MoneyHH Archives | Page 11 of 25

Sep

2023

How Dark Pools Operate – and Why They Exist

What Is a Dark Pool in Trading?

By Colin Dodds | Growing Wealth, invest, Investing, Terminology | Comments Off

Dark pools, sometimes referred to as “dark pools of liquidity,” are a type of alternative trading system used by large institutional investors to which the investing public does not have access.

Living up to their “dark” name, these pools have no public transparency by design. Institutional investors, such as mutual fund managers, pension funds, and hedge funds, use dark pool trading to buy and sell large blocks of securities without moving the larger markets until the trade is executed.

Understanding the History of Dark Pools

The history of dark pools in the trading world starts in the 1980s, following changes at the Securities and Exchange Commission (SEC) which effectively allowed brokers to make trades in large share blocks. Later, in the mid-2000s, further SEC changes that were meant to cut trading costs and increase market competition led to an increase in dark pool trading.

Dark Pool Examples

There are many dark pools out there, and they can be operated by independent companies, brokers or broker groups, or stock exchanges themselves. An internet search would bring up names of specific dark pools.

But to get a sense of how a dark pool can be used to investors’ benefit, say there’s a mutual fund looking to sell 2 million shares of Stock X. Given that selling that amount of shares would create ripples in the market, the mutual fund may not want to sell them all at once. As such, they sell them in blocks of 10,000, 1,500, or 5,000 shares — and find buyers for the smaller blocks accordingly.

This method makes it less obvious that a huge number of shares are being sold, which could avoid Stock X’s shares losing value quickly.

Who Runs Dark Pools?

Investment banks typically run dark pools, but some other institutions run them as well, including large broker-dealers, agency brokers, and even some public exchanges. Some trading platforms, where individual investors buy and sell stocks, also use dark pools to execute trades using a payment for order flow.

Recommended: What Is a Market Maker?

The role of dark pools in the market varies over time. At times, dark pool trades comprise as much as half of all trading in a single day, while at other times, they make up significantly less of U.S. equity volume.

Because trades in a dark pool aren’t reflected in the prices on a public exchange, participants in a dark pool trade based on the prices offered on a public exchange, using the midpoint of the National Best Bid and Offer (NBBO) to set prices.

💡 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.

Why Institutions Use Dark Pools

Large, institutional investors such as hedge funds, may turn to dark pools to get a better price when buying or selling large blocks of a single stock. That’s because of the way that large trades impact the public markets.

As discussed, if a mutual fund manager, for example, wants to sell a million shares of a given stock because it’s underperforming or no longer fits their strategy, they’d need to use a floor trader to unload the position on a public exchange. Selling all those shares could impact the price they get, driving down the VWAP (volume weighted average price) of the total sale.

To avoid driving down the price, the manager might spread out the trade over several days. But if other traders identify the institution or the fund that’s selling they could also sell, potentially driving down the price even further.

The same risk exists when buying large blocks of a given security on a public market, as the purchase itself can attract attention and drive up the price.

New Risks

The risks of attracting attention from other traders have intensified with the rise of algorithmic trading and high-frequency trading (HFT). These strategies employ sophisticated computer programs to make big trades just ahead of other investors. HFT programs flood public exchanges with buy or sell orders to front-run giant block trades, and force the fund manager in the above example to get a worse price on their trade.

Dark Pool Benefits

Utilizing a dark pool and conducting a dark trade, institutional investors can sell a million shares of a stock without the public finding out because dark pool participants don’t disclose their trades to participants on the exchange. The details of trades within a dark pool only show up after a delay on the consolidated tape — the electronic system that collates price and volume data from major securities exchanges.

There are other advantages for an institutional trader. Because the buyers and sellers in a dark pool are other institutional traders, a fund manager looking to sell a million shares of a given stock is more likely to find buyers who are in the market for a million shares or more. On a public exchange, that million-share sale will likely need to be broken up into dozens, if not hundreds of trades.

Criticism of Dark Pools

As dark pools have grown in prominence, they’ve attracted criticism from many directions, and scrutiny from regulators. For instance, the lack of transparency in dark pools and the exclusivity of their clientele makes some investors uneasy. Some even believe that the pools give large investors an unfair advantage over smaller investors, who buy and sell almost exclusively on public exchanges.

The Takeaway

As discussed, dark pools are sometimes referred to as “dark pools of liquidity,” and are a type of alternative trading system used by large institutional investors to which the investing public does not have access. They’re typically run and utilized by large investment banks.

Given the nature of dark pools, they attracted criticism from some due to the lack of transparency, and the exclusivity of their clientele. While the typical investor may not interact with a dark pool, knowing the ins and outs may be helpful background knowledge.

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

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

FAQ

How can you see dark pool trades?

Investors can access dark pool trading data through various securities information processors, and can be accessed through FINRA’s website as well.

Who regulates dark pools?

The Securities and Exchange Commission, or SEC, is the government body that regulates dark pools and dark pool trading.

What are dark pools in cryptocurrency?

A dark pool in cryptocurrency is more or less the same as a dark pool in other equities markets, and is a place that matches buyers and sellers for large orders outside of a public exchange or view.

How do dark pools differ from lit pools?

As many might surmise, lit pools are effectively the opposite of dark pools, in that they show trading data such as number of shares traded and bid/ask prices.

Photo credit: iStock/DNY59

SoFi Invest®

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

Sep

2023

What Is Efficient Frontier?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

The efficient frontier is a financial framework that investors can use to build an optimized asset portfolio that attempts to give them the greatest returns within their particular risk profile. In other words, it shows which investment portfolio will be “efficient” or provides a higher expected return for a lower amount of risk. It does not, however, eliminate risk for investors, which is important to keep in mind.

It’s visualized as a curved line on a graph according to an individual’s goals and risk tolerance. The framework is called the efficient frontier or the efficiency frontier because if one’s investments fall within the ideal range, they are working efficiently to achieve one’s goal.

How Does the Efficient Frontier Work?

The efficient frontier concept is a key facet of modern portfolio theory, which was created in 1952 by Harry Markowitz. Essentially, the efficient frontier is the optimal baseline for an investment portfolio. If an investor’s portfolio gives them lower returns because it contains riskier investments, then it may not be as well balanced as it could or should be. It’s also possible for a portfolio to provide returns that are greater than the frontier. As such, as long as a portfolio’s potential returns justify its associated risks, then the portfolio is well-allocated.

Every investor has a different risk tolerance, and their own corresponding goals for portfolio growth. Accordingly, every investor has a different frontier. By adjusting that frontier, the inventors can then see if their current portfolio measures up to the parameters set by the efficient frontier graph, and make changes to their asset allocation accordingly.

💡 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.

How Is the Efficient Frontier Constructed?

Investors hoping to utilize the efficient frontier concept as a part of their strategy will create a corresponding graph, and apply it to their specific portfolio.

When constructing the graph, expected returns are on the y-axis and the standard deviation of returns, which are a measure of risk, are on the x-axis. Then, they would plot a curve that shows where the ideal or expected portfolio would land on the graph and the standard deviation of returns.

Once the graph is created, the investor can plot a portfolio or individual asset on the graph according to its expected returns and their standard deviation, and then compare it to the efficient frontier curve. The investor can also plot two or more portfolios on the graph to compare them.

A portfolio that falls on the right side of the graph has a higher level of risk, while a portfolio that is low on the graph has lower returns. If an investor finds that their portfolio doesn’t fall on the graph where they would like it to, they can then make decisions about how to reallocate investments to move closer to the goal.

The curved line reflects the diminishing marginal return to risk. Adding more risk to a portfolio doesn’t result in an equal amount of increased return. Portfolios that lie below the curve on the graph are suboptimal because they don’t provide high enough returns to justify their amount of risk. Portfolios to the right of the curve are also suboptimal because they have a high level of risk for their particular level of return.

Again, the portfolios that display the lowest levels of risk are not inherently risk-free, which investors will need to keep in mind.

Efficient Frontier Example

Efficient frontier can be a somewhat difficult concept to visualize, so consider this: Your portfolio contains two assets. Each asset has its own respective expected annual return, and standard deviation — so multiple variables for each asset.

Data sets for each can be put together showing correlated expected returns and standard deviations, and plotted on a graph, as discussed. That graph will reveal the efficient frontier, and help investors determine which portfolio they’d prefer accordingly.

Again, it’s somewhat difficult to visualize, but practically speaking, a visual chart with different portfolios can be helpful in making portfolio decisions.

Benefits of the Efficient Frontier

The primary benefit of the efficient frontier is that it helps investors visualize and understand whether their investment portfolio is performing the way they would like it to. Every investment and portfolio comes with some risk, and oftentimes with more risk there is more reward. But it’s important to make sure that your returns are worth the risk, and to remember that there is no such thing as a risk-free investment or portfolio.

Investors can use the efficient frontier to analyze the current performance of a portfolio and figure out which assets to adjust, potentially liquidate, or reallocate. Investors can also see if a particular asset is giving them the same reward with less risk than other assets. In this case, they might want to sell the higher risk asset and put more funds into the lower risk asset.

How Do Investors Use the Efficient Frontier Model?

Using an efficient frontier model is one method of building a portfolio made of different types of investments that have the optimal balance of risk and return. No portfolio is without risk, and investors do need to reallocate investments on occasion to continue optimizing toward their goal. But the optimal portfolio would have a balance of high-risk, high-reward investments and more stable investments that still get decent returns.

There is often an assumption that investments with greater risk provide greater returns — as noted. Although this is sometimes true, the optimal portfolio holds both high risk and low risk assets, according to the efficient frontier.

If an investor has a higher tolerance to risk, they could choose to own a higher percentage of investments on the right end of the efficient frontier graph with higher risk and higher return. If an investor is more conservative, they could choose to hold lower-risk assets.

Proponents of efficient frontier claim that more diversified portfolios tend to be closer to the efficient frontier line than less diversified portfolios, and therefore have lower levels of risk, though they’re not risk-free.

Limits and Downsides of the Efficient Frontier

The main downside of using the efficient frontier tool is that it creates a curve with a normal distribution, which doesn’t necessarily always match reality. Real investments may vary within three standard variations of the mean curve. This “tail risk” means there are limits to the conclusions you can draw from the efficient frontier graph.

Another issue is that investors don’t always make rational decisions and avoid risk. Market decisions involve many complex factors that the efficient frontier does not factor into its calculations. Instead, the efficient frontier assumes that people always avoid risk and make investing decisions rationally.

Finally, the efficient frontier assumes that the number of investors in a market has no impact on market prices, and that all investors have the same access to borrow money with risk-free interest rates.

Investors using the efficient frontier should understand its limitations and might consider using it in conjunction with other tools for analyzing an investment strategy.

The Takeaway

The efficient frontier is one of many useful methods of analyzing portfolios and creating a long-term investing plan. It involves utilizing a financial framework to build an optimized asset portfolio with aims to maximize their potential gains within their particular risk profile. It also involves visuals to help investors get a better sense of where their portfolio stands. Investors should remember that it is not a tool that will help them completely remove risk from their investment portfolio or allocation.

It’s also a relatively high-level investing concept and tool that many investors may not feel comfortable using. There are plenty of strategies and tools that can be utilized in its stead, of course, and it may be worthwhile to consult with a financial professional if investors feel they’re in over their heads.

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 common assumptions of the efficient frontier model?

Common assumptions of the efficient frontier model include that asset returns will follow a more or less common distribution, that investors will act rationally, and that riskier investments inherently lead to larger returns.

Can the efficient frontier be negative?

The efficient frontier model cannot be negative, as a negative figure would imply that an investor garnered losses from a given set of potential portfolios. That means that the investor was not actually investing.

What is the difference between efficient frontier and efficient portfolio?

The efficient frontier is a set of investment portfolios expected to provide the highest return for a specific risk level. Efficient portfolio, on the other hand, is a single portfolio that provides the highest return for a specific risk level.

Photo credit: iStock/undrey

SoFi Invest®

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

Sep

2023

What Is a Joint Bank Account?

By Julia Califano | Budgeting & Goals, Family Finances, money | No Comments

If you are hitched or have a significant other, you may wonder if a joint bank account is the right move or if you should keep your finances separate.

When you open a joint checking account, it can make it easier for the two of you to budget, spend, and save, especially if you are splitting household expenses. However, doing so also means you have less privacy financially speaking and you may not be comfortable with this level of transparency.

If you are mulling over this decision, read on to learn the pros and the cons of opening a joint bank account, as well as the steps required to open a joint bank account. In addition, you’ll find out about options to a shared bank account which may suit your needs.

🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.

What Is a Joint Bank Account?

A joint bank account is an account that’s shared between two people.

Simply put, a joint bank account is an account that’s shared between two or more people. Each person has full access to the money, whether withdrawing or adding to the funds.

While some couples will open an account and put all of their combined cash into it, other couples may choose to open up a shared bank account in addition to their pre-existing individual accounts.

Shared accounts can be both checking and savings accounts, and which account you choose — if you choose to create one at all — will depend on your specific goals and circumstances.

Sharing a financial account can come with some great benefits, as it generally provides each account holder with a debit card, a checkbook, and the ability for two people to deposit and withdraw funds into the same account. It can also come with some potential drawbacks.

One of the biggest decisions a couple will make is whether they decide to treat their money as a shared asset or as separate entities. As with any discussion about money, every individual or couple will have different goals and experiences, so it’s helpful to take a look at both sides. Considering the pros and cons of joint accounts may help you decide if this kind of account suits you.

How Does a Joint Account Work?

A joint account functions just like an individual account, except that more than one person has access to it.

Everyone named on a joint account has the power to manage it, which includes everything from deposits to withdrawals.
Any account holder can also close the account at any time. And, all owners of a joint account are jointly liable for any debts incurred in relation to the account.

Two or more people can own a joint account. They don’t have to be a married couple or even live at the same address to combine bank accounts.

You can open a joint account with an aging parent who needs assistance with paying bills and managing their money. You can also open a joint account with a friend, roommate, sibling, or business partner.

What Are Some Pros of a Joint Bank Account?

Here are some of the pros of opening a joint account.

• Ease of paying bills. When you’re sharing expenses, such as rent/mortgage payments, utilities, insurance and streaming services, it can be a lot simpler to write one check (or make one online payment), rather than splitting bills between two bank accounts. A shared account can simplify and streamline your financial life.

• Transparency. With a joint checking account, there can’t be any secrets about what’s coming in and in and what’s going out, since you both have access to your online account. This can help a newly married couple understand each other’s spending habits and talk more openly about money.

• A sense of togetherness. Opening a joint bank account signals trust and a sense of being on the same team. Instead of “your money” and “my money,” it’s “our money.”

• Easier budgeting. When all household and entertainment expenses are coming out of the same account, it can be much easier to keep track of spending and stick to a monthly budget. A joint account can help give a couple a clear financial picture.

• Banking perks. Your combined resources might allow you to open an account where a certain minimum balance is required to keep it free from fees. Or, you might get a higher interest rate or other rewards by pooling your funds. Also, in a joint bank account, each account holder is insured by the Federal Deposit Insurance Corporation (FDIC), which means the total insurance on the account is higher than it is in an individual account.

• Fewer legal hoops. Equal access to the account can come in handy during illness or another type of crisis. If one account holder gets sick, for example, the other can access funds and pay medical and other bills. If one partner passes away, the other partner will retain access to the funds in a joint account without having to deal with a complicated legal process.

🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.

What Are Some Cons of a Joint Bank Account?

Despite the myriad advantages of opening a joint account, there are some potential downsides to a shared account, which include:

• Lack of privacy. Since both account holders can see everything that goes in and comes out of the account, your partner will know exactly what you’re earning and how much you are spending each month.

• Potential for arguments. While a joint account can prevent arguments by making it easier to keep track of bills and spending, there is also the potential for it to lead to disagreements if one partner has a very different spending style than the other.

• No individual protection. As joint owners of the account, you are both responsible for everything that happens. So if your partner overdraws the account, you will both be on the hook for paying back that debt and covering any fees that are charged as a result. If one account holder lets debts go unpaid, creditors can, in some cases, go after money in the joint account.

• It can complicate a break-up. If you and your partner end up parting ways, you’ll have the added stress of deciding how to divide up the bank account. Each account owner has the right to withdraw money and close the account without the consent of the other.

• Reduced benefits eligibility. If you open a joint account with a college student, the joint funds will count towards their assets, possibly reducing their eligibility for financial aid. The same goes for an elderly co-owner who may rely on Medicaid long-term care.

How to Open a Joint Bank Account

If you decide opening a joint account makes sense for your situation, the process is similar to opening an individual account. You can check your bank’s website to find out if you need to go in person, call, or just fill out forms online to start your joint account.

Typically, you have the option to open any kind of account as a joint account, except you’ll select “joint account” when you fill out your application or, after you fill in one person’s information, you can choose to add a co-applicant.

Whether you open your joint account online or in person, you’ll likely both need to provide the bank with personal information, including address, date of birth, and social security numbers, and also provide photo identification. You may also need information for the accounts you plan to use to fund your new account.

Another way to open a joint account is to add one partner to the other partner’s existing account. In this case, you’ll only need personal information for the partner being added.

Before signing on the dotted line, it can be a good idea to make sure you and the co-owner know the terms of the joint account. You will also need to make decisions together about how you want this account set up, managed, and monitored.

Should I Open a Joint Bank Account or Keep Separate Accounts?

As you consider your options, know that it doesn’t have to be all or nothing. You could open a new joint account while keeping your own separate bank accounts. Or you could decide between separate vs. joint accounts, and go all in on one or the other.

Some couples may find that the best solution is to pool some funds in a joint account for specific purposes, from paying for basic living expenses to saving for the down payment on a house or building an emergency fund.

Recommended: Find out how much you should save for unexpected expenses with our emergency fund calculator.

You might keep your own separate accounts as well, where you can spend on what you like without anyone watching (or judging). Or perhaps you want to keep some funds separate so you can pay off your student loans, while your partner doesn’t have any.

In addition to making financial logistics more streamlined, opening a joint account may also help you and your partner practice better communication about money.

Opening a Joint Checking and Savings Account with SoFi

If you decide that a joint account feels right for you, you’ll have a number of options, including opening a SoFi joint account.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

🛈 At this time, SoFi only offers joint accounts for members 18 years old and above.

FAQ

What are the disadvantages of a joint account?

Disadvantages of a joint account include complete transparency (meaning you and your partner can see each other’s financial transactions), responsibility for the other person’s cash management, and complications if you decide to separate down the road.

Are joint bank accounts a good idea?

Joint accounts can be a good idea and can help streamline money management, save on fees, and reach financial goals more efficiently. Much depends on the two people involved and how well they can sync their financial lives.

Is it better to have joint or separate bank accounts?

That’s a personal decision. Joint accounts offer benefits like simpler money management, transparency, and saving money on fees. However, others prefer to keep separate accounts and have control over their funds as well as privacy.

Who owns the money in a joint bank account?

Money in a joint bank account belongs to those who hold the account. Each person has the right to add or withdraw funds.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

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

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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

SOBK0923007

Sep

2023

Navigating the IPO Lock-up Period

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

Following an initial public offering, or IPO, many companies and investment bankers will tie your stock up in a lock-up period to stop you from cashing out too quickly and help keep the share price steady.

That may be frustrating if you’re an early employee and investor in a company that’s about to go public, as you may be expecting the value of your stock to skyrocket after the initial public offering, and were hoping to sell some shares. But lock-up periods serve a purpose, and stakeholders will need to know how to navigate them.

Key Points

• An IPO lock-up period is a period after a company goes public during which some early employees and investors aren’t allowed to sell their shares.

• Companies or investment banks self-impose the lock-up period contractually, usually lasting between 90 and 180 days.

• The purpose of the lock-up period is to stop early investors from cashing out too quickly and maintain a steady share price.

• Companies may also use the lock-up period to avoid flooding the market with shares and to prevent insider trading.

• Regular investors may want to pay attention to the lock-up period when investing in IPOs, as it can affect the risk of investing in the company.

What Is an IPO Lock-up Period?

As a part of the IPO process, the IPO lock-up period is the length of time after a company goes public, during which some early employees or investors in the company aren’t allowed to sell their shares.

These restrictions are not mandated by the Securities and Exchange Commission (SEC), but rather are self-imposed contractually by companies or the investment banks that were hired to advise and manage the IPO process.

Lock-periods can be any length of time, but usually they’re between 90 and 180 days after the IPO. Companies may also decide to have multiple lock-up periods that end on different dates and allow different groups of people to sell their shares at different times.

How the IPO Lock-Up Period Works

Here’s an example of an IPO lock-up period: When one lock-up period ends company executives might be allowed to sell their shares, while a subsequent lock-up ending means regular employees can sell their shares.

What Does “Going Public” Mean?

When a company has an IPO, it is offering shares of the company for sale to the public stock market for the first time. The company is shifting at this point from a privately held company to a publicly traded company. This is the origin of the phrase “going public,” which you may have heard bandied around in reference to IPOs.

When a company is private, ownership is limited and can be tightly controlled. But when a company goes public, anyone can buy shares. But at this point there may be a lot of fingers in the pie already. Company founders, early employees, and even venture capitalists may already own shares or have stock options in the company.

💡 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 IPO Underwriting?

Before a company goes public it often goes through an underwriting process in which an underwriter — usually an investment bank — advises the IPO process and helps come up with the business’ valuation. The most common way they do this is by agreeing to buy a company’s entire inventory of stock.

Then to alleviate the risk of holding all of this stock, the underwriter will allocate shares of the company to institutional investors before the IPO.

The underwriter will try to drum up so much interest in the stock that more people will want it than there are shares available. This will lead to the stock being oversubscribed, which will hopefully support its price when it hits the market.

Recommended: What Sets IPO Valuations

How IPO Lock-ups Get Used

A company or its underwriters might use the lock-up period as another tool to bolster the share price during the IPO.

Shares held by the investment bank or institutional investors can be sold during an initial public offering, but the shares held by company insiders — including founders, executives, employees, and venture capitalists — may be subject to a lock-up period.

With Silicon Valley tech startups in particular, a greater proportion of compensation may be paid out with equity options or restricted trading units. In order to avoid flooding the market with shares when employees exercise these contracts, the lock-ups restrictions mean that these shareholders are not able to sell their stock until this period is over.

Recommended: Guide to Tech IPOs

What Is the Purpose of a Lock-up Period?

Ensuring Share-Price Stability

Insiders, like employees and angel investors, can potentially own far more shares in a company than are initially available to the general public. The last thing a company wants during an IPO is to have these extra shares flood the market.

Since share price is set by supply and demand, extra shares can drive down the price of the stock. And that’s not a good look, especially when a company is trying to impress investors and raise capital.

Avoiding Insider Trading

Company insiders may face other restrictions beyond the lock-up period. That’s because they might have information that can help them predict how their own stock might do that is not available to the general public.

Though insider trading can be legal if properly controlled and documented, it is not legal when based on information the public doesn’t have yet. So, depending on when a lock-up period ends, company insiders may have to wait extra time before selling their shares.

For example, if a company is about to report its earnings around the same time a lock-up period is set to end, insiders may have to wait for that information to be public before they can sell any shares.

Public Image

Finally, lock-up periods can be a way for companies to keep up appearances. When those closest to the company hold their shares, it can signal to investors that they have confidence in the strength of the company.

If company insiders start to dump their stock, investors may get suspicious and be tempted to sell their shares as well. As demand falls, the price of the stock usually does, too.

Even if the insiders were trying to cash in their stocks for no other reason than simply wanting the money, public perceptions may change and damage the company’s reputation. The lock-up period may have an effect by keeping this from happening — at least while the newly public company gets off its feet.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

What’s an Example of a Lock-up Period?

For example, let’s say Business X — a unicorn company — went public with an IPO in March 2022. The company used a system of multiple lock-ups with different expiration dates. The first lock-up expired in July 2022, and allowed early investors and insiders to sell up to 400 million shares of the company.

As new shares hit the market the stock dropped by as much as 5%, and it closed the day down just over 1%. A second lock-up expired in August 2022, allowing regular employees to sell their pre-IPO shares in the company. When this lock-up ended, employees were allowed to sell more than 780 million shares of Business X on the open market.

What Does the Lock-up Period Mean for Employees with Stock Options?

Restrictions imposed during a lock-up period usually apply to any stock options someone has been given as an employee before an IPO. Stock options are essentially an agreement with a company that allows its employees to buy stock in the company at a predetermined price.

The thinking behind this type of compensation is that the company is trying to align employees’ incentives with its own. Theoretically, by giving employees stock options, the employees will have an interest in seeing the company do well and increase in value.

There’s usually a vesting period before employees can exercise their stock options, during which the value of the stock can increase. At the end of the vesting period, employees are able to exercise their options, sell the stock, and keep the profits.

It’s possible that the company will issue stock options before it goes public. If stock options vest before the IPO, employees may have to wait until after the lock-up period to exercise their options. However, stocks may not vest until after the lock-up period, in which case the restrictions don’t have much bearing on the employee’s ability to exercise their stock options.

How Does the IPO Lock-Up Period Affect Investors?

When buying IPO stocks as a regular investor, you likely don’t have access to shares of a company before it goes public. Even so, you still might want to pay attention to the lock-up period. Investing in IPOs can be tricky and are generally considered risky.

The underwriters will probably do everything they can to make sure that stock prices go up when company shares hit the market. But in the end, no one really knows what will happen during an IPO.

Reading the IPO Prospectus

What’s more, investors interested in buying a stock that’s about to go public don’t really have much information to go on to help them figure out what kind of value they’re getting. When they’re private, companies don’t have to divulge very much information about their inner workings to the SEC.

However, before going public they will make documents available, including the Form S-1 and the red herring prospectus that can give investors some clues about a company’s business model and what they plan to do with the money they raise. Investors can also look at what happened when similar companies went public and whether they did well.

Waiting to Buy Until After Lock-ups End

This is all to say that with little idea of what a company’s stock will do when the company goes public, regular investors may want to hold off before they invest. Investors may even want to hold off until the lock-up period is over.

When the lock-up ends and insiders and employees can finally sell their shares, the stock price may experience some volatility as the new shares enter the market, potentially causing drops in a stock’s price.

Some investors may try to take advantage of the dip that can occur when a lock-up period ends. For example, if investors see that a company’s financial health is good during the first stages of its public life, they may use the expiration of the lock-up period as a chance to buy shares at a “discount.”

They may feel that if the stock’s fundamentals were good before the lock-up ended, the company is in good financial health and the stock should rebound. Timing the market, however, isn’t necessarily a good idea for all investors, especially those not used to taking a deep dive into the fundamentals of a company’s financials. It’s also not guaranteed to produce good results.

The Takeaway

Lock-up periods are agreed-upon periods between early investors and employees of a company and underwriting investment bankers during which selling of shares is prohibited. Having such stakeholders hold off on selling their shares can help the stock price of a newly public company stay more stable.

An initial public offering’s lock-up period can be hard to navigate. Yet, they can be really exciting for investors looking to get in on the ground floor and employees or insiders looking to cash in on their shares or stock options.

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

SoFi Invest®

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

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.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0523116

Sep

2023

What Are Assets Under Management (AUM) and Why Do They Matter?

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Assets under management (AUM) refers to the total market value of client funds managed by a person or a financial institution, such as financial advisory firms, brokerages, and mutual funds. The term may refer to funds managed for an individual client or total clients.

Typically, the higher an institution’s AUM, the higher their earnings, so it’s a measure they’re often looking to increase. That said, institutions have different meanings of AUM. So it’s important to have a good understanding of why AUM matters and how it is calculated before using it as a metric to decide whether or not to invest with a financial institution or a fund.

What Is AUM?

As mentioned, assets under management (AUM) refers to the total market value of client funds being managed by an individual or financial firm. To calculate AUM, a firm adds up the total value of the securities they manage, such as stocks, bonds, treasury notes, or futures contracts. However, there are some differences in the ways that organizations do this calculation.

For example, some banks might include cash deposits in AUM, while others may only include assets over which they have discretion. While the Securities and Exchange Commission (SEC) has rules about what can and cannot be included in AUM, different firms may interpret these rules differently.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Factors Impacting AUM

AUM, also known as funds under management, is not a static figure, and several factors that can cause the number to fluctuate.

Inflows and Outflows

As clients and investors increase or decrease the amount of money they have invested with a firm or in an investment fund, the total AUM will change. For example, if investors sell off shares of a mutual fund, AUM will likely start to fall. Or if a client at a financial advisory firm decides to use that firm to manage more of their money, that firm’s AUM will likely go up.

Market Shifts

Market shifts can also have a big impact on AUM, as the value of the securities in which the firm or fund has invested changes. For example, in a year when the stock market does poorly, assets managed by an advisory firm may decrease in value. During a market sell off, AUM often goes down for many firms. When markets do well, AUM will increase.

Dividends

If a firm or portfolio manages investments that pay dividends and the firm reinvests those dividends instead of distributing them, AUM can also grow.

A Moving Measure

The factors above mean that AUM is constantly in flux. How dramatic the fluctuations are depends on how many investors are shifting their money, as well as the types of investments AUM includes. For example, funds with a lot of volatile investments, such as stocks, may see broader swings in AUM than funds that hold more stable investments, such as bonds.

Recommended: Understanding How Bond Markets Work

Is a Larger AUM Better?

A larger AUM can be a plus or minus depending on circumstances. For banks, asset managers, and other financial institutions, larger AUM can be a sign of prestige and a measure of success. That’s because a larger AUM can determine things like compensation and bonuses for managers and how the company ranks against its peers. Larger AUM often also means higher revenues for the company.

However, larger AUM isn’t always a positive factor. For example, in actively managed mutual funds where a manager is looking to outperform a benchmark, large inflows of cash that boost AUM may hinder their goals. That’s because allocating large amounts of money quickly can be difficult to do without changing the price of the investments being bought or sold. To compensate for this issue, the fund may purchase other types of investment that cause it to shift away from its initial focus, a process called style drift.

Investors may consider the size of a fund as an indicator of the ease by which they can buy and sell shares in a mutual fund or an exchange-traded fund (ETF). High net assets and trading volumes suggest that the fund is highly liquid and investors should have no problem buying and selling shares at any time.

It can also be helpful to understand how a firm’s AUM has changed over time, and how they compare to peers.

Recommended: Top ETF 9 ETF Trends for 2023

Why is AUM Important?

AUM can have a big impact on individual investors’ decisions as they consider where to put their money. Companies often use their AUM as a selling point when they market themselves to clients. They contend that the larger the AUM, the more client interest and participation there is. In other words, AUM signals a vote of confidence in a firm. On the flip side, the lower the AUM, the fewer clients are interested in working with the institution or fund — theoretically anyway.

But AUM doesn’t always tell a full story. One firm with a handful of high-net-worth clients might have a higher AUM than a firm with dozens of clients with less savings. In this case, more clients actually chose to work with the firm with a lower AUM. So investors should be careful to look at other factors, such as investment approach, when determining who they want to work with.

Or a firm could decide to limit the number of investors it works with in order to provide more personalized service. In that case, the AUM might be lower, though the service could be better.

AUM can also have an impact on the investment fees that you pay. Many firms charge clients based on a percentage of their individual AUM, the money they hold with the firm personally. That percentage often goes down as the client’s AUM goes up.

💡 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.

AUM Regulation

AUM may determine how financial advisors must comply with certain regulations. Firms with $100 million or more in AUM must register with the SEC, disclosing their AUM and a host of other information, each year.

In addition to information about AUM, Form ADV contains disclosures about disciplinary events involving advisors and their key personnel. Investors can access this information through the SEC’s Investment Advisor Public Disclosure website and use it to make informed decisions when choosing an advisor or money manager.

The Takeaway

As you choose funds to invest in — or firms to invest with — it’s important to understand their AUM. When it comes to investment funds, AUM can help you get a sense of the size of the fund and how easily you will be able to buy and sell shares.
When it comes to choosing an advisory firm or other financial institutions, AUM can help you understand the size of the firm.

That said, investors should consider a wide array of other factors, including the fees, fund’s performance and manager’s experience, when choosing investments and the professionals who can help manage their portfolios.

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

SoFi Invest®

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

SOIN0623015

What Is a Dark Pool in Trading?

Understanding the History of Dark Pools

Dark Pool Examples

Who Runs Dark Pools?

Why Institutions Use Dark Pools

New Risks

Dark Pool Benefits

Criticism of Dark Pools

The Takeaway

FAQ

How can you see dark pool trades?

Who regulates dark pools?

What are dark pools in cryptocurrency?

How do dark pools differ from lit pools?

What Is Efficient Frontier?

How Does the Efficient Frontier Work?

How Is the Efficient Frontier Constructed?

Efficient Frontier Example

Benefits of the Efficient Frontier

How Do Investors Use the Efficient Frontier Model?

Limits and Downsides of the Efficient Frontier

The Takeaway

FAQ

What are common assumptions of the efficient frontier model?

Can the efficient frontier be negative?

What is the difference between efficient frontier and efficient portfolio?

What Is a Joint Bank Account?

What Is a Joint Bank Account?

How Does a Joint Account Work?

What Are Some Pros of a Joint Bank Account?

Get up to $300 when you bank with SoFi.

What Are Some Cons of a Joint Bank Account?

How to Open a Joint Bank Account

Should I Open a Joint Bank Account or Keep Separate Accounts?

Opening a Joint Checking and Savings Account with SoFi

FAQ

What are the disadvantages of a joint account?

Are joint bank accounts a good idea?

Is it better to have joint or separate bank accounts?

Who owns the money in a joint bank account?

Navigating the IPO Lock-up Period

What Is an IPO Lock-up Period?

How the IPO Lock-Up Period Works

What Does “Going Public” Mean?

What Is IPO Underwriting?

How IPO Lock-ups Get Used

What Is the Purpose of a Lock-up Period?

Ensuring Share-Price Stability

Avoiding Insider Trading

Public Image

What’s an Example of a Lock-up Period?

What Does the Lock-up Period Mean for Employees with Stock Options?

How Does the IPO Lock-Up Period Affect Investors?

Reading the IPO Prospectus

Waiting to Buy Until After Lock-ups End

The Takeaway

What Are Assets Under Management (AUM) and Why Do They Matter?

What Is AUM?

Factors Impacting AUM

Inflows and Outflows

Market Shifts

Dividends

A Moving Measure

Is a Larger AUM Better?

Why is AUM Important?

AUM Regulation

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Student Loan
Refinancing

Personal
Loans

Online
Investments