How to Know When to Sell a Stock

Whether on TV, on the radio, or from your third cousin at the Thanksgiving dinner table, there is a lot of chatter dedicated to the discussion of which stocks are hot buys.

For many investors, buying and researching what stocks to buy is fun and interesting. Others are lured in by the chance to pick the next big winner.

The desire to identify a great stock pick taps into our human nature. We love to talk about what investments to integrate into our portfolios in the hope we turn a profit.

Conversely, our human nature can sometimes make it difficult for us to let go of a stock, whether that stock has done poorly or it has been on a ship to the moon.

You’ve probably noticed, but there isn’t a lot of discussion over the airways on the decision of when to sell a stock. This could be because it can feel like a tricky decision to make. And the decision isn’t easier whether that stock has done really great or if it has been a total dud.

Here are some ideas you could keep in mind if you own stock and are wondering when to sell a stock for profit or when to sell a stock at a loss.

Why Selling Stock Is Hard

If you’re having a difficult time making a decision about whether to sell a stock, you’re not alone. This decision can tap into a lot of different human emotions.

For example, humans can experience something called loss aversion, where they have a physical reaction to the thought of losing money.

The thought of selling stocks at a loss can trigger this emotion, and it can make it hard to sell even when a person logically understands that the money could be better used in another stock or investment. We may want to hold onto that investment, hoping that it improves.

On the flip side, knowing when to sell a stock at a gain can be equally as difficult. After a stock has a precipitous rise, it can be tough to sell because the inclination is to believe that the stock may continue to rise.

This feeling could be exasperated by hubris, the feeling that it was because of your intelligence that the stock has done so well, or good old-fashioned greed (which is a totally natural reaction).

Beyond the ways our brains are working against us, there is no universal protocol for selling stocks. There are no rules for making a good decision.

And often, there is no one right answer, because knowing how a stock will move forward requires knowing what will happen in the future. Good luck with that.

Trying to Time the Market

Before discussing valid reasons you may want to sell a stock, let’s talk about what might not be a good reason to sell a stock: Making a knee-jerk reaction to the recent performance of that stock.

This can be classified as attempting to time the market. Even the experts cannot always buy at the bottom and sell at the top. Know that there is no perfect equation and that it is not science.

It can be tempting to sell a stock based on a big dip or bump in price, but the recent price movement alone might not give a complete picture of the current value of a stock.

It may help to remember that a stock is something that trades in an open marketplace and that prices shift due to the buying and selling of these stocks.

This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as geopolitical or economic events or announcements) as they do with the health of the underlying company.

When You Might Sell a Stock

There are several reasons you might want to consider selling a stock. If you’re currently in this position, you may want to weigh several of these ideas against one another.

Please note that none of these methods amount to a recommendation, but are ways to think about the same decision from within different frameworks.

1. When You No Longer Believe in the Company

When you bought the stock, you presumably did so because you believed that the company was promising and/or that the price was reasonable.

If you were to believe that the underlying fundamentals of the business were in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

Most businesses won’t last, or be successful, forever. That’s simply the nature of running a business. There are many reasons you may lose faith in a company’s underlying fundamentals.

For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems, among other things.

Part of the trick here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year and what feels like it could be the start of a more sustained change within the business.

2. Opportunity Cost

Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.

Same goes for investing—for each stock you buy, you are doing so at the cost of not holding some other stock.
No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars.

This is easier said than done because we are emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.

3. The Valuation Is High

Oftentimes, stocks are looked at in terms of their price-to-earnings (P/E) ratio. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future.

But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons. First, because the price has increased without a corresponding increase in the expected earnings for that company.

And two, because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. Personal Reasons

Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing the money for living expenses. If this is the case, you may want to consider a number of factors in choosing which stock to sell.

You may make the decision based purely off of which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook. Or, you may make the decision based on tax reasons.

5. Taxes

The ubiquitous saying goes, “don’t let the tax tail wag the investment dog,” meaning that tax strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.

It may be possible to offset some capital gains with capital losses, which are acquired by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional.

Alternative Solutions

If making the decision about when to sell a stock is causing you to lose sleep or is something you don’t feel ready for, it may be time to consult the help of a professional or seek out investment strategies that don’t require making such a decision.

To hire the help of a professional, you might want to bring someone on who will act as your fiduciary.
Fiduciaries are required by law to make recommendations in the client’s best interest. A fiduciary could be an individual, a financial planning firm, or an online investment service and platform like the one offered by SoFi.

With SoFi Invest®, you have the opportunity to choose between two investing methods. The first, SoFi Active Investing, is a platform that allows you to actively buy, sell, and trade stocks online and other investments, like exchange-traded funds (ETFs).

But if making that decision about when to sell stocks (and when to buy them) is something you are looking to get away from, SoFi Automated Investing may be more your style.

With Automated Investing, SoFi builds an investment portfolio of ETFs using your goals, risk tolerance, and investing time horizon as a guide.

SoFi manages both the short-term and long-term upkeep of the portfolio, including making shifts to your strategy as your goals change. With this service, you’ll never have to make a decision regarding the management of your portfolio.

Best of all, this management service is provided at no cost to you. Whether or not you opt for using an automated investment service (also known as a robo-advisor), using funds may be a helpful solution to the problem of when to sell a stock. Funds, whether they be mutual funds or ETFs, generally hold many other investments.

For example, an S&P 500 mutual fund (or ETF) holds all 500 companies held in the S&P 500 index. With the purchase of just this one fund, you are actually buying into the 500 stocks that are currently measured by the S&P 500 index.

In this way, many funds are already diversified investment holdings. For many people, they may be a solid strategy for long-term investing.

With a fund-based buy and hold strategy, you could largely avoid the decisions involved in managing a portfolio of stocks, such as when to sell stocks and when to hold onto them.

When choosing funds, you might want to consider the composition (what types of stocks are held within the fund) and the fees involved with owning the fund.

Also, you may want to differentiate between index funds and managed funds. Index funds mimic some particular part of the overall stock market and don’t involve an active manager.

Just as it sounds, managed funds have an active manager making decisions about what stocks are held within the funds. Managed funds are typically more expensive than index funds, so be sure to make sure the fee is worth it.
There’s no doubt about it, managing a portfolio of stocks can feel like a full-time job. What to buy and when to sell at a loss or when to sell for a profit might all be considerations on an ongoing basis.

Investment portfolios require upkeep, and so either an investor does it or they hire someone or a service to do it for them. Ultimately, it will be up to the investor to decide which of these makes sense for them.

Ready to have an investment portfolio that is fully managed for you? Check out SoFi Invest.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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Investing for Beginners: Basic Strategies to Know

As an investor, you are unique. And as you start building your portfolio, there are many strategies you can draw upon to help you achieve your personal financial objectives. Which you choose will depend on your needs and the goals you are trying to accomplish.

Choosing an Investment Strategy

Say you’re in the market for a new pair of shoes. You’ll likely want to choose something that will last a long time, is a comfortable fit, and doesn’t leave you wondering whether you made a mistake when you bought them.
The shoes should also fit your individual needs—are they for long-distance running, for work, for going out at night?

In many ways, choosing an investment strategy is like shopping for the right pair of shoes. You need one that fits your personal goals, whether those goals are saving for a down payment on a house, a child’s education, or retirement.

And you need a strategy that will be comfortable for you to pursue in the long-term. You don’t want to be tempted to switch strategies frequently, potentially upending your financial plan.

Ultimately, the best strategy (or mix of strategies) is the one that works for you. Here’s a look at some of the fundamental strategies that you may want to consider as you start to build out your investment portfolio for the first time.

Strategies for Building a Portfolio

Asset Allocation

An investment strategy that splits a portfolio among asset classes—including stocks, bonds, and cash—asset allocation helps strike a balance between investment risks and returns.

Each of the assets classes above behaves differently under different market circumstances, which means each has its own risk and return profile. For example, stocks tend to offer the potential for the highest returns. They can also be volatile, which means in addition to high highs, they may experience low lows.

Cash, on the other hand, tends to be extremely stable. The money in your savings account isn’t likely to go anywhere and might even be insured by the federal government.

Yet, the trade-off for that stability is the fact that savings accounts or other cash equivalents, such as certificates of deposit, offer relatively low returns, typically between 0.01% and 3% APY.

The proportion of each asset class that investors hold is related to their personal goals, time horizon, and risk tolerance. Time horizon is the amount of time an investor has to invest before they achieve their goals, and risk tolerance is an investor’s willingness to lose some of an investment in exchange for potentially greater long-term returns.

Asset allocation might shift over time. An investor in their 20s saving for retirement might have a portfolio made up of mostly stocks. Stocks could offer the greatest potential returns, and with 40 years before the investor might need the money, they may have plenty of time to ride out any downturns in the stock market.

A person who has already retired and needs much more immediate access to their cash may hold more fixed-income investments, like bonds, which are less volatile and therefore less likely to experience hard downturns at the time the investor needs them.

Diversification

One way to manage risks in a portfolio is through diversification, building a portfolio with a broad mix of investments across assets. Essentially, diversification can help investors avoid putting all their eggs in one basket.

Imagine for a moment a portfolio invested in just one oil stock. If the price of oil goes down, the entire portfolio suffers.

Now imagine a portfolio that holds stocks from all sectors, in companies of all sizes from all around the world. Not only that, but the portfolio holds a variety of bonds and even other investments like real estate.

Similar to asset allocation, the idea here is that these different investments will behave differently during changing market conditions. For example, U.S. stocks may not perform the same as European stocks, and energy stocks may not perform the same as medical company stocks.

With a diversified portfolio, as market condition changes—such as a drop in the price of oil—one group of investments may suffer while another may not, thereby spreading out risk.

Rebalancing

Your portfolio can change over time. During a bull market, you may find your stocks are performing well and that they now make up a much greater portion of your portfolio than they did before.

Remember that your portfolio is balanced based on your personal goals, time horizon, and risk tolerance. So when there is a shift in holdings, investors may want to buy or sell assets to bring their portfolio back in line with their planned asset allocation.

Strategies for Buying and Selling

Tax Efficiency

Tax efficiency is a measure of how much of your return stays with you and how much ends up going to the government. Keeping an eye on taxes can be an important part of maximizing your investment returns.

The first step in building a tax-efficient portfolio is to understand where the investments—whether in taxable, tax-deferred, or tax-free accounts—will be held. Taxable accounts include brokerage accounts, and income from these accounts may be subject to long- and short-term capital gains tax and other taxes.

Long-term capital gains tax is a tax treatment applied to investments that have been held for a year or more. Short-term capital gains tax is applied to investments that are held for less than a year and are pegged to an investor’s tax bracket.

Investors looking to minimize their taxes might want to hold on to investments for more than a year to be subject to the longer long-term capital gains rates.

Tax-deferred accounts, such as 401(k)s and traditional IRAs, allow investments to grow tax-free as long as they remain in the account. Investors fund these accounts with pre-tax dollars, and withdrawals made after age 59½ are subject to regular income tax.

Tax-free accounts, such as Roth 401(k)s and Roth IRAs, are funded with after-tax dollars, but investments inside the account then grow tax-free. When investors make qualified withdrawals from these accounts, they pay no additional taxes.

As a general rule of thumb, tax-efficient investments, such as regular stocks, may be held in a taxable account, while investors may want to hold inefficient investments, such as taxable bonds, in accounts that have preferential tax treatment.

Dollar-Cost Averaging

Dollar-cost averaging is a process by which investors invest on a regular basis, making purchases regardless of price. For example, an investor might choose to invest $100 a month in an index fund that tracks the S&P 500.

The share price for that fund will likely vary from month to month, though the amount of money the investor uses to buy shares does not. By design the investor buys fewer stocks when they are priced high and more when they are priced low.

This strategy might help investors mitigate buying high and selling low. And because investment is done on a regular schedule with a set amount of money, this strategy is one way for investors to avoid emotional investing.

Buy and hold

Investors who choose to use a buy and hold strategy will typically buy stocks and hang on to them for the long term, regardless of short-term market movement. Buy and hold investors believe that they will achieve some kind of return in the future despite fluctuations in the market on a short-term basis.

Fluctuations in the market are a normal occurrence, but investors may still get nervous and want to sell their stocks at the first sign of a downturn.

However, this tendency can work against investors, as selling a stock locks in any losses they may have experienced and means they could miss out on any subsequent rebound in price. A buy and hold strategy might help curb this tendency.

What’s more, the buy and hold strategy could help investors minimize fees associated with trading, which might help boost the overall return of the portfolio.

Strategies for Picking Stocks

Fundamental analysis

Fundamental analysis is a strategy that can help investors choose specific stocks to buy. When practicing fundamental analysis, investors look at public data like financial statements, revenue, earnings, future growth, and profit margins as well as broader economic factors when choosing a stock.

Fundamental analysis attempts to look at everything that affects a security’s value, including macroeconomic factors like overall market conditions and industry conditions and microeconomic factors such as company management.

Investors hope that a thorough examination of these factors can help them arrive at an intrinsic value for the stock. The price at which the stock is actually trading may be above or below this value, and by comparing this value with the current price, investors could determine whether or not it’s a good time to buy.

Technical Analysis

Unlike fundamental analysis, technical analysis does not try to identify an intrinsic value of a particular investment. Technical analysts believe that a stock’s fundamentals are already factored into the price of the stock so do not require individual attention.

So, when using this strategy, investors try to identify good investments by looking at statistical trends. For example, investors may look at factors such as price movement and trading volume. By identifying patterns and current trends, investors hope to be able to predict future patterns and trends.

Value investing

Value investing is a strategy that makes use of fundamental analysis. The basic idea behind this style of investing is that investors only buy stocks that are priced lower than their actual value and hold onto them for the long-term, or at least until they rise above the investor’s price target.

In other words, these investors are looking to buy stocks that are mispriced or priced at a “discount.” If an investor buys a stock at a lower price than they believe it is actually worth, chances may be good that the price of the stock will rise before the investor sells it.

Before buying any asset, investors should be sure to do their due diligence, learning as much about it as they can. In some cases, investors can lean on the expertise of others. Rather than try to identify values of stocks themselves, investors can buy mutual funds, index funds, or exchange-traded funds (ETFs) that hold value stocks that have already been identified by professional fund managers.

Growth investing

While value investors are looking for stocks that are priced less than they are worth, growth stock investors put much less emphasis on the current price.

They are focused on stocks that are likely to increase in value in the future, more so than other stocks in their industry or the market as a whole.

Growth investors tend to focus on young companies that have a lot of growth potential, companies in quickly expanding industries, and those that make use of new technologies and services.

There is no real formula for what to look for when identifying growth stocks. However, investors looking for growth opportunities might want to look at companies that have strong historical earnings growth in the recent past. Investors might also look at forward earnings growth.

Publicly traded stocks must make earnings announcements on a regular basis, and analysts will make earnings estimates shortly before these announcements are made. These numbers can help analysts approximate the fair value for the company.

Once again, investors can leave the analysis up to professionals and may choose to invest in mutual funds, index funds, or ETFs that invest in growth stocks. Investors interested in taking a hands-off approach through investing in funds may consider an automated investing account to help them build a portfolio.

Monitoring Your Portfolio

Your life is not static, and your goals and financial needs will change. For example, you may change careers, get married, have children, decide to retire early or decide you want to work longer than you had planned. Each of these milestones can affect your goals and how much money you need to save.

You could consider SoFi Invest®, which lets you invest however you feel most comfortable, whether that’s hands-on with active investing or letting automated investing do the work for you.

With SoFi Invest, there are no transaction or management fees, and you can speak to a financial advisor at no charge.

Ready to learn more about investment strategies and how to begin investing? Visit SoFi Invest today.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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What is a Market-On-Open Order?

Have you ever wanted to place a trade while the market was technically closed? (Because let’s be honest, the market’s hours of 9:30 am to 4:00 pm EST aren’t particularly convenient for anyone working a 9-to-5.)

Or, have you ever wanted to place a trade on a stock or exchange-traded fund (ETF) that executes as the bell rings the market to open for the day? A market-on-open (“MOO”) order might be your answer. An “MOO” order is one that will execute at the open of the market at the prevailing price.

This is not to be confused with after-hours and pre-hours trading, where trades are actually executed during hours that market exchanges are technically closed.

As you might be catching on, buying or selling a security on an exchange isn’t hard, but it’s also not as simple as clicking a button without a thought as to how it happens.

Even within a relatively easy-to-use online dashboard or trading platform, investors still need to make some decisions about the details of each transaction.

Overview of Market-On-Open Orders

Here’s an overview of market-on-open orders, including some reasons you might want or need to use a market-on-open order, the risks and benefits of a MOO order, and how to place a MOO order if you ultimately decide it’s right for your trade.

A market-on-open order is an order to be executed at the day’s opening price. Just as the name implies, MOO orders are only to be executed when the market opens.

To fully understand how a MOO order works, it may help to first understand both securities exchanges and the different ways that trades can be executed. The latter is generally referred to as an “order type” or “market order.”

Securities exchanges are marketplaces where securities such as stocks, ETFs, and options are bought and sold. In the United States, there are currently fifteen national securities exchanges registered with the SEC, including the New York Stock Exchange, the NASDAQ, and the Chicago Board Options Exchange. Next, order types. Order types can be put into one of two broad categories: market orders and limit orders.

Market Order

A market order is an order to buy or sell at the best available price at the time. Generally, a market order focuses on speed and will be executed as close to immediately as possible.

But, securities that trade on an exchange experience price fluctuations throughout the day, so the investor may end up with a price that is higher or lower than the last-quoted price.

Limit Order

A limit order is an order to buy or sell a stock at a specific price. A limit order is triggered at the limit price or within $0.25 of it. At the next price, the buy or sell will be executed.

Therefore, limit orders can be made at a designated price, or very close to it. While limit orders do not guarantee execution, they may help ensure that an investor does not pay more than they can (or want to) afford for a particular security.

For example, an investor can indicate that they only want to buy a stock if it hits or drops below $50. If the stock’s price doesn’t reach $50, the order is not filled.

Therefore, a market-on-open order is a specific version of a market order. Because it is a market order, it will happen as close to immediately as possible, and at the open of the market. The order will be filled no matter the opening price of investment.

Beyond market and limit orders, there are many other order types, such as stop orders, stop limit orders, buy stop orders, and so on.

With each order type, the investor is providing specific information on how, and under what circumstances, they would like the order filled. In the world of order types, these are semi-customizable orders with modifications.

A MOO order is not to be confused with after-hours (and sometimes, pre-hours) trading. Some brokerage firms are able to execute trades for investors during the hours immediately following the market closing or prior to the market’s open.

Generally, after-hours trades are done through electronic communication networks (ECNs). Investors can contact their brokerage firm or financial services company of choice to learn more about which types of orders are available for buying and selling. It is possible that some firms may offer order types while others do not.

Investors with something particular in mind may want to shop around between different financial services companies to be certain that they get what they need.

Why Use a Market-On-Open Order?

For one, market exchanges aren’t always open. The New York Stock Exchange (NYSE) and the NASDAQ are both open between 9:30 am and 4:00 pm EST.

There are a number of reasons that a person may want to place a trade outside of these hours. One such reason is convenience. Living in this busy world, it is not hard to imagine a scenario where a person wants to place a trade when they actually have the time (and before they forget).

Traders and investors may use a market-on-open order when they foresee a good buying or selling opportunity at the open of the market. For example, traders may expect price movement in a stock if significant news is released about a company after the market closes.

Good news, such as a company exceeding their earnings expectations, may lead to an increase in the price of that stock. Bad news, such as missing earnings estimates, may lead to a decline in the stock price. Some traders and investors may also watch the after-hours market and decide to place a MOO order in response to what they see.

Let’s look at a hypothetical example: Say that news breaks late in the evening regarding a large scandal within a company.

The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future.

They enter a MOO order to sell their holding as soon as the market is open for trading. Or, maybe they believe that the stock will bounce back throughout the day, so they place a MOO order to buy more stock at the open.

With a MOO order, the investor is committed to buying or selling stock at whatever the price may be at the open, no matter how much it has moved up or down since the previous trading day. The investor must be prepared for unexpected price moves.

Though this won’t apply to the average individual investor, MOO orders may also be used by the brokerage firms to fix errors from the previous trading day. A MOO order may be used to rectify the error as early as possible on the following day.

Risks of MOO Orders

It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different than the price at the previous close. Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different—or it could be a lot different.

Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.

It is very hard to predict the direction any one stock, security, or group of securities will be in the short-term, because short-term price movements can often be based on sentiment, not fundamentals.

Most investors will likely want to avoid trying to weave in and out of the market in the short-term and stick with a long-term plan. Some investors may use MOO orders with the intention of taking advantage of price swings, but the variability of the market could bamboozle a new investor.

Because the order could be filled at a price that is significantly different than anticipated, this may create the problem of not having enough cash available to cover a trade.

How a cash shortage during a market order is handled will typically depend on the brokerage firm and the type of account.

To be safe, it can be smart to make sure there’s a cash buffer available before placing any market order, including a market-on-open order. Contacting your financial services company for more information on how they would handle such a situation might also help.

An alternative option is to use a limit-on-open order, which is like a MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.

With a MOO order, there is also the problem of limited liquidity. Liquidity describes the degree to which a security, like a stock or an ETF, can be quickly bought or sold.

Investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.

But smaller companies can be more illiquid, making them slightly trickier to trade. In the event that there is not enough liquidity for a trade, the order may not be filled, or may be filled at a price that is very different than anticipated.

Getting Started with Investing

Feeling ready to get started? The next step for investors is to choose a brokerage firm or financial services firm, like SoFi Invest®. SoFi Invest provides many options for investors including those who want to control their own investment choices, and those who want more help via an automated investment service.

With SoFi Active Investing, investors buy and sell stocks and ETFs of their choosing. And there are no transaction costs, unlike at many standard brick-and-mortar traders.

Investors who’d like the help of an automated investment service may want to look at SoFi Automated Investing. This service invests according to a person’s goals, tolerance of risk, and investing timeline using low-cost ETFs—and with no additional SoFi fees.

With either SoFi Invest service, help from a certified financial planner (CFP) is never more than a phone call away. Because even the savviest investor may have questions about their investment accounts, transactions, or portfolio strategy from time to time.

Ready to become an investor? Open a SoFi Invest account to start on the active or automated investing track.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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How to Start Investing in Stocks

The very idea is sublime: Having your money make you more money? Yes please!

If you’re reading this, you’ve likely heard about the opportunity to earn money by investing in the stock market, but maybe you don’t know where to start. Or maybe you’ve been turned off by that one friend or relative (we all have one) who speaks of “the market” with frustration.

By educating yourself on how the stock market works and proper practices for investing in stocks, you may be able to take advantage of the upside potential created in the stock market while minimizing risk (and feeling mentally prepared to deal with the inevitable volatility).

But for lots of people, this is easier said than done. There’s a lot of information out there for those who are interested in learning how to start investing in stocks. It can feel too easy to get swept up in the sea of information available to people who just want to get started.

The good news? Investing in the stock market is easier than ever with the prevalence of brokerage firms, financial services institutions, and apps that have made investing accessible.

Let’s distill down some of the most important elements of stock investing, specifically for beginners. Here’s a step-by-step guide for those who want to start investing in stocks.

Learning Stock Market Basics

It may sound obvious, but you might want to keep in mind what it is you are buying when you buy a stock. A stock represents a small percentage of ownership in a public company. Public simply means that anyone with the capital can invest, and therefore be an owner, in that company.

There are two types of stocks: common stocks and preferred stocks. Common stocks are what you’re probably thinking of when you consider investing in the stock market. Preferred stocks, on the other hand are considered first in line for dividend payouts, but they don’t come with voting rights, unlike the shareholders of common stocks.

Next, you could think of a big picture about investing: In general, the whole reason for investing is so that the investment earns money in the future. This is also known as a “rate of return.” When you buy a stock, you are also purchasing its potential future performance.

With stocks, that rate of return comes in two forms: price appreciation and dividends. Price appreciation is just as it sounds—that’s where the price (the value) of a stock increases over time. For example, if a stock’s value increases from $10 to $50, the price appreciated by $40.

Next are dividend payments. Dividends are cash payouts made by the company to stockholders—you can think of them as your share of the profits as an owner of the company.

Okay, so this is all pretty straightforward stuff. So, why is the stock market so volatile?

First, it helps to understand that volatility refers to the up-and-down movement in the prices of both individual stocks and the average of all stocks—the whole stock market.

And while we have many preconceived notions about what causes volatility—financial news, economic growth, and geopolitical events, to name a few—volatility is also caused by the competing forces of supply and demand.

Another way to say this? Volatility in the prices of stocks is quite literally caused by the buying and selling of those same stocks, as well as world events and news that cause people to buy or sell.

Because the price of stocks is determined by the large, sweeping forces of supply and demand, it can be very hard to predict price movement in stocks, especially in the short term. In the short term, prices move on investor sentiment—how much investors want to buy or sell that stock.

Sometimes, price movements make perfect sense given the underlying fundamentals (company posts strong earnings, good economic growth, etc).

Sometimes, though, price changes in the market don’t make sense. Stock prices are not serially correlated, which is a fancy way to say that past performance doesn’t predict the future.

Because predicting short-term price moves in the stock market is so difficult, many investors may prefer to utilize a diversified, buy and hold strategy.

This way, they aren’t taking big bets on individual companies, but giving the overall stock market time to (hopefully) reflect the real wealth creation that happens at corporations across the country or even the entire world.

How to Start Investing in Stocks: Know Your Options

For those wondering how to start investing in the stock market, it might help to understand that there is more than one method to do so: The first is to buy individual stocks.

Buying Individual Stocks

This method requires a fairly significant amount of research into the stocks themselves. If you go this route, you might want to do a deep dive into the business’s inner workings and compare that to the price the stock is currently trading at.

One of the most basic metrics for understanding a stock’s value as compared to company profits is its price-to-earnings ratio. You may also want to consider other ratios, such as price-to-sales and earnings per share.

Additionally, you might want to get comfortable reading a company’s balance sheet and other financial statements. All public companies are required to file this information with the Securities and Exchange Commission (SEC), so you won’t have trouble finding them.

You may also want to consider factors such as the business’s relative industry strength, operating margins, leadership, product pipeline, and capital structure, among other things. While “buying what you know” may be fine advice to get started, investors who are serious about buying individual stocks have their work cut out for them.

One advantage of owning individual stocks is that you have control over the investments. Many folks who choose to invest in individual stocks do so because they want the chance to “do better” than the market average. Others may do so because they have an interest in the individual stocks or like buying stocks as a hobby.

The flipside to the possibility of outperformance is the corresponding possibility to do worse. And each individual must decide for themselves whether this is the route they want to take, given their personal risk tolerance and preference for investing methodology.

Investing in Funds

A second way to start investing in stocks is by using funds, either mutual funds or exchange-traded funds (ETFs). A fund is a basket of some other investment type, like stocks or bonds.

While there are some structural differences, mutual funds and ETFs serve a similar purpose—to help investors achieve diversified exposure to a particular market.

Index funds, in particular, have become increasingly popular because of their low-cost structure and for consistently outperforming their managed counterparts. An index fund, whether an index mutual fund or an index ETF (most ETFs are index funds), is designed to invest in the whole market or a representative sample of the market.

For example, an S&P 500 index fund invests in 500 of the largest companies in the United States. With the purchase of just this one fund, the investor hopes to return the average of the U.S. market.

A benefit to investing in stocks via funds is that you do not take on the risk of being invested in individual stocks that do not perform well. Additionally, index funds may be a more affordable way to invest in the stock market.

While most index funds do carry an annual management fee (called an expense ratio), it is quite low compared to managed mutual funds. And at most brokerage firms, there is a transaction cost to buy and sell individual stocks (and sometimes ETFs), but sometimes, there is no such fee to buy a firm’s proprietary index mutual funds.

Whether investing in individual stocks or funds, you may want to think about the level of diversification that feels right for you. There is no one universally accepted consensus about the right way to diversify. For one person, proper diversification could mean owning 20 stocks. For another, it could mean owning the “whole” market via a handful of funds.

Just remember that anytime your investments are focused on narrower areas of the market, such as owning only a handful of individual stocks or only investing in certain industries, you may be taking on additional risk. But with that risk does come the potential for added reward.

Where to Start Investing in Stocks

Once you’ve made the decision to purchase stocks (or stock funds), it might be a good time to figure out where to do it. The good news is, you have lots of options to choose from.

The first option is through a brokerage account. A brokerage account gives you a platform on which to buy and sell securities (mostly stock and bonds) through an exchange or from their own supply. Brokerage firms will typically charge a fee for the service either in the form of a per-trade fee or per-security commission.

Additional services offered through a brokerage can include advice and management as well as banking. Typically, full-service brokerages offer more services but higher overall costs, while discount brokerages give scaled-down services with lower overall costs.

As mentioned before, most brokerage firms charge a commission, called a transaction charge or a trading fee, for securities bought and sold on an exchange including stocks and ETFs.

This can make buying and selling individual stocks an expensive affair, especially if you are trying to build a diversified portfolio with many stock holdings. Therefore, ETFs or no-commission mutual funds might be a more economical way for new investors to get into the stock investing game.

If you choose to invest in individual stocks, and they pay a dividend, you will want to decide how you would like to handle the dividend.

One option is to simply accumulate the dividend in cash and use it to supplement income. This strategy is generally used for older investors rather than younger ones.

You could also use the dividends to purchase either a different security or additional shares of the security that generated it.

If you choose the latter, you may want to utilize a Dividend Reinvestment Program (DRIP). DRIP allows you to repurchase shares (including fractions of shares) as dividends are generated. Utilizing DRIP is typically commission free and ensures that you are fully invested in the stock.

Most brokerages offer DRIP services. Another way to invest in stock is by purchasing directly through the company itself or through its designated transfer agent.

This will allow you to hold the shares in your name (rather than street name) but you can expect higher costs and less convenience. Most publicly traded companies list their transfer agent on the “investor relations” section of their website.

You could also buy stocks and ETFs through an online trading platform like SoFi Invest®. Unlike at most brokerage firms, you don’t have to pay a transaction fee when you buy and sell stocks and ETFs.

There are also no fees to open an invest account, no annual account maintenance fees, and no other annoying hidden fees for investing.

Best of all, there’s a version of SoFi Invest that might fit your needs and investing style. You could buy and trade stocks and ETFs on your own with active investing, and do it with ease on an app on your phone, or on your desktop.

If you’d prefer more guidance, automated investing may be right up your alley. After answering questions about goals and risk tolerance, automated investing allocates money into a diversified, low-cost ETF strategy.

Not only are there no fees to buy the investments, the automated service is provided at no additional cost. Can’t decide? You can always do both. With both active investing and automated investing, you can start with as little money as you want.

No matter which platform you decide on, certified financial planners can help answer your questions. And you guessed it—these planners come at no additional cost to you.

Good luck in your journey investing in stocks—hopefully, it is a long and successful one.

Ready to get started investing in stocks? Open a SoFi Invest account today.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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Investing in Retail Stocks

Walking into a favorite store may bring on a little rush of adrenaline with the anticipation of buying something needed, wanted, or longed for. Items are diligently picked up and tried on or tested out, being examined for a potential purchase. Time, effort, and money are invested in the decision about which items to add to the shopping cart.

There’s a wave of joy upon checkout with the realization that the new favorite item will soon take its place in its new home. When a shopper spends a lot of money in a particular store, they might wonder whether they should be investing in that company. Enter: retail stocks.

Retail stocks may seem like a good idea to most as it’s one of the most tangible trades. We all have favorite stores and favorite products, so it is a natural correlation to want to invest in the company that makes said goods.

However, retail stocks can be tricky. Especially in today’s retail ecosystem. Here’s everything you need to know about retail stocks before diving headfirst into the market.

What Are Retail Stocks?

All stocks represent partial ownership—a share—in a business. The owner of a stock is entitled to a percentage of the profits in that business. That percentage is based on the number of shares in a company one owns. This is often called earnings.

Retail stocks cover the retail industry: stores that sell physical goods such as clothing, books, computers, homeware, tools, groceries, auto parts, and more.

Owning retail stocks is essentially partial ownership in any business within the retail industry that sells goods directly to a consumer for personal use through a store or e-commerce website.

What are the biggest retail stocks right now?

Though this can change rapidly in the market, some of the biggest—and most recognizable—retail stocks include Amazon, Walmart, Target, Costco, Best Buy, Home Depot, and Lowe’s.

There are many others including TJX Companies, which owns TJ Maxx and Marshalls, as well as The Gap, Sears Holding, CVS Health Corporations, and thousands more.

Changes in the Retail Industry

Remember the olden days when the mall was the place everyone’s mom drove them to pick up a few items for back-to-school shopping? Or, for the really lucky, there was catalog shopping. It was a simpler time when shoppers could only buy things in person.

That was the reality until the internet came along and changed everything forever. More specifically, that was until Amazon came around and changed retail for good.

In 1994, Jeff Bezos launched a digital bookstore known as Amazon. Since then, that small, online operation has grown into one of the most profitable businesses in the world. However, with all that success Amazon also changed the retail industry forever, swallowing up competitors, mom-and-pop shops, and brick-and-mortar stores along the way.

Because of the moves Amazon has made over the last 25 years, retail has had to change alongside it. That meant more stores having to move into the digital space, creating an entire ecosystem of e-commerce websites.

And large chains like Walmart, Target, Sears, and Home Depot had to adapt, too, as Amazon began to sell the same merchandise at often better prices and with faster delivery times.

These stores and others then had to become what is known as omnichannel, offering both online and in-store offerings. Chains like Target began offering online ordering with in-store return or exchange. Though these are two separate business models, they now have to operate as one.

This shift in consumer focus to online shopping also changed the stores along Main Street, USA, into more of a marketing tool and destination rather than a first point of sale.

Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store. Those in-store activations look like the Geek Squad at Best Buy, and the Apple Care experts in-store, or Ulta Beauty’s salon experiences.

Those that couldn’t keep up with the changing times had to shutter their doors. According to the global marketing research firm Coresight Research , nearly 9,100 store closures were announced in 2019 alone. That marked a 55% jump in total closures from 2018. Those closures included Payless Shoes, craft store A.C. Moore, DressBarn, Barneys New York, and more closing physical stores .

Looking at Retail Stock Metrics

Deciding to invest in retail stocks is truly a hands-on affair. Evaluating a stock takes time, but one of the best ways to assess whether to invest is visiting a few physical locations. This way, an investor can get a sense of what’s happening on the ground.

Is the store selling timely merchandise? Is the store well lit, and well laid out? Is there a lot of foot traffic? All of these are signs that the store is probably in good financial health.

After visiting a store’s physical location, a prospective investor might want to check out its online presence, too. If it doesn’t have one, that’s a problem.

However, if the store’s e-commerce operation seems strong and includes similar merchandise to its in-person locations, it is easy to navigate, and offers customer service, this, too, points to the good health of a company.

The 4 R’s of Investing in Retail Brands

Next, it’s time to dig deeper into the company’s finances. With this, it could be a good idea to look into the Four Rs of Investing in Retail: return on revenues, return on invested capital, return on total assets, and return on capital employed.

•   Return on revenue indicates how much net income the company made—or profited—after paying employees, taxes, supplies, or any other outflows.
•   The return on invested capital is the amount of profit a company made per store. This is a key metric for larger chains as it also shows how quickly each location was able to return the capital invested to open its doors. It can be an indicator of how fast a larger retailer may be able to grow its profits.
•   The return on total assets looks at the total profits made from a company’s total assets. This, again, is a key metric for larger companies like Amazon that own multiple businesses (e-commerce, cloud computing, a music arm, and more).
•   Finally, return on capital employed is a bit more nuanced but shows how well a retailer uses its own capital. According to Investopedia , this is defined as “earnings before interest and taxes divided by capital employed, which typically represents total assets less a company’s current liabilities.”

After all this, it may also be prudent to look at comparable store sales. This means comparing a store’s sales during the same time periods of different operating years.

For instance, a retailer might look at a store’s fourth-quarter sales from 2017 and 2018 in order to gauge growth and make adjustments for 2019.

New stores may skew numbers, making a retailer look more profitable. By looking at comparable-store sales from locations that have been open for a year or more, however, one can glean just a little more information on how well a retailer is performing and if its new-store good luck will last.

Who Might Want to Invest in Retail Stocks?

Becoming a retail investor isn’t for the faint of heart. It takes a lot of due diligence and time before an investor decides where to plunk down some cash.

It also takes an investor who isn’t afraid of a little volatility within a stock. Retail stocks can offer big wins for those willing to stick it out and can stomach the price swings that inevitably happen over the course of a year (holiday, back-to-school, and other major retail shopping times countered by periods of consumer inactivity).

All that said, investing in retail is easy enough for even novice investors. Each investor should choose a retail stock that feels like a good portfolio fit for themselves.

Possible Risks of Investing in a Retail Stock

Like all investments, investing in a retail stock can come with risks. Retail stocks are highly tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink.

Retail stocks are also often at risk of consolidation. It’s unquestionably a shrinking field, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.

Furthermore, retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain. All of these are things investors may want to take into consideration when assessing personal risk tolerance with any stocks.

As for when to buy retail stocks, that’s totally up to the individual investor. But the best time to buy will always be after all the homework is done and an investor feels confident in investing their cash. Timing the stock market doesn’t work in investors’ favor.

Investing With SoFi Stock Bits

If the idea of doing all this homework and tracking individual stocks sounds daunting, it’s because it is. It takes time, research skills, and a strong stomach for market fluctuation to invest in retail stocks. However, if you really want to give it a go with retail there is a way—SoFi Stock Bits.

This offering from SoFi offers members the ability to buy and sell fractional shares with as little as $1 in more than 50 popular stocks and Exchange Traded Funds (ETFs). This way investors can dip a toe in the investing waters without diving all in.

With SoFi Stock Bits you can diversify your existing portfolio without spending a lot of money or having to commit to buying an entire share.

And, with SoFi Invest® you won’t be spending needlessly, as the service never charges for trading fees to buy and sell Stocks Bits, so the money you invest is 100% invested in your future earnings instead.

So now, you can invest in a new wardrobe, a kitchen makeover, and a new financial future with retail all at the same time.

Ready to become a retail investor? Try it with SoFi Stock Bits.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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