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The First Step to Investing: Understand Your Goals

When it comes to investing, most people start with What. What should I invest in? What should my portfolio strategy be? What stock should I invest in?

But there’s actually a more important place to start: Why. Why do you want to invest in the first place? Why are you building a portfolio?

Selecting an investment strategy largely depends on your financial goals. This is sometimes an overlooked first step in building a sound investment strategy.

You can’t plan the right portfolio unless you know what you want to save for, how much you want to save, and when you’d like to use that money.

You might think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals. Should you even be in stocks, or in bonds? Or should your money be held in cash? Or, should you do something else entirely?

Setting Your Financial Goals

First, you may want to consider these two recommended goals: Creating an emergency fund and saving for retirement. These are sometimes referred to as “bookend goals, because they are your primary short-term and primary long-term financial goals. From there, how you prioritize your other goals is entirely up to you.

Creating an Emergency Fund

Your emergency fund is a lump sum that you can easily access should an emergency arise—for example, if you get laid off or face unexpected health costs. It is common knowledge that this fund be three to six times your monthly spend, depending on how risk-averse and well-insured you are.

Consider Asking Yourself:
•   How much do I spend each month?
•   How much of that is necessary spending, and how much is discretionary?
•   How many months’ expenses would I like to have saved?
•   Do I have dependents or others that live off my income?
•   What’s my target emergency fund?

Creating a Retirement Fund

Retirement may be your largest long-term financial goal, and even if it feels very far away, it’s helpful to start saving early. Why? The earlier you start saving, the more time your money has to work for you.

Consider Asking Yourself:
•   At what age do you want to retire? For those born after 1960, full Social Security full Social Security retirement age is 67 .
•   How much money do you need to live on each year (in today’s dollars)?
•   How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of about 79 years, but to be safe (and optimistic), you may want to plan for (much) longer.
•   What do you currently have saved for this goal? You may want to use a retirement calculator to see if you are on track.

Your In-Between Goals: Houses, Families, Businesses, and More

How you prioritize everything in-between your emergency fund and retirement depends entirely on you. For example, do you want to buy a home? Start a family? Launch a business? Go on an epic month-long vacation? Many of the above?

Any goal you can think of is on the table. You may want to be specific—exactly how much money you need to achieve each goal, and by when. Why? If you’re specific, you’ll have a much higher likelihood of reaching that target, when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.

Consider Asking Yourself:
•   What is your goal?
•   When do you need the money?
•   How much do you need?
•   How much can you save each month?
•   What may be some obstacles that could come up?

Starting Your Investment Strategy

As you’ve seen in the exercises above, each of your goals has a specific time horizon. This leads to an underlying investment strategy: Generally speaking, the longer the time horizon, the more risk you can afford to take, because you can weather market volatility.

When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.

There is no such thing as an investment that is high reward with no risk. (If someone promises such an arrangement to you, you may want to run for the hills—it’s probably a scam.)

Oftentimes, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for returns to even back out to their historical averages.

Short Term (Less Than Three Years)

For goals like: Setting up an emergency fund, travel, buying a new car.

A good rule of thumb is to keep any money you need within the next three years “liquid,” or available to access as soon as you need it. For example, the whole point of having emergency cash is to have access to that money without worry.

Additionally, it is unlikely that you will want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash.

If you have a higher risk tolerance, you can consider investing some money for short-term goals in a conservative portfolio that will pay a higher interest than a savings account, but that still has a low risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.

Your cash can be held in a savings account of your choosing. You may elect to keep this cash in an interest-bearing savings account where you can earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.

Medium Term (Five to 10 Years)

For goals like: Home purchase, starting a family.

With a time horizon of five to 10 years, you may be able to afford taking some risk with your money and give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio.

Depending on your comfort level, this portfolio may hold a combination of cash, other fixed-income investments, like bonds, and some stocks.

More than likely, you’ll hold these investments in an investment account, which is sometimes also called a brokerage account.

For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or Traditional IRA. You could be penalized for pulling the money out before retirement.

Medium to Long Term (10-20 Years)

For goals like: Child’s college savings, second home

With a time horizon of 10-20 years, you may be able to afford taking more risk with your money in order to take advantage of the power of compounding.

Depending on your comfort level, you may want to consider a moderate to moderately aggressive portfolio. Generally, the longer your investing timeline, the more risk you can take. This may mean building in a higher allocation to stocks and bonds.

Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account. For a child’s college, consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.

Long Term (20+ Years)

For goals like: Retirement, financial independence

For long-term goals, time may be on your side. Having several decades or more gives a portfolio time to weather the ups and downs of the market and economic cycles. This allows an investor to take on more risk with the hope of more reward.

With this in mind, you may want to focus on aggressive growth while you are young, and then shift to a more conservative investment allocation over time. Depending on your comfort with the stock market, this may mean allocating a majority of your portfolio to the stock market or other high-risk, high-reward investments.

To save for retirement, you may want to consider investing in a 401(k) plan, a online IRA, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.

What’s Next?

Once you’ve outlined your goals, you’ve completed the first step of investing.

A good second step? Learning more about the investment options that are available to you. This will aid you in building a portfolio that will help you achieve your goals.

A good place to start is learning the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.

Another option is to set up a complimentary appointment with a SoFi financial planner, who can help you define and quantify your goals and discuss the potential investment strategies to reach them. With SoFi Invest, this service is complimentary.

Depending on how involved you would like to be, SoFi has options for building your own investing portfolio or having an automated portfolio built for you, with your goals in mind. There are no associated costs or fees with utilizing either investing option.

Investing isn’t just for the wealthy; it’s for anyone who wants to achieve financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes. You could get started today with a few clicks.

But before you do, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.

Interested in investing, now that you know where to start? Check out SoFi Invest® today.


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

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How to Read Stock Charts as a New Trader

Remember the first time you got behind the wheel of a car?

Chances are the experience was as intimidating as it was exciting. You had all those knobs, pedals, and dials to figure out… not to mention keeping tabs on what the other cars around you were doing.

Of course, fast forward just a week or two, and you were probably scooting around town like a pro—or at least without being in acute danger of a collision.

Well, reading stock charts is pretty similar. It may seem totally baffling at first… but once you know what to look for, it may not be as confusing as you thought, and it can help you make much better decisions as a new investor.

How Investing Can Help You Reach Your Financial Goals

Before we dive into the nitty-gritty of reading stock charts, let’s take a step back. Why is investing often considered such an important financial move in the first place?

Well, for one thing, it can be a way to make money—otherwise known as a passive income stream. When you buy and hold market assets that perform well, you’re earning money without putting in extra hours at work, which can unlock a whole new level of income-generating potential. One can also leverage an automated investing service that will auto rebalance and diversify holdings based on set goals.

But perhaps more importantly, investing is a great way to ensure your stash of cash keeps up with the cost of living. Even a large nest egg will lose value over time due to inflation, especially if you’re keeping it under your mattress—or even in a low-interest savings account.

When considering the various savings and investment options available, you’ll find that smart stock investing has some of the best potential ROI, or return on investment—and thanks to the power of compound interest, the capital gains you could earn might eclipse inflation.

Parts of a Stock Chart, Broken Down

If you’ve decided investing is right for you, you’re probably ready to learn what, exactly, all those stock chart lines and letters mean. Since this post is directed at beginners, we won’t get too technical on you, but here are the basics when you’re first learning how to read stock charts.

Stock Symbol and Exchange

The first thing you’ll need to get familiar with when you’re looking at a stock chart is the stock symbol. This is the series of letters, and sometimes numbers, by which a particular stock is uniquely identified, and is also known as a “ticker.” For example, the stock symbol for Apple is AAPL, and the stock symbol for Amazon is AMZN.

Stock symbols are defined by the exchanges on which those stocks are traded—for instance, the New York Stock Exchange (NYSE) or the Nasdaq. These are the markets on which stocks and other assets are bought and sold. Stocks traded on the NYSE and Nasdaq can have tickers up to 5-letters long, but most are only 2-4.

The ticker symbol identifies which stock’s chart you’re looking at, and you may need to know it beforehand in order to look up the stock chart in the first place. You can usually find the ticker pretty simply by running a quick online search, and you can then use a website like StockCharts.com or Trading View to pull up the chart itself.

Chart Period

The first thing you’ll notice when looking at the chart itself is that it’s pretty much a line graph. Remember middle school math? You’re dealing with a basic X and Y axis—and the X axis refers to time.

The trend line is measuring the asset’s performance over that period of time, which we’ll dive deeper into in just a minute, but for now, let’s focus in on how much time we’re talking about.

You might want to view the stock’s performance over a single day, week, or month, or see its long-run trend line over the past year or longer. It all depends on your personal trading goals.

To adjust the chart period, find the portion of the stock chart with different listed lengths of time, such as one day, five day, six months, YTD (“year to date”), or even the stock’s full history.

Clicking each will result in a different trend line corresponding to the stock’s behavior over that period of time, and may even offer live, up-to-the-minute updates if the exchange is currently open.

Price Changes

Now, let’s hone in on that actual trend line you’re looking at. It corresponds to the trade price of the stock in question, which changes over time.

Some stock charts may spell out the stock’s opening price, low price, high price, and closing price during a given time period, usually marked simply O, L, H, and C. Here’s what those figures each refer to:

•   The opening price is the first price at which the stock traded during the given time period.

•   The low price is the lowest price at which the stock sold during the given time period.

•   The high price is—you guessed it—the highest price at which that stock sold during the given time period.

•   Finally, the closing price is the last price at which the stock sold before the exchanged closed.

If the exchange is still open and the stock is being actively traded, the stock chart will likely display the last price, which is just what it sounds like: the last price at which the stock was successfully sold.

You might also see the change in that price from the one immediately before it, or last change, usually displayed as both a dollar value and a percentage.

For example, if you were looking at a chart for Apple stock, it might display the following string of letters and numbers:

AAPL 197.16 +0.05 (+0.04%)

In this example, AAPL is the ticker symbol, and $197.16 is the last recorded price of a single share sold on the exchange. That price was five cents higher than the trade immediately before it, meaning the value of the stock raised, in that time, by 0.04%.

By looking at how the trend line moves over the chart period, you can get a sense of the stock’s price and performance over time as well as its most recent statistics.

Volume

Alright. At this point, you’ve got price over time, which is a huge key component to understanding how a stock is behaving on the market.

But there’s one more uber-important factor to take into consideration: volume.

Volume corresponds to how many shares are bought and sold within a specific time period. In other words, it’s a measure of supply and demand.

Volume is often represented as a series of bars running along the bottom axis of the chart. The bars’ size aligns with the number of trades made during that time period, and can be useful for guesstimating upcoming sales trends for that asset.

It’s not a perfect science, of course, but if a stock is trading at low volume—i.e., few shares are being bought and sold each day—it may indicate that the current price trend is about to change. Perhaps the stock is in poor demand because it’s valued too highly for the market. It could also just mean the investment is out of favor with investors.

On the other hand, a high trade volume might indicate that you’ll have an easier time selling the stock quickly if you’re considering short-term trading.

Other Details

Guess what? You’ve already got the basics of reading stock charts down! Understanding that you’re watching the way an asset is traded over time is the most important part of learning how to read stock charts.

Of course, these charts are used by both veteran and amateur investors, which means that lots of techy traders have come up with all sorts of digital tools to glean ever more nuanced information—some of which may honestly be more confusing than helpful to a beginner.

But some of it can be informative. For instance, your stock chart may indicate when dividends (portions of profit) were paid to shareholders, or when stock splits occur. (In a stock split, a company decides to divide existing shares into more shares, or split them, which can encourage traders if the price of a single stock has grown very high.)

You may also be able to manipulate how the price trend information is displayed, perhaps by overlaying a general market trend line for comparative purposes or using a “candlestick display,” which segments off each trading day into a candlestick-shaped bar, which indicates the high and low price at a glance.

Some stock chart platforms also include auxiliary information, such as financial ratios and the company’s latest income statements, which can help you get a better sense of the big picture.

Okay… So What Does it All Mean?

Don’t get us wrong: There is a lot to take in when you’re looking at a stock chart. And as with all things investing, even if you knew what every single line and letter meant, a lot of investing is guesswork. There’s always some risk involved—and there’s no such thing as a totally safe investment!

But the basic information you can glean from a stock chart is actually pretty simple: how has this asset performed over time? That information can help you extrapolate—or at least make a cautious, well-informed guess—as to how it might continue to perform in the future.

Of course, reading stock charts is just one small part of evaluating potential investments. Other things you may want to consider could include looking into the company’s values and policies, taking a gander at the financial ratios, and taking advantage of the wealth of online tips and tools available to traders—all while keeping a critical eye and remembering that every investment is a risk.

It’s also important to keep in mind that even the “safest” investment will be vulnerable to market fluctuations, with some assets being riskier than others. Only you can ultimately decide how much risk you’ll tolerate in your portfolio.

If Reading Stock Charts Gives You a Headache, You Still Have Options

If reading stock charts makes you want to pull your eyeballs out… honestly, we get it. It’s a lot of information, and if you’re not a career day trader, chances are you have other things to spend your time and mental energy on.

Fortunately, you don’t have to give up on investing entirely if you don’t want to become a stock-chart whisperer. There are plenty of other options to explore that can help you build a diversified, targeted portfolio and get you closer to achieving the goals you’ve set for your financial future.

Automated investing, or “robo-investing,” as it’s sometimes called, has created a whole new avenue for folks who want to put their money to work without making it into a personal project.

Using a combination of human-powered research and high-powered computer algorithms, automated investment platforms can allocate, track, and rebalance your assets without stress or strain on your.

SoFi Invest® offers an automated investment product that can help you plan for your financial goals and create a diversified portfolio to help get you there. (Plus, there are no SoFi management fees at all. Just sayin’.)

No matter what kind of investment strategy you decide is right for you,and whether or not you pour your heart into learning the ins and outs of reading stock charts, keep in mind that the magic of compound interest is powered by time—which means it may be in your best interest to start early.

Want to learn more about investing and reaching your financial goals? Try SoFi Invest!


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

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”).

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Estate Planning 101: The Basics of Estate Planning

Before we begin, we just wanted to let you know that the following article is meant for general informational purposes. For questions regarding estate planning and any related topics, please consult a legal professional.

You may have heard the old expression, “you can’t take it with you.” The “it” that you’d most likely like to leave behind requires a plan. When you pass, you can’t bring along your bank accounts, property, and investments.

So who gets your wealth? Have you thought about who will receive your assets and how your loved ones will be taken care of when you are gone? The process of putting together these specific directions is called estate planning.

Immediate Advantages of Estate Planning

Many younger people assume that estate planning is only for the old and the rich, but estate planning can be addressed at any time and in any tax bracket.

In fact, estate planning is not only about passing on your assets when you die, rather it includes what directions you would want to provide to loved ones, or who would take care of your children if you are a parent.

You can make changes to your estate plan along the way, as your life situation changes.

Even more important, estate planning is a way to start thinking through these decisions and put them down in writing to communicate to others. Rather than simply assuming that your loved ones would know what you want, you have the opportunity to get rid of potential ambiguity and arguments by defining your wishes.

What Is an Estate?

In the simplest terms, an estate is everything you own—money and assets, including your home and your car—at the time of your death. When you decide, in advance and in writing, who will get your assets and money, that’s estate planning.

Your heirs are the people who will receive your money and assets after you’re gone. The act of giving these things to your heirs is called asset distribution.

Your debts are also part of your estate—anything you owe on credit cards and loans may have to be paid off first by your estate before any further money or assets are distributed to your heirs.

Estate planning is not entirely about money. It may also leave instructions for how your incapacitation or death may be handled. For instance, you may not want to be kept on a life-support system if you were in a coma. You may want to be cremated instead of buried. These instructions can be included in your estate planning.

Creating an Estate Plan

Many people struggle with the idea of where to start, or simply do not think they need to have a plan. The simple fact is that estate planning will be different depending on your lifestage. Here is a rough idea of what you might want to explore based on your lifestage (don’t worry if you are not familiar with the documents listed, we will explain those later):

•   Are you single without any dependents? You may want to explore a durable power of attorney, letter of instruction, and defining beneficiary designations on your accounts.

•   Are you married without any dependents? You may want to explore a durable power of attorney, letter of instruction, living will, healthcare power of attorney, and defining beneficiary designations.

•   Do you have dependents? You may want to explore a durable power of attorney, letter of instruction, living will, healthcare power of attorney, will, and defining beneficiary designations.

Now that we’ve talked about what you might want to consider when developing your estate plan, let’s summarize what each of those documents does:

•   A durable power of attorney: This is a legal document in which you name another person to act on your behalf if you are unable to do so. You can grant limited or broad power to that person. Some examples include being able to pay your bills or make decisions about your investments.

•   A letter of instruction: This is a document that can help organize the logistics of your estate plan and give you an opportunity to provide a personalized message to your loved ones. This document could be used by your loved one to understand your wishes and easily access everything you own and owe.

•   A living will: This is a document that expresses your intentions regarding life-sustaining measures. It is important to understand that this expresses what you want but does not give anyone the authority to speak for you, which is why it’s normally accompanied by a healthcare power of attorney.

•   A healthcare power of attorney: This is a document that authorizes someone to make medical decisions for you in the event that you are unable to make them for yourself.

•   A will: This is a document that provides instructions for distributing your assets upon your death. There are additional provisions that could be added and details your attorney can work through, but for parents, this is also where they might designate a guardian.

•   Beneficiary designations: Beneficiary designations are made on accounts and insurance policies to establish who gets the account when you pass away. You may want to review these and make sure they align with your overall intentions and are updated as your life changes.

Asking Yourself the Following Questions Before Estate Planning

•   Who is the executor? Be sure it’s someone you can trust with your life. Literally.
•   Who will receive my assets? In most cases it’s children or next of kin, but you can leave your assets to anyone or anything, including charities.
•   Who gains custody of my children? Basically, who are your children’s godparents? Who is responsible for and worthy of raising your children if you are no longer there?

Partnering Up With an Attorney or Tax Professional

You might want to educate yourself all you can and make sure a professional has your back and can help you navigate the choppy waters of estate planning. A professional might help you create the documents that can make your estate official and advise you on how taxes may affect your plan.

Ultimately, you will have the final say on how you want your estate to be managed and executed, but a professional could help you arrive at educated, rational, and sensible decisions. They could also help communicate your objectives so that mistakes and miscommunications can be avoided.

They may even be able to help you plan your estate so that you can pay taxes correctly and possible pay even less in taxes than you may have done on your own.

An estate professional will more than likely charge you a fee, but the cost of having expert help may ultimately save you thousands of dollars in costs, legal and otherwise, if you make a mistake.

Getting Started on Your Estate Planning

Need some more tips to hash this out? That’s not uncommon. Estate planning is not as basic as it looks.

And if you’re just starting out, it may help to figure out a way to grow your assets so that when you do leave something behind, it could be significant and useful. Maybe even life-changing.

You could talk to a financial planner about how to get started on your financial journey. A professional can walk you through some of the initial steps of starting a financial plan, with your future goals in mind.

Work with SoFi Financial Planners to help create an effective plan for the long term.


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

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What Is Margin Trading?

Investing can seem like a foreign language sometimes. There are a whole bunch of acronyms and a lot of lingo to learn, even if you’ve been at it a while.

There are IRAs, 401Ks, 403Bs, stocks, bonds, common stock, index funds, exchange-traded funds, REITs, and a whole lot more. And that doesn’t even get into all the ways you can invest, like limit orders, stop orders, short sales, and fractional shares.

Then there’s margin trading, which can be a confusing trading method because it comes with a lot of rules—and a lot of specialized words and lingo. Maybe you’ve heard of it, maybe the term is wholly new, or maybe you’re thinking about getting into margin trading yourself.

No matter where you sit on the spectrum, margin trading is happening at record levels thanks to the bull market we’ve been enjoying in the United States.

In May of 2018, borrowing by margin traders hit an all-time high of $668.9 billion . That figure is over $100 billion higher than 2016 figures and over double of trading at the end of 2010 . That’s a whole lot of investors taking advantage of this unique way to invest in the stock market.

So margin trading is kind of a big deal, but what is it actually? How is it different than the way you might be buying stocks, ETFs, index funds, and other investments now? What are the potential benefits? What might some of the risks associated with margin trading be? And how do you get started?

At first, margin trading might seem a little bit more complicated than some other ways to invest in the stock market but, as the 2018 numbers can attest, it’s a method favored by a lot of folks.

How Does Margin Stock Trading Work?

There are different ways to buy stocks, funds, bonds, and other securities. You might buy one share of a company at its full price. You might buy a fractional share.

You might throw $10 a week into an ETF that’s made up of stocks from an industry you like or eco-friendly businesses.

Margin trading is a little bit different than these approaches. Trades are made using some of your money and someone else’s, usually a brokerage firm’s .

The investor takes out a loan on an investment they hope is going to rise, with the aim of seeing a return. When the investment is sold, the borrowed funds are returned, and the investor keeps the profits.

For example, if an investor wants to buy $5,000 worth of stock in something with a potentially big year, they could use $2,500 of their own money. The brokerage firm may lend the investor $2,500 to make up the difference so the total investment would be $5,000 for an initial cost of only $2,500 to the investor.

You’ll likely need a margin account with a brokerage firm to execute this kind of trade. The firm may require a minimum deposit in a margin account, and the account balance acts as collateral against the loan.

The loan often includes an interest rate, and the person borrowing the money for the margin trade is responsible for the amount owed plus interest. This means if the stock drops in value, the investor would still be responsible for the $2,500 and any interest on the loaned amount.

On the flip side, if the stock goes up, using a margin account effectively increases an investor’s purchasing power and potential profit. Margin exposes the investor to potentially greater gains or losses and is a riskier way to invest than not using margin.

Those are the basics, but there’s still a lot to learn before placing your first margin trade—like all the margin trade lingo, for instance.

Useful Margin Trading Terms

Because margin trading is a little different than some other ways to invest, it might be helpful to familiarize yourself with a few terms. Here are some key words you might run into.

Margin Account

This is the kind of brokerage account you’ll likely need to begin margin trading. It means the brokerage firm will lend funds for stock purchases.

FINRA

The Financial Industry Regulatory Authority is a nonprofit organized by Congress. The organization oversees margin trading by writing and enforcing rules governing the industry, ensuring brokerage firms’ compliance with those rules, and educating investors. FINRA’s goal is to help protect investors and regulate brokerages to ensure they’re working in the best interests of American investors.

Minimum Margin

FINRA rules set a dollar amount that must be deposited based on the kind of margin trading to be executed. The amount may vary depending on the purchase amount of the investment and brokerage firm policies.

Initial Margin

The initial margin for new accounts is set at 50% by Regulation T of the Federal Reserve Board . This means that a $10,000 trade, for example, would require an initial margin of $5,000. Some brokerages might even ask for more than 50% as part of the initial margin.

Maintenance Margin

The maintenance margin specifies the amount of money that investors are required to keep in their margin accounts. According to the SEC, “FINRA rules require this ‘maintenance requirement’ to be at least 25 percent of the total market value of the securities purchased on margin (that is, ‘margin securities’).” This might mean investors may have to add cash to their margin accounts if the price of their investment drops significantly.

Margin Call

A margin call happens when the value of an investor’s margin account dips below the brokerage’s maintenance margin. The “call” is a request for the investor to meet the maintenance margin and usually happens when a security the investor purchased decreases in value.

Once you’ve familiarized yourself with margin trading lingo and some basic stock market terms, it might be helpful to understand some of the potential benefits and risks of margin trading.

Potential Benefits of Margin Trading

A primary benefit of margin trading is the potential expansion of an investor’s purchasing power, sometimes exponentially. This could possibly help boost returns if the price of the stock or other investment purchased with a margin trade goes up.

Benefits of margin loans might include lower interest rates than other types of loans, such as personal loans, and the lack of a set repayment schedule.

You could also use margin trading to diversify your portfolio.

Another potential advantage might be a complicated trading method called short selling. Margin trading might make it possible for you to sell stocks short.

Short selling differs from most other investment strategies in that investors make a bet that a stock’s price will fall.

The rules for short selling with a margin account can get even more complicated than a traditional margin trade. For instance, Regulation T of the Federal Reserve Board requires margin accounts to have 150% of the value of the short sale when the trade is initiated.

While the benefits of being able to buy more investments—and potentially make more money—might seem appealing to some investors, there are some potential risks to margin investing that might be worth considering before you decide if it’s right for you.

Potentially Risky Business

While a primary benefit of margin trading may be increased buying power, investors could lose more money than they initially invested. Unlike a cash account, the traditional way to buy stocks or other investments, losses in a margin account can actually extend beyond the initial investment.

If an investor purchases $100 worth of stock with a cash account, the most they can lose is $100. If that same investor uses $100 of their own money and a margin—essentially a loan—of $400 and the stock loses value, they may actually end up owing more money than their initial $100.

Another potential negative aspect of margin trading is getting a margin call. Investors might have to put additional funds into their account on short notice if a margin call is triggered because the investment lost value. Additionally, a drop in value might mean an investor has to sell off some or all of the investment, likely at an inopportune time.

The SEC warns investors that if some of their stock must be sold to cover a margin call, the investor usually does not get to decide which investments are sold, and they may get little to no notice that their securities are going to be sold to cover a margin call. They also advise investors to be aware that a brokerage might increase margin requirements with little notice, also likely at an inopportune time.

How to Get Started With Margin Trading

Typically, the first step to getting started with margin trading is to open a margin trading account with a brokerage firm.

Even if you already have a stock or investment account, which are cash accounts, you still have to open a margin account because they are regulated differently. First-time margin investors have to deposit at least $2,000 per FINRA rules . If you’re looking to day trade, this dollar figure goes up to $25,000 according to FINRA rules. This is the minimum margin when opening a margin trading account.

FINRA defines a day trade as “the purchase and sale, or the sale and purchase, of the same security on the same day in a margin account.” These higher dollar amounts might be associated with what some have called the greater risk of day trading.

Once the margin account has been opened and the minimum margin supplied, the SEC advises investors to read the terms of their margin and have a grasp of how their new margin trading account will work.

The SEC advises investors to protect themselves by doing the following: “Understanding that your broker charges you interest for borrowing money and how that will affect the total return on your investments, being aware that not all securities can be purchased on margin, and knowing how a margin account works and what happens if the price of the securities purchased on margin declines.”

Does Margin Trading Work for Your Goals?

That’s the question most investors will probably have to answer for themselves once they’ve learned the lingo, weighed the pros and cons, and figured out how margin trading works.

As with most investing strategies and vehicles, margin trading comes with a unique set of potential benefits, risks, and rewards.

Margin trading can seem a little more complicated than some other approaches to investing, and it should be up to an individual investor to decide if the potential risks are worth the potential rewards and if this strategy aligns with their goals for the future.

Want to explore what investing options might work with your goals? Check out automated or active investing with SoFi Invest® today.


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

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”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

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Investment Risks and Ways to Manage

When it comes to the stock market, things can change—rapidly. Numerous factors impacting the value of individual stocks and the market as a whole can translate into being up one day, down the next. And try as they might, it can be near impossible for analysts to predict how the stock market will fare.

While the markets can be unpredictable, fluctuation is a sign that the stock market is working normally. As an investor, it’s important to get comfortable with the market’s volatility. Understanding how risk plays a role in investing can help inform the investing decisions you make for yourself.

What Is Investment Risk?

All investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

Different types of investments come with different levels of risk. Typically, as the risk increases, so do the potential returns. Understanding the types of risks associated with investing can be the key to informing your risk tolerance.

Types of Investment Risk

Just as there are a variety of investment vehicles, there are a number of different types of risk involved in investing. Here are a few common kinds:

Market Risk

Sometimes global economic trends, like a recession, or current events, like a natural disaster or political turmoil, can impact how the markets perform. Market risk refers to the potential for an investor to experience losses due to factors that are influencing the financial markets as a whole.

This type of risk is often referred to as systematic risk. The four most common types of market risk include interest rate, equity, commodity, and currency risk.

Interest rate risk reflects the market fluctuations that might occur after a change in interest rates is announced. Fixed-income investments, like bonds, are the investments that are most likely to be influenced by interest rate risk.

Equity risk refers specifically to the risk investors face from market volatility—the possibility that the value of shares will decrease.

Commodity risk comes from price fluctuations in commodities (raw materials) that impacts the users and producers of those same materials.

Currency risk is also known as exchange-rate risk. It stems from the price differences when comparing one currency to another. This type of risk is most relevant to investors who have assets in a foreign country or companies who have a lot of activities abroad.

Inflation Risk

Inflation measures the increase of the cost of goods over a set period of time and a rise in inflation means consumers have less purchasing power. Inflation risk is a concern for investors that have money saved in accounts with fixed interest rates, because the rate of inflation may outpace the fixed interest rate being earned.

Business Risk

When you buy a stock, you’re essentially buying a small share of the company. In order to make a possible return on your investment, the company you’ve invested in needs to remain in business. If a company goes out of business, common stockholders are likely the last to get paid, if at all.

Liquidity Risk

This type of risk reflects the concern that investors won’t find a market for their holdings when they ultimately do decide to sell their investments. This could prevent investors from buying and selling assets as desired; they may have to sell for a lower price, if they are able to sell at all.

This risk could also apply to investments with strict term limits like a certificate of deposit (CD). Account holders would typically face a penalty from withdrawing or liquidating this account before the specified time.

Horizon Risk

In investing, a time horizon is the amount of time you have until a specific financial goal.

A lengthy time horizon could potentially allow you to take on riskier investments, since if you do suffer a loss, your investments will have more time to rebound.

Horizon risk occurs when the time horizon of an investment is unexpectedly shortened—like, say, by an unexpected, expensive medical emergency.

On the other side of the spectrum, investors in or nearing retirement could face the risk of outliving their savings. This is referred to as longevity risk.

Concentration Risk

This type of risk can occur when an investor is invested in a limited number of assets or owns assets only in one category or asset class. If that one category experiences losses, so will a concentrated investment portfolio.

The Investment Risk Pyramid

Remember the food pyramid? Before MyPlate , the food pyramid was the gold standard of nutrition in the U.S. It recommended a hearty foundation of grains, followed by a smaller layer of fruits and veggies, followed by an even smaller layer of dairy, meats, beans, eggs, and nuts. At the very top, making up the smallest portion of the pyramid were fats, oils, and sweets.

The investment risk pyramid takes a similar approach, and could prove helpful if you’re looking for guidance as you’re evaluating the risks associated with different types of investments.

It may help you understand which investments pose the greatest risk, and can assist you in creating a portfolio that falls in line with your personal risk tolerance.

At the base of the pyramid are lower risk investments that have the potential to earn foreseeable returns. These investments create the foundation of a financial portfolio. Low risk investments typically include things like government bonds, CDs, money market accounts, and savings accounts.

In the middle of the pyramid are investments with moderate risk. These investments will be a little riskier than the base of the pyramid, but will hopefully lead to capital appreciation. Investments like high-income government bonds, real estate, equity mutual funds, and large and small cap stocks would fall into this category.

The riskiest investments are at the peak of the pyramid. Just like sweets, fats, and oils should make up a limited portion of your diet, these investments are generally recommended to only make up a relatively small portion of your overall investment portfolio.

Since these investments are so risky, some guidelines suggest only investing money that, if lost, won’t cause serious issues in your day-to-day life.

As you continue building your investment portfolio, it’s helpful to know that although the investment risk pyramid can be a useful tool, it’s just a guideline. Just as everyone’s dietary and nutritional needs are different, so are individual investment portfolios.Take it with a grain of salt.

Managing Risk

Here’s the thing about investing—risk is an unavoidable reality. While you won’t be able to eliminate risk completely, there are strategies to help you manage the investment risks your portfolio is subject to.

Understanding Your Financial Goals and Risk Tolerance

The first step in managing risk will be determining your risk tolerance—how much risk you are willing to take on as an investor. Your financial goals could help inform your risk tolerance. Consider asking yourself what you want to use your money for and then figuring out the timeline for when you’ll need it.

The amount of time you have to invest will likely influence the type of investments you make with your money.

For example, if you are saving for retirement in 40 years, you may be able to take on more risk than someone who plans to retire, in say, 10 years.

Try as we might, we can’t plan for everything and life can change quickly. As it does, it can be helpful to re-check your financial goals and re-assess your risk tolerance to see if any changes are necessary.

For example, if you’ve recently had a child, you may want to integrate a college fund into your financial plan. Or perhaps you and your partner have decided you want to upgrade to a bigger house before growing your family.

Diversifying Your Portfolio

With a diversified portfolio, your money isn’t concentrated into one specific area. Instead, it’s spread across different asset classes—like stocks, bonds, and real estate—the money isn’t concentrated in one specific area within each asset class.

While it can be tempting to concentrate your investments into areas you are most familiar with, limiting yourself to only a few industries or types of investments can be the financial equivalent of putting all of your eggs in one basket.

A diversified portfolio can provide some insulation to risk. If your portfolio is highly concentrated in one area and that sector takes a dip, it’s likely your portfolio will be impacted.

But if your portfolio is balanced across varied assets and classes, the impact of one underperforming section won’t be felt as dramatically. While a diversified portfolio won’t eliminate risk, it could help make your portfolio a little less vulnerable.

You could choose to diversify your portfolio through a series of thoughtful investments. As an alternative, you could also choose to invest in mutual funds or ETFs—exchange-traded funds.

When you buy shares in a mutual fund, you are automatically invested in each company that is included in the fund, which provides instant diversification. ETFs, on the other hand, bundle a group of securities together in one neat package and they can be a low-cost way to diversify your portfolio.

Monitoring Your Investments

It can be tempting to set it and forget it when it comes to investments. But keeping an eye on your portfolio is another step that could potentially help you manage risk. You won’t know there is an issue unless you monitor progress.

As the market fluctuates, your portfolio likely will, too. Consider setting a recurring time to monitor your holdings. It doesn’t have to be every day, but once a week or even once a month could be a good idea.

How have the assets been performing? Is your portfolio still in line with your current risk preferences? If not, consider taking the time to make adjustments so you’re comfortable with where your investments stand.

Regularly checking in with your investments will also allow you to monitor your progress and see if you’re still on track with your goals.

Asking for Help

Investing can be confusing. Sometimes all it takes a second set of (experienced) eyes to provide a bit of clarity. Don’t feel like you have to build your investment portfolio in a vacuum.

Consider speaking with a financial advisor who can assist you in creating a personalized financial plan that is designed to help you achieve your specific goals.

Know that financial advisors often charge fees for their services, but they can often provide valuable insight and advice. SoFi members have access to one-on-one advice with certified financial professionals, at absolutely no cost.

Becoming an Investor

Now that you understand how risk impacts investments and some of the ways to manage risk, you might be ready to build your investment portfolio. Investing can be a good way to grow your wealth in the long term. And the good news is it’s never too early or too late.

If you’re ready to get started, consider an account with SoFi Invest®, which offers a variety of options so you can invest in line with your personal risk preferences and financial goals.

For those that like to be in the driver’s seat—there’s active investing. You can buy and sell stocks, creating a completely personalized portfolio without any fees.

Investors who prefer to take a less intensive approach can opt for an automated account. You won’t have to worry about tracking individual stock prices and making timely trades. The account will do most of the work for you, automatically rebalancing to stay in line with your specified risk preference.

And SoFi offers a range of exchange-traded funds. SoFi offers four different types of ETFs that are intelligently weighted and are automatically rebalanced, so they’re always at the forefront of growing industry.

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

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”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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