Investing Archives | Page 4 of 231

Nov

2023

What Is the Average Rate of Return on a 401(k)?

By Samuel Becker | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

The average rate of return on 401(k)s is typically between 5% and 8%, depending on specific market conditions in a given year. Keep in mind that returns will vary depending on the individual investor’s portfolio, and that those numbers are a general benchmark.

While not everyone has access to a 401(k) plan, those who do may wonder if it’s an effective investment vehicle that can help them reach their goals. The answer is, generally, yes, but there are a lot of things to take into consideration. There are also alternatives out there, too.

Key Points

• The average rate of return on 401(k)s is typically between 5% and 8%, depending on market conditions and individual portfolios.

• 401(k) plans offer benefits such as potential employer matches, tax advantages, and federal protections under ERISA.

• Fees, vesting schedules, and early withdrawal penalties are important considerations for 401(k) investors.

• 401(k) plans offer limited investment options, typically focused on stocks, bonds, and mutual funds.

• Asset allocation and individual risk tolerance play a significant role in determining 401(k) returns and investment strategies.

Some 401(k) Basics

To understand what a 401(k) has to offer, it helps to know exactly what it is. The IRS defines a 401(k) as “a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”

In other words, employees can choose to delegate a portion of their pay to an investment account set up through their employer. Because participants put the money from their paychecks into their 401(k) account on a pre-tax basis, those contributions reduce their annual taxable income.

Taxes on the contributions and their growth in a 401(k) account are deferred until the money is withdrawn (unless it’s an after-tax Roth 401(k)).

A 401(k) is a “defined-contribution” plan, which means the participant’s balance is determined by regular contributions made to the plan and by the performance of the investments the participant chooses.

This is different from a “defined-benefit” plan, or pension. A defined-benefit plan guarantees the employee a defined monthly income in retirement, putting any investment risk on the plan provider rather than the employee.

Benefits of a 401(k)

There are a lot of benefits that come with a 401(k) account, and some good reasons to consider using one to save for retirement.

Potential Employer Match

Employers aren’t required to make contributions to employee 401(k) plans, but many do. Typically, an employer might offer to match a certain percentage of an employee’s contributions.

Tax Advantages

As mentioned, most 401(k)s are tax-deferred. This means that the full amount of the contributions can be invested until you’re ready to withdraw funds. And you may be in a lower tax bracket when you do start withdrawing and have to pay taxes on your withdrawals.

Federal Protections

One of the less-talked about benefits of 401(k) plans is that they’re protected by federal law. The Employee Retirement Security Act of 1974 (ERISA) sets minimum standards for any employers that set up retirement plans and for the administrators who manage them.

Those protections include a claims and appeals process to make sure employees get the benefits they have coming. Those include the right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged, that certain benefits are paid if the participant becomes unemployed, and that plan features and funding are properly disclosed. ERISA-qualified accounts are also protected from creditors.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

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401(k) Fees, Vesting, and Penalties

There can be some downsides for some 401(k) investors as well. It’s a good idea to be aware of them before you decide whether to open an account.

Fees

The typical 401(k) plan charges a fee of around 1% of assets under management. That means an investor who has $100,000 in a 401(k) could pay $1,000 or more. And as that participant’s savings grow over the years, the fees could add up to thousands of dollars.

Fees eat into your returns and make saving harder — and there are companies that don’t charge management fees on their investment accounts. If you’re unsure about what you’re paying, you should be able to find out from your plan provider or your employer’s HR department, or you can do your own research on various 401(k) plans.

Vesting

Although any contributions you make belong to you 100% from the get-go, that may not be true for your employer’s contributions. In some cases, a vesting schedule may dictate the degree of ownership you have of the money your employer puts in your account.

Early Withdrawal Penalties

Don’t forget, when you start withdrawing retirement funds, some of the money in your tax-deferred retirement account will finally go toward taxes. That means it’s in Uncle Sam’s interest to keep your 401(k) savings growing.

So, if you decide to take money out of a 401(k) account before age 59 ½, in addition to any other taxes due when there’s a withdrawal, you’ll usually have to pay a 10% penalty. (Although there are some exceptions.) And at age 73, you’re required to take minimum distributions from your tax-deferred retirement accounts.

Potentially Limited Investment Options

One more thing to consider when you think about signing up for a 401(k) is what kind of investing you’d like to do. Employers are required to offer at least three basic options: a stock investment option, a bond option, and cash or stable value option. Many offer more than that minimum, but they stick mostly to mutual funds. That’s meant to streamline the decision-making. But if you’re looking to diversify outside the basic asset classes, it can be limiting.

How Do 401(k) Returns Hold Up?

Life might be easier if we could know the average rate of return to expect from a 401(k). But the unsatisfying answer is that it depends.

Several factors contribute to overall performance, including the investments your particular plan offers you to choose from and the individual portfolio you create. And of course, it also depends on what the market is doing from day to day and year to year.

Despite the many variables, you may often hear an annual return that ranges from 5% to 8% cited as what you can expect. But that doesn’t mean an investor will always be in that range. Sometimes you may have double-digit returns. Sometimes your return might drop down to negative numbers.

Issues With Looking Up Average Returns As a Metric

It’s good to keep in mind, too, that looking up average returns can create some issues. Specifically, averages don’t often tell the whole story, and can skew a data set. For instance, if a billionaire walks into a diner with five other people, on average, every single person in the diner would probably be a multi-millionaire — though that wouldn’t necessarily be true.

It can be a good idea to do some reading about averages and medians, and try to determine whether aiming for an average return is feasible or realistic in a given circumstance.

Some Common Approaches to 401(k) Investing

There are many different ways to manage your 401(k) account, and none of them comes with a guaranteed return. But here are a few popular strategies.

60/40 Asset Allocation

One technique sometimes used to try to maintain balance in a portfolio as the market fluctuates is a basic 60/40 mix. That means the account allocates 60% to equities (stocks) and 40% to bonds. The intention is to minimize risk while generating a consistent rate of return over time — even when the market is experiencing periods of volatility.

Target-Date Funds

As a retirement plan participant, you can figure out your preferred mix of investments on your own, with the help of a financial advisor, or by opting for a target-date fund — a mutual fund that bases asset allocations on when you expect to retire.

A 2050 target-date fund will likely be more aggressive. It might have more stocks than bonds, and it will typically have a higher rate of return. A 2025 target-date fund will lean more toward safety. It will likely be designed to protect an investor who’s nearer to retirement, so it might be invested mostly in bonds. (Again, the actual returns an investor will see may be affected by the whims of the market.)

Most 401(k) plans offer target-date funds, and they make investing easy for hands-off investors. But if that’s not what you’re looking for, and your 401(k) plan makes an advisor available to you, you may be able to get more specific advice. Or, if you want more help, you could hire a financial professional to work with you on your overall plan as it relates to your long- and short-term goals.

Multiple Retirement Accounts

Another possibility might be to go with the basic choices in your workplace 401(k), but also open a separate investing account with which you could take a more hands-on approach. You could try a traditional IRA if you’re still looking for tax advantages, a Roth IRA (read more about what Roth IRAs are) if you want to limit your tax burden in retirement, or an account that lets you invest in what you love, one stock at a time.

There are some important things to know, though, before deciding between a 401(k) vs. an IRA.

💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.

How Asset Allocation Can Make a Difference

How an investor allocates their resources can make a difference in terms of their ultimate returns. Generally speaking, riskier investments tend to have higher potential returns — and higher potential losses. Stocks also tend to be riskier investments than bonds, so if an investor were to construct a portfolio that’s stock-heavy relative to bonds, they’d probably have a better chance of seeing bigger returns.

But also, a bigger chance of seeing a negative return.

With that in mind, it’s going to come down to an investor’s individual appetite for risk, and how much time they have to reach their financial goals. While there are seemingly infinite ways to allocate your investments, the chart below offers a very simple look at how asset allocation associates with risks and returns.

Asset Allocations and Associated Risk/Return
Asset Allocation	Risk/Return
75% Stock-25% Bonds	Higher risk, higher potential returns
50% Stock-50% Bonds	Medium risk, variable potential returns
25% Stock-75% Bonds	Lower risk, lower potential returns

Ways to Make the Most of Investment Options

It’s up to you to manage your employer-sponsored 401(k) in a way that makes good use of the options available. Here are some pointers.

Understand the Match

One way to start is by familiarizing yourself with the rules on how to maximize the company match. Is it a dollar-for-dollar match up to a certain percentage of your salary, a 50% match, or some other calculation? It also helps to know the policy regarding vesting and what happens to those matching contributions if you leave your job before you’re fully vested.

Consider Your Investments

With or without help, taking a little time to assess the investments in your plan could boost your bottom line. It may also allow you to tailor your portfolio to better accomplish your financial goals. Checking past returns can provide some information when choosing investments and strategies, but looking to the future also can be useful.

Plan for Your Whole Life

If you have a career plan (will you stay with this employer for years or be out the door in two?) and/or a personal plan (do you want to buy a house, have kids, start your own business?), factor those into your investment plans. Doing so may help you decide how much to invest and where to invest it.

Find Your Lost 401(k)s

Have you lost track of the 401(k) plans or accounts you left behind at past employers? It may make sense to roll them into your current employer’s plan, or to roll them into an IRA separate from your workplace account. You might also want to review and update your portfolio mix, and you might be able to eliminate some fees.

Know the Maximum Contributions for Retirement Accounts

Keep in mind that there are different contribution limits for 401(k)s and IRAs. For those under age 50, the 2023 contribution limit is $22,500 for 401(k)s and $6,500 for IRAs. For those 50 or older, the 2023 contribution limit is $30,000 for 401(k)s and $7,500 for IRAs. Other rules and restrictions may also apply.

Learn How to Calculate Your 401(k) Rate of Return

This information can be useful as you assess your retirement saving strategy, and the math isn’t too difficult.

For this calculation, you’ll need to figure out your total contributions and your total gains for a specific period of time (let’s say a calendar year).

You can find your contributions on your 401(k) statements or your pay stubs. Add up the total for the year.

Your gains may be listed on your 401(k) statements as well. If not, you can take the ending balance of your account for the year and subtract the total of your contributions and the account balance at the beginning of the year. That will give you your total gains.

Once you have those factors, divide your gains by your ending balance and multiply by 100 to get your rate of return.

Here’s an example. Let’s say you have a beginning balance of $10,000. Your total contributions for the year are $6,000. Your ending balance is $17,600. So your gains equal $1,600. To get your rate of return, the calculation is:

(Gains / ending balance) X 100 =

($1,600 / $17,600) X 100 = 9%

Savings Potential From a 401(k) Potential by Age

It can be difficult to really get a feel for how your 401(k) savings or investments can grow over time, but using some of the math above, and assuming that you keep making contributions over the years, you’ll very likely end up with a sizable nest egg when you reach retirement age.

This all depends, of course, on when you start, and how the markets trend in the subsequent years. But for an example, we can make some assumptions to see how this might play out. For simplicity’s sake, assume that you start contributing to a 401(k) at age 20, with plans to start taking distributions at age 70. You also contribute $10,000 per year (with no employer match, and no inflation), at an average return of 5% per year.

Here’s how that might look over time:

401(k) Savings Over Time
Age	401(k) Balance
20	$10,000
30	$128,923
40	$338,926
50	$680,998
60	$1,238,198
70	$2,145,817

Using time and investment returns to supercharge your savings, you could end up with more than $2 million through dutiful saving and investing in your 401(k). Again, there are no guarantees, and the chart above makes a lot of oversimplified assumptions, but this should give you an idea of how things can add up.

Alternatives to 401(k) Plans

While 401(k) plans can be powerful financial tools, not everyone has access to them. Or, they may be looking for alternatives for whatever reason. Here are some options.

Roth IRA

Roth IRAs are IRAs that allow for the contribution of after-tax dollars. Accordingly, the money contained within can then be withdrawn tax-free during retirement. They differ from traditional IRAs in a few key ways, the biggest and most notable of which being that traditional IRAs are tax-deferred accounts (contributions are made pre-tax).

Learn more about what IRAs are, and what they are not.

Traditional IRA

As discussed, a traditional IRA is a tax-deferred retirement account. Contributions are made using pre-tax funds, so investors pay taxes on distributions once they retire.

HSA

HSAs, or health savings accounts, are another vehicle that can be used to save or invest money. HSAs have triple tax benefits, in that account holders can contribute pre-tax dollars to them, allow that money to grow tax-free, and then use the holdings on qualified medical expenses — also tax-free.

Retirement Investment

Typical returns on 401(k)s may vary, but looking for an average of between 5% and 8% would likely be a good target range. Of course, that doesn’t mean that there won’t be up or down years, and averages, themselves, can be a bit misleading.

While your annual return on your 401(k) may vary, the good news is that, as an investor, you have options about how you save for the future. The choices you make can be as aggressive or as conservative as you want, as you choose the investment mix that best suits your timeline and financial goals.

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FAQ

What is the typical 401(k) return over 20 years?

The typical return for 401(k)s over 20 years is between 5% and 8%, assuming a portfolio sticks to an asset mix of roughly 60% stocks and 40% bonds. There’s also no guarantee that returns will fall within that range.

What is the typical 401(k) return over 10 years?

Again, the average rate of return for 401(k)s tends to land between 5% and 8%, with some years providing higher returns, and some years providing lower, or even negative returns.

What was the typical 401(k) return for 2022?

The average 401(k) lost roughly 20% of its value during 2022, as increasing interest rates and shifting economic conditions over the course of the year (largely due to increasing inflation) caused the economy to sputter.

Nov

2023

Class A vs Class B vs Class C Shares, Explained

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

Broadly speaking, Class A, Class B, and Class C shares are different categories of company that have different voting rights and different levels of access to distributions and dividends. Companies may use these tiers so that certain key shareholders, such as founders or executives, have more voting power than ordinary shareholders. These shareholders also may have priority on the company’s profits and assets, and may have different access to dividends.

Not all companies have alternate stock classes. And what can make share categories even more complicated is that while the classifications are common, each company can define their stock classes, meaning that they can vary from company to company. That makes it even more important for investors to know exactly what they’re getting when they purchase a certain type of stock. Understanding how different share classes typically differ can help when making investment decisions or analyzing business news.

Key Points

• Class A, Class B, and Class C shares are different categories of company stock with varying voting rights and access to dividends.

• Companies may use different share classes to give certain shareholders more voting power and priority on profits.

• Share classes can vary from company to company, making it important for investors to understand the specific terms and differences.

• Class A shares generally have more voting power and higher priority for dividends, while Class B shares are common shares with no preferential treatment.

• Class C shares can refer to shares given to employees or alternate share classes available to public investors, with varying restrictions and voting rights.

Why Companies Have Different Types of Stock Shares

When a company goes public, they are selling portions of their company, known as stocks, to shareholders.

Shareholders own a portion of the company’s assets and profits and have a say in how the company is governed. To mitigate risk and retain majority control of the company, a company can restrict the amount of stock they sell and retain majority ownership in the company. Or they can create different shareholder classes with different rights.

By creating multiple shareholder classes when they go public, a company can ensure that executives maintain control of the company and have more influence over business decisions. For example, while ordinary shareholders, or Class B shareholders, may have one vote per share owned, individuals with executive shares, or Class A shares, may have 100 votes per share owned. Executives also may get first priority of profits, which can be important in the case of an acquisition or closure, where there is only a finite amount of profit.

Different stock classes can also reward early investors. For example, some companies may designate Class A investors as those who invested with the company prior to a certain time period, such as a merger. These investors may have more votes per share and rights to dividends than Class B investors. A company’s charter, perspective, and bylaws should outline the differences between the classes.

Class differentiation has become more critical in creating a portfolio in recent years because investors have access to different classes in a way they may not have had access in the past. For example, mutual funds frequently divide their shares into A, B, and C class shares based on the type of investor they want to attract.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

The Different Types of Shares

Just like there are different types of stock, there are different types of shareholders. Because different stock classes have such different terms, depending on the company, investors may use additional terminology to describe the stock they hold. This can include:

Preferred shares

Investors who buy preferred shares may not have voting rights, but may have access to a regular dividend that may not be available to shareholders of common stock.

Common shares

Sometimes called “ordinary shares,” common shares are stocks bought and measured on the market. Owners have voting rights. They may have dividends and access to profits, though they may come after other investors, such as executive shareholders and preferred shareholders have been paid.

Nonvoting shares

These are typically offered by private companies or as part of a compensation package to employees. Companies may use non voting shares so employees and former employees don’t have an outsize influence in company decision-making, or so that power remains consolidated with the executive board and outside shareholders. Some companies create a separate class of stock, Class C stock, that comes without voting rights and that may be less expensive than other classes.

Executive shares

Typically, these shares are held by founders or company executives. Their stock may have outsize voting rights and may also have restrictions on the ability to sell the shares. Executive shares usually do not trade on the public markets.

Advisory shares

Often offered to advisors or large investors of a company, these shares may have preferred rights and do not trade on public markets.
Recommended: Shares vs. Stocks: Differences to Know

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What Are Class A Shares?

While the specific attributes of Class A shares depend on the company, they generally come with more voting power and a higher priority for dividends and profit in the event of liquidation. Class A shares may be more expensive than Class B shares, or may not be available to the general public.

Many companies can have different stock tiers that trade at different prices. For instance, Company X may have Class A stock that regularly trades at hundreds of thousands of dollars while its Class B stock may trade for hundreds of dollars per share. Class B stockholders may also only have a small percentage of the vote that a Class A stockholder has. And while Class A stockholders might be able to convert their shares into Class B shares, a Class B shareholder may not be able to convert their shares into Class A shares.

Many of the tech companies that have gone public in recent years have also used a dual-share class system.

In some cases, shareholders are not allowed to trade their Class A shares, so they have a conversion that allows the owner to convert them into Class B, which they can sell or trade. Executives may also be able to sell their shares in a secondary offering, following the IPO.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

What Are Class B Shares?

Often companies refer to their Class B shares as “common shares” or “ordinary shares,” (But occasionally, companies flip the definition and have Class A shares designated as common shares and Class B shares as founder and executive shares). Investors can buy and sell common shares on a public stock exchange, where, typically, one share equals one vote. Class B shares carry no preferential treatment when it comes to dividing profits or dividends.

What Are Class C Shares?

Some companies also offer Class C shares, which they may give to employees as part of their compensation package. These shares may have specific restrictions, such as an inability to trade the shares.

Class C shares also may also refer to alternate share classes available to public investors. Often priced lower than Class A shares and with restrictions on voting rights, these shares may be more accessible to larger groups of investors. But this is not always the case. For example, Alphabet has Class A and Class C shares. Both tend to trade at similar prices.

The difference between Class C and common stock shares can be subtle. It’s important to note that these stock classes vary depending on the company. So doing research and understanding exactly which type of shares you’re buying is key before you commit to purchasing a certain class of stock.

Class A vs Class B vs Class C Shares

What Are Dual Class Shares?

Companies that offer more than one class of shares have “dual class shares.” This is a fairly common practice, and some companies offer dual class shares that automatically convert to a common share with voting privilege at a set period of time.

These may be startups who go public through IPO and do not want public investors to have a say in the company’s decision-making. There has been controversy about companies offering two share classes of stock to the public, with detractors concerned that multiple share classes may lead to governance issues, such as reduced accountability. But others argue that multiple share classes can be an asset for a public company, leading to improved performance.

The Takeaway

Class A, Class B, and Class C shares have different voting rights and different levels of access to distributions and dividends. It can be difficult to determine which investment class is the best option for you if you’re deciding to invest in a public company that offers multiple share classes. Beyond market price, understanding how the stock will function in your overall portfolio as well as your personal investing philosophy can help guide you choose the best share class for you.

For example, investors who may be looking for shorter-term investments may choose a stock class without voting privileges. Other investors who want to be active in corporate governance may prefer share classes that come with voting rights. And some investors may be looking for stocks that provide guaranteed dividends, which may guide their decision toward one class of shares.

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Photo credit: iStock/g-stockstudio

Nov

2023

Strike Price, Explained: Definition and Examples

Strike Price: What It Means for Options Trading

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

In options trading, a strike price represents the price at which an investor can buy or sell a derivative contract. An option strike price can also be referred to as an exercise price or a grant price, as it comes into play when an investor is exercising the option contract they’ve purchased.

Strike price can determine the value of an option, and how much or how little an investor stands to gain by exercising option contracts. Trading options can potentially generate higher rewards for investors, though it can entail taking more risk than individual stocks. Understanding strike price and how they’re set is key to developing a successful options trading strategy.

Key Points

• Strike price is the price at which an investor can buy or sell a derivative contract.

• The strike price determines the value of an option and the potential gain for the investor.

• Strike prices are set when options contracts are written and can vary for different contracts.

• There are different types of options, including calls and puts, which have different strike prices.

• Understanding strike price is crucial for developing a successful options trading strategy.

What Is a Strike Price?

An option is a contract that gives the owner or buyer of the option the right to buy or sell a particular security on or before a specific date, at a predetermined price. In options trading terminology, this price is called the strike price or the exercise price.

Strike prices are commonly used in derivatives trading, a derivative draws its value from an underlying investment. In the case of options contracts, this can be a stock, bond, commodity or other type of security or index.

Further, Options contracts can trade European-style or American-style. With European-style options, investors can only exercise them on their expiration date. American-style options can be exercised any time up until the expiration date. This in itself doesn’t affect strike price for options contracts.

There are two basic types of options: calls and puts. With either type of option, the strike price is set at the time the options contract is written. This strike price then determines the value of the option to the investor should they choose to move ahead with exercising the option and buying or selling the underlying asset.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Calls

A call option conveys the right to a purchaser to buy shares of an underlying stock or other security at a set strike price.

Puts

A put option conveys the right to to a purchaser to sell shares of an underlying stock or other security at a set strike price. This is one way that investors can short a stock.

Examples of Strike Price in Options Trading

Having an example to follow can make it easier to understand the concept of strike prices and how it affects the value of a security when trading option contracts. When trading options, traders must select the strike price and length of time they’ll have before exercising an option.

The following examples illustrate how strike price works when buying or selling call and put options, respectively.

Buying a Call

Call options give a purchaser the right, but not the obligation, to purchase a security at a specific price. At the same time, the seller of the call option must sell shares to the investor exercising the option at the strike price.

Let’s say you hold a call option to purchase 100 shares of XYZ stock at $50 per share. You believe the stock’s price will increase over time. This belief eventually pans out as the stock rises to $70 per share thanks to a promising quarterly earnings call. At this point, you could exercise your option to buy shares of the stock at the $50 strike price. The call option seller would have to sell those shares to you at that price.

The upside here is that you’re purchasing the stock at a discount, relative to its actual market price. You could then turn around and sell the shares you purchased for $50 each at the new higher price point of $70 each. This allows you to collect a $20 per share profit, less any trading fees owed to your brokerage and the premium you paid to purchase the call contract.

Buying a Put

Put options give purchasers the right, but not the obligation, to sell a security at a specific strike price. The seller of a put option has an obligation to buy shares from an investor who exercises the option.

So, assume that you hold a put option to sell 100 shares of XYZ stock at $50 per share. Your gut feeling is that the stock’s price is going to decline in the next few months. The stock’s price drops to $40 per share so you decide to exercise the option. This allows you to make a profit of $10 per share, since you’re selling the shares for more than their current market price.

Writing a Covered Call

A covered call is an options trading strategy that can be useful in bull and bear market environments. This strategy involves doing two things:

• Writing a call option for a security

• Owning an equivalent number of shares of that same security

Writing covered calls is a way to hedge your bets when trading options. You can possibly generate income by writing a call option from the premiums investors pay to purchase it. Premiums paid by a call option buyer are nonrefundable, so you get to keep these payments even if the investor decides not to exercise the option later. Covered calls can offer some downside protection if you’re waiting for the market price of the underlying asset to rise.

So, say own 100 shares of XYZ stock, currently trading at $25 per share. You write a call option for 100 shares of that same stock with a strike price of $30. You then collect the premium from the investor who buys the option.

One of two things can happen at this point: If the stock’s price remains below the $30 stock price then the option will expire worthless. You still keep the premium for writing it and you still own your shares of stock. On the other hand, if the stock’s price shoots up to $35. The investor exercises the option, meaning you have to sell them those 100 shares. You still collect the premium but you might have been better off holding onto the stock, then selling it as the price climbed.

Moneyness

Moneyness describes an option’s strike price relative to its market price. There are three ways to measure the moneyness of an option:

In the Money

Options are in the money when they have intrinsic value. A call option is in the money when the market price of the underlying security is above the strike price. A put option is in the money when the market price of the underlying security is below the strike price.

At the Money

An option is at the money when its market price and strike price are the same.

Out of the Money

An out-of-the-money option has no intrinsic value. A call option is out of the money if the market price of the underlying security is below the strike price. A put option is out of the money when the market price of the underlying security is above the strike price.

Understanding moneyness is important for deciding when to exercise options and when they may be at risk of expiring worthless.

How Is Strike Price Calculated?

The strike price of an option contract is set when the contract is written. Strike prices may be determined by the exchange they’re traded on (like the Chicago Board Options Exchange). Options contract writers may use the security’s closing price from the previous day as a baseline for determining the strike price while taking into account volatility and trading volume.

A writer can issue multiple option contracts for the same security with varying strike prices. For example, you might see five option contracts for the same stock with strike prices of $90, $92.50, $95, $97.50 and $100. This allows investors an opportunity to select varying strike prices when purchasing calls or put options for the same stock.

Note, however, that writing options in this fashion will likely result in those calls being uncovered, unless the writer owns enough shares to cover all of the options issued — that can mean incurring significant risk.

How Do You Choose a Strike Price?

When deciding which options contracts to buy, strike price is an important consideration. Stock volatility and the passage of time can affect an option’s moneyness and your potential profits or less from exercising the option.

As you compare strike prices for call or put options, consider:

• Your personal risk tolerance

• Where the underlying security is trading, relative to the option’s strike price

• How long you have to exercise the option

You can also consider using various options trading strategies to manage risk. That includes covered calls as well as long calls, long puts, short puts and married puts. Learning more about how to trade options can help you apply these strategies to maximize returns while curbing the potential for losses.

What Happens When an Option Hits the Strike Price?

When an option hits the strike price it’s at the money. This means it has no intrinsic value as the strike price and market price are the same. There’s no incentive for an investor to exercise an option that’s at the money as there’s nothing to be gained from either a call or put option. In this scenario, the option will expire worthless.

If you’re the purchaser of an option that expires worthless, you would lose the money you paid for the premium to buy the contract. If you’re the writer of the option you would profit from the premium charged to the contract buyer.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

The Takeaway

Strike price is a critical concept for investors to know, especially if they’re trading or otherwise dealing with options as a part of their investing strategy. The strike price simply refers to the price that a purchaser can buy or sell an underlying security. Again, options can be fairly high-level, and may not be appropriate for all investors.

If you’re interested in options trading, getting started isn’t complicated. You simply need to choose an online brokerage that offers options trading. When comparing brokerages be sure to check the fees you’ll pay to trade options.

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

Photo credit: iStock/Paul Bradbury

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Nov

2023

When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

By Pam O’Brien | Budgeting & Goals, invest, Investing, Life & Career, Preparing for Retirement | No Comments

When it comes to figuring out when you can retire, there are a number of factors to consider: Social Security, inflation, and health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

Key Points

• Factors to consider when deciding when to retire include Social Security benefits, inflation, and healthcare costs.

• The full retirement age for Social Security benefits varies based on birth year.

• Early retirement can result in reduced Social Security benefits, while delaying retirement can increase monthly benefits.

• Different retirement accounts have specific rules for withdrawals, such as Roth IRAs and traditional IRAs.

• Other sources of retirement income to consider include part-time work, pensions, inheritance, and rental income.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

💡 Quick Tip: You can’t just sit on the money you save in an IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

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Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $21,240 in 2023, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit.

Pension

A pension, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will not affect your social security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize. These are some of the major expenses retirees commonly face.

Healthcare

For most people, healthcare costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, the average amount that a couple who are both age 65 will spend on healthcare during their first year of retirement is $12,300.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, Americans aged 65 and older spent $16,880 annually on housing during the years from 2016 to 2020, according to the Bureau of Labor Statistics.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. From 2016 to 2020, people over age 65 averaged about $7,062 in transportation costs a year.

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59 ½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59 ½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59 ½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59 ½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to figure out how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

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

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount, or just 70%, of your benefits.

There is something called the rule of 55 that allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.

Nov

2023

How to Know When to Sell a Stock

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Table of Contents

When Is a Good Time to Sell Stocks?
7 Reasons You Might Sell a Stock
4 Reasons You Might Not Want to Sell a Stock
Selling a Stock 101

Knowing the right time to sell a stock can be a complicated decision. There’s the desire to sell at a profit, or to sell in order to prevent a loss — and sometimes there’s a logic to selling at a loss for tax purposes.

There can also be times when selling a stock isn’t necessarily a good idea — like when the market is volatile, and an investor lets the market jitters interfere with their wider investing strategy. In any circumstance, it helps to know your rationale for when to sell a stock.

Key Points

• Knowing when to sell stocks requires considering factors such as a company’s fundamentals, opportunity cost, valuation, personal needs, and tax implications.

• Economic reports and earnings releases can affect stock prices, but there is no specific ideal time to sell.

• Different sell order types, such as market sell, limit sell, stop-loss sell, and stop-limit sell, offer investors varying levels of control and execution.

• Investors selling stock should consider how a sale aligns with their financial goals, risk tolerance, and time horizon.

• Financial advisors and online brokerage platforms provide options for selling stocks, but costs and individual preferences should be considered.

When Is a Good Time to Sell Stocks?

There are a few ways to approach the question of when to sell stocks. Perhaps the most relevant answer is “when you need to.” That will depend on the individual investor, of course. But some investors, looking to generate a profit from their stock holdings, may also want to plan to sell stocks on certain dates, or during certain times of the day.

For example, earnings reports are usually released quarterly, and are often associated with movements in share price. This is often called “earnings season.” While there’s no way to know for sure how an earnings release will affect a stock’s price, more often than not, share prices gain or lose value in the wake of an earnings report.

As for specific times of the day — if you’re a more experienced trader, you may consider selling your shares around the open (9:30 am EST) or close (4 pm EST) of the stock market. Stock prices are most volatile around these times, so you may be able to capitalize on a sudden jump in price.

The point is not that there is a specific time period that’s ideal, or not ideal, when it comes to selling stocks. It’s best to familiarize yourself with the cadence of different economic reports (the jobs report, consumer confidence survey, interest rate changes, etc.), and learn what the impact of those data releases can be.

Once you have a sense of the literal ‘when’ of selling stocks, it’s up to you to judge the right time to make a move based on your rationale for why you want to do so.

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7 Reasons You Might Sell a Stock

There are several reasons that could prompt you to think about selling your stock.

1. When You No Longer Believe in the Company

When you bought shares of a certain company, you presumably did so because you believed that the company was promising and you wanted to invest in its stock, and/or that the share price was reasonable. But if you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

There are many reasons you may lose faith in a stock’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.

Part of the task here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year, and what feels like it could be the start of a more sustained change within the business.

2. Due to Opportunity Cost

Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.

The same goes for investing — for each stock you buy, you are doing so at the cost of not buying some other asset.

No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes — like bonds or commodities — as well as newer markets like crypto, have also created competition to simply holding plain-vanilla company stocks.

This is easier said than done, however, because we are often emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.

3. Because the Valuation Is High

Often, stocks are evaluated in terms of their price-to-earnings (P/E) ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future. But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons: Because the price has increased without a corresponding increase in the expected earnings for that company, or because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. For Personal Reasons

Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing a cash infusion in preparation for the home-buying process or some other purchase. If this is the case, you may want to consider a number of factors in choosing which stock to sell.

You may make the decision based purely on which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook.

5. Because of Taxes

Employing a tax-efficient investing strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.

It may be possible to offset some capital gains with capital losses, which are triggered by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional. One strategy that some people use is tax-loss harvesting, where you purposely sell some investments at a loss in order to offset the tax consequences of gains in your portfolio.

6. To Rebalance a Portfolio

If you’re looking to make some tweaks to your investment strategy for one reason or another, you may want to sell some stocks as a part of a strategy to rebalance your portfolio. Investors are often encouraged to rebalance their portfolios often — but not too often — as market and economic conditions can and do change.

This typically involves taking a look at your desired asset allocation, thinking about your risk tolerance (and how it may have changed), and deciding how you may want to change the different asset classes that comprise your portfolio, if at all. Selling stocks would be involved in most rebalancing efforts.

7. Because You Made a Mistake

Finally, you may want to sell stocks if you simply made a mistake. You may have purchased shares of the wrong company, or bought a stock that is simply too risky, and are doing your due diligence and risk management in regards to your portfolio. If that’s the case, you can sell your stocks and reinvest the money elsewhere.

4 Reasons You Might Not Want to Sell a Stock

In addition to weighing possible reasons for selling a stock, there are counter arguments for holding onto your shares: e.g. having a knee-jerk reaction to the recent performance of that stock. There is, of course, a lot to think about when considering risk and investing, but you’ll need to know before buying any stocks that the markets are going to move — a lot.

1. Because a Stock Went Up

As mentioned, stock prices will go up at some point, and you may want to hold onto your stock in the hope that it will continue to grow. But that isn’t necessarily a good reason to try to time the market.

Even the experts cannot always buy at the bottom and sell at the top. There are no crystal balls, as they say. So even if a stock’s price is rising, you may want to have a few other reasons for not selling the stock.

2. Because a Stock Went Down

Conversely, stock prices will, at some point, go down. Again, it may be tempting to try and cut your losses before you accrue even bigger losses — assuming you think that the stock’s value will continue to plummet. But, again, it may be helpful to think longer-term rather than what’s happening today. Prices will, likely, rebound, and you may only lock your losses in by selling.

3. Because of an Economic Forecast

Economic forecasts come and go, and they change — a lot, and often. This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as political or economic events or announcements) as they do with the health of the underlying company.

4. Because of Short-Term Reasons

There can be a million potential reasons that could spur you to sell your stocks in the short term. But many financial professionals will probably tell you that focusing on the longer term is a better idea, and not selling — i.e. using a classic buy-and-hold strategy — could lead to bigger returns over time.

So, barring some other reason, short-term issues or market fluctuations may not be a good reason to sell.

When to Sell Depends on You

Ultimately, whether you sell your stocks or not will boil down to your goals as an investor. That includes factors such as your investment style — are you looking at day trading, or employing a buy-and-hold strategy, for instance? — how much risk you’re willing to assume, and your overall time scale.

Many investors who are simply investing for retirement may very rarely sell stocks. Others, who are looking to turn a profit on a weekly or monthly basis, may sell much more frequently. It all depends on the individual. It’s more a matter of looking at what you’re hoping to generate from your investments, and how fast you’re hoping to generate it.

Risk, style, and how much time you have to do it are all critical variables.

Selling a Stock 101

These are the basic steps required to cash out and sell stocks:

1. Whether by phone or via an online brokerage account platform, let your broker know which of your stock holdings you’d like to sell.

2. Specify which order type (more on that below). This can determine at what price level your stock is sold.

3. Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes a couple of days for a trade to settle.

4. Click “Sell” or “Submit Order.”

Different Sell Order Types

There are several different stock order types that can be useful in different situations.

Market Sell Order

This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed. There may also be a difference due to delayed versus real-time stock quotes to consider as well.

Generally speaking, the advantage of using a market order is that your trade is likely to be executed quickly. That’s especially true for bigger or more popular stocks, which tend to be more liquid. But again: the biggest potential drawback is that you might not get the exact price you thought you were due to market volatility.

Limit Sell Order

Limit orders involve selling a stock at a specific price. For example, if you’re buying stocks, you can specify a price that you’re willing to pay — the trade will then be executed at that price, or lower.

If you’re selling stocks, the inverse is true — your stock will be sold at the specified price, or higher.

The upside to using limit orders is that they give investors some semblance of control by allowing them to name their price. The investor can then walk away, and let their brokerage handle the execution for them.

The downsides, though, include the fact that the trade may never execute if the specified price isn’t reached, and that using limit orders may take some practice and experience to properly execute.

Stop-Loss Sell Order

A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “sell-stop order.” But note that there are other types of stop-loss orders, such as buy-stop orders, and trailing stop-loss orders.

Stop-loss orders can be useful in that they can prevent investors from losing more than they’re comfortable with, or that they can afford to lose. They, as the name implies, are a very useful tool to prevent losses. But depending on overall market conditions, they can also work against an investor. If there’s a short-term drop in share prices, for instance, it’s possible that an investor could miss out on gains if share prices rebound in the medium or long term.

Stop-Limit Sell Order

A stop-limit sell order is an order that’s executed if your stock’s price drops to a certain price, but only if the shares can be sold at or above the limit price specified. They are, in effect, a sort of bridge between stop and limit orders. These types of orders can help investors dodge the risk that a stop order executed at an unexpected price, giving them more control over the price at which a sell order will execute.

Different Ways to Sell Stocks

There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common platforms individual or retail investors use to currently buy or sell stocks. However, another option is through a financial advisor.

Financial advisors are professionals who have been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute. They can do a number of other things for you, too, including proffer advice and help you formulate an investing strategy. But there are costs to using financial advisors, so it may not be worth it, depending on how involved in the markets you are.

The Takeaway

Knowing when to sell stocks is not an intuitive thing — there are a lot of times when it may be a good idea to sell your stocks, and others when it’s not. For example, if you’ve lost faith in a company, need a cash infusion, or are doing some portfolio rebalancing, then it may be a good time to sell stock.

On the other hand, if you’re unnerved that your stock’s price fell after a bad earnings report, you may want to hold on and let things play out. It’s difficult, and is a true test of your risk tolerance. But over time, it should become easier and more natural as you gain experience as an investor.

With SoFi Invest®’s Automated Investing, a robo-advisor service, you can get an investment portfolio of ETFs suggested for you using your goals, risk tolerance, and investing time horizon as a guide. An alternative is SoFi’s Active Investing platform, which allows you to actively buy, sell, and trade stocks, ETFs and fractional shares.

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

FAQ

How can you tell when to sell a stock?

There’s no exact science, and determining whether it’s a good time to sell a stock will come down to the individual investor’s preference, risk tolerance, and time horizon. However, you can also keep an eye on a stock’s valuation, consider your opportunity costs, and weigh other factors in order to make a decision.

Should you ever sell stocks when they’re down?

You can sell stocks when they lose value for any number of reasons, but it’s likely best practice to make sure you’re doing so as a part of an overall investing strategy, e.g. tax-loss harvesting, and not simply because you’re making an emotional or irrational decision based on current market conditions.

How much profit do I need before I sell a stock?

There’s no exact science or answer to determine how much of a return you’d need to see before you sell a stock. That’s up to the specific investor, and there may be times when you actually generate a negative return when selling a stock.

SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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