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6 Things To Consider When Choosing A Stock To Buy

For many, the idea of beating the stock market and becoming a seasoned investing veteran holds an aura of allure and a way to prove big smarts.

However, before you go jumping into the market with both feet, you may want to slide in carefully, one foot at a time. Investing in stocks can be a great move for sure, but look before you leap and realize the factors to consider before investing.

First, you’ll need to get real. Ask yourself why you are investing. What’s your endgame? It could be retirement, a college fund, your family’s future, or just to grow your net worth. It could also just be to show off, but we’re going to concern ourselves with more meaningful outcomes for you.

Finding out which kind of stock investor you want to become and how the stock market works will can be a good way to serve your goals. There are two kinds:

Growth Investors

They’re often risk takers, more associated with the idea of big players, investing in high-priced stocks that you may not have ever heard of, with a lot of perceived potential.

Income Investors

They’re usually more conservative, favoring more sure, stable and well-established stocks, often called “blue chips.” Think of business icons like AT&T, IBM, Coca Cola and Boeing.

Only you can decide the type of investing that will best work for you. Often, younger investors give growth a try; older, more conservative investors stick with income. However, there is no law keeping you from deciding on one or the other; it’s completely up to you.

Considerations Before Investing

1. Buy What You Know — and Like

If you’re just getting started, you may want to stick with the companies you know, and the brands you use and trust. Trusting your gut and investing in something familiar goes a long way toward avoiding the hype that the stock market often thrives on.

Even if you hear great things about a company, not having a clear understanding of what they do or why they exist may mean that it’s not clearly defined as a business.

2. Learn the Company’s Present and Future Financial Health

If you like doing research and comparison shopping, you may like picking stocks. It all begins with reviewing the company’s financial reports. If a company is listed on a stock market, that means that it’s a “public” company, co-owned by stockholders (not privately owned).

By law, a public company has to offer quarterly and annual reports and file with the Securities and Exchange Commission (SEC). Be prepared to dig in your heels: looking over just one report is not going to cut it. You’re looking for consistency in the company’s past and present financial health, so that means going back a year or two, and with a fine-tooth comb.

What you’re looking for:

•  Earnings: This is the company’s after-tax income, also known as “the bottom line.” This is most often directly related to the company’s stock price and the most observed number by investors. Good earnings show that the company is profitable and successful. You can usually find them in quarterly and annual financial statements (be sure to check them both, going back a few years). Are these earnings consistent? Or do the earnings fluctuate from quarter to quarter and from year to year? Earnings tell a company’s story. Stocks rise and fall on this kind of information.

•  Operating margins: Also known as return on sales, this measures a company’s profitability. How much does the company make on a dollar’s worth of sales, after paying all the related costs (but before paying interest or tax)? Here’s the math: divide a company’s operating profit by its net sales. Another way to say that: divide the company’s operating income by its sales revenue. There are higher and lower operating margins (higher is usually better). A good number may mean that the company is well managed and its management has a clear vision. A lower number may mean that the company is a greater risk for investment.

•  Cash flow: this is a key indicator of whether your company is over- or undervalued. A high valuation but precious little cash flow usually doesn’t make for a healthy combination.

Know these and you will most likely know the current and future health of your company of interest.

3. Know the Company’s Long-Term Future with Asset Utilization

This number tells you how well your company is doing, and also how well it’s doing in comparison with its peers. The math works like this: if your company shows revenues of $100,000 and assets of $50,000, the asset utilization ratio is 2:1. Your company’s operations generate $2 in revenues for every $1 in assets. That’s not bad. How do similar companies compare to that?

4. Know How the Company Pays for its Business Operations

The term for this is “capital structure,” which is the amount of debt and/or equity a firm uses to fund its operations and finance its assets. The number to look for when researching this is its debt-to-equity ratio (sometimes called a debt-to-capital ratio).The company takes a periodic look at itself and decides if it needs more debt and/or equity to fund new or current projects.

The perfect mix is for the company to have both a nestegg of short-term liquidity to cover its operating costs, and enough left over for expansion and growth. What debt this figure doesn’t include: long-term debt.

5. Know the Company’s Earnings Patterns

The company’s ongoing earning power shows you where it’s been and where it is going. How is that earning momentum? Does it slow down or speed up during certain periods of the year? Given a certain time frame, you can recognize patterns in a company’s earnings momentum, which gives you a better understanding of it’s long-term growth potential.

The detective work includes looking at earnings reports over the last few quarters and any projections that are offered for the near future. If you see slow earnings growth, that could be a red flag, but it could be a result of other factors, like seasonal sales or changes in direction.

6. Know the Real Value (not the market value) of the Company

You may have heard the old stock-market adage “buy low and sell high.” That means to buy a “cheap” stock that will rise in value, then sell it at a higher price. This, of course, is easier said than done. If it were super easy, everyone would be a billionaire.

A stock’s value is measured by its price-to-earnings ratio (P/E for short). You get that number by dividing a company’s share price by it’s net income. Once you calculate that number, compare it to the P/E ration posted by other companies in the same industry. The lower the number, the “cheaper” the stock is. The higher the number, the more “expensive” the stock is, in comparison with the company competition.

Keep in mind that a cheap stock is not always a better buy, and that an expensive stock is not always something to steer clear. There are all kinds of reasons why stocks are valued the way they are, but you want a stock that you feel that will increase its value with time.

When using valuation models like this to determine a company’s worth, you’re looking at its intrinsic value. This gives you a clear understanding of a stock’s real value.

On the other hand, if you’re looking at how the stock is perceived by investors, that’s the market value. Market value has value too: a good perception by investors could raise the stock’s worth.

Other Considerations to Think About When Choosing A Stock

Buying just because you think the price is right. A stock suddenly plunging in price may be falling for a bad reason. Find out why the stock took a dip, and why it may come back and make you money.

Relying on just one guru. Listening to somebody with more experience explain stock recommendations — including when to buy and sell — could be both a positive and negative learning experience. You’ll learn quickly that even the most trusted experts don’t always get it right.

Letting a rollercoaster ride scare you. Unlike mutual funds, where you are investing in a diversified group of stocks, the value of individual stocks can fluctuate greatly.

Check the stock’s 52-week highs and lows to get a better understanding of how high and low the stock can go (remember that past performance is not an indicator of future performance, but the knowledge can give you a bit of perspective).

A Word (or Three) About Risk

You’re not in the game to lose, right? If you want to be more sure of not losing money, you can stash it in a simple savings account or bury it in the backyard. However, what’s safe isn’t always what’s best. Sometimes if you want what’s best, you have to take some risks.

If you’re hoping for a higher return, chances are you are going to have to get used to more volatility. If you drive a car, you’ll understand: every time you get into a car, you’re inviting risks, but if you keep your eyes ahead of you and stay aware and alert, you’ll get to where you want to go.

Youth is often the time for taking risks, because of the gift of time. Perhaps if you want to get more conservative and take fewer risks, the time to do that is as you sail closer to retirement age.

That is, of course, as long as you’ve successfully invested the amounts you need in order to retire happily. You can get a better of idea of where you stand by consulting SoFi’s retirement calculator.

Selling Stocks

All the tips in the world may not give you the perfect strategy for knowing the right time to sell a stock, but having a plan in place ahead of time may keep you from wringing your hands over the decision.

You may decide to sell when a price rises or falls to a certain point, if the stock is downgraded, or if the company suffers some kind of setback. Of course, this may take a little trial and error before you settle on a formula that works best for you.

Who Is Investing (Besides You)?

Jumping into the stock market may not be as crowded a pool as you may think. Only a little more than half of all Americans own stocks (54 percent), according to a 2017 Gallup report .

That includes individual stocks, 401(k) plans, mutual funds or IRA accounts. In addition, the Census Bureau reports that two-thirds of Americans do not participate in or have access to a 401(k) plan.

Turns out that the wealthiest Americans possess more than 80 percent of stocks, according to a New York University paper, “Household Wealth Trends in the United States.” The wealthiest 10 percent of households account for 81 percent of the total value of stocks.

Help from SoFi Invest®

Trying to wrap your head around the stock market and choosing stocks on your own can be a daunting task. It can frustrate even the most experienced experts, and not just once or twice. You may want to consider a trusted partner to help set you up, give you advice and help you with the long-term navigation.

SoFi financial advisors can work with you on a plan to achieve your goals. They’ll help you map out a strategy and then help you stick with it.

Remember, some investment risk can be reduced through diversification — investing in many types of assets. With an automated SoFi Invest account, we actively manage the assets for you and automatically rebalance them as needed.

Become a SoFi member and gain access to personalized advice based on your specific goals. Being a SoFi Member gets you access to over 200 SoFi events, as well as free professional career and salary guidance.

Ready to get started online investing? Work with SoFi Invest today!


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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.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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. Advisory services offered through SoFi Wealth, LLC. An SEC registered Investment Advisor. SoFi Securities, LLC, member FINRA / SIPC .
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How to Choose Your First Stock

Buying your first stock can be a rewarding and fun way to learn more about investing and find out whether it’s something you want to do more of. It’s the perfect way to dip your toe into the water of stock investing. So let’s talk about the steps you’ll need to take to become a stockholder.

If you’re considering buying your first stock, hopefully you’ve already cut your teeth on completing other personal finance tasks, like:

•  Reducing debt: It can be good to get rid of all high-interest debt if you’re able, so you’re freed up to start investing.

•  Building a safety net: Generally, everyone should build an emergency fund of at least three to six months of your salary, for the unexpected expenses that may come your way.

•  Contributing to a retirement fund: That’s where many of us begin to learn about investing, usually in mutual funds through our 401(k) or IRA.

Once you’ve done all that, a next great step can be to start wading into the investing waters of stock trading.

Recommended: How to Buy Fractional Shares

Step 1: Understand How Stocks Work

When you’re ready to settle on your first stock to buy, you’re really talking about buying a piece of a company.

You become a part-owner and might have certain rights, such as voting on a board of directors or other corporate matters.

You’re also share in the company’s performance, reflected in the stock price. When the company does well, you should be rewarded. When it’s in a funk, well, your stock will be too.

Stocks come in two general varieties:

Common stock. This is what people generally mean when they refer to stock trading. When you buy one or more shares, you become a common shareholder, which gives you certain voting rights, but these stocks may also offer dividends and potentially a gain in value, so one day, you can hopefully sell for a profit. Dividends might be declared by the company, say on a quarterly basis. It’s a way of distributing earnings and keeping shareholders happy. Common shareholders have little protection in a bankruptcy and liquidation of a company. In fact, you’d be last in line behind creditors and another class of stock. But don’t let that concern you too much. If you pick solid companies with good track records, you can attempt to minimize this risk.

Preferred stock. As the name implies, these stockholders get preferential treatment in the case of a corporate collapse. While they may or may not have voting rights, they are usually just behind creditors when it comes to getting back some of their original investment in liquidation.

Preferred shareholders also share more fully in a company’s profits because their dividends can be set in perpetuity. Corporations can cut dividends of common shareholders, but not preferred shareholders. However, companies can “call” their preferred stock, which means they can buy back your preferred shares according to the defined terms, but likely at a premium. So, not bad.

Step 2: Open an Online Brokerage Account

Gone are the days when you walked into a broker’s office and she placed a purchase order for your stock with the New York Stock Exchange—you know, the market pits where shouting traders haggled with each other to buy or sell stocks until the final bell rang.

Now, almost all of trading is done electronically, and for the average investor, from their laptop or mobile phone. With the arrival of online brokerage accounts, trading stocks became cheaper and much more hands-on for investors. Today, opening up an account is about as easy as opening a savings account on your bank’s website.

In choosing an online brokerage for picking your first stock to buy, don’t just select the one with the lowest trading fees. It may be worth paying a little more for great customer service or additional perks.

Some questions to ask yourself: How often do I intend to buy or sell stocks? How much support and additional educational services do I want? How much money do I want to spend? Typically, online trades will run you between $5 to $7, but fees have been falling over time and some online firms don’t charge any commissions to trade – like SoFi Invest®.

Win up to $1,000 in free
stock today.


Step 3: Choose a Company and Research It

Buying your first stock inherently carries risk. How much depends on the specific company purchased and the volatility of the market. Some investors have their portfolios weighted across as many as 40-50 stocks to help create a diversified portfolio. When you have diversification, it can lower and level out the risk to some extent, so when one stock falls in price, others rising in price have the potential to balance it out.

So what should be your first stock to buy? One strategy could be to go with a company for which you have an affinity or with which you are pretty familiar. Think of the brands that are household names. If you’re buying just one share to try out stock trading, keep it simple and cheap.

Around $100 or $200 can be a good range to start with. Remember, this is for learning, first of all, so if you have a lot more money to invest, it may make good sense to chat with one of SoFi’s financial Planners before diving into the market on your own.

Once you have a few companies in mind, it’s time to find out more about them. Are they profitable? How do they perform against others in their industry? Has there been bad news recently on one or two of them? Here are some resources to discover more.

Company filings. The US government requires most companies to file financial data on their performance and notable changes in the corporation. Look for the company’s quarterly and annual balance sheet, income statement, and the cash-flow statement. It’s also a good idea to look at each company’s retained-earnings statement and its shareholders’ equity.

You can find these on the company’s website under the Investor Relations section, or you can go to the Securities and Exchange Commission website to find any required filing. You’ll need to get acquainted with financial ratios . They will help you contrast and compare different companies so you can make a final decision. You’ll find them invaluable for selecting your first stock to buy.

Market news sites. Plenty of sites devote pages and pages of content on what companies are doing, where sectors are heading, and how the market is reacting. Get in the habit of browsing a few every day. You can even set up alerts. That way, when you learn how to buy your first stock, you can keep up with all the news.

Almost all of the better sites have mobile apps, making it a snap to find out what’s going on. Some of the more widely respected financial news sources include MarketWatch, The Wall Street Journal, CNBC, and Bloomberg. But there are many more, so find the ones you enjoy reading.

Deep analysis sites. Many companies offer stock-market research and make the task of evaluating stocks easier. Some offer information at no cost, others charge a subscription. Zacks Stock Screener, Finviz.com and Seeking Alpha are examples of sites that do not charge. The sites that offer even deeper analysis, like Morningstar, may charge a fee. Many online brokerages also offer analysis content you can use.

Step 4: Consider Other Investments, Too

If you’re new to investing, and especially if you’ve never ventured beyond savings accounts, consider two other investment vehicles that can offer a bit more diversity: Exchange-traded funds (ETFs) and mutual funds.

Whether you’ve settled on buying your first stock or opted for one of these alternatives depends on your risk tolerance. These other options provide slightly less risky ways to invest than buying individual stocks, and have the potential to be just as rewarding.

Mutual funds. You’re probably already familiar with mutual funds. They’re diversified portfolios of individual stocks and are managed by an investment professional and may seek to track a certain market. They allow you to benefit from diversification, helping to lower your risk.

You can invest in mutual funds that mainly hold blue-chip companies, or ones that hold companies with high growth potential. You can even invest in index mutual funds, which hold stocks that mirror the major market indexes like the S&P 500 and the Dow Jones Industrial Average.

If you’re already enrolled in your company’s 401(k), you probably own shares in several mutual funds already. Many of these investments are appropriate for long-term investors, so they make sense in retirement accounts.

Unlike ETFs, however, mutual funds may not be as tax-efficient. In other words, every time a stock is sold for a gain within your mutual fund, it has the potential to create a tax liability. With ETFs, a potential tax liability is created when you sell the ETF and not often when individual stocks are sold for a profit within the fund.

ETFs. Exchange-traded funds have the diversification of a mutual fund with the convenience of stock trading. They essentially act like a basket of investments, whether that’s stocks, bonds, or commodities, and they trade on the open market, so their value fluctuates throughout the day. They offer a convenient way to own a portion of many stocks in one investment that can be traded easily on a market exchange.

Instead of managing a portfolio with hundreds of individuals stocks, many investors prefer the simplicity of owning a handful of diversified ETFs. Investors who want to invest in certain sectors also look to ETFs so they can own a broad spectrum of companies in one particular industry. In that scenario, they can be more effective than trying to pick the right stocks in a sector and hoping they match the overall industry’s performance.

Taking a First Step Before You Buy a Stock

When you’re ready to start choosing your first stock to buy, you’ll need an account from which to begin trading. Investors sometimes save up money to use for investments in an interest-bearing checking or savings account.

That allows your parked funds to continue to grow while you wait for your next stock-buying opportunity. Similarly, a money-market account, which reinvests dividends from money-market funds, can be a good way to hold your money. Both are highly liquid, which means fast access to your money.

Another option is a wealth management account, where you can combine several accounts into one and even get access to certain investment vehicles, such as ETFs. A SoFi Invest account also offers complimentary access to financial advisors when you become a SoFi member. Plus, SoFi’s automated investment account automatically balances your investments for you, so you don’t have to do all the heavy lifting.

Going from “how to buy my first stock,” to “there are so many great stocks to choose from,” means a lot of good learning has transpired. And you’ll soon find out that stock trading and investing can be a rewarding way to learn about companies and business while (hopefully) growing your savings. Take your time, keep on learning, and you’ll likely be set for many years of investing enjoyment.

Is it time to get serious about online stock trading? Set up a SoFi Invest account today and start expanding your financial possibilities.


Choose how you want to invest.

Ready to
do-it-yourself?

Learn more →

Want to take a
hands-off role?

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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.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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What You Should Know as a Novice Crypto Investor

We’re reading a lot about cryptocurrency being here to stay, but for many of us, it’s still not a regular part of our everyday financial lives. Why is that? Could be lack of education among investors, and the general lack of current, regular commercial use of cryptocurrency. However, if acquiring the right financial knowledge is a roadblock, let’s move that out of the way right now and do some schooling on cryptocurrency trading for beginners.

The Basics of Cryptocurrency

Cryptocurrency is digital currency (used exclusively online) that acts as a direct financial exchange between users without the involvement of a bank or other third parties. Think of it as an alternative currency to traditional forms of payment, like cash, checks, and credit cards.

The information used within the system is kept safe through the use of encryption techniques . These methods scramble the info to make the activity secret and difficult for outsiders to access.

When you and others use a cryptocurrency system, everyone and everything remain anonymous. Each exchange that takes place is woven into a group called “blocks” (hence the term blockchain), which again is coded (encrypted) in order to keep it private and secure.

The basic unit of value of cryptocurrency is expressed as a “token,” which is used exclusively by members of the group involved in the blockchain. Every time a transaction happens, a “miner” updates the blockchain (more about this later).

Cryptocurrency is not created by any bank system or government agency, which means it’s in a universe of its own. Also, it isn’t regulated to the same degree as other financial products, like banking and investments. At least not yet.

Many people find this freedom to be a very cool vehicle to ride. Its popularity is growing in an organic way too; this makes it hard to predict where it’s going and where it will end up.

Cryptocurrency can be bought and sold on special exchanges ; the most commonly known cryptocurrency is bitcoin. SoFi also allows users to buy and sell cryptocurrency.

Recommended: A Beginner’s Guide to Cryptocurrency

The Future of Cryptocurrency

Of course, not everybody is on board with cryptocurrency being a given for the future. Although there are have been more than 2,000 cryptocurrencies on the market, more than 800 of them are now no longer operational.

Another fact to note: the U.S. Securities and Exchange Commission (SEC) has denied more than a dozen applications for permission to list bitcoin exchange-traded funds (EFFs). The reason, though, could be to your benefit as an investor: the need to minimize risks of fraud and manipulation, and to increase investor protection.

“We’ve seen some thefts around digital assets that make you scratch your head,” SEC Chairman Jay Clayton said at CoinDesk’s Consensus Invest conference. “We care that the assets underlying that ETF have good custody and that they’re not going to disappear.”

That said, are you a believer? Are you thinking about taking a leap, or at least getting in on the ground floor, before the anticipated mad mainstream rush?

Let’s break down the details of cryptocurrency trading for beginners:

SoFi Invest offers a new way
to trade crypto.


It’s in the Wallet?

Offline, cryptocurrencies are stored in “wallets.” A wallet is a software program that stores both private and public keys that allow you to send and receive digital currencies and keep an eye on your coin.

Hot wallets give you easier access, but they can also more easily be hacked. Cold wallets are harder to open. If you plan on holding on to your investment for a long time, you may want to opt for the cold wallet. If you need to dip into your coin more than occasionally, consider the hot wallet.

There are a number of wallet providers , and you’ll want to do some due diligence before choosing one.

Learn to Chill

Cryptocurrency is still a relatively new technology, which means it can act like a newborn: crying jags, not understanding how things work, crawling and stumbling, and behaving irrationally.

You’ll need to get used to huge price swings, instability when least expected, rollercoaster performance reports, and general anxiety on your part. Be sure you can take it.

Tune Out The Naysayers

Cryptocurrency trading for beginners means getting involved in a new idea. When that happens, get ready for the know-it-alls and Negative Nellies to tell you what’s what. You’re going to hear that cryptocurrency is overhyped, just a fad, or a wicked scam.

Of course, you’re going to do your due diligence and make up your own mind with educated decisions, so let don’t let them rattle you. Also, what may be true and unfortunate for one cryptocurrency may not be the same for another.

Get Professional Insights

Here’s the thing: Maybe cryptocurrency isn’t for you right now. The fact is, cryptocurrencies aren’t endorsed or guaranteed by any government—and they are volatile and involve a high degree of risk.

Not only that, but consumer protection and securities laws don’t regulate cryptocurrencies in the same way that they regulate traditional investment products. If you instead want to learn more about traditional investment products, now’s the time to check out SoFi Invest®.

With SoFi Invest, you’ll get access to financial planning and personalized advice, all based on how you want to invest and what your future goals are. All you need to do is make an appointment to chat with one of our SoFi Invest Advisors.—there is no obligation and no cost.

We’ll work with you to make sense of an investment strategy and help you map out a plan (and stick with it).

With an automated investing account with SoFi, we’ll invest in thousands of assets, actively managing them, which can help you get a clearer vision of your future path. To avoid veering off the road, we’ll automatically rebalance your investments as needed, so that they stay on track.

Make an appointment with a SoFi financial planner and start your path to a more healthy financial future. And whatever the future brings, you don’t have to take that path alone.


Choose how you want to invest.

Ready to
do-it-yourself?

Learn more →

Want to take a
hands-off role?

Learn more →



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.
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.
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. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member
FINRA / SIPC .
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How Much Stock Market Fluctuation is Normal?

If you are turn on any of the up-to-the-minute financial news programming, you’d hear the anchors yelping about what stocks are up, which stocks are down, and all of the reasons why.

Every day, someone compares the stock market to a rollercoaster ride, with its ups, downs, and sideways action; sometimes enough to make you want to lose your lunch.
The stock market has become something of an affair in entertainment. If the stock market is down, it’s entertainment. If the stock market is up, it’s entertainment. But, it’s also people’s lives and livelihoods.

There are millions of people who have their retirement savings tied up in the stock market. For these people, fluctuations aren’t fun or interesting, they can be painful. A great way to overcome the pains associated with stock market fluctuation? Understand why it’s happening. We all know that some amount of stock fluctuation is normal. But just how much?

Below, we will first answer the question, “Why does the stock market fluctuate?” in order to understand how much market fluctuation is normal. Having a good grasp on volatility in the stock market is critical to as an investor in the stock market over your lifetime.

Why Does the Stock Market Fluctuate?

To understand market fluctuation, it helps to first understand stocks and the stock market.

A stock, which is a small percentage of ownership in a company, can be bought and sold by investors like us. That’s right, everyday folks can own a share of companies like Tesla, Starbucks, and Snapchat. That’s why investors of stocks are also called shareholders.

A stock might be bought and sold in what we call the stock market. And the stock market is like any other open marketplace; it just so happens that what’s for sale are these pieces of ownership in a company, called shares. And just as in any open marketplace, there are two important forces that determine the value (and therefore the price) of these goods for sale: supply and demand.

Remember our old friends, supply and demand? Let’s do a refresher, because they’ll be important later. Supply is how much of a good is available for sale. Demand is how much consumers want to buy the good. Between the pressures of supply and demand, the economy determines the value of that good.

Here’s an alternate way to describe supply and demand: buying and selling. How much investors are buying or selling a certain stock on any given day, month, or year, quite literally give a stock its value.

Go big in scope, smart on risk.




Distributor, Foreside Fund Services, LLC

Crazy, right? So while the television commentators may have you believe that it’s some single, external event (such as a tsunami or newly released economic numbers) that causes the price of stocks to increase or decrease, that’s not totally true.

The real truth is that investors were selling out of their stocks in a way that outpaced how many investors were buying into those same stocks; supply and demand at work. Why does the overall stock market fluctuate? Because investors are buying and selling stocks in such a way, and in such volume, that stock prices make a large move in one direction or another. That’s it.

Volatility Means the Stock Market Is Working

As tough as a nasty price drop in your investments can be to stomach, stock market volatility is a normal part of stock market investing. In fact, volatility is natural and even healthy, and shows that the stock market is working as it should. If you want to be a good stock market investor, you have to accept this.

Here’s why: The more investors weigh in—by actively buying and selling stocks—the more accurate the prices of stocks will ultimately be. Think of it this way: If you needed an opinion about something that didn’t have a precise answer (in this case, what the value of any one stock should be), would you ask just one person? Two people?

Or would you take a poll from as many people as possible, weighing out all of their many respective perspectives and responses? That’s essentially what is happening in the stock market—it’s a weighing of information about the “correct” price of a stock from investors across the globe.

It’s also helpful to remember that volatility doesn’t just relate to rising stock prices—it also relates to plummeting stock prices Yet for whatever reason, some only really think about “volatility” and “stock market fluctuation” as happening when there’s a downturn in the market. But when the stock market makes a surge upward, that is also considered stock market fluctuation too.

If you want the possibility of returns, you have to be willing to see your investments dip sometimes. Risk and reward are two sides to the same coin. You cannot have one without the other. If you hear someone promising outsized returns with no risk, it is absolutely a scam; run far, far away.

The stock market has returned about 10% annualized over the long term according to some estimates . But almost never does this come in the form of perfectly 10% years. Usually stock market returns are higher or lower than this, and they sometimes even go into the negative.

So, What is Normal?

This is a notoriously hard question to answer because really, almost any amount of market fluctuation is possible.

Of course, this would be hard to believe if all of your stock investments were down 50% or more. But such drops have happened in the past, and could happen again.

Our best guide for understanding what is normal (and what is abnormal) is to look at what has happened in the past. While past performance is never a guarantee of future financial success, it’s helpful to look at the data.

The most commonly cited pool of data is the S&P 500, which is an index that measures the returns of the United States’ 500 “leading” U.S. companies. The S&P 500 can give us a good historical gauge of stock market movement.

Since World War II—the “modern” stock market era, the S&P 500 has seen 11 drops in the stock market of over 20% . A more than negative 20% market is what is classified as a “bear market,” or a bad market.

Peak (Start)

Return

  May 29, 1946     -30%
  August 2, 1956     -22%
  December 12, 1961     -28%
  February 9, 1966     -22%
  November 29, 1968     -36%
  January 11, 1973     -48%
  November 28, 1980     -27%
  January 11, 1973     -48%
  November 28, 1980     -27%
  August 25, 1987     -34%
  July 16, 1990     -20%
  March 27, 2000     -49%
  October 9, 2007     -57%

You’ll notice that a big drop in the stock market happens about once every five to ten years—so somewhat frequently. And smaller fluctuations of 5% or 10% to the downside happen much more frequently than that. In fact, it’s common to see a drop like this in most years.

As far as we’ve seen, there has never been a market dip that hasn’t eventually recovered. And really, it seems like the most upward movements happen after the worst of times. While there’s no denying that seeing a big drop in the value of your investments is painful, it’s possible to learn from the bad times. It is important to understand that dips are normal, and that shouldn’t necessarily scare you from investing in the market.

Also, know thyself. Investing in good times is easy. Investing in bad times is hard. If you’re skittish or uncomfortable with market gyrations, you may want to consider having a financial advisor on hand who can help talk you through any confusion.

SoFi Invest® not only helps you invest according to your goals and risk tolerance, but provides you with real, live financial advisors to answer any questions. Because keeping investors on track is so important, this is a service that SoFi provides its members for free.

Want help investing during the good times and the bad? Open an investment account with SoFi, an easy, automated way to invest, but with the assistance of real, live wealth advisors.


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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.
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. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member
FINRA / SIPC .
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How to Invest While Paying Off Student Loans

If you’re struggling with the dilemma of whether to pay off your student loans or invest, you’re not alone. There are millions of Americans struggling with student loan debt; between rent, groceries, utilities, and a variety of other expenses, your monthly income can dwindle rapidly, leaving little for investing.

While common financial advice is to pay off debts as soon as possible, you may want to reconsider that when it comes to student loans. If you have a low-interest federal student loan, you could be better off investing or saving for retirement than sending all of your “extra” cash to your student loan holder.

In a perfect world you wouldn’t have to debate whether you should pay off student loan debt or save for retirement, however, there are ways for you to prioritize both.

Start with an Emergency Fund

One of the best ways to start saving is by building an emergency fund. This is a safety net of cash you can use for any unexpected expenses, like a sudden layoff, emergency medical care, unanticipated veterinary needs, or home and car repairs.

While your financial circumstances will dictate how much money you should save in an emergency fund, the general rule of thumb is that you should have between three to six months of living expenses saved up for financial emergencies.

If that seems like an intimidating amount of money, start with a smaller sum—say, $500—and build your emergency fund up from there. It could be good to have a dedicated account for your emergency fund. One great option is a checking and savings account, such as SoFi Checking and Savings™. Where you can earn 0.20% APY on all your cash and take out the money whenever you want at no charge!

Having a financial safety net is critical should any unforeseen, urgent costs arise. If you are prepared with your emergency fund, your loan repayment and retirement savings can stay on track.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!


Prioritize Minimum Payments

While paying off student loan debt, it is important to make the minimum monthly payments on all of your loans. If you fail to make the minimum payments each month, your loans could become delinquent or end up in default, and that is a situation you want to avoid.

The consequences of defaulting on a student loan are severe and include losing the benefits of deferment and forbearance, having to pay the unpaid balance of your loan in full, and possibly, being taken to court.

To avoid these repercussions, remember to always make your minimum payments, and make them on time. To make it easier, sign up for automatic payments with your loan holder.

The money will be taken directly out of your account every month so you’ll never have to worry about missing a payment. And with certain lenders, you could qualify for a reduced interest rate when you sign up for AutoPay.

If you have a little wiggle room in your budget, you could also consider paying a bit more than the monthly minimum on your student loans. Since most student loans have no prepayment penalties, it could be one of the fastest ways to accelerate your student loan repayment.

Refinance Your Student Loans

If you are buried under a number of student loans, it could be time to consider refinancing. Before you do, make sure you’ve done your research on the specific types of loans you hold. Refinancing a federal student loan will eliminate benefits like deferment, forbearance, and income-based repayment plans.

However, if your student loan debt is incredibly high, or you are already carrying both private and federal student loans, refinancing could be an smart option for you. When you refinance your student loans, you take out a new loan—usually through a new lender—with a new interest rate and new loan terms.

If you have a good credit history and solid earning potential, you could lower your interest rate or monthly payments, ultimately reducing the amount of money you pay over the life of the loan. To see what refinancing could do for you, take a look at the SoFi student loan refinance calculator.

Take Advantage of Employer-Sponsored Retirement Plans

If you are employed and are able to enroll in a 401(k), take advantage of the opportunity. A 401(k) is an employer-sponsored retirement plan to which both you and your employer can contribute. Often, employers who offer 401(k) plans will match your contributions up to a certain dollar amount or percentage.

If you’re struggling to pay off debt or save for retirement it might make sense to take advantage of the free money your employer is offering by taking advantage of the match program. Another great benefit of a 401(k) is that you can set up your contributions through payroll, so they are automatically deducted from your paycheck.

Use Windfalls Wisely

Another great way to make a dent in paying off debt while saving for retirement is to use financial windfalls wisely. Instead of using your tax return to splurge on a new outfit, a swanky vacation, or other indulgences, use that money to pay off debt or save for retirement.

You could even split it up and use a portion to repay student loans and use the rest to add to a 401(k) or another retirement account, like a traditional or Roth IRA. Paying down debt and investing now will be impactful in the future as you get closer to retirement.

About SoFi Invest®

If you’re already making headway toward repaying your student loans and are making active efforts to save in a 401(k) or IRA, consider investing as part of your financial strategy. Investing is a great way to put your money to work, instead of having it sit idle in a low-interest savings account. One way to boost your investments is to open an investment account with SoFi Invest.

At SoFi, you can begin investing with as little as $100. You’ll have access to a credentialed financial advisor who will work with you to set up your financial goals—a step toward making your goal of repaying your debt and investing at the same time a reality.

SoFi will work with you to establish your threshold for risk and will diversify your investments to match. With portfolio selection and auto-rebalancing, SoFi is a great option to begin investing.

When you’re ready to start investing (even while paying off your student loans), consider opening a SoFi Invest account.


Choose how you want to invest.

Ready to
do-it-yourself?

Learn more →

Want to take a
hands-off role?

Learn more →



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.
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. Advisory services offered through `SoFi Wealth, LLC. A registered investment advisor. Neither SoFi nor its affiliates is a bank. SoFi Checking and Savings is offered through SoFi Securities, LLC, member FINRA / SIPC .

SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

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