How to Start Investing in Stocks

How to Start Investing in Stocks

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.

By educating yourself on how the stock market works, you may be able to take advantage of the potential upside in share prices, while minimizing risk. But it can be easy to get swept up in the sea of information available. The good news? Investing in the stock market is in many ways more accessible given the prevalence of brokerage firms, low trading costs, and mobile investing apps.

Let’s break 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 stock investing.

1. Learn Stock Market Basics

A stock represents a small percentage of ownership in a public company. Public simply means shares of the company are available for anyone to invest in in the stock market.

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 are considered first in line for dividend payouts, but they don’t come with voting rights, unlike the shareholders of common stocks.

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.”

With stocks, that rate of return comes in two forms: price appreciation and dividends. Price appreciation is when the price (the value) of a stock increases over time. For example, if a stock’s value increases from $10 to $12, the price appreciated by $2 or 20%. Dividends can be 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.

3. Research Different Ways to Invest in Stocks

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.

One way is by buying individual company stocks. Another is through purchasing funds, either mutual funds or exchange-traded funds (ETFs).

1. Buying Individual Stocks

This method requires a significant amount of research into individual stocks. You want to do a deep dive into the company’s inner workings and compare that with the price of the stock.

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.

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

If there’s a company whose share price is out of an investor’s reach, one possibility is to vest via fractional shares, or slices, if applicable of one whole company stock.

One advantage of owning individual stocks is getting direct exposure to a company an investor believes has the potential to grow revenue and earnings. The downside of course is that the investor needs to make sure themselves that their portfolio is well diversified.

2. 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 individual investments, such as all stocks, bonds or a combination of both.

Two of the main differences between mutual funds and ETFs are fees and when investors can trade. In general, ETF fees tend to be lower than mutual fund fees. Most mutual fund buy-and-sell orders are executed once a day, during the market close at 4 p.m. Meanwhile, ETFs trade like stocks on an exchange so can be bought and sold during the market trading hours of 9:30 a.m. to 4 p.m.

Whether investors pick a mutual fund or ETF, they need to decide whether they want an active or passive (Index) fund. Active funds are typically managed by a human portfolio manager, who picks and chooses which stock they deem to be of best value. However, in the past dozen years or so, passive or index funds have become increasingly popular because of their low-cost structure and the easy diversification they offer.

For example, an S&P 500 index fund invests in all 500 companies that make up the benchmark stock gauge. With the purchase of just this one fund, the investor gains exposure to all these companies.

A benefit to stock funds is that you do not take on the risk of being invested in individual stocks that do not perform well. Additionally, index investing can be an affordable way to get broad exposure to the stock market. Some funds, such as thematic ETFs, may also hold a narrow slice of the market based on a specific niche or theme.

3. Investing Through Robo-Advisors

Another way people can get exposure to the stock market is through robo-advisors, computer algorithms that essentially generate financial planning for individuals. The services robo-advisors offer include building portfolios, rebalancing them, executing trades, and automated tax-loss harvesting.

Robo-advisors aim to make financial and retirement decisions more affordable for consumers. Many consumers have found robo-advisors worth it as they’ve been deterred by the higher costs of human financial planners. Here’s how they typically work: an individual fills out an online questionnaire about their financial goals, risk tolerance and investment horizon.

The robo-advisor will generate a portfolio for them, allocating more to riskier assets like stocks if the individual is investing for the long term, while allocating more to safer assets like bonds if the person is closer to retirement.

2. Set an Investing Budget

How much money should a person invest in the stock market? When it comes to a personal budget, essentials come first: housing and food costs, childcare costs, an emergency fund. Any money left over after important costs can be used as investment funds.

4. How to Invest for the Long-Term

People who put money into the stock market tend to benefit if they invest for a longer period of time. This is true from a tax perspective and due to the stock market’s tendency to experience shorter-term volatility.

Taxes on investment gains are called capital gains taxes, and profits from investment held for less than a year are taxed at a higher rate.

Plus, holding investments for longer may help investors ride out stock market volatility. For instance, after the Covid-19 pandemic triggered a selloff in share prices during March 2020, the market bounced back later in the year.

5. Open a Brokerage Account

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. One of the easiest options is through a brokerage account.

A brokerage account gives you a platform on which to buy and sell securities (mostly stock, options and bonds) through an exchange or from their own supply. Additional services offered through a brokerage can include advice and management. Typically, full-service brokerages offer more services but at higher overall costs, while discount brokerages give scaled-down services with lower overall costs.

Some 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 brokerages might be a more economical way for new investors.

6. Manage Your Investment Portfolio

As mentioned, it’s often better to invest for the long-term in stocks. While it’s important to monitor the stock market, worrying about the day-to-day price fluctuations isn’t necessary.

However, as a person gets older and closer to retirement, they may want to shift their investments to safer stocks. For instance, a person investing in their 20s may benefit from higher exposure to cyclical stocks, those more closely tied to economic growth, or international stocks, which are generally riskier than domestic blue-chip companies.

Meanwhile, an older person eyeing retirement may want to adjust their portfolio to have a bigger bond weighting.

The Takeaway

Investing in the stock market has been an important way for individuals to build personal wealth. However, stocks are a risky asset class. While long-term they’ve generally climbed higher, the market is also prone to volatility and selloffs. It’s important for beginner investors to start investing by using the step-by-step guide above.

Investors can buy and sell individual stocks, ETFs or fractional shares while paying zero commissions through SoFi Invest®’s Active Investing platform. For those who are interested in investing in stocks through a more hands-off approach, the Automated Investing service builds, manages and rebalances portfolios at no management costs. Plus, certified financial planners can answer questions for no additional fees.

Start investing with your SoFi Invest account today.


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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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.

SOIN19088

Read more
businessman with smartphone

Crypto Arbitrage: How It Works & Trading Strategies

Cryptocurrency arbitrage is a strategy in which investors buy a cryptocurrency on one exchange and then quickly sell it on another exchange for a higher price.

Cryptocurrencies like Bitcoin trade on hundreds of different exchanges, and sometimes, the price of a coin or token may differ on one exchange versus another. That’s where the classic Wall Street strategy of “arbitrage” comes in. “Capturing the arb” means taking advantage of the fact that an asset is selling for cheap in one place and at a higher price in another market.

With crypto arbitrage therefore, investors seize upon the opportunity that a digital currency is trading at a lower price on one exchange by buying and selling it almost immediately for a higher price on another exchange. Here’s a closer look at how crypto arbitrage works and trading strategies that use the tactic.

What Types of Arbitrage Exist?

There are some different ways investors can conduct crypto arbitrage. These are a couple of the types.

Spatial Arbitrage

Spatial arbitrage involves trading virtual currencies across two different exchange platforms. Spatial arbitrage is a straightforward way of conducting crypto arbitrage.

While this is a simple tactic that can take advantage of price discrepancies, spatial arbitrage exposes the traders to risks like transfer times and costs.

Spatial Arbitrage Without Transferring

Some traders try to to avoid the risks of transfer costs and times that spatial arbitrage poses. For example, in a hypothetical case, they may go long Bitcoin on one exchange and short on another and wait until the prices on the two exchanges converge.

That allows them to avoid transferring coins and tokens from one platform to another. However, trading fees may still apply.

Triangular Arbitrage

Triangular arbitrage takes advantage of pricing inefficiencies among different pairs of cryptocurrencies on the same exchange. With this strategy, an investor starts with one cryptocurrency and then trades it for another cryptocurrency on that same exchange—one which is undervalued relative to the first crypto.

The investor would then trade that second cryptocurrency for a third cryptocurrency which is relatively overvalued when compared with the first. Finally, the investor would trade that third cryptocurrency for the first crypto, completing the circuit a little richer.

How to Take Advantage of Crypto Arbitrage Algorithmically

At first glance, cryptocurrency arbitrage seems like a simple matter of looking for gaps between the prices on one exchange and another, and then executing a buy and a sell.

Famously, in 2017 there was a moment when the price of Bitcoin on Kraken was $17,212, but only $16,979 on Bitstamp—presenting an arbitrage opportunity. In that instance, an investor could potentially make $233 per Bitcoin by buying them on Bitstamp, and then quickly selling them on Kraken.

While Bitcoin spreads aren’t always as wide as in the above example, there are times when other, less well-known forms of crypto could offer even wider gaps. Since cryptocurrency prices can vary from exchange to exchange, arbitrage opportunities can pop up, with thousands of cryptocurrencies trading on hundreds of exchanges for people investing in cryptocurrency.

There are a number of apps investors can download that will track the prices of Bitcoin and other cryptocurrencies for arbitrage opportunities. This way, investors can take advantage of algorithms that automatically scan for arbitrage across different crypto exchanges. This automated approach can allow crypto-arbitrage traders to take advantage of multiple different price discrepancies.

Recommended: How Do Crypto Trading Bots Work?

How to Find a Crypto Arbitrage

Not every cryptocurrency digital asset is created equal when it comes to arbitrage.

For instance, Bitcoin has become very widely traded. That’s resulted in fewer Bitcoin arbitrage opportunities.

But there are other ways to get involved in crypto arbitrage besides investing in bitcoin.

Method 1: New Software

With so many different cryptocurrencies on so many exchanges, finding those opportunities is a daunting task. That’s why many traders use software applications that track the hundreds of cryptocurrency exchanges in real time.

There are a growing number of companies that specialize in software to automate crypto arbitrage. Some companies have a tool that allows investors to choose an automated arbitrage strategy and execute it across different exchanges.

Method 2: Less Popular Cryptocurrencies

Investors can find bigger price spreads for the same cryptocurrency digital assets among less-popular, less-frequently traded forms of crypto.

Because they’re less popular, though, these cryptocurrencies are prone to rapid price fluctuations. That volatility can be good or bad news, but it adds another level of risk to an arbitrage strategy.

Recommended: Top 30 Cryptocurrencies By Market Cap

Start trading Bitcoin, Ethereum,
and Litecoin today.


What Are the Dangers of Crypto Arbitrage?

Losses

To succeed in crypto arbitrage, investors need to execute the trades quickly in order to take advantage of cryptocurrency price differences from exchange to exchange, while those differences are still profitable.

With the thinly traded forms of crypto that offer the widest spreads, a trader has to be careful not to increase the purchase price and decrease the sale price of a digital asset by their own trades.

Volume

The crypto exchanges all work similarly, pricing crypto based on the last trade on that exchange. But it’s important to note that not all exchanges are created equal. Some of them have enormous trading volumes, while others aren’t as active. The trading volume on each affects the liquidity and the available prices on a given exchange.

Low volume may mean that the exchange can’t execute a trade large enough to deliver the profit an investor is hoping for. Low volume may also mean that the trade is possible but will take too long to seize the pricing opportunity.

Transaction Costs

At the same time, traders need to keep an eye on the transaction fees that come with buying and selling across trading platforms. As the cryptocurrency markets evolve, these fees continue to fluctuate, varying from exchange to exchange.

Fraud, Hacks

Cryptocurrencies are largely unregulated, which is one of the key things to know before investing in cryptocurrency.

Recommended: Cryptocurrency Rules & Regulations

As a result, they come with more risks from hacks, fraud, and outright currency collapse. That’s why securely storing your cryptocurrencies is a hot topic among investors.

Recommended: Cold Wallet vs. Hot Wallet

Taxes

In the US, where cryptocurrency adoption has skyrocketed in recent years, the IRS has created a tax guide which categorizes cryptocurrencies as property. The Securities and Exchange Commission, on the other hand, has called cryptocurrencies a form of security—and the Commodity Futures Trading Commission has called them a form of commodity.

Recommended: Is Crypto a Commodity or a Security?

The IRS treats cryptocurrency gains in the same way as gains made from selling property. With that in mind, investors must account for any capital gains taxes on their Federal income tax return, but may also be able to take deductions based on any losses.

The Takeaway

Arbitrage exists across the capital markets, in stocks, bonds and commodities, wherever the same asset trades for different prices in different places. Since cryptocurrencies are digital and aren’t based on an underlying asset, it is harder to place a value upon and doesn’t have the same pricing conventions as equities and bonds, which are tied to the performance of a company, municipality or nation.

Cryptocurrency is complicated, and arbitrage strategies can be even more complex. But the practice is legal, and has the potential to yield high rewards while also exposing an investor to high risk.

As with any investment strategy, it is important for investors to do their own research when exploring crypto arbitrage, including looking at different, lesser-known cryptocurrencies, and available software to track cryptocurrency exchanges in real time.


On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors' crypto holdings secure.
Get started trading crypto on SoFi Invest today.



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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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.

SOIN20206

Read more
What Is a Shell Company and Why Do They Exist?

What Is a Shell Company and Why Do They Exist?

A shell company, also called a shell corporation, refers to any legally structured corporation that has no meaningful assets or business operations. In popular culture, they’re often used to conceal illegal businesses, or to conceal the owners of a business from law enforcement, the public, or both. However, shell companies are not illegal, and they do have some legitimate uses.

As business entities, they exist to protect, and sometimes to conceal or at least misrepresent the assets of the shell company’s owner. But there’s nothing necessarily illegal about shell corporations themselves. It’s important to not only understand the definition of a shell company, but also to recognize how and why they’re used by businesses and people.

How Are Shell Companies Created?

There is more than one way to create a shell company. Most often, the people or corporations that launch new shell corporations use a registered agent in the country where the company will have its legal headquarters. So, in the United States, shell companies would need to register with the Securities and Exchange Commission.

In most countries, the agent must register his or her name, and the name of an owner or a shareholder director. The cost of creating and legally registering a corporation will vary from country to country, from as little as a few thousand dollars to as much as several hundred thousand dollars.

Being “hollow,” by definition, shell companies can do a great many things. They can open bank and brokerage accounts. They can transfer funds in and out of their home country. They can buy and sell real estate or other companies. And own copyrights and earn royalties on those copyrights.

Why Do Shell Companies Exist?

People and corporations use shell companies in a wide range of legitimate businesses for legitimate reasons. Those might be used as a vehicle to raise funds, as a legal entity to attempt to take over another business via a reverse merger, or as a legal entity to give form to a company that intends to go public.

Shell Corporations Provide Tax Benefits

Many shell corporations operate in a legal gray area, where the major corporations and wealthy individuals may use them to dodge taxes.

A great many companies have found ways to move their profits to offshore shell corporations to take advantage of less expensive, or more permissive tax regimes in other countries. American corporations might set up shell companies in countries with inexpensive labor, where they have already begun to outsource some of their operations.

Corporations aren’t the only ones who use shell companies to avoid paying taxes. Wealthy people around the world use shell corporations, domiciled all over the world, to hide their earnings and their wealth from the governments of the countries in which they prosper.

This widespread employment of shell corporations to legally avoid taxes became impossible to ignore after the publication of the Panama Papers in 2016. The 11.5 million documents in the leak showed how the wealthy used 214,488 offshore shell companies to avoid taxes in their home countries and resulted in a global scandal. “It’s not that they’re breaking the laws,” said then-President Barack Obama at the time. “It’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by.”

Shell Companies Offer Less Risk and More Opportunity

Tax avoidance isn’t the only reason a corporation would set up a shell corporation. It might create a shell company to operate in a country, while protecting its other operations from the legal, political and financial risks related to that country. That way, if something goes wrong in the country where it operates, the parent company can limit its exposure by existing – at least on paper – offshore.

A corporation may also set up a shell corporation in another country to gain a window into new regions. A business might set up a shell company in Panama or Switzerland to gain access to the local business community to find contacts and information that would lead it to business opportunities in Latin America or Western Europe.

Shell Companies Can Be Used as SPACs

While shell companies come up in the news in relation to questionable tax-avoidance schemes or the widespread abuse detailed in the Panama Papers, they’ve hit the headlines again for less-nefarious reasons recently. That has come with the use of shell companies in special purpose acquisition companies, or SPACs.

There are almost 500 shell companies that qualify as SPACs by some estimates. These are companies formed exclusively to raise capital via an initial public offering (IPO), which will then purchase a company already in operation. SPACs are one type of “blank check company.” And while these companies have existed for decades, they’ve grown increasingly popular in recent years.

These companies issue an IPO, then hold the money in a trust, until the SPAC management team chooses a company and buys it. And if the SPAC doesn’t find a company to buy, or can’t buy the company or companies it likes within a pre-set deadline — often twenty-four months — then the managers promise to liquidate the SPAC and give investors their money back.

Recommended: What Is An IPO?

Shell Companies and Shady Dealings

While there are many legitimate uses for shell companies, criminals also use them to shield their operations and their assets from authorities. And as different jurisdictions compete for business, new loopholes emerge on a regular basis. In Panama, the British Virgin Islands, Nevada and Delaware, to name only a few, there are strong laws that prevent the government from revealing the beneficial owner of a given shell corporation.

And for creative financiers, there are always new ways to add layers of anonymity, such as phony company directors, who agree to sign their names for a few dollars. Among professionals who specialize in such things, there are ways to find would-be board members, and for countries and states with convenient tax and privacy laws.

The Takeaway

Most investors wouldn’t use shell companies in their day-to-day trading, but they might consider allocating part of their portfolios to a SPAC. It’s important to remember that these are speculative, risky investments, so they don’t make sense for every portfolio.

Whether you’re looking to put money into SPAC or into an ETF, get started investing today by opening an account on the SoFi Invest® platform. SoFi Invest offers an active investing solution that allows you to choose stocks and ETFs and other investments. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk.

Photo credit: iStock/akinbostanci


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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN0421162

Read more
What Is the IPO Process?

What Is the IPO Process?

Before a private company can make its shares available to the public for investment, it first has to go through the initial public offering (IPO) process.

An IPO marks the first time individuals other than angel investors or venture capitalists can make investments in a company. Once the initial public offering process is complete, traders can buy or sell shares in the company through a public exchange like the New York Stock Exchange or Nasdaq.

There are different reasons a company may choose to do an IPO, but it’s often used as a means of raising capital. The initial public offer process can also help raise visibility around a particular company’s brand, helping to fuel growth. It means that ownership of the company is transitioning from founders and a few early investors to a much larger group of individuals and organizations.

From an investor standpoint, getting in on the ground floor of a new initial public offering might be appealing if the company you think has the potential to take off. If you’re interested in how to buy IPO stock, this primer explains how the IPO process works step by step.

A Quick Refresher on IPOs

Again, IPO stands for initial public offering. If a company launches an IPO, it means that it’s only had private investors, such as angel investors, up to that point but it’s now ready to let other investors purchase shares. Under federal securities laws, this can’t happen until the company is properly registered with the SEC.

An IPO can help companies raise capital as an alternative to other methods, such as crowdfunding, which involves raising funds from a pool of investors though unlike an IPO, it doesn’t involve the buying or selling of shares in a company.

Recommended: What Is An IPO? A Beginner’s Guide

How Does the IPO Process Work?

At a glance, the initial public offering process seems relatively simple to understand. A private company makes its shares available to the public for the first time, hence why it’s often referred to as “going public”.

But the initial public offering process is more detailed and complex than that. There are specific steps that have to take place to ensure that an IPO is completed in accordance with Securities and Exchange Commission regulations. The company, either on its own or while working with analysts and investors, must value the company and set an initial public offer.

After completing due diligence, the company can move forward with an IPO announcement and choose an IPO launch date. Investors can then review the IPO prospectus to determine whether they want to invest or not.

The entire IPO process can take six months to a year or even longer to complete. Aside from being time-consuming, it can also be costly, so companies must have some degree of certainty that the IPO will succeed before undertaking it.

7 Steps of the IPO Process

The IPO process takes time, and it’s important for all parties involved that the appropriate steps be followed. If something is missed or overlooked, that could put the success of a company’s initial public offering in jeopardy. Here are the steps they must go through:

1. Choosing an Underwriter

Before starting any of the other IPO process steps, a company first has to connect with a reputable underwriter or group of underwriters. Again, these are investment banks that are registered with the SEC to offer underwriting services.

When choosing an underwriter, companies can consider a variety of factors, including:

•  Reputation

•  IPO track record

•  Research quality

•  Industry expertise

•  Distribution (i.e. what type of investors the bank will be able to distribute the initial public offering to)

Companies may also weigh any prior relationship they have with a particular investment bank or banks when deciding which one(s) to use for underwriting.

2. Due Diligence

During the due diligence phase, the IPO underwriting team will conduct background research into the company and its upper management. This ensures that there are no surprises prior to or during the IPO launch that could affect share pricing.

At this step in the IPO process, the underwriter and the company will sign necessary contracts specifying the scope of services provided. The contract can take several structures:

•  Firm Commitment: In this type of arrangement, the underwriter agrees to purchase the IPO and resell shares to the public. This guarantees that the company receives an agreed-upon amount of money.

•  Best Efforts: With this type of agreement, the underwriter assents to selling shares to the best of its ability, though there’s no guarantee that all shares will sell.

•  All or None: In an all or none or agreement, all shares of the IPO must be sold or the offering is canceled.

In some cases, a group or syndicate of underwriters can come together to oversee the IPO process and manage risk. Each bank in the syndicate can sign a contract with the company to sell part of the IPO.

The underwriters will also initiate the registration process with the SEC and complete supporting documents for the IPO. These might include:

•  Engagement Letter: An engagement letter typically includes a clause stating what expenses the company will reimburse to the underwriter as well as the spread that’s used to pay the underwriter’s fees, typically 7% of proceeds.

•  Letter of Intent: This letter outlines the underwriter’s commitment or obligations to the issuing company, the company’s statement of commitment to cooperate with the underwriter and an agreement to provide the underwriter with a 15% over allotment option.

•  Underwriting Agreement: The underwriting agreement binds the underwriter to purchase shares from the issuing company at a specified price.

•  Red Herring Document: A red herring document contains some of the same information about the IPO that’s included in the IPO prospectus, excluding the price and number of shares being offered.

•  S-1 Registration Statement: This is the document that’s submitted to the SEC to register the IPO and it must include relevant information about the company that must be included in the prospectus, as well as additional details that are not made available to the public.

3. SEC Review and Road Show

At this stage of the initial public offering process, the SEC will review all of the documents submitted for the registration. Meanwhile, the company and its underwriting team will prepare for the road show.
This road show is effectively a marketing strategy in which the underwriters attempt to gauge interest in the IPO from institutional investors. This can help underwriters to set the IPO price and determine what number of shares to offer.

4. IPO Pricing

Once the SEC has approved the IPO, the next critical step is choosing an initial share price. In terms of how an IPO price is set, this can depend on a number of factors, including:

•  Company valuation

•  Anticipated demand for shares among investors

•  Road show outcomes

•  Market conditions

•  How much capital the company hopes to raise

•  The company’s reputation

Pricing is important because it can determine the success or failure of an IPO. Price an initial public offer too high and it may scare off investors; price it too low and the company may not reach its target goal for capital raised once shares go on the market.

5. Launch

Once an IPO has the SEC’s approval and the number and price of shares has been set, all that’s left to do is launch. The company or underwriters typically announce ahead of time when an IPO is set to list so interested investors can ready themselves to buy shares on that date.

6. Stabilization

Stabilization refers to the underwriter taking direct action to stabilize share prices once the IPO launches. This is something underwriters can do during the 25-day window after an initial public offering hits the market, otherwise known as the quiet period.

In essence, the underwriter can execute trades during this period in an effort to influence pricing in favor of the company. Any SEC restrictions against price manipulation are temporarily suspended during this time.

SEC rules do, however, still apply to investors who owned shares before the company went public. Specifically, they’re required to observe the IPO lock-up period rule. This rule prevents them from selling any shares they own in the company for a set time period after the IPO, typically 90 to 180 days. This keeps those investors from dumping their shares prematurely which could affect share prices.

7. Transition to Market Competition

After the initial 25-day period following an IPO launch, the underwriters take their hands off the wheel. Rather than relying on the prospectus to determine valuations, shareholders turn their attention to market movements instead. The underwriter can continue acting in an advisory role but at this point, they can no longer do anything to influence pricing.

What Parties Participate in the IPO Process?

It takes a team to successfully launch an IPO, and each member has a distinct role in the initial public offer process. The company is the star player around which the team revolves around, with senior management typically taking the lead. But an IPO also requires assistance from other professionals. Understanding who is involved and what they do can help with navigating the steps of the IPO process.

Investment Banks

One role of an investment banker, also called underwriters, is to effectively oversee and manage the initial public offer process. The underwriting team is responsible for performing some of the most important IPO steps, including:

•  Preparing IPO documentation

•  Conducting necessary due diligence

•  Preparing marketing materials for distribution to investors

•  Overseeing the sale of company stock through the IPO

The investment banks serving as underwriters can also help with determining the appropriate valuation of a business as part of the IPO process.

Securities and Exchange Commission [SEC]

Companies must register with the SEC before launching an initial public offering. The SEC must review and accept all documentation the company submits in reference to the IPO prior to shares being sold to the public.

Attorneys and Accountants

Attorneys and accountants work alongside underwriters during the initial public offer process to prepare the required documentation. Legal counsel may draft documents and manage the SEC filing, while accountants may be prepare the financial statements that accompany the SEC registration paperwork.

Stock Exchange

Going public with an IPO means choosing an exchange through which traders can buy and sell stock. In the United States., this typically means the New York Stock Exchange or the Nasdaq.

Recommended: What Are the Different Stock Exchanges?

Investors

These include both the those, such as venture capitalists, who put money into the company prior to its going public and those who anticipate trading shares once the IPO launches. Both institutional investors, such as hedge funds or mutual funds, and individual retail investors who are interested in owning shares, may participate in an IPO.

The Takeaway

When considering IPO investing, be sure to weigh the pros and cons to decide if it aligns with your investment goals.

If you’re ready to get started, you can invest in the latest IPOs using the SoFi Invest® Brokerage Platform.

Photo credit: iStock/TimArbaev


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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
SOIN0521220

Read more
What Are Discount Brokers? What to Look For in a Broker

What Are Discount Brokers? What to Look For in a Broker

Discount brokers make it possible for investors to buy and sell securities, without paying the higher fees associated with a full-service brokerage. Using a discount brokerage could make sense for investors who are comfortable making trading decisions without the help of an investment professional.

The rise of discount brokerage firms has made investing more accessible for a wider variety of people. Discount stockbrokers can offer both tax-advantaged and taxable investment accounts. It’s possible to build a portfolio with a discount broker that includes a different types of investments, including stocks, exchange-traded funds (ETFs) and even cryptocurrency.

A discount stock broker can offer a cost-effective way to invest, but it’s important to understand that every discount brokerage works differently.

Recommended: What Exactly is an Investment Broker?

What Is a Discount Broker?

Discount brokers offer investors access to lower-cost securities trading. Many discount brokerages operate online or via mobile investment apps. They’re often geared to the DIY investor who’s interested in self-directed trading.

Some of the characteristics of discount brokers can include:

•  Investment selection that can include stocks, ETFs, mutual funds, bonds

•  Low or zero commission fees to trade stocks and exchange-traded funds (ETFs)

•  Access to investment alternatives, such as cryptocurrency and initial public offerings (IPOs)

•  Fractional share trading or options trading

•  Low minimum investment thresholds

•  Investor-guided trading

While discount brokers offer a flexible way to invest they’re still subject to government regulation. Discount brokerage firms must register with the Securities and Exchange Commission. They must also belong to the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corp (SIPC).

History of Discount Brokers

Discount brokerages have grown in popularity in recent years but online trading has its roots in the 1980s. In 1984, Charles Schwab introduced The Equalizer, the first DOS-based portfolio management and trading tool. Shortly after, competitors entered the market, including TeleBroker, the first phone-based keypad trading application, and StreetSmart, a PC-based trading software program.

In 1992, E-Trade became the first online brokerage service provider. By 1995, E-Trade wgenerated 80% of its revenues from trading commissions and the number of new discount brokerages joining the fray wcontinued to grow. Larger firms, such as Charles Schwab and Fidelity began offering discount broker services. Over the last decade or so, they’ve been joined by newer startups such as Robinhood and Webull.

Along with the introduction of new online trading platforms and expanded investment options, the discount broker industry has evolved from a pricing perspective. In 2019, Charles Schwab was among the first of the largest discount brokerage firms to announce that it would move to $0 commission fees for US stock and ETF trades. Many other discount stockbrokers followed suit, in an effort to remain competitive within the digital investing landscape.

How Do Discount Brokerages Work?

Discount stock brokerages put the investor in the driver’s seat. You decide which type of account to open with a discount broker. This may be a tax-advantaged account, such as a traditional or Roth Individual Retirement Account (IRA). Or you may choose to open a taxable brokerage account instead.

Once you open your account, you can then decide how to allocate it and how much to invest. For instance, if you prefer an active investing style, then you might be interested in day trading stocks or dipping your toes into options. If you lean more toward passive investing, on the other hand, you could build your portfolio around index mutual funds or ETFs.

Recommended: Active vs Passive Investing: What You Should Know

With a discount brokerage, you decide how much to invest in each fund or stock. You also have control over how long you hold those investments and when you decide to sell. When you’re ready to execute trades, you may pay low or no commission fees to do so.

Discount brokerages can also open the door to new investment opportunities, beyond stocks or ETFs. For instance, you may be interested in investing in IPO stocks. With a discount brokerage account, you may have tools on hand to help you understand how the IPO process works and how companies set an IPO price. You can then compare IPOs and decide whether you want to invest, based on your investment goals and risk tolerance.

Discount brokers work well for newer investors and more advanced investors alike. They’re not as well suited for venture capitalists or investors with large portfolios who might be interested in crowdfunding options for investing or investors who want access to things like hedge funds and private equity.

Full-Service Brokers vs Discount Brokers: Key Differences

Brokerage firms help investors to execute trades of stocks and other securities. There are two main types of brokers to choose from: full-service and discount brokers.

Full-service Brokerages

Full-service brokerages assist clients with making trades. But they can also provide other services, including offering investment advice. For instance, a broker might recommend specific stocks or mutual funds to invest in. In exchange for this expert advice, investors pay fees on top of the commissions they may pay to complete trades.

Discount Brokerages

A discount brokerage differs in the scope of services provided and the fees investors pay. With discount stockbrokers, investors receive little to no direct personalized financial advice or analysis from investment professionals. Instead, it’s up to the investor to decide which securities to buy or sell.

Discount brokerage firms are effectively a link between investors and the market, as they help to carry out trade transactions. But they don’t have the higher fees associated with full-service brokerage firms.

Pros and Cons of Working With a Discount Stock Broker

Choosing a discount broker in place of a full-service broker can offer both advantages and disadvantages. While full-service brokers have a longer track record, discount brokers are making it easier for a broader group of investors to gain entry to the market.

Whether using a discount broker makes sense depends on what you need from a brokerage and what you’re willing or able to pay to build a portfolio. Here’s an overview of the main pros and cons to consider when comparing discount stockbrokers against a full-service option.

Pros of Using a Discount Broker

•  Cost. Arguably, the best reason to consider discount brokers in lieu of full-service brokers is cost. Discount brokers charge lower commission fees to trade, and you’re not paying additional costs for their professional investment research or advice since you’re responsible for making investment decisions.

•  Convenience. Discount stock brokerages make it easy to invest from virtually anywhere, since you can execute trades online or via mobile apps. If you come across a buying opportunity, for example, you can log in and complete the transaction in minutes without having to connect with a human broker first.

•  Variety. Another advantage of using a discount stock broker is the selection of investments to which you have access. That may include not only stocks, mutual funds, ETFs and bonds but you may also be able to buy IPO stock, cryptocurrency, commodities or options. Discount brokers make it easier to build a diversified portfolio in one place, with minimal costs.

•  Self-directed trading. If you prefer making investment decisions yourself, a discount brokerage account allows you to do so. You can choose when to buy or sell and how much of your portfolio to allocate to one security versus another.

Cons of Using a Discount Broker

•  No access to professional advice. While discount stockbrokers can be cost-friendly, they’re typically missing one big thing: professional advisors to guide you through the investment process and discuss potential investment risks. Whether this is a con for you depends on how comfortable you are charting your own course with investing.

•  Customer support. Every discount brokerage is different in terms of the level of customer service and support they provide. Some may be more helpful than others, which is something to consider when choosing a discount broker.

•  Not fee-free. While many discount brokers charge $0 commissions to trade US stocks and ETFs, that doesn’t mean there are no fees for trading. You may pay fees to trade mutual funds, for example. Or the brokerage may charge an extra fee if you need to complete a trade by phone.

•  Some limits: While discount brokerages give investors access to many types of investments, they don’t typically offer access to some riskier investments, such as hedge funds or crowdfunding.

What to Look for When Choosing a Discount Brokerage to Work With

If you’re interested in opening a brokerage account, researching your options is the first step. While picking the right brokerage won’t guarantee returns, it can make it easier for you to manage your portfolio and focus on your investments. When comparing discount brokers, here are some of the most important things to keep in mind.

•  Cost. First, consider what you’ll pay to trade stocks and other securities at a particular brokerage. Also, be sure to check the full fee schedule to see what additional trading or account fees may apply.

•  Investment selection. Next, consider what investments you can add to your portfolio with a particular discount stock broker. SoFi Invest®, for example, offers stocks but you can also invest in IPOs and trade cryptocurrency. Other discount brokers may not offer those options.

•  Minimum investment. Depending on where you are on your investing journey, you may have a lot of money or a little to start trading. So consider the minimum investment required to open an account at different discount brokerage firms.

•  User experience. If you’re going to be making trades online or via a mobile device, it’s important that the platform you use be easy to navigate. Check out websites and mobile apps for different discount brokers to see how they compare in terms of features and ease of use.

•  Research tools. Discount stock brokerages may offer research and analysis tools to help you construct your portfolio. Consider what types of tools, (i.e. tickers, stock simulators, etc.) may be available to help with your investment decision-making.

•  Customer support. Look at what type of customer support is available to help investors with a particular discount broker. The more ways you can communicate, such as email, by phone or live chat, the easier it may be to get help managing your account when you need it.

•  Reputation. Finally, consider how well a discount broker stands out compared to the competition. Does it have a great reputation for low-cost trading, for example? Has it won any major industry awards? What are investors saying about the brokerage? Looking at a discount stockbroker’s overall reputation and track record can help decide if it’s a good fit.

Discount Brokers Make Investing Affordable

Opening an account with a discount broker can be a first step toward growing wealth. Because they’re generally a low-cost way to invest, you’re able to preserve more of your investment returns over time.

If you’re ready to build your portfolio with minimal fees, one great way to start is by opening an account on the SoFi Invest brokerage platform. It offers both an active version that allows you to build your own portfolio and an automated option in which the app will build and monitor a portfolio on your behalf.


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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
SOIN0521221

Read more
TLS 1.2 Encrypted
Equal Housing Lender