

If a stock pays dividends, that may lower the price of the stock warrant (as an inducement to investors, who won’t see dividends, but may see a higher payoff). But a stock warrant can also be structured so the share price incrementally rises over time, which may not be favorable to the investor.

Stock warrants are typically not considered very liquid, because there are so few of them.


💡 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

Warrants differ from options in a few important ways:

1.    A stock option is a contract entered into by two investors, whereas a warrant is issued by the company that issues the stock.

2.    Stock warrants also differ from options in that they can have expiration dates as far as 15 years in the future. Most options last for much shorter periods, and rarely more than three years.

3.    Warrants are a source of capital for the issuing company, whereas options are instruments traded between entities.

4.    Call warrants and options give the holder the right to buy a stock; puts give the holder the right to sell a stock. But there is a difference between put options and put warrants in that put options may be more advantageous because their price goes up when the stock price goes down. If you buy a put warrant from a company and the price goes down to zero, you may not be able to sell your stock back to the company.

Warrants

Options

Issued directly by a company Traded between investors
Expiration dates as long as 15 years Expiration dates typically less than a year
Source of capital for the company Potential profit or loss for investors, not the underlying company/entity
Put warrants may be more risky than put options Put options may be more advantageous than put warrants

How Do SPAC Warrants Work?

SPACs, which stands for special purpose acquisition companies, are shell companies that raise money by listing shares on a stock exchange, and then merging with private companies that wish to go public.

When it comes to SPACs, investors who buy in during the pre-listing process are given “units.” Each “unit” includes a share and a warrant or a fraction of a warrant. The warrants are meant to be additional compensation to pre-listing SPAC investors for agreeing to have their capital held in a trust until the merger.

SPAC Market Declines

While SPACs once saw considerable interest from investors only a few years ago, with billions flowing into these deals, SPACs are less common today. In 2022 alone, the number of SPAC mergers dropped by 22% — and the number of canceled SPACs doubled to about 55 last year.

In addition, institutional investors — hedge funds, mutual funds, and pensions — historically have had greater access to SPAC units, since units are allocated during the private placement stage of a SPAC deal.

This has been one of the criticisms lobbed at SPACs, with detractors arguing that it gives institutional investors a better risk-reward proposition than retail traders, who typically just buy regular shares in the market without the added potential value warrants can offer.

Recommended: SPAC vs. IPO

Example of Exercising SPAC Warrants

The SPACs’ shares “separate” from the warrants usually 52 days after the initial public offering or IPO. This allows unitholders to trade the warrants and shares separately. The fees for exercising or trading warrants can be more sizable than the fees for trading shares.

Here’s a case example of how an investor may exercise their SPAC warrant. A merger between the SPAC and the target company is completed, and 52 days later, the warrants become exercisable at their strike price, which is typically $11.50 in SPACs.

So let’s say the shares of the combined company are trading at $15, so higher than the strike price of $11.50. That means investors can exercise their warrants and buy additional shares at $11.50 and immediately sell them for $15.

The investor would then pocket the difference between the exercise price of $11.50 and the current share price of $15 for a tidy profit.

But if the share price is trading lower than the exercise price, the investor is in a wait-and-see situation — and if the share price never rises above the strike price, the warrants are essentially worthless.

Recommended: What to Know About SPACs Before You Invest in Them

Important Things to Know About SPAC Warrants

While SPAC warrants can be a lucrative opportunity, it’s also important to be aware that each SPAC and the terms of the warrant contracts need to be evaluated by investors on a case-by-case basis.

Remember, warrants offer an opportunity but they can also expire when worthless. For instance, it’s possible shares of the combined company never rise above the strike price of $11.50, making it impossible for investors to exercise the warrants.

Furthermore, the regulation of SPACs and their warrants could change. In April 2021, the Securities and Exchange Commission (SEC) changed how SPAC companies can classify warrants on their balance sheet. Many SPACs have considered warrants as equity. But under the new guidelines, in certain circumstances, SPAC companies need to classify warrants as liabilities.

Many SPACs in the pipeline have had to reevaluate their financial statements in order to make sure they’re in compliance with the new regulatory guidelines. Market observers interpreted the SEC’s move as an attempt to cool the red-hot SPAC market.

Why Do Companies Issue Warrants?

The reason that companies issue stock warrants is to raise capital without selling other bonds or stock. Selling warrants also protects the company’s stock from becoming diluted, as would happen with the issuing of new stock — unless or until investors exercise them.

Call warrants will dilute the shares on the market when investors exercise them.

Recommended: Understanding Stock Dilution

Because warrants are less expensive than the underlying stock, unproven companies will use them to entice new shareholders. The company makes money on the warrant sale, and on the exercise of the call warrant if the owner buys the underlying shares. And if the warrant expires, the company keeps the purchase price of the warrant.

A company may issue call warrants as a show of confidence for shareholders who want to hedge their holdings of that company’s stock. The company offers the hedge of the call warrant to reassure shareholders while raising capital from the sale of the warrant.

Sometimes, companies will also issue warrants as a way to raise capital during periods of turbulence. For example, some companies issue warrants if they’re headed for bankruptcy.

How to Find Warrants to Invest In

Not every publicly traded company offers warrants. In the U.S. the companies that tend to issue warrants are not big Fortune 500 corporations. Instead, they tend to be smaller, more speculative companies.

While there are some online databases of warrants, they’re not necessarily comprehensive and up-to-date. But if an investor has a company they’re interested in investing in via warrants, they can contact that company’s investor relations department. Investors can also go to the company website and search for the word “warrant,” or the company’s ticker symbol, followed by “WT.”

Some warrants can also be traded under the symbol that includes the underlying stock symbol with either a “W” or “WS” before it. Once an investor finds a warrant, most online brokerage accounts will allow them to buy and sell the warrant.

How to Use Warrants

For an investor who owns warrants, the first decision is when to exercise the warrant. For a call warrant, that’s when the stock price has risen above the warrant’s strike price. If it’s a put warrant, then it means the stock is trading below the strike price.

But a warrant holder has another option, which is to sell the warrant on the open market because warrants can be traded like options. This is one thing to consider if a call warrant is below the strike price. Even if it’s below the strike price, the call warrant may still have intrinsic value right up until it expires, though the market may offer you less for the warrant than you paid for it.

Even if the current stock price is higher than the strike price, an investor may choose to hold onto the warrant. That’s because the price could rise even higher before the warrant expires.

Whether buying, selling, or exercising a warrant, most brokers can help an investor get it done. Once purchased, a warrant will appear in a trading account just like a stock or option. But with warrants, like most financial derivatives, most brokers charge higher transaction fees. After the broker contacts the company that issued the warrants and exercises them, the stock will replace the warrants in the trading account.

Other Important Things to Know About Warrants

It’s important to remember that every company that issues warrants does it differently. One company may issue warrants in which five warrants can be exercised to obtain one share of stock. Another company may set the ratio at ten to one or twenty to one.

Some companies can adjust the strike price of their call warrants if the company pays out dividends. This is a twist that can benefit the buyer because warrants with a lower strike price are more likely to be exercised at a profit.

But not every contractual term in a warrant is necessarily to an investor’s benefit. There are some call warrants whose structure allows the issuing company to force investors to sell their warrants if the stock price rises too high above the warrant’s strike price. There are even some warrants whose strike price is designed to rise higher over time, which makes it less likely that an investor will be able to exercise the warrant at a profit.

While it makes sense to study and understand the fine print before buying a warrant or any investment, it’s especially important to double-check those terms and conditions when getting out of the investment, by exercising a warrant, for example.

The Takeaway

Stock warrants are a bit like their cousin, the stock option — but there are some key differences to know. These often-overlooked securities can offer investors an inexpensive way to bet on the long-term success of a company. But they come with potential pitfalls, particularly when it comes to the fact that they can expire if investors don’t exercise them.

Warrants have become more topical since they’re issued in SPACs, which have seen an equally dramatic rise and fall in popularity over the last few years. In SPACs, early investors often get a share plus a warrant or partial warrant. However, investors should evaluate each SPAC and warrant carefully given the potential volatility of these arrangements.

All of that said, stock warrants are relatively uncommon as investment vehicles in the U.S.

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

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

FAQ

What is an example of exercising a stock warrant?

Let’s say a stock is trading at $5 per share. The company decides to sell call warrants for a strike price of $5.50 per share. If the stock price rises to $6 per share before the expiration date, an investor could exercise their stock warrants to make $0.50 per share. If the stock price drops to $4.75/share, investors would have to wait rather than take the loss — and hope for a price increase before the warrant expires.

What is the purpose of a stock warrant?

Stock warrants are generally issued by a corporation as a means of raising capital. The company sells the warrants to investors, who have a specified period of time in which to exercise the warrant (say, five years). In the above example, the company would raise $0.50 per share by selling call warrants at a slightly higher price-per-share.

How can you find a stock warrant to invest in?

Trying to find a stock warrant over-the-counter from the issuing company isn’t impossible, but it can be difficult, especially because most companies don’t offer warrants. The easiest way to find stock warrants on the secondary market is to purchase them through your brokerage account. Warrants are indicated with a W or WS added to the ticker.


Photo credit: iStock/PeopleImages

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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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What Are Sin Stocks? Investing in "Vice" Behaviors

What Are Sin Stocks? Investing in “Vice” Behaviors

“Sin stocks” are stocks that come with some cultural and lifestyle baggage that may not appeal to investors who take an ethical stand on the company their portfolio keeps. Proponents of these types of stocks point to the fact that some studies show that many sin stocks have, historically, performed better than their more “wholesome” market competitors.

Sin stocks are also known as “vice stocks,” and though they may have baggage, it doesn’t mean that some investors don’t think they’re a good fit for their portfolios.

What Are Sin Stocks?

Sin stocks take the definition of “sin” (i.e., an “immoral act”) and apply it to financial securities. The term “sin stock” refers to stock in companies that engage in businesses and markets that cultural forces may deem as unethical.

There’s actually no formal sin stock list, and many individuals and institutions have their own idea of what constitutes a sin stock. This may include different types of investments in one or more of the following categories, which include some of the largest corporate brands in the world.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Gambling

This sector includes big name companies that are involved or in the orbit of the gambling space. They can include casinos, sports betting applications and platforms, entertainment companies, and more.

Alcohol

The adult beverage market includes numerous staples, including the makers or creators of various beers and wines. There are many on the market, including some large beverage conglomerates.

Tobacco

This sector includes companies that traditionally produce cigarettes or other tobacco products. As with the alcohol sector, there are some large conglomerate companies in the space.

Weapons and defense

The weapons and defense market – think firearms and military arsenal providers. It may also include aerospace or even tech companies.

Sex and adult entertainment

This sector includes all sorts of companies, ranging from adult-themed social media networks to publishers and media companies.

Fossil Fuels

This sector includes a host of energy companies that may be involved in the production of coal, oil, or gas.

Recommended: How and Why to Invest in Oil

Pros and Cons of Sin Stocks

Like any stock market category, vice stocks have their upsides and downsides. Here’s a closer look:

Potential Pros of Sin Stocks

The “shun” factor. With many investors turning up their nose at sin stocks, other investors can wade in and potentially get good value on vice-themed portfolio plays. Stocks that some investors avoid could end up undervalued.

Sin companies may have less competition. While every business has its own unique identifiers, the stigma of being viewed as a company that profits on vice may thin the competitive playing field. Companies in sectors with less competition allow those companies that do operate in a “vice” sector to have products and services with higher demand and fewer barriers to robust profits.

Recession resistance. Are sin stocks recession proof? Not completely, but they may perform better than their peers during a downturn. No matter what the economy is doing, for example, people may down a pint at the pub or puff a quality cigar. Even if those habits aren’t for you, you may be able to profit from other people’s habits.

Recommended: Investing During a Recession

Potential Cons of Sin Stocks

Ethical qualms. There’s evidence that specific sin stock products like cigarettes, liquor and gambling may create health hazards that lead to severe illness and even death. Investors in those sectors may worry about the ethics of profiting on habits that lead to negative physical and mental health consequences.

Subject to cultural or regulatory shifts. While they may be less prone to recessions, some sin stocks may carry investment risk due to changes in the regulatory or cultural landscape. For example, increased gun control measures could decrease the value of firearms manufacturers while expanded legal betting could increase the value of gambling stocks.

Sin Stocks vs Angel Stocks

Sin stock sectors often sit on the opposite side of the spectrum from environment, social and governance (ESG) stocks, which have risen in prominence over the past 20 years, as investors look for ways to align their portfolio with their values.

Performance-wise, the edge may go to sin stocks, however, which have performed as well or better than ESG stocks. It’s worth keeping in mind that “sin stock” is a subjective term. One person’s sin stock may be another person’s perfectly reasonable stock.

As an extreme example, one of the sins listed by religious historians is sloth. Under that definition, an investor in streaming services may be labeled as a sin stock investor by engaging with companies that contribute to sloth, via long stretches of binge-streaming.

Or, one investor may view defense stocks as a virtuous investment, since these companies build products that help defend the United States from potential enemies. Another investor may view defense stocks as sin securities, since the companies produce tanks, guns and helmets wind up on battlefields where soldiers are killed or wounded.

Recommended: 27 Potential Ways to Invest in a Carbon-Free Future

How to Invest in Sin Stocks

If you invest in broad index funds, you likely already have some exposure to sin stocks, since they’re traded on all the major exchanges. If you’d like more exposure to sin stocks, you can evaluate individual stocks for potential investment, or purchase shares in a thematic ETF in a sector such as gaming or energy more diversification within that field.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Sin stocks are shares of companies that operate in sectors that some investors may not be comfortable supporting. They can include stocks of companies that produce products like alcohol or tobacco, or even those that operate in the adult entertainment space, or those that produce fossil fuels.

While some sin stocks have delivered outsized returns for investors, the decision as to whether you should invest in a specific sin stock or sector is a personal one. You’ll want to consider your own ethics and values as well as the performance of the stock and how it could fit into your overall portfolio strategy.

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.

Photo credit: iStock/kupicoo


SoFi Invest®

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

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

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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