A hostile takeover is when one company tries to obtain another company through hostile or unfriendly means. This can include a tender offer, where the hostile company makes an offer to buy the other company’s shares directly from shareholders, or a proxy fight, where the hostile company tries to replace the other company’s board of directors.
The machinations of hostile takeovers may seem remote for regular investors. However, if you own shares of the companies involved, the outcomes of a takeover can be important for short- and long-term stock price movements.
How Hostile Takeovers Work
A hostile takeover is a type of legal acquisition in which a bidder — either another company or an investor — tries to purchase a target company without the approval of the target company’s board of directors. Hostile takeovers are often characterized by aggressive tactics such as proxy fights, tender offers, and open letters to shareholders.
In a hostile takeover, the bidder seeks to acquire a majority stake in the target company without the approval of the target’s board of directors. This aggressive action contrasts with typical acquisitions, where two companies work together to agree on a deal, and the board of directors of the target company approves of the purchase.
Hostile takeovers happen when a target company’s management refuses initial takeover offers, but the bidding company is persistent in its efforts to acquire the company.
There are many reasons why a company or investor may try to take over another company. Sometimes it is because the stock market undervalues the target company’s shares, and the bidder believes that they can increase the company’s value. Other times, it may be because the bidder wants the target company’s assets, brand recognition, or market share.
If the company making the hostile takeover successfully acquires a majority of the shares, then it can gain control of the target company. Once in power, the acquiring company can make changes to the target company’s management, strategy, and operations. In some cases, the company making the hostile takeover may take steps to increase the value of the company, such as selling off non-core assets, cutting costs, or increasing investment in research and development.
Hostile Takeover Strategies
There are a few ways a company may pursue a hostile takeover. Sometimes a bidder may try to buy a significant percentage of shares of the target company on the open market, hoping to gain enough voting power to persuade the board of directors to accept a takeover offer. If that doesn’t work, the bidder uses its voting power to change management.
The bidder may also take aggressive measures, such as making open letters to shareholders or launching a public relations campaign to pressure the target company’s management to accept the offer. The most common hostile takeover tactics include:
• Tender offers: A tender offer is when the bidding company reaches out directly to the target company’s shareholders, offering to purchase shares — usually at a premium to the current market value. The bidder pursues a tender offer to bypass a company’s leadership and get enough shares to have a controlling stake in the company. Each shareholder can then decide if they want to sell the stake in the company.
• Proxy fights: A proxy fight is a battle between competing groups of shareholders to gain control of a company. In a hostile takeover, a bidder, which usually owns a portion of the target company’s stock, tries to persuade other shareholders to vote out the target company’s management. This may allow the bidder to replace the board of directors and seize control of the company.
Examples of Hostile Takeovers
A hostile takeover usually starts when the acquiring company makes an unsolicited bid to purchase the target company. If the board of directors of the target company doesn’t approve of the proposal, they may reject the offer. The acquiring company then will pursue a hostile takeover bid by going directly to the shareholders or trying to replace the board of directors.
However, hostile takeovers don’t usually reach this conclusion. The target companies may defend themselves, causing the bidding company to drop the takeover attempt. Or the target company’s board of directors will relent and eventually agree to terms on an acquisition.
Sanofi’s Acquisition of Genzyme
The French healthcare company Sanofi (SNY) attempted a hostile takeover of the American pharmaceutical firm Genzyme in 2010. Before the hostile bid, Sanofi’s management made several friendly offers to buy Genzyme, but the American company’s management declined. As a result, Sanofi courted shareholders to gather support for a deal and made a tender offer. This put pressure on Genzyme management to finally accept a deal, which they did. Sanofi bought Genzyme for $20.1 billion in 2011.
Kraft Foods’ Takeover of Cadbury
Kraft Foods (KHC), an American food company, launched a hostile bid for Cadbury, a UK-based chocolate company, in 2009. The hostile takeover was motivated by Kraft’s desire to increase its market share in the global confectionery market and acquire Cadbury’s valuable portfolio of brands. Cadbury’s management opposed the takeover and put together a hostile takeover defense team. Also, Cadbury shareholders and the UK government opposed the deal. However, Kraft was ultimately successful in acquiring Cadbury, and the takeover was completed in 2010 for $19.6 billion.
Oracle’s Purchase of PeopleSoft
Oracle (ORCL), the computer software and technology company, launched a hostile takeover of PeopleSoft in June 2003. PeopleSoft attempted to defend itself from the takeover, enacting a poison pill provision. However, Oracle made a tender offer to PeopleSoft shareholders, and nearly 60% of shareholders agreed to sell. PeopleSoft management thus relented, agreeing to sell the company to Oracle for $10.3 billion.
How Can Companies Defend Against Hostile Takeovers?
Companies can deploy various strategies to defend against a potential or imminent hostile takeover. These defensive plans are intended to make the hostile takeover more difficult, expensive, or less attractive to the bidder.
Poison Pill
Companies may adopt a shareholder rights plan, more commonly known as a poison pill, to protect themselves from a hostile bidder. With a poison pill, the target company’s shareholders have the right to purchase additional shares at a discount if a hostile takeover attempt is made, diluting the ownership of the existing shareholders. This makes it more expensive for the acquirer to buy a controlling stake in the company and often deters hostile takeover attempts altogether.
Golden Parachute
A golden parachute is a hostile takeover defense where the target company offers its top executives large severance packages if another firm takes over the company and the executives are terminated due to the acquisition. This makes the purchase more expensive and unattractive for a potential buyer.
Pac-Man Defense
A Pac-Man defense is an offensive strategy employed by a target company in a hostile takeover attempt. A Pac-Man defense refers to a target company that fights back against a hostile bidder by launching its own takeover bid for the bidder.
How Hostile Takeovers Affect Investors
A hostile takeover can significantly affect investors who own shares of either the target or bidding company, causing uncertainty in short- and long-term stock market prospects.
In the short term, investors who own shares of the competing companies may see share prices rise or fall, depending on whether the markets view the proposal as a good or bad deal.
The target company’s management may also make the company less attractive to a bidder, such as by adopting poison pill provisions or increasing debt levels. These tactics may increase costs and debt burdens, which may negatively impact the long-term outlook for the company.
However, the target company’s share price may be positively affected as the hostile company tries to buy the target company’s shares at a premium.
If the hostile takeover is successful, the investors in the target company may see a change in the management of the company, as well as a potential change in the company’s strategy. This may change the long-term outlook for the company, which may be bullish or bearish for investors.
On a macro level, a hostile takeover can also affect the industries in which the target company and bidder operate. If the hostile takeover is successful, the industry may see a consolidation of companies, affecting market competition and share prices of related firms.
The Takeaway
The term hostile takeover evokes an image of corporate raiders and a feeling of the 1980s, when the strategy first became popular. However, hostile takeovers, while rare, continue to this day.
Investors may hear about these hostile takeover bids in the financial press, causing them to wonder how it all affects them and their portfolios. There is no definitive answer, however. In some situations, the stocks of the companies involved may go up, and the stocks may go down in other situations. In the end, it’s essential to monitor the news of the deal carefully and pay attention to price fluctuations in the market.
With the SoFi app, you can monitor your portfolio and keep track of the latest market news, so you can keep up on the latest details of takeover events. Additionally, you can trade stocks online with SoFi Invest® with as little as $5.
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When Bitcoin launched in 2009, it didn’t have much — or any — competition in the newly minted realm of digital currency. By 2011, though, new types of cryptocurrency began to emerge as competitors adopted the blockchain technology that bitcoin was built on to launch their own platforms and currencies. Suddenly the race to create more crypto was on.
The rest, as they say, is history. The rush toward crypto is a financial services explosion that doesn’t affect a single country only, but one that has captured the entire world. To say that cryptocurrency is popular today is an understatement.
One of the reasons cryptocurrency has seized the hearts, minds, and wallets of so many people is the innovative nature of its blockchain technology. It’s impressive that blockchain and the concept of decentralization can apply not only to finance, but to so many other industries, needs, and uses in our society.
Then there’s the sheer speed of blockchain technology; money transfers abroad, for example, that used to take between 3-and-5 days via wire transfer can occur almost instantly — or as long as a few minutes, on a slow day — with blockchain. The list of reasons for crypto’s popularity seems endless. Crypto exemplifies numerous traits that appeal to both the human imagination and our everyday needs.
In this article, we examine cryptocurrencies in detail, discuss their various types, and highlight 20 coins that are popular today. Of course, all things crypto change as fast as the speed of blockchain. So, this list may already be obsolete after it’s published; but don’t worry, we’ll keep you updated.
Today there are thousands of different cryptocurrencies in the world, and while each is designed to provide some new feature or function, most are founded on principles similar to those of Bitcoin:
• Cryptocurrencies are not issued, regulated, or backed by a central authority like a bank or the government. They are decentralized, not centralized.
• Cryptocurrencies are created using a distributed ledger (blockchain) and peer-to-peer (P2P) review.
• Bitcoin and other coins are encrypted (secured) with specialized computer code called cryptography.
• As assets, cryptocurrencies are generally stored in digital wallets, commonly a blockchain wallet, which allows users to manage and trade their coins.
As of March 2022, there were more than 18,000 different types of cryptocurrencies, for a total market capitalization (market cap) for all cryptocurrencies of $2 trillion.
Also, in March 2022, approximately 8% of the United States population participated in cryptocurrency trading. And, as a continent, Asia had more than four time more crypto users than did any other continent.
Why Are There So Many Different Cryptocurrencies?
Bitcoin might have been conceived as an alternate means of exchange (like money), but using crypto as a currency is not legal in all parts of the world, and in some countries, crypto is restricted, or banned altogether. So, many of the 18,000 types of crypto are not used as money or currency at all.
Developers can build almost anything using powerful blockchain technology. Some crypto coins are used as investment vehicles, stores of value that may be bought, sold, or traded on crypto exchanges.
Many other crypto platforms have purposes that go far beyond acting as an exchange of value. Blockchain, in fact, can offer solutions to longstanding problems in many sectors of the economy besides finance including agriculture, cybersecurity, fine art, gaming, healthcare, insurance, law, medicine, real estate, and supply chain management.
Another reason there are so many types of cryptocurrencies could lay in the fear of missing out (FOMO) factor. Encouraged by crypto’s rapid growth of the past few years, in an effort to get in on any potential profit, entrepreneurs are continuously unleashing huge numbers of new coins to the crypto market.
What Are the Different Types of Crypto?
Although some people use the terms crypto, coins, and tokens interchangeably, they are not the same things. To gain a basic understanding of cryptocurrency, it’s important to understand how these terms differ from one another.
Cryptocurrencies generally fall into one of two categories:
• Coins: Can include Bitcoin and altcoins (all cryptocurrencies other than Bitcoin)
• Tokens: Programmable assets that live within the blockchain of a given platform
The term altcoin refers to all cryptocurrencies other than Bitcoin. Some main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
What Are Crypto Coins?
Crypto coins are strings of computer code that can represent an asset, concept, or project — whether tangible, virtual, or digital — intended for various uses and with varying valuations. Originally, these coins were meant to function as a type of currency.
Cryptocurrencies are not like fiat currencies, e.g., the dollar, euro, or yen. Fiat money is tangible; it’s governed by central authorities, and it operates as a store of value: You can exchange any fiat for goods and services. But cryptocurrencies — including the various types of coins we discuss here — can serve many purposes beyond that of currency. Cryptocurrency as “currency” is a usage that only grazes the surface of blockchains’ capabilities. Because they are built on blockchain tech, some cryptos can offer solutions to long-standing problems in almost every sector of our economy.
What Are Tokens?
Tokens are usually created and distributed through an initial coin offering (ICO), much like an initial public offering (IPO) for stock. They can be represented as:
Like American dollars, tokens represent value, but they are not exactly valuable themselves, in the same way a paper dollar’s value may not be $1. But tokens can be used in transactions for other things.
A token differs from a coin in the way it’s constructed within the blockchain of an existing coin, like Bitcoin or Ethereum.
Crypto Coins vs Tokens
When discussing cryptos, you’ll see the terms coin and token. Some people use them interchangeably, but that’s a mistake. They are not interchangeable, and it’s important to know the difference between a coin and a token.
While coins and tokens are considered forms of cryptocurrency, they provide different functions. Coins are built on their own blockchain and were originally intended as a form of currency. Generally, any blockchain-based cryptocurrency that is not Bitcoin is referred to as an altcoin (more on those below).
A digital coin is created on its own blockchain and acts much like fiat (traditional money). Coins can be used to store value and as a means of exchange between two parties doing business with each other. Examples of coins include Bitcoin and Litecoin.
But tokens — which are created on an existing blockchain (not their own) — can function in many more ways than acting as currency. Instead of representing an exchange of value, tokens are considered programmable assets on which you may create and execute unique smart contracts. These contracts can establish ownership of assets outside the blockchain network.
Tokens can represent units of value — including real-world items like electricity, money, points, coins, digital assets, and more — and can be sent and received. Ether (ETH), which is used to make transactions on the Ethereum network, is a token. In another example, the Basic Attention Token (BAT), also built on Ethereum, is used in digital advertising.
Tokens can be used as part of a software application — such as granting access to an app, verifying identity, or tracking products moving through a supply chain. They can also represent digital art — as with non-fungible tokens (NFTs). There have even been experiments using NFTs to represent physical assets, such as real-life art, and real estate.
What Are Altcoins?
The term altcoin began as shorthand for alternative to Bitcoin, and most altcoins were launched to improve upon Bitcoin in some way. Some examples of altcoins are Namecoin, Litecoin, Peercoin, Ethereum, and USD Coin.
Like Bitcoin, some cryptocurrencies have a limited supply of coins — which helps create demand and reinforce their perceived value. For example, there is a fixed number of bitcoins that can be created — 21 million, as decided by the creator(s) of Bitcoin.
Though most altcoins are built on the same basic framework as Bitcoin and share some of its characteristics, each altcoin offers slightly different traits. Some altcoins use a different process to produce and validate blocks of transactions. Some might offer new features, like smart contracts or an advantage, like less price volatility.
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The 17 Largest Cryptocurrencies By Market Cap, as of June 25, 2022
Below is a list of the 20 biggest cryptocurrencies arranged by market capitalization (market cap) — highest first — according to CoinMarketCap on Jun 25, 2022. Bitcoin (BTC) is the clear leader in the cryptocurrency sector, with a market capitalization of $407,387,696,36, followed by Ethereum (ETH), at $149,402,716,985.
Biggest Is Not Necessarily Best, But…
It’s difficult to know which are the best cryptos — especially when there are so many virtual currencies with wildly varying prices. But quantitative metrics like market cap and others can help us attach comparative value to these myriad cryptocurrencies. Bitcoin, Ethereum, and some of the largest altcoins out there are top-tier options because of their scalability, privacy, and the scope of functionality they support.
Market Cap For Valuing Cryptos?
Borrowed from traditional finance (TradFi), market cap is an essential metric because it helps investors and analysts form a rough estimate of a crypto’s stability. A coin with a much larger market cap than its peers has the potential to be a more stable investment than one with a much smaller market cap. Digital currencies with smaller market caps are more susceptible to the whims of the market; they have the potential to experience dramatic gains or losses.
To calculate a cryptocurrency’s market cap you multiply its current price by the total number of coins in circulation.
Prices of cryptocurrencies are continuously changing — every moment of every day. The global crypto market is open for trading 24/7. As such, data like these are obsolete the moment they’re published. CoinMarketCap publishes price changes of cryptocurrencies in real time daily.
Finally, note that, in the list below, the name of the blockchain platform may be different from its digital currency.
Bitcoin in the clear leader in the crypto sector. It is also the very first cryptocurrency. Bitcoin launched in 2009; created by a person (or possibly a group) that goes by the pseudonym Satoshi Nakamoto. As of June 2022, there are slightly more than 19 million Bitcoin tokens in circulation, against a capped limit of 21 million. Almost a thousand new bitcoins are mined each day, bringing Bitcoin ever closer to its maximum finite number.
Bitcoin was designed to be independent of any government or central bank. Instead, it relies on blockchain technology, a decentralized public ledger that contains a digital record of every Bitcoin transaction. Bitcoin established the basic system of cryptography and consensus — i.e., peer-to-peer (P2P) verification — that is the foundation of most forms of crypto today.
As a reminder, a P2P network structure in blockchain technology is generally decentralized and designed to operate in the best interest of all parties involved, as opposed to benefitting a centralized entity primarily. A peer-to-peer blockchain network connects different computers (or nodes) together, so they can function in unison. Ideally, P2P platforms are censorship resistant, open, public networks, which allow important data and other functionalities to be shared.
Bitcoin miners use powerful computers to verify blocks of transactions and generate more bitcoins. Bitcoin mining uses a complex, time-consuming process called proof of work (PoW). The transactions are logged permanently on the blockchain — which helps to validate and secure each bitcoin and the network as a whole. Recently, the vast amount of energy required to create Bitcoin has raised concerns about environmental pollution.
Like Bitcoin, Ethereum is a blockchain network. But Ethereum was designed as a programmable blockchain — meaning it wasn’t created to support a currency, but rather to enable the network’s users to create, publish, monetize, and deploy decentralized applications (dApps). Ether (ETH), the native Ethereum currency, was developed as a form of payment on the Ethereum platform. It might be helpful to think of ETH as a kind of fuel that powers the Ethereum blockchain. Ethereum has helped to launch many initial coin offerings because many ICOs are built on the Ethereum blockchain. Ethereum has also been the blockchain behind the boom in non-fungible tokens (NFTs).
As the two most widely known blockchains and cryptocurrencies, many people often directly compare Ethereum and Bitcoin against each other. In reality, Bitcoin and Ethereum are designed to achieve different goals, and in many ways can be regarded as complementary forces. Bitcoin is a peer-to-peer digital cash network, which facilitates transactions without the need for a central authority. This novel network architecture has paved the way for the complex blockchain ecosystem that we have today. Ethereum, often referred to as the world computer, iterates on Bitcoin’s technology while introducing smart contracts. Smart contracts allow for building dApps that span a broad range of crowdfunding platforms, financial instruments, digital games and collectibles, and decentralized marketplaces.
As of June 2022, Ether was the number two virtual currency, behind Bitcoin. Also like BTC, ETH is generated using a PoW system. But unlike Bitcoin, there is no limit to the number of ETH that can be created.
3. Tether (USDT)
• USDT—Crypto Type: Stablecoin
• Market Cap (06/25/22): $66,837,248,865
Tether was the first cryptocurrency marketed as a stablecoin — a breed of crypto known as fiat-collateralized stablecoins. The value of the tether is pegged to a fiat currency — in this case, the U.S. dollar. Tether is the world’s largest stablecoin; in 2022, the majority of cryptocurrencies traded using tether.
Like other stablecoins, tether is designed to offer stability, transparency, and lower transaction fees to users. Tether was not meant to be a speculative investment like some cryptocurrencies; originally, investors who wanted to avoid the extreme volatility of the crypto market used USDT. Tether is pegged to the U.S. dollar (which is why the ticker is USDT), and it allegedly maintains a 1:1 value with the dollar, although this claim has come under some scrutiny.
Many believe that Tether is the lifeblood of the crypto ecosystem. They’re concerned that if Tether implodes, then the entire system would crash.
In May 2022, that’s exactly what happened: Tether lost its peg to the dollar briefly, and all cryptocurrencies plummeted. In part, this was a result of another stablecoin, terraUSD (USD) falling below 30 cents. The wave of panic in the broader crypto market was palpable. Because of this crash, many crypto investors tried to redeem their tethers, others tried to exit the asset class altogether, and many lost their investments.
4. USD Coin (USDC)
• USDC Crypto Type: Stablecoin
• Market Cap (06/25/22): $55,887,416,457
USD Coin (USDC) is a digital stablecoin pegged to the U.S. dollar. It operates on the Ethereum and Stellar blockchains. USDC was initially created by the Centre consortium, which includes its two main founding members, Circle and Coinbase. Each USDC token is backed by $1 held in reserve and regularly audited by Grant Thornton, a major accounting corporation. USDC was launched in September 2018, and during March 2021 it was announced that Visa would facilitate the use of USDC for settlement on its payment network.
USDC is a stablecoin that runs on the Ethereum blockchain and several others. It is pegged to the U.S. dollar. Like the stablecoin tether (USDT) described above, a USDC is worth one U.S. dollar — the guaranteed 1:1 ratio making it a stable form of exchange.
Various stablecoins have proliferated as the crypto ecosystem has developed, and many are now an essential part of the market. How a stablecoin maintains its stability — known as its peg — is dependent on its infrastructure. Stablecoins can be issued by a centralized institution or collateralized in a decentralized way. They can even use one of numerous algorithmic mechanisms to maintain a stable price.
The goal of having a stablecoin like USDC is to make transactions faster and cheaper. While there are questions about whether the tether stablecoin is fully backed by U.S. dollar reserves, some investors believe that USDC is more transparent: Its reserves are monitored by the American arm of Grant Thornton, LLC, a global accounting firm. On March 29, 2021, Visa announced the use of USDC to settle transactions on its payment network. As of June 2022, there were 55.09 billion USDC in circulation.
Binance is one of the world’s biggest cryptocurrency exchanges. The Binance Coin (BNB) was created as a utility token for use as a medium of exchange on Binance. It was initially built on the Ethereum blockchain, but now lives on Binance’s own blockchain platform. Originally, BNB allowed traders to get discounts on trading fees on Binance, but now it also can be used for payments, to book travel, for entertainment, online services, and financial services.
As one of the top five cryptocurrencies by market cap in 2022, BNB has developed a wide range of use cases and real-world applications. But, as with other digital assets, this crypto platform has also faced regulatory hurdles here and abroad.
BNB was created with a maximum of 200 million tokens, about half of which were made available to investors during its ICO. Every quarter, to drive demand, Binance buys back and then “burns” — permanently destroys, or removes from circulation — some of the coins it holds. A project burns its tokens to reduce the overall supply. The motivation is often to increase the value of the remaining tokens, as assets tend to rise in price whenever the circulating supply falls, and they become more scarce.
6. XRP (XRP)
• XRP—Crypto Type: Coin
• Market Cap (06/25/22): $17,768,795,974
XRP is the native coin of the Ripple Ledger Network. It is designed to be a medium of exchange and value transfer, and is intended to be used as a low-cost bridge between fiat currencies for a broad range of global transactions.
XRP enables a system that can outperform many established cryptocurrencies and fiat transmission technologies. This has led to a world-class payments system that minimizes intermediary processes and enhances the overall benefit to its users.
XRP was developed by Ripple Labs, Inc. And while some people use the terms XRP and Ripple interchangeably, they are different. Ripple is a global money transfer network used by financial services companies. XRP is the crypto that was designed to work on the Ripple network. You can buy XRP as an investment, as a coin to exchange for other cryptocurrencies, or as a way to finance transactions on Ripple.
Unlike Bitcoin and many other cryptocurrencies, XRP cannot be mined; instead, there is a limited number of coins — 100 billion XRP — that already exist. Also, XRP doesn’t rely on a complex digital verification process via blockchain the way Bitcoin and others do. The Ripple network employs a unique system for validating transactions in which participating nodes conduct a poll to verify transactions. This makes XRP transactions faster and cheaper than Bitcoin.
7. Binance USD (BUSD)
• BUSD—Crypto Type: Stablecoin
• Market Cap (06/25/22): $17,365,183,938
Binance USD (BUSD) is the stablecoin developed and employed by the Binance exchange platform. BUSD is pegged at a 1:1 ratio to the U.S. dollar and was initially deployed on the BNB Chain. BUSD is also interoperable with other blockchains such as Ethereum, and can be used for various DeFi applications and value transfers between blockchains. BUSD is one of the largest USD-pegged stablecoins in the world, with a market cap of approximately USD 18 billion (as of June 25, 2022).
Binance USD (BUSD) is a 1:1 USD-backed stable coin issued by Binance (in partnership with Paxos). BUSD is approved and regulated by the New York State Department of Financial Services (NYDFS). Launched in September 2019, BUSD aims to meld the stability of the dollar with blockchain technology. It is a digital fiat currency, issued as an ERC-20 token and supports BEP-2.
Based on their price stability, stablecoins plays an important role in transactions, payments and settlement, and decentralized finance (DeFi). Here are some things you can do with BUSD:
• Transfer BUSD anywhere in minutes at low cost on the blockchain
• Trade it on different centralized and decentralized exchanges (DEXs)
Dogecoin (pronounced dohj-coin) is widely known as the first joke cryptocurrency; it was launched in 2013 as a way to poke fun at Bitcoin. Nonetheless, the currency captured people’s attention and a fair amount of investment. In April 2019, a tweet from Elon Musk indicated he had a positive view of Dogecoin, which further raised Dogecoin’s profile as a legitimate cryptocurrency.
Dogecoin is an altcoin similar to Bitcoin and Ethereum in that it runs on a blockchain network using a PoW system. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).
Dogecoin has been used primarily as a tipping system on Reddit and Twitter to reward the creation or sharing of quality content. You can get tipped Dogecoin by participating in a community that uses the digital currency, or you can get your Dogecoin from a Dogecoin faucet. A Dogecoin faucet is a website that will give you a small amount of Dogecoin for free as an introduction to the currency, so that you can begin interacting in Dogecoin communities.
Dogecoin is also associated with some headline moments in crypto — for example, investors paid the equivalent of about $30,000 in Dogecoin to help send the Jamaican bobsled team to the Winter Olympics in 2014.
Despite its place as one of the biggest coins by market cap, DOGE trades at one of the lowest prices: $0.072 cents, as of June 25, 2022.
Gavin Wood co-founded Polkadot — he also co-founded Ethereum — to take the capabilities of a blockchain network to another level. The blockchain’s cryptocurrency is called DOT. Since its launch in 2020, the Polkadot platform has become one of the bigger crypto networks in a relatively short time.
Polkadot operates using two blockchains — the main relay network, where transactions are permanent, and a parallel network of user-created blockchains, called parachains. Parachains are Polkadot-based independent blockchains that connect to and run off of Polkadot’s main blockchain (relay chain).
Parachains process transactions via sharding — splitting a blockchain into multiple pieces, or shards, and storing that separated data across multiple different computers. In this way, the computational burden on each computer is lessened. The network can process a larger volume of transactions — than if the sharding had not occurred — at extremely fast transaction times. Parachains can be customized for myriad uses like building apps; they can support other coins, and may benefit from the main blockchain’s security.
What differentiates Polkadot from other blockchains is its core mission to solve the problem of interoperability by building so-called bridges between blockchains. Polkadot is not the only system trying to act as a translator to help blockchains talk to one another.
10. Dai (DAI)
• DAI—Crypto Type: Token (originally), Now a Coin
• Market Cap (06/25/22): $6,812,982,370
Dai (DAI) is one of two native cryptocurrencies of the Maker Protocol, an open-source software application maintained by the Maker distributed autonomous organization (MakerDAO).
DAI, is a decentralized stablecoin — meaning that it’s not managed by a central authority or organization, but by smart contracts. It’s also soft-pegged to the U.S. dollar — it’s correlated to USD but not backed by actual dollars — to try to keep its value relatively steady compared with other cryptos. The utility and governance token of MakerDAO is MKR, which is used to stabilize the price of Dai crypto.
Dai was created to facilitate crypto lending, which is the main focus of the Maker protocol. But as an ERC20 token, Dai crypto also offers a wide range of possible use cases on Ethereum, including the creation of smart contracts.
Dai (DAI) is a collateral-backed cryptocurrency, one that attempts to maintain roughly a one-to-one value with the U.S. dollar through the use of smart contracts. In other words, Dai coin is a stablecoin. But whereas other stablecoins are run by centralized organizations that seek to keep their prices steady, DAI crypto is based on smart contracts and backed by other forms of crypto, by using collateralized debt.
Shiba Inu cryptocurrency (SHIB) is what’s known as a “meme coin,” or a cryptocurrency based on a meme. A meme coin is a cryptocurrency or crypto token based on a viral joke or cultural reference. Projects built around meme coins rely heavily on social media hype to attract new users/investors. Shiba Inu (SHIB) was inspired by Dogecoin (DOGE), the original meme coin created in 2014 that uses the image of a Shiba Inu dog, and which we discussed above.
SHIB intends to be an alternative to Dogecoin or a “Dogecoin killer.” Unlike DOGE, which has its own blockchain, SHIB runs on the Ethereum blockchain. One thing DOGE and SHIB both have in common, however, is that their supply is abundant. SHIB began with an initial circulating supply of one quadrillion coins.
As with any investment vehicle, Shiba Inu crypto has both advantages and disadvantages. It also has value for a couple of reasons:
• There is a limited supply of SHIB. The SHIB coin was launched in 2020 with a fixed 1 quadrillion supply — nearly 50% of which has already been burned or donated — which has kept the market price low (one SHIB coin is worth a fraction of a penny). The cap on the number of coins has also given the price somewhere to go, if demand should rise.
• SHIB comes with attractive rewards. Shiba Inu has a system that can provide investors with passive income via rewards from staking — locking up crypto holdings to get rewards or earn interest — or depositing funds in a liquidity pool. This reward system intends to offer users the incentive to expend different coins on the network.
12. TRON (TRX)
• TRX—Crypto Type: Token
• Market Cap (06/25/22): $6,004,598,717
TRON (TRX) is a decentralized blockchain-based operating system developed by the Tron Foundation and launched in 2017. Originally, TRX tokens were ERC-20-based tokens deployed on Ethereum, but a year later they moved to their own network. TRON is a blockchain-based operating system that aims to ensure this technology is suitable for daily use.
The TRON software supports smart contracts, various kinds of blockchain systems, and dApps. It uses a transaction model similar to Bitcoin, namely UTXO. Transactions take place in a public ledger, where users can track the history of operations. The data hosted on the TRON network is free with no central authority.
TRON aims to help content creators — who receive only a small part of income for their work, in the form of TRX tokens — and encourage them with more rewards. For example, TRON invites content consumers to reward content makers directly, without intermediaries like YouTube, Meta, or Apple. TRON also deploys decentralized games on the network, and players can encourage and reward creators with digital assets directly.
The platform was built to create a decentralized Internet and serves as a tool for developers to create dApps, acting as an alternative to Ethereum. Anyone can create dApps on the TRON network, offer content, and in return receive digital assets as compensation for their efforts. The ability to create content and share it openly without hesitation regarding transaction fees is an advantage of TRON.
Avalanche (AVAX) is a blockchain platform built for smart contracts, dApps, and subnets (customized blockchains). The network focuses on fast transactions, low fees, and efficient energy. AVAX, is Avalanche’s native token.
With its three-blockchain architecture and PoS consensus protocol, Avalanche can deliver high throughput, which will help the network grow without sacrificing its security or decentralization.
Avalanche is part of a group of smart contract platforms that compete with Ethereum, collectively referred to as “Ethereum killers.” As we note earlier, Ethereum is the second-largest crypto by market cap and was the first blockchain to enable smart contract functionality. Smart contracts are programmatic agreements that are trustless, i.e., they don’t require third-party authentication and can execute automatically when certain conditions are met.
The Ethereum network has been host to numerous complex apps for decentralized finance (DeFi), and non-fungible tokens (NFTs) also have been built on Ethereum. This has created network congestion as users compete to have their transactions included in the next block on the blockchain, which has resulted in higher gas fees. Because of this, crypto protocols have begun building on layer-2 solutions. Avalanche wants to work around this need and instead have a layer-1 solution that can handle all that’s needed for this kind of blockchain .
Avalanche use three different blockchains to achieve this, which allows the platform to perform at a scale suitable for the broader internet. Each of the three blockchains performs a specialized task in the Avalanche ecosystem, whereas on most other blockchains, a single chain handles all the work.
14. UNUS SED LEO (LEO)
• LEO—Crypto Type: Token
• Market Cap (06/25/22): $5,619,863,497
UNUS SED LEO is a utility token that’s used across the iFinex ecosystem, and IFinex is the parent company of Bitfinex.
iFinex launched LEO in May 2019 for a specific purpose. Unlike many other cryptocurrencies, LEO was not meant to exist forever. UNUS SED LEO was founded after Crypto Capital — a company that processed iFinex’s payments — had part of its funds seized by the government. Because it was not clear whether IFinex could recover these funds, it created LEO to help defray the financial shortfall.
LEO helps Bitfinex users save money on trading fees by offering them a discount based on how much LEO a customer has in their account.
Whereas some cryptocurrencies just launch on a single blockchain, LEO tokens were issued on two blockchains. While 64% of the original supply was on Ethereum, the remaining 36% were created on EOS ( a platform designed to allow developers to build dApps easily.
The project’s goal is relatively simple: to make it as straightforward as possible for programmers to embrace blockchain technology — and ensure that the network is easier to use than rivals.
Throughout the process of creating the token, iFinex acted with transparency, announcing that it would buy back the token from investors gradually until none were left circulating in the marketplace. iFinex also put monitoring procedures in place so the crypto community could see whether the LEO initiative was meeting its stated targets. This type of integrity is one quality that makes UNUS SED LEO a unique crypto.
15. Wrapped Bitcoin (WBTC)
• WBTC—Crypto Type: Token
• Market Cap (06/25/22): $5,692,540,738
A wrapped cryptocurrency is an ERC-20 token that has the exact value as the other asset it represents. The value can be pegged either through 1-to-1 backing with the underlying asset or via a smart contract that negotiates a stable value.
Wrapped Bitcoin is an ERC-20 token that represents one bitcoin and can be used in dApps. With WBTC, users can deploy bitcoin in the Ethereum ecosystem, whereas otherwise they would not be able to. Decentralized applications (dApps) can process wrapped token transactions faster than unwrapped versions because there’s no need to compute across different blockchains, which is difficult.
The only thing required to transact on Ethereum using wrapped tokens is a small gas (ETH) fee.
There are currently several types of wrapped cryptocurrencies, including a handful of stablecoins like Tether (USDT) and Coinbase’s United States Dollar Coin (USDC). Private cryptocurrency Zcash has a wrapped token, too. And other coins are coming out with wrapped versions, in an effort to stay relevant and usable during a period of rapid DeFi adoption.
Launched in January 2019, WBTC was designed to bring the liquidity of bitcoin to Ethereum. In the 18 months following its launch, users converted more than $800 million of Bitcoin into WBTC.
Litecoin (LTC) is a cryptocurrency created in 2011 as one of the first altcoins (alternatives to bitcoin). Though it’s built on bitcoin’s original source code and shares certain features with BTC, LTC was designed to improve upon BTC, especially in terms of transaction speed. Though Litecoin was initially a popular entry into the crypto category, it has gained and lost value over time, displaying a similar volatility to many cryptocurrencies (or even certain stocks and bonds).
Like many forms of crypto, Litecoin is a decentralized, peer-to-peer cryptocurrency; it was created from a fork in the Bitcoin blockchain, the transparent, digital public ledger used by most cryptocurrencies. Litecoin was designed to enable almost instant, near-zero cost payments that can be exchanged between people or institutions worldwide.
As with Bitcoin, Litecoin uses a PoW consensus system to verify transactions on the blockchain, but owing to certain modifications it’s considered a lighter, faster version of Bitcoin. The main difference between Litecoin and Bitcoin is that Litecoin uses a mining algorithm called scrypt, to enable faster transaction times.
Litecoin generates a new block to be mined every 2.5 minutes, which is about four times faster than Bitcoin’s 10 minutes. The Litecoin supply is also four times as great. While Bitcoin has a cap of 21 million coins, the Litecoin supply overall has a cap of 84 million.
Uniswap is the largest decentralized crypto exchange (DEX) running on the Ethereum blockchain. Its native governance token is the UNI. Uniswap is a protocol on the Ethereum blockchain for swapping all ERC-20 tokens. Unlike centralized exchanges, which are set up to charge transaction fees, Uniswap is designed more as a tool for the community to trade tokens without platform fees or middlemen.
Unlike well-established, centralized crypto exchanges (CEXs) like Binance or Coinbase, the Uniswap protocol uses smart contracts to facilitate trading of ERC-20 tokens, acting as an automated market maker (AMM). The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all bid and ask (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.
Uniswap was one of the first DEXs to create an automated liquidity protocol to facilitate trades. Unlike well-established, centralized crypto exchanges (CEX) like Binance or Coinbase, the Uniswap protocol uses smart contracts to facilitate trading of ERC-20 tokens, acting as an AMM. Uniswap was one of the first DEXs to create an automated liquidity protocol to facilitate trades.
The Takeaway
On October 31 in 2009, an individual or group of individuals using the pseudonym Satoshi Nakamoto launched the Bitcoin project, described a year earlier in the iconic whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System. . In this way, cryptocurrency was born.
Could the author of that paper have known then that the public release of Bitcoin would set the world on a path toward economic and social change the likes of which it could not have imagined? Possibly not. Yet, today, there are thousands of different cryptocurrencies for investors to learn about.
This guide to 20 different types of cryptocurrency offers a grounding in today’s largest cryptocurrencies, including how and why they differ from each other. We hope it would help you decide how best to invest in crypto, according to your own investment style and tolerance for risk.
FAQ
Can you invest in all types of crypto?
Yes. It’s possible to invest in all the types of crypto mentioned here, and many more. However, not all crypto exchanges offer all the different cryptos in existence. So,— if you’re looking for a specific coin, it’s best to see which exchanges carry it. It’s also wise to check the fee schedules of the exchanges you’re interested in, as they may be different across exchanges.
Is crypto regulated by the Securities and Exchange Commission (SEC)?
Not entirely; but the SEC is working on it: In May 2022, SEC Chair Gary Gensler announced plans to expand the SEC’s Crypto Assets and Cyber Unit — which has existed as an arm of the SEC Division of Enforcement since 2017 — by adding 20 new dedicated positions. At the same meeting, Gensler also said that the SEC plans to register and regulate crypto exchanges.
The expanded Crypto Assets and Cyber Unit will continue to leverage the agency’s expertise to ensure that investors are protected in the crypto markets.
A number of cryptos are considered by the SEC to be securities, so the SEC will continue to investigate securities law violations related to crypto asset offerings. In its investigations, and rule making, the SEC also will focus on crypto asset exchanges, crypto asset lending and staking products; decentralized finance (DeFi) platforms; non-fungible tokens (NFTs); and stablecoins.
When did crypto become popular?
In its now 13-year-old history, there are some milestones that, in hindsight, may be said to correlate with cryptocurrency’s and Bitcoin’s surge in popularity. These include, but are not limited to, the year 2011, when the first rivals to Bitcoin’s supremacy (the altcoins) came on the scene. Another marker could be around 2016, when ordinary folks began to wake up to the power of blockchain technology and the Ethereum coin, ETH, became wildly popular. Following upon ETH’s popularity, was a frenzy of initial coin offerings (ICOs), which finally reached its peak in early 2018, at 1,253 ICOs.
Another pivotal period was in 2017, when Bitcoin reached a priced of $10,000 and continued to grow. This growth resulted in part from a gradual increase in the number of places where Bitcoin could be spent, as well as traded.
Not insignificantly, crypto’s popularity spurt in 2017 also coincided with the first commercial and investment banks’ displaying interest in the digital assets sector.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
SOIN19040
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
Dividend Reinvestment Plans, or DRIPs, are programs that automatically invest cash from dividends into additional shares of the stock making those dividend payments.
Stock investors can enroll in DRIP programs as a way to take advantage of compounding returns, dollar-cost averaging, and potential discounts on shares purchases.
Investors can sign up for DRIP programs through the public companies themselves, an online brokerage, or take on a do-it-yourself approach and reinvest stock dividends themselves. It’s not complicated, but to be an effective DRIP investor, you want to understand the ins and outs of this strategy.
Using Dividends to Buy More Shares of Stock
Dividends are distributed payments of corporate profits to shareholders. Companies can reinvest profits into their businesses or distribute them among shareholders. When they do the latter, those payments are called dividends.
The majority of dividends are paid quarterly, so four times a year. But some stocks or exchange-traded funds (ETFs) pay dividends monthly or annually.
Some companies don’t make enough money to cover their expenses and pay shareholders dividends. Most companies that pay dividends tend to be larger and have stable, reliable businesses.
Some of the most popular and effective DRIP stocks are offered by the so-called Dividend Aristocrats: These are companies that have increased their dividend payouts every year for at least 25 years.
When an investor buys shares in a company that pays dividends, those dividends normally get paid out as a direct deposit or check. If investors sign up for a DRIP program, they have the option to reinvest the dividends back into their DRIP stocks rather than receiving the payout.
Thus, the reinvested dividends go towards additional shares of the same stock. When the dividend cash is reinvested, it can sometimes go into buying fractional shares — slices of whole shares. DRIP programs essentially use dollar-cost averaging, or the practice of making periodic purchases in order to mitigate the effect of stock volatility.
Investors must still report the dividends as taxable income even though they may not receive the dividends directly. Investors using a DRIP may want to consult a tax expert.
Many times, additional shares in DRIPs are purchased directly from the company. Usually DRIP shares are issued directly from the company’s reserves and can’t be resold on a public stock exchange. Some brokerage accounts offer DRIP shares to investors — usually commission free or for a small fee.
How Does DRIP Investing Work?
As an example: Company X offers shareholders dividends of $1.76 per share each year, or $0.44 each quarter. Shareholders who take advantage of the DRIP can reinvest that money into more Company X shares.
If a shareholder owns 100 shares of Company X, they receive $44 in dividends every quarter. If Company X’s stock price is $88, the dividend reinvestment will buy the investor half of one share of stock.
Company DRIPs
For investors, participating in company DRIPs can be advantageous, especially when companies offer shares at a discounted rate. Some companies hire outside firms or transfer agents to run their DRIP.
Companies that offer DRIP shares can use the money from shareholders into growing their business. Also, DRIP shares are less liquid than regular shares since they can’t be sold on a public stock exchange. This means investors are more likely to hold onto the shares.
Shareholders in DRIPs tend to be stable, long-term stock holders, since they are using the program to grow their portfolio and have chosen to enroll in the plan with that particular company.
Online Brokerages and DRIPs
Online brokerages DRIPs can be easier for investors looking to invest in multiple stocks. Shareholders can choose to enroll in DRIPs for all of their investments or just for select companies.
That said, one disadvantage may be that brokerages don’t offer shares at a discounted level as company DRIPs do.
What Are Fractional Shares?
Some of the key advantages of traditional DRIP programs used to be zero-commission stock purchases and the ability to buy fractional shares. (Instead of purchasing one share of stock at its current value, it’s possible to purchase a fraction of one share of a stock, using whatever dollar amount they have available.)
But these days, many brokerages offer zero-commission trading and the ability to purchase fractional shares via a DRIP.
Pros and Cons of DRIPs for Investors
There are a number of reasons investors choose to reinvest their dividends through a Dividend Reinvestment Plan, and several reasons companies choose to offer them.
Pros Explained:
• Discounted Price: Discounts on DRIP shares can be anywhere from 1% to 10%. Investors can also purchase fractional shares through DRIPs, as noted above. This is useful because dividend payments may not be enough to buy an entire share of the stock.
• Dollar-cost Averaging: Because a DRIP reinvests dividends at steady intervals throughout the year, usually every quarter, these programs essentially provide a type of dollar-cost averaging, which helps to mitigate price volatility.
• Zero Commission: DRIP programs can allow you to buy new shares without paying commission fees. (However, many brokerages offer zero-commission trading outside of DRIPs these days.)
• Compounding Returns: If an investor buys an asset which pays out interest or dividends, and then they reinvest those earnings into buying more of the asset, they are then earning on both their initial investment and on the interest.
• Automated Purchases: Investors can set up automatic reinvestment of their dividends into DRIP shares so they don’t even have to think about it after the initial set up.
Cons Explained:
• Less Liquid: DRIP shares aren’t as liquid as normal shares and can often only be sold back to the company directly. This means it will be difficult for an investor to quickly sell off shares.
• Require Monitoring: If an investor sets up automated DRIP investing, it can be easy to forget about the investment. Although the DRIP investment may be attractive at first, over time the market can change and the investor may want to allocate their money elsewhere, rebalance, or further diversify their portfolio.
• Limited Diversification: Investors sometimes use dividend income to invest in new stocks, but with DRIP investments they must invest the money back into more of the same stock. This may prevent portfolio diversification.
• Tax Reporting: Dividends are considered taxable income by the IRS, so even if you reinvest your dividends directly, they’re still reported to the IRS as income. That’s why figuring out tax reporting can be complicated with DRIPs. Investing in an IRA or using a brokerage account can help keep track of DRIP transactions. Again, consult a tax professional.
How to Set Up a DRIP
Whether your brokerage offers a DRIP or you have to sign up using a third-party manager (usually called a transfer agent), establishing a DRIP isn’t hard. It’s not like you have to select a range of investments options for reinvesting your dividends; they simply go toward purchasing more of the same stock.
That said, some DRIP plans charge fees for setting up the program. So you may want to check out the terms.
The Takeaway
In order to start reinvesting via dividend reinvestment programs (DRIPs), investors must first own shares of stock in companies that offer dividend reinvestment. The share or shares must be owned in the investor’s name, not a broker’s name.
Dividends are steady payouts to company shareholders. By reinvesting these payouts every quarter, for example, the investor can buy more shares of that stock (or partial shares, a.k.a. fractional shares).
Investors need to remember that shares purchased via a DRIP may be cheaper, but they are less liquid because you can’t turn around and trade your DRIP stocks on a public exchange. Typically you have to sell them back to the company to redeem these shares. Also, dividends count as taxable income, even if they’re reinvested automatically through a DRIP, so consult a tax professional as needed.
Since there are hundreds of companies to choose from, it can be challenging to figure out which DRIP is the best. SoFi Invest® offers a full suite of tools and an easy to use mobile app for online investing. When you open an Active Invest account with SoFi, you can buy company stocks, ETFs, and fractional shares, while electing to participate in available DRIP programs.
Learn more about SoFi Invest today.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
Penny stocks are shares of small companies that trade for less than $5 per share. They are highly speculative investments, meaning they carry a high degree of risk. Usually, traders looking for short-term gains use penny stocks, rather than long-term investors looking to build wealth.
But investors are often allured by penny stocks because they are relatively cheap and offer potentially high returns. Most people have a story of a relative who swears they know about a great penny stock that’ll cost next to nothing, promising some way to get rich quickly. While this story is seductive, it’s far from reality. Before trying to use penny stocks to make quick gains, investors must know how they work and the risks involved.
What Are Penny Stocks?
Penny stocks are low-priced securities that trade for less than $5 a share, though usually, they trade for less than $1.
Penny stocks are generally considered to be highly speculative and risky investments. This is because most penny stocks are issued by small, unknown companies with little or no operating history. In addition, these companies often lack the financial resources to continue operating for very long and are susceptible to fraud.
Despite the risks, some investors are attracted to penny stocks because they offer the potential for large profits in a short period of time. For example, if a penny stock’s price doubles from $0.30 per share to $0.60 per share, that’s a 100% return on investment on just a $0.30 price increase. Of course, the flip side is that you could also lose all of your investment just as quickly.
Exploring Penny Stocks & How They Work
Although some penny stocks trade on major exchanges, such as the New York Stock Exchange or Nasdaq, most penny stocks trade on the over-the-counter (OTC) market, through the OTC Bulletin Board (OTCBB) or on the pink sheets.
Penny stocks that trade on the OTC market do not have the same regulatory requirements as companies listed on major exchanges. Companies that list their shares on the major exchanges are subject to a high degree of regulatory scrutiny; these publicly traded companies must meet minimum listing standards and provide regular financial reports to the Securities and Exchange Commission (SEC).
In contrast, over-the-counter stocks have fewer hoops to jump through, as they do not have to meet minimum listing requirements. However, penny stocks that trade on the OTCBB must file financial statements with the SEC, while penny stocks listed on the pink sheet are not required to do so.
Because many penny stocks do not have to report periodic financial statements to a regulatory agency, it can be difficult for investors to find adequate information to make informed investment decisions on these securities. This lack of knowledge is one of the reasons penny stocks are risky investments.
Penny Stocks Are Highly Speculative
As noted above, penny stocks are highly speculative investments often bought and sold by traders who want to make short-term gains. Because of this potential for significant, short-term gains, many people view penny stocks as a way to get rich quickly. However, this is far from the case; penny stocks carry a high degree of risk and, as such, should be traded by people with the time, money, and risk tolerance to dabble in this market. You should only invest in them if you are willing to lose all of your money.
Anyone can buy and sell penny stocks, though it is recommended that they have the appropriate risk tolerance before investing in these speculative securities.
To trade penny stocks, you’ll need to open an account with a broker that offers OTC trading. Many online brokers offer this service, but do your research before selecting one, including what kind of fees they charge. Once you have an account, you can start buying and selling penny stocks. Just remember to be careful, as they can be very risky.
Pros of Penny Stocks
High Reward Potential
There is a belief by some penny stock traders that these small securities have more room to grow than large stocks, thus resulting in significant, short-term price appreciation. The potential for short-term gains means that penny stocks may provide high rewards, despite their risks, especially if traders utilize buying on margin to make their trades.
Enjoyment
Just as some people like to gamble, others like to trade stocks and other securities for fun. Plenty of people would consider analyzing stock charts, reading up on unknown companies, and making bets as one of their hobbies. Traders like this might consider penny stocks as “fun spending,” not long-term investing.
Cons of Penny Stocks
Small Likelihood of Success
Making money on a penny stock can be a rare occurrence. Investors should be aware of this, despite the tales of sudden wealth they may hear. Also, contrary to popular belief, success by investing in penny stocks can often take a long time.
Possibility of Losing it All
A small likelihood of success means that there will inevitably be many failures. It is common for small, unestablished businesses to fold and go under, flounder, or have unsuccessful stock. When stocks become worthless, investors lose all of their money.
Lack of Liquidity
Penny stocks usually do not have a lot of liquidity, meaning it can be challenging to find buyers when you want to sell. This can make it hard to get out of a position if the stock price declines.
Volatility
Penny stocks have high volatility, which means that their prices can change a lot, rapidly. This can happen in either direction, making them a difficult tool for building long-term wealth.
Scammers
The penny stock business is ripe with scammers and fraudsters. Numerous penny stock newsletters promise big wins, and penny stock “investors” manipulate both the market and potential customers.
Researching Penny Stocks to Buy
It’s often difficult for investors to adequately research what penny stocks to buy and sell. Because many penny stock companies do not have to file reports to regulators, investors do not always have great information about the company’s finances, management, and operations.
One of the first things investors should do is check websites like the OTC Markets website to search for company information on the penny stocks you’re interested in. Once you’ve done that, you can see if the companies have filed reports with the SEC through its EDGAR database . Using this company and financial information, you can develop a sense of the company’s finances and business practices.
Also, it may help to look at penny stocks that trade on exchanges such as the NYSE or NASDAQ. Because these stocks are required to file regular financial reports to the SEC, there is more easily accessible research investors can use to make investment decisions. Additionally, these companies are usually more stable and have more liquidity than penny stocks trading on the pink sheets or OTCBB.
Overall, you want as much public information as possible when researching penny stocks to buy and sell. When you make investment decisions with inadequate public information, you may open yourself up to relying on shady information that could come from paid promoters or fraudsters looking to pump and dump a stock.
The Takeaway
The allure of making significant, short-term gains by trading penny stocks draws many people into this market. But with the potential of high rewards comes the increased risk and a probability that gains will be hard to come by. Before diving into penny stock trading, assessing your risk tolerance is essential to see if this strategy is right for you.
For investors more comfortable with trading penny stocks listed on the major exchanges, like NYSE and Nasdaq, SoFi can help. With SoFi Active Investing, investors can buy and sell stocks, as well as fractional shares and exchange-traded funds (ETFs), with no commission for as little as $5.
Ready to take a step toward reaching your financial goals? Learn about SoFi Invest®
While making money with penny stocks is possible, it is also possible to lose money. Penny stocks are generally considered a high-risk investment, and as such, they may not be suitable for all investors.
Are penny stocks good for beginners?
Penny stocks are generally not good for beginners. They are often very volatile and can be challenging to trade.
Are penny stocks popular investments?
Penny stocks are sometimes popular investments for traders looking for high-risk, high-reward investments. These stocks are typically very volatile, which can lead to significant profits or losses.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
Both TFSAs and RRSPs are accounts that provide Canadian consumers with a chance to save while enjoying investment earnings and unique tax benefits. While a TFSA acts as a more general savings account, an RRSP is used for retirement savings.
Saving is never a bad idea, so here we’ll help you understand the difference between these accounts and how they can play a role in securing your financial future.
Keep reading for a more detailed breakdown of a TFSA vs. RRSP. We’ll cover:
• What is a TFSA?
• What is an RRSP?
• What are the similarities and differences between these two savings vehicles?
• How can you choose the one that’s best for you?
What Is the TFSA?
A Tax-Free Savings Account (TFSA) is a type of registered tax-advantaged savings account to help Canadians earn money on their savings — tax-free. TFSA accounts were created in 2009 by the Canadian government to encourage eligible citizens to contribute to this type of savings account.
Essentially, a TFSA holds qualified investments that can generate capital gains, interest, and dividends, and they’re tax-free. These accounts can be used to build an emergency fund, to save for a down payment on a home, or even to finance a dream vacation.
A TFSA can contain the following types of investments:
• Cash
• Stocks
• Bonds
• Mutual funds
It’s possible to withdraw the contributions and earnings generated from dividends, interest, and capital gains without having to pay any taxes. Accountholders don’t even have to report withdrawals as income when it’s time to file taxes.
There is a limit to how much someone can contribute to a TFSA on an annual basis. This limit is referred to as a contribution limit, and every year the Canadian government determines what the contribution limit for that year is. If someone doesn’t meet the contribution limit one year, their remaining allowed contributions can be made up for in following years.
To contribute to a TFSA, an individual must be at least 18 years of age and be a Canadian resident with a valid Social Insurance Number (SIN).
What Is the RRSP?
A Registered Retirement Savings Plan (RRSP) is, as the name indicates, a type of savings plan specifically designed to help boost retirement savings. To obtain one, a Canadian citizen must register with the Canadian federal government for this financial product and can then start saving.
When someone contributes to an RRSP, their contributions are considered to be tax-advantaged. What this means: The funds they contribute to their RRSP are exempt from being taxed the year they make the contribution (which can reduce the total amount of taxes they need to pay for that year). On top of that, the investment income these contributions generate will grow tax-deferred. This means the account holder won’t pay any taxes on the earnings until they withdraw them.
Unlike a TFSA, there isn’t a minimum age requirement to open and contribute to an RRSP. That being said, certain financial institutions may require their customers to be the age of majority in order to contribute. It’s possible to contribute to an RRSP until the year the account holder turns 71 as long as they are a Canadian resident, earned an income, and filed a tax return.
Keep reading for a TFSA vs. RRSP comparison.
Similarities Between a TFSA and an RRSP
How does a TFSA vs. RRSP compare? There are a few similarities between TFSAs and RRSPs that are worth highlighting. Here are the main ways in which they are the same:
Next, let’s answer this question: What is the difference between an RRSP and a TFSA? Despite the fact that both an RRSP and a TFSA share similar goals (saving money and earning interest on it) and advantages (tax benefits), they have some key differences to be aware of.
• Intended use. RRSPs are for retirement savings whereas TFSAs can be used to save for any purpose.
• Age eligibility. To contribute to a TFSA one must be 18 years old, but there isn’t an age requirement to open an RRSP.
• Contribution limit. The limits are usually set annually and are different for TFSAs and RRSPs. For 2022, the contribution limit for an RRSP is the lesser of either 18% of earned income reported on an individual’s 2020 tax return or the contribution limit, which was $27,830 in 2021. The limit for a TFSA, which also can vary annually, was most recently $6,000.
• Taxation on withdrawals. While RRSP withdrawals are taxable (but subject to certain exceptions), TFSA withdrawals can be made at any time tax-free.
• Taxation on contributions. Contributions made to a TFSA aren’t tax-deductible, but RRSP contributions are.
• Plan maturity. An RRSP matures at the end of the calendar year that the account holder turns 71. TFSAs don’t have age limits for account maturity.
• Spousal contributions. There is no form of spousal TFSA available, but someone can contribute to a spousal RRSP.
How Do I Choose Between a TFSA and RRSP?
Choosing between a TFSA and an RRSP depends on someone’s unique savings goals and tax preferences. That being said, if someone’s main goal is saving for retirement, they’ll likely find that an RRSP is the right fit for them. When someone contributes to an RRSP, they can defer paying taxes during their peak earning years. Once they retire and make withdrawals (which they will need to pay taxes on), they will ideally have a lower income (and be in a lower tax bracket) and smaller tax liabilities at that point in their life.
If someone wants to be able to use their savings for a variety of different purposes (perhaps including a medium-term goal like a down payment on a home), they may find that a TFSA offers them more flexibility. That said, there’s no reason TFSA savings can’t be used for retirement later on. Contributing to a TFSA is a great option for someone who has already maxed out their RRSP contributions for the year, but who wants to continue saving and enjoying tax benefits.
It is indeed possible to have both an RRSP and TFSA and to contribute to them at the same time. Putting money into both of these financial vehicles can be a great way to save. There are no downsides associated with contributing to both an RRSP and TFSA at the same time if a person can afford to do so.
Can I Have Multiple RRSP and TFSA Accounts?
Yes, it’s possible to have more than one TFSA and RRSP open at the same time, but there’s no real benefit here. The same contribution limits apply. That means that opening more than one version of the same account or plan only leads to having more accounts to manage and incurring more administration and management fees. Just as you don’t want to pay fees on your checking account and other bank accounts, you probably don’t want to burn through cash on fees here.
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Should I Prioritize One Over the Other?
Which type of account someone should prioritize depends on their savings goals. Their preferences regarding the unique tax advantages of each account may also come into play. That being said, if someone is focused on saving for retirement, they’ll likely want to make sure they max out their RRSP contributions first.
The Takeaway
Both RRSP and TFSA accounts are great ways for Canadian citizens to save for financial goals like retiring or financing a wedding. Each account has unique advantages and contribution limits. While an RRSP account is designed to help with stashing away cash for retirement, a TFSA account can be used to save for any type of financial need. Whether you choose one or both of these products, you’ll be on a path towards saving and helping to secure your financial future.
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FAQ
Is it better to invest in TFSA or RRSP?
When it comes to TFSA vs. RRSP, there’s no right answer to whether investing in one is better than the other. Someone focused on saving for retirement may want to prioritize an RRSP, while someone who wants to save for other expenses (like a home or wedding) may find a TFSA more appealing.
Should I max out RRSP or TFSA first?
If someone is focused on saving for retirement, they may want to max out their RRSP first. That being said, this is a personal decision that depends on unique financial goals and tax preferences.
When should you contribute to RRSP vs TFSA?
Typically, the contribution deadline for RRSPs is around March 1st. A Canadian citizen can put funds in a TFSA at any point in a calendar year, and if they don’t max out their account, they will usually be able to contribute the remaining amount in the future.
Photo credit: iStock/anilakkus
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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