Investing Archives | Page 101 of 221

Jul

2023

Investing in Small Cap Stocks

By Ashley Kilroy | Growing Wealth, invest, Investing, Terminology | Comments Off

Small cap stocks are stocks in smaller companies, typically those worth between $250 million and $2 billion. Small cap stocks often have high growth potential, which makes them a potentially attractive investment. However, while investors may see higher returns with these stocks, they may also mean higher volatility and risk levels.

For investors considering adding small cap stocks to their portfolios, it’s essential to understand how these stocks work and the advantages and disadvantages that come with this type of investment.

What Are Small Cap Stocks?

With a market cap between $250 million and $2 billion, small cap companies are usually moderately young companies. Small cap stocks typically have some growth potential, but they may not have a longstanding market history. Therefore, these stocks are considered to be riskier than mid-cap stocks or large cap stocks.

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

Understanding Market Capitalization

Market capitalization, or market cap, is a measure of an individual company’s value. The market cap represents the value of total outstanding shares. Investors can use this value to compare similar companies as well as consider future growth predictions.

To calculate a company’s market cap, multiply the total number of outstanding shares by the current share price. For example, let’s say a company has 15 million outstanding shares at a share price of $25 per share. Using this calculation, the company’s market cap would be $375 million.

Due to share price fluctuations, the market cap fluctuates over time. To find the number of outstanding shares, investors can review the “capital stock” numbers on a company’s balance sheet. This information is updated during the quarterly filings with the Securities and Exchange Commission (SEC).

Are Small Cap Stocks a Good Investment?

Small cap stocks may be a good investment as part of a diversified portfolio, but there are risks. The market cap of a company can give investors an idea of the risk and reward of purchasing individual stocks. Purchasing small cap stocks may be riskier than buying stocks of larger companies because the companies are often still in growth mode. In addition, small cap companies often have fewer resources than large-cap companies, and may have less access to liquidity.

Due to these factors, any market dip can negatively impact small cap stocks. Conversely, smaller companies often have higher upside potential, and small cap growth stocks may deliver higher returns than their peers. Still, investors who choose these investments may have to weather market volatility along the way to growth.

Pros of Investing in Small Cap Stocks

There are several benefits to allocating some of your portfolio into small cap stocks.

Growth Potential

When comparing large cap stocks to small cap stocks, small cap stocks tend to have a higher growth potential over the long-term. For much of the stock market’s history, small cap stocks had higher returns than large-cap stocks, and other asset classes.

This growth potential makes small cap stocks an attractive investment choice for investors. They tend to perform particularly well after recessions, during economic expansion.

They’re Often Undervalued

Analysts usually spend less time analyzing small cap stocks, so they get less attention from investors which can lead to lower demand — and lower prices. Therefore, investors may be able to leverage the inefficiencies of the market for potentially better returns.

Financial Institutions Don’t Increase Stock Prices

Specific regulations may not allow financial institutions such as hedge funds and mutual funds to heavily invest in small cap stocks. Therefore, it’s unlikely that large investments from financial institutions will artificially increase the stock price.

Cons of Investing in Small Cap Stocks

While small cap stocks have their benefits, there are also several drawbacks that investors should consider.

High Risk

Investing in small cap stocks tends to have significant risk for investors. Since they’re often younger companies, small cap companies do not always have a time-tested business model. If the company’s management can not make appropriate adjustments to the business model, it may yield poor financial or operational results.

Also, because small cap companies may lack the resources such as capital or access to financing that larger companies have, they may struggle to expand the business or fill in cash flow gaps, especially if the economy hits hard times.

Research May Be Time-Consuming

Due to the limited availability of research and analysis done on small cap stocks, investors may have to spend a significant amount of time researching each investment option.

Minimal Liquidity

Small cap stocks tend to have less liquidity than large cap company stocks. Since there are fewer shares available, investors may not be able to purchase the stock. Conversely, investors may not be able to sell their shares at a reasonable price. The liquidity of small cap stocks adds to the risk of investing in this type of stock.

How to Invest in Small Cap Stocks

Investors can purchase small cap stocks through a brokerage firm or an individual investment account. Since there’s often less public information available about small cap stocks, investors must do their own due diligence in researching companies to understand their potential risks and returns.

Investors who don’t have the time or expertise to determine which individual small cap stocks to buy can invest in small cap companies by purchasing mutual funds or exchange-traded funds (ETFs) that track a broader range of small cap indexes. Some funds may also have unique characteristics within them, such as growth- or value-oriented stocks.

Buying mutual funds and ETFs allow investors to pool funds with other investors to sell and buy buckets of market securities. This type of investing aims to mitigate risks by diversifying investments. Instead of investing in a single company, fund investors are purchasing shares in dozens or hundreds of companies. Investing in mutual funds and ETFs is more of a passive investment strategy that doesn’t require investors to make trades actively.

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

Diversifying With Small Cap Stocks

Even though small cap mutual funds and ETFs provide diversification within a specific asset class, investors can further reduce their risk exposure by expanding portfolio diversification into a broader mix of assets.

Depending on market conditions, different types of stocks may perform differently. The concept can apply to stocks of companies that vary in sizes. Depending on what the market is doing, small, medium, and large companies may either beat the market returns or underperform.

When diversifying a portfolio, investors may start by determining their investment goals, risk tolerance, and time horizon. Then, by assessing these factors, they can decide an appropriate asset allocation to determine the portfolio’s percentage that may include stocks. A typical example is a portfolio composed of 60% stocks and 40% bonds.

Investors use the same factors (time horizon, goals, and risk tolerance) to decide the mix of stocks that will go into the portfolio’s stock percentage portion. Then, as market fluctuations happen, allocations of the portfolio will perform inversely.

For instance, as small cap stocks are rising, mid cap stocks may fall. In this case, small cap stock prices’ upward movement can offset the decrease in mid cap stock prices, thus mitigating losses.

The Takeaway

Small cap stocks are shares of companies with market caps ranging from $250 million to $2 billion. Although small cap stocks have the potential for long-term growth, they tend to come with more risk. With this in mind, building a diversified portfolio with a broader range of investments can help minimize your risk exposure.

But, attempting to build an entire portfolio from scratch and keep it balanced can be time-consuming and a risky venture if you’re an average investor. Instead, many investors choose to get small cap exposure by purchasing mutual funds and exchange-traded funds (ETFs), which mimic the returns of indices that track stocks meeting certain criteria.

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

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Photo credit: iStock/Erikona

Jul

2023

Tips on How to Choose The Right ETF

By Inyoung Hwang | invest, Investing | Comments Off

ETFs are tradable funds that investors can buy and sell on stock exchanges all day. They typically hold a basket of assets, such as stocks or bonds, and mirror the moves of another underlying index. Since its start almost three decades ago, the ETF industry has taken the financial world by storm, and there are thousands of different ETFs on the market that investors can choose from.

But each investor is different, and some ETFs likely won’t be a good fit for their portfolio or strategy. Learning to choose or pick ETFs that do fit your strategy can take some practice, but it’s good to have some guidelines in mind.

How Do I Pick an ETF?

There’s no right or wrong way to pick an exchange-traded fund (ETF), but you can follow a process to help you determine which securities may be the best fit for you. It starts with picking an asset class.

Step 1: Pick the Asset Class

Because the performance of an ETF is so closely tied to an underlying index, investors need to first decide which underlying asset class they want exposure to. The main asset classes are stocks, bonds, currencies, and commodities.

Risk is generally inversely correlated to return. So riskier assets have the potential to deliver greater returns, while safer assets tend to deliver reliable, albeit smaller, returns. Stocks are considered to be a riskier, more volatile asset class. Commodities even more so. Meanwhile, bonds tend to be safer but also deliver more muted returns.

Keep in mind, just because an investor buys an ETF that gives them exposure to one asset class, that doesn’t preclude them from buying another that invests in another market. In fact, it’s a healthy portfolio diversification strategy to allocate one’s money into different asset classes, a practice known as asset allocation.

Step 2: Narrow the Focus

Once an investor has chosen their asset class, they can dive deeper within that market. When it comes to stock ETFs, this usually involves picking an industry – like technology or financial – that they’d like to get greater exposure to. Equity ETFs may also focus on a specific attribute a stock can have. Or dividend ETFs, which hold shares of companies with regular payouts.

For bond ETFs, investors can decide between funds that invest in U.S. government-bond versus bonds issued by countries abroad, as well as investment-grade (higher quality) company debt versus high-yield (junk) bonds.

More recently, thematic ETFs have taken off. These are stock funds that tend to be much narrower than the traditional sector ETF. They can focus on a niche subsector, like robotics, electric cars or blockchain, or even modern trends, like the gig economy or working from home.

There are pros and cons to thematic ETFs: while they’re often marketed as a convenient way to wager on an investment story, they also tend to underperform the broader market. Thematic ETFs have also been criticized for being too narrow and not offering the wide breadth that ETFs were originally designed to offer.

Step 3: Explore Different ETF Strategies

ETFs began as a way to provide investors access to broad markets with a single investment. Since then however, the popularity of the industry has led to the creation of numerous different kinds of ETFs, some of which employ complex strategies.

Here are some of the different ETF types:

• Leveraged ETFs allow investors to make magnified bets on different assets or markets. So instead of replicating the move of the underlying index exactly, leveraged ETFs will produce a move that’s 2x or 3x.

• Inverse ETFs let investors wager against an asset, so shorting or betting that the price of a market will go down. So if on a given day, the underlying market goes down, the inverse ETF’s price will go up.

• Actively Managed ETFs invest in assets without following an index. While ETFs are usually a form of passive investing–the strategy of tracking another index–actively managed ETFs are like stock-picking strategies packaged into a tradable fund.

• Smart-Beta & Factor ETFs use a rules-based system — such as stock weightings, valuations, or volatility trends — to choose the investments in a fund. These funds are often considered a hybrid between passive and actively managed ETFs.

• Currency-Hedged ETFs are funds that let investors wager on a basket of overseas stocks, while mitigating the risk that stems from currency fluctuations.

Step 4: Look at ETF Costs

A fundamental reason why ETFs have become so influential is their low cost. Low ETF fees have compressed costs across the board in asset management. The average expense ratio of most ETFs has fallen over time. Expense ratios are a percentage of assets subtracted each year. So, an expense ratio of 0.45% means that the charge is $4.50 for every $1,000 invested each year.

Because the vast majority of ETFs tend to be passive, they tend to be much cheaper than mutual funds, many of which are still actively managed. More complex ETFs like leveraged funds, or actively managed ones, tend to have higher expense ratios. But some passive ETF fees have hit rock-bottom levels.

Step 5: Other Ways to Analyze ETFs

What about how well an ETF has done? Should that matter? While profitability can make an investment look more attractive, it shouldn’t be the only factor investors use when determining which ETF to buy. That’s because in investing, past performance is not indicative of future results.

For ETFs, another key measure of performance is how well it tracks the underlying index. Tracking errors, when a move in the ETF veers from one by the market it’s designed to track, can come up from time to time, particularly in leveraged funds or ones that invest in stocks overseas.

Looking at the assets under management (AUM) can be a helpful way to pick an ETF. A larger AUM can signal an ETF’s popularity, which in turn makes it more likely that it’s liquid, or easy to trade without impacting prices.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How to Find an ETF’s Holdings, Prospectus, and Fact Sheet

Another touted perk of ETFs is their transparency. Investors can look up what’s exactly in a fund by going to the ETF provider’s website and searching for the fund. Contacting the ETF provider directly for this information is also possible. ETF providers are required to update this information regularly.

Securities and Exchange Commission (SEC) regulation also requires that ETF providers make easily available an ETF’s prospectus. The prospectus has information about the ETF including its investment objective, the risks, fees, as well as expenses. For investors interested in an ETF, one of the most important things they can do is research the fund by carefully reading the prospectus.

Similarly, ETF fact sheets act like quick summaries of the fund, giving key information like performance, the top holdings, and other portfolio characteristics. ETF providers typically produce fact sheets every quarter and make them available on their website.

The Takeaway

Choosing an ETF from the thousands out there can seem daunting, but taking a step-by-step approach can help individuals sort through the multitude of options. A key step investors can take in researching ETFs is reading the fund’s prospectus, where they’ll find vital information on the investment objectives as well as potential risks.

Considerations include which asset class an investor wants to invest in; how broad or narrow of an exposure they want; costs — which are usually shown as expense ratios; and lastly, an ETF’s size can give clues on the popularity and liquidity of the fund. One ETF, on its own, can provide some diversification. However, some people choose to use a number of ETFs as building blocks to assembling a well-balanced portfolio.

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

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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.

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

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.

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

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Jul

2023

Bonds vs Stocks: Understanding the Difference

By Anna Davies | Growing Wealth, Investing, Terminology | Comments Off

Understanding the differences between stocks and bonds can help an investor build a stronger portfolio.

Jul

2023

Federal Reserve Interest Rates, Explained

By Michael Flannelly | invest, Investing, Terminology | No Comments

If you pay attention to the news, you have probably noticed that the Federal Reserve (or Fed, for short) makes headlines every so often. The Fed has recently been in the spotlight because it has been making policy moves to combat rising prices. In the face of the highest inflation rate in 40 years, the Fed has raised interest rates – otherwise known as the federal funds rate — to between 5.00% and 5.25% as of early July 2023.

There’s a connection between the Fed’s interest rate decisions, the national economy, and your personal finances. The Fed works to help balance the economy over time—and its actions and influence on monetary policy can affect household finances. Here’s what consumers should know about the Federal Reserve interest rate and how it trickles down to the level of individual wallets.

What Is the Federal Funds Rate?

The federal funds rate, or federal interest rate, is a target interest rate assessed on the bank-to-bank level. It’s the rate at which banks charge each other for loans borrowed or lent overnight.

The federal funds rate is not directly connected to consumer interest rates, like those that might be paid on a personal loan or mortgage. But it can significantly influence those interest rates and, over time, can impact how businesses and individuals access lines of credit.

How Is the Federal Funds Rate Set?

The Federal Open Market Committee (FOMC) sets the federal funds rate. The FOMC is a 12-member group made up of seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

The FOMC meets a minimum of eight times per year—though the committee will meet more often than that if deemed necessary. The group decides the Fed’s interest rate policy based on key economic indicators that may show signs of inflation, rising unemployment, recession, or other issues that may impact economic growth.

The FOMC often slashes rates in response to market turmoil as an attempt to boost the economy. Lower rates may make it easier for businesses and individuals to take out loans, thus stimulating the economy through more spending. The Federal Reserve enacted a zero-interest rate policy in 2008 and maintained it for seven years to boost the economy following the Great Recession.

On the other hand, the FOMC may raise interest rates when the economy is strong to prevent an overheated economy and keep inflation in check. Higher interest rates make borrowing more expensive, disincentivizing businesses and households from taking out loans for consumption and investment. Because of this, higher interest rates theoretically will cool the economy.

Current Federal Funds Rate

As noted above, the current federal funds rate is between 5.00% and 5.25% as of early July 2023. The FOMC raised interest rates rapidly throughout 2022 in an effort to bring down inflation, which was at the country’s highest levels since the 1980s.

The federal funds rate is a recommended target—banks can ultimately negotiate their own rate when borrowing and lending from one another. Over the years, federal fund targets have varied widely depending on the economic outlook. The federal funds rate was as high as 20% in the early 1980s due to inflation and as low as 0.0% to 0.25% in the post-Covid-19 environment when the Fed used its monetary policy to stimulate the economy.

How Does the Fed Influence the Economy?

The Federal Reserve System is the U.S. central bank. The Fed is the primary regulator of the U.S. financial system and is made up of a dozen regional banks, each of which is localized to a specific geographical region in the country.

The Fed has a wide range of financial duties and powers to take measures to ensure systemic financial and economic stability. These duties include:

• Maintaining widespread financial stability, in part by setting interest rates

• Supervising and regulating smaller banks

• Conducting and implementing national monetary policy

• Providing financial services like operating the national payments system

The Fed has authority over other U.S. banking institutions and can regulate them in order to protect consumers’ financial rights. But perhaps its most famous job is setting its interest rate, otherwise known as the federal funds rate.

💡 Recommended: How Do Federal Reserve Banks Get Funded?

How Does the Federal Funds Rate Affect Interest Rates?

Although the federal funds rate doesn’t directly influence the interest levels for loans taken out by consumers, it can change the dynamics of the economy as a whole through a kind of trickle-down effect.

The Fed’s rate changes impact a broad swath of financial areas—from credit cards to mortgages, from savings rates to life insurance policies. The Fed’s rate change can affect individual consumers in various ways.

The Prime Rate

A change to the federal funds rate can influence the prime interest rate (also known as the Bank Prime Loan Rate). The prime interest rate is the rate banks offer their most creditworthy customers when they’re looking to take out a line of credit or a loan.

While each bank is responsible for setting its own prime interest rate, many banks choose to set theirs mainly based on the federal funds rate.

Generally, the rate is set approximately three percentage points higher than the federal funds rate—so, for example, if the rate is at 5.00%, a bank’s prime interest rate might be 8.00%.

Even for consumers who don’t have excellent credit, the prime interest rate is important; it’s the baseline from which all of a bank’s loan tiers are calculated.

That applies to a wide range of financial products, including mortgages, credit cards, automobile loans, and personal loans. It can also affect existing lines of credit that have variable interest rates.

Savings Accounts and Certificates of Deposit

Interest rates bend both ways. Although a federal rate hike may mean a consumer sees higher interest rates when borrowing, it also means the interest rates earned through savings, certificates of deposit (CDs), and other interest-bearing accounts will increase.

In many cases, this increase in interest earnings influences consumers to save more, which can help as an incentive to build and maintain an emergency fund that one can access immediately, if necessary.

How Does the Federal Funds Rate Affect the Stock Market?

While the federal funds rate has no direct impact on the stock market, it can have the same kind of indirect, ripple effect that is felt in other areas of the U.S. financial system.

Generally, lower rates make the market more attractive to investors looking to maximize growth. Because investors cannot get an attractive rate in a savings account or with lower-risk bonds, they will put money into higher-risk assets like growth stocks to get an ideal return. Plus, cheaper or more available money can translate to more spending and higher company earnings, resulting in rising stock performance.

On the other hand, higher interest rates tend to dampen the stock market since investors usually prefer to invest in lower-risk assets like bonds that may offer an attractive yield in a high-interest rate environment.

💡 Recommended: How Do Interest Rates Impact Stocks?

What Other Factors Affect Consumer Interest Rates?

Although the Federal Reserve interest rate can impact personal finance basics in various ways, it may take up to 12 months to feel the full effect of a change.

On a consumer level, financial institutions use complex algorithms to calculate interest rates for credit cards and other loans. These algorithms consider everything from personal creditworthiness to loan convertibility to the prime interest rate to determine an individual’s interest rate.

The Takeaway

The federal funds rate — or federal interest rate — set by the Federal Reserve is intended to guide bank-to-bank loans but ends up impacting various parts of the national economy—down to individuals’ personal finances. For investors, changes in the federal funds rate can indicate where the stock market may be headed. At least, it’s a factor that investors may watch.

If you’re paying attention to the Federal Reserve interest rate policy changes and want to make investing decisions based on those moves, SoFi can help. With a SoFi Invest® online brokerage account, you can trade stocks and exchange-traded funds (ETFs) for as little as $5.

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

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Jul

2023

Common Questions About Investing — Answered

By Pam O’Brien | Growing Wealth, invest, Investing | No Comments

If you’re curious about investing but have yet to start, you’re not alone. Taking the plunge may be the hardest part.

The world of investing is broad, and at times, it can feel complicated. As much as you may read and research, it’s natural to end up with unanswered questions about investing.

For answers, you can scour the internet for articles, but it can be hard to know where to go and whom to trust. That’s where a trusted financial advisor comes in.

Getting Started With Investing

To begin your investment journey, you need to understand basic information about the process. That can help you feel secure and comfortable enough to take the first concrete step.

For instance, you’re probably wondering about such things as, how much money do I need to invest? And what basic investments are right for me?” Read on to learn the answers to these investing questions and more.

6 Investing Questions to Ask Yourself

As you begin your investment journey, the following 6 questions to ask about investing can help you figure out how much to invest as well as investment options you may want to look into.

1. What’s a Good Amount of Money to Start Investing?

Great news: Investing in your future is no longer an activity reserved for the wealthy. You can get started easily with active investing, even without much in your pocket.

When you’re an investor starting with a small amount, say $10 or $100, it may be a good idea to look for banks or online stock trading platforms that offer free accounts, no account and investment minimums, and no trading costs. SoFi Invest® is one such option.

By starting early, and choosing certain types of investment or savings accounts, such as money market accounts, high-yield savings accounts, and CDs, you may be able to take advantage of the power of compounding. Compound interest is the phenomenon of earning interest on your interest. Essentially, the way it works is that the interest you earn is added to the principal balance in your account, and the new higher amount earns even more.

So, if you invested $1,000 in a money market account and earned $20 in interest, your principal balance becomes $1,020, and that new higher amount earns even more interest. Compound interest may help your money grow.

That said, it may be worth setting up a secure emergency fund before you start investing. An emergency fund is often held in cash separate from your checking account, preferably in an accessible, FDIC-insured savings account.

It’s recommended to save between three to six month’s worth of expenses before investing. (One exception? Take advantage of your company’s 401(k) match, if you have one.)

2. I Only have $30 In My Bank Account — Can I Invest?

First, do you have an emergency fund?

Falling within $30 of a zero-dollar bank account at the end of the month may mean there’s not enough extra for unexpected emergencies and incidentals.

What happens if you get hit with an unforeseen medical bill? Or your car breaks down? It’s helpful to have a cash cushion to weather any storms — and avoid going into credit card debt to cover unexpected costs.

You might consider spending some time building up your cash reserves. As mentioned above, three months of expenses is a good start. But you may want to increase this amount to six months or more.

And once you’ve secured a minimum of three months’ expenses in an emergency fund, it may be time to consider your next money moves.

A great next step is to determine if your employer offers a 401(k) match. Even if you’re only able to invest 1% of your salary, your employer may match with an additional 1% — an immediate 100% return on your investment.

Don’t have a 401(k)? In that case, it may be wise to avoid wasting precious resources on the fees and costs of investing when you’re starting with small amounts, like $30. Instead, work on that emergency fund.

3. What Are My Investment Options With $10,000?

With that amount of money, it can be wise to consider a diversified investment strategy.

Diversification is the practice of allocating money to many different investment types. Big picture, this means investing in multiple different asset classes like stocks, bonds, cash, and real estate. Next, an investor might consider diversifying within each category. With stocks, investors might consider companies within different industries and countries of origin.

One way to diversify is with a portfolio of low-cost index funds, whether index mutual funds or exchange-traded funds (ETFs). For example, you could buy an S&P 500 index fund that invests in 500 leading companies in the United States across many industries. This way, you may eliminate the risk of investing in only one company or in one industry.

Once you’ve established a diversified strategy with the majority of your funds, you might consider buying a few individual stocks. Bear in mind that stock-picking is hard work and requires hours of research — and a ton of luck. Therefore, you may not want to use more than $500 (5% of your $10,000) on individual stocks.

4. Are ETFs or Mutual Funds Better For Beginner Investors?

ETFs vs. mutual funds are similar in that they each bundle together some other type of investment, such as stocks are bonds.

They also have some important differences. ETFs trade throughout the day, like a stock. Mutual funds trade once per day.

Here’s an important question: What is the strategy being used to invest within the fund? Funds, both mutual funds and ETFs, come in two varieties: actively managed and index. (Currently, many ETFs are index, though there are actively-managed ETFs.)

An actively-managed fund typically has higher costs, while an index fund aims to invest in the market using a passive strategy, usually at a low cost. (Not sure of the cost? Look for a fund’s annual fee, called an expense ratio.)

They’re called index funds because they track an index that aims to measure market performance. For example, the S&P 500 is an index designed for the sole purpose of tracking U.S. stock market performance.

But, it is possible to buy an index fund that mimics the S&P 500 — and this can be done via either an ETF or an index mutual fund.

Considering that it’s possible to buy ETFs and index mutual funds that accomplish the same exact thing, you may want to consider the following: 1) Which do you have access to and 2) Which option is lower-cost?

For example, if you only have access to index mutual funds in your 401(k), that may be the direction to go in.

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5. Should I Open a Traditional IRA or a 401(k)?

If your employer offers a 401(k) and contributes matching funds, it likely makes sense to join the plan. A 401(k) allows you to make contributions that may reduce your taxable income. You can have the contributions automatically deducted from your paycheck, which makes it easy. And if you leave your job, you can roll over the IRA to another plan.

In addition to your 401(k), you can absolutely consider opening another investment account like a traditional IRA.

However, as an active participant in your 401(k), your ability to contribute to a traditional, tax-deductible IRA depends on your income level. If you are already covered by a workplace retirement plan, the IRS allows you to deduct the full amount ($6,500) only if you earn less than $73,000 as a single person and $116,000 if you file taxes jointly.

You might have better luck with a Roth IRA, which has different taxation and rules for use than a Traditional IRA. Unlike a 401(k) and Traditional IRA, Roth IRA contributions are not tax-deductible.

Although you don’t get a tax break now, you won’t pay taxes on it when you pull the money out in retirement. You can contribute the full amount to a Roth IRA if you earn less than $138,000 as a single filer or $218,000 for joint filers.

If neither of these options work, you can always open up a brokerage account with an online trading platform. Just because these accounts do not have “special” tax treatment like retirement-specific accounts does not mean that they cannot be used to save and invest for the long term. You’ve got lots of options.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

6. Do I Need a Financial Advisor?

A financial advisor can help you create a financial plan for your future while also meeting your current obligations, like your mortgage and bills. If you’re worried about making a mistake with your money, and you think using a financial advisor would make you feel more confident about investing, getting financial advice may be worth it for you.

Financial advisors do charge fees. They may charge you a flat fee, or they may make commissions on investments they suggest to you. It’s important to find out what their fees are and how the fee process is structured.

If you decide to enlist the help of a financial advisor, proceed carefully to make sure you find the right professional to work with.

Automated Investing

Another option you may want to consider is a robo advisor or automated investing. This is an algorithm-driven digital platform that provides basic financial guidance and portfolio options based on such factors as your goals and risk tolerance.

Because most automated portfolios are built with low-cost index or exchange-traded funds (ETFs), these services are considered efficient and low cost compared with using a human advisor.

Robo portfolios often involve an annual fee, perhaps 0.25% to 1% of the account balance.

Financial Planning With SoFi

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

FAQ

What are good questions to ask about investing?

As a beginning investor, it’s important to ask some good basic questions, including: How much can I afford to invest, how much risk am I comfortable taking, and what types of investments are right for me? You’ll also want to consider your goals (for instance, are you investing for retirement), your age, and how long you plan to invest your money.

What are the benefits of investing?

Investing can help you put your money to work for you and potentially make it grow so you can reach your financial goals. Investing can be a way to save for retirement, build wealth, and outpace inflation. In addition, some investments, like 401(k)s and IRAs, can also help you save on taxes.

How do beginners learn to invest?

One good way for beginners to learn to invest is to open a 401(k) if their employer offers one, especially if the employer matches a portion of their contributions. With a 401(k), you’ll choose investment options based on what your employer offers. This can help you learn the basics, such as figuring out your risk tolerance and what types of funds are right for you, and diversifying your investments so that you have a mix of different assets, such as stocks and bonds.

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

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.

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.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

SOIN1122023

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Common Questions About Investing — Answered

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Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

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6. Do I Need a Financial Advisor?

Automated Investing

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