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SWOT Analysis, Explained: Definition and Examples

A SWOT analysis is a tool used by businesses and investors to assess a company’s strengths, weaknesses, opportunities, and threats. Businesses often use the SWOT framework to help make strategic decisions about where to allocate resources and how to respond to changes in the marketplace.

Investors can use a SWOT analysis to decide whether or not to invest in a particular company. This can be helpful because investors look for any way to evaluate stocks and other investments. By conducting a SWOT Analysis on a specific company, it can be one more tool in an investor’s toolkit when choosing what stocks to buy and sell.

What Is a SWOT Analysis?

SWOT is an acronym that stands for Strength, Weakness, Opportunity, and Threats. Analysts who use a SWOT analysis consider these four key aspects of a company to determine its future performance.

Initially, SWOT analyses were used by businesses to assess a firm’s operations. But now, SWOT analyses are used by all sorts of organizations and individuals, including investors.

When using the SWOT framework, investors consider a company’s internal operations and external competition with the expectation that this will provide a well-rounded view of where the stock lies—and where it might be headed.

💡 Recommended: How to Analyze a Stock

Strengths and weaknesses are a company’s elements that give it a relative advantage or disadvantage over its competitors. In this analysis, the strengths and weaknesses usually come from internal factors involving the company’s operations. Opportunities and threats typically come from external factors in the company’s industry or the overall economy.

Many investors probably use some form of a SWOT analysis already, whether they realize it or not. Common sense could compel investors to consider the strengths and weaknesses of a company to some extent.

Using the formal SWOT analysis may give an investor a more systematic, in-depth picture of a company’s present and its potential future.

💡 Recommended: How to Evaluate a Stock Before You Buy

SWOT Analysis Matrix

Business analysts and investors usually depict a SWOT analysis in a table, with quadrants dedicated to each element. Analysts typically create a list of questions for each component that they can answer with quantitative and qualitative data. Strengths and weaknesses are listed first, followed by opportunities and threats.

Example SWOT Analysis Matrix

Strengths Weakness

•   What products are performing well?

•   What assets does the company have?

•   What unique resources and relationships does the company have access to?

•   What areas of the company need to improve?

•   How much debt does the company have?

•   What complaints do customers usually have?

Opportunities Threats

•   Could the company offer additional products or enter a new market?

•   Is there talent available that the company could hire?

•   Could the company leverage new technology to improve operations?

•   Do regulations threaten business operations?

•   Is the company positioned to withstand an economic downturn?

•   Are there any outside security risks?

How to Do a SWOT Analysis

There are several ways to approach a SWOT analysis. Regardless of the method used, analysts should look at a company’s strengths, weaknesses, opportunities, and threats to identify the key factors that will impact an investment.

Strengths

Strengths may be areas or characteristics where a company excels and has a competitive advantage over its peers. Examples of strength include having a solid brand, conducting innovative research on new technologies or products, or cornering the market for a particular sector in an area (e.g., being the first legal cannabis company in a state that recently legalized cannabis).

Analysis of strength might also come from simply looking at a company’s financial statements. Rising quarterly earnings and dividends, for example, might be considered a strength because it means the company is growing.

Weakness

If a company doesn’t perform well in critical areas that typically indicate strength, that could show a potential weakness. Declining earnings, cutting or suspending dividends, or a general lack of promising research and development could be signs of weakness. Additionally, analysts may consider inexperienced management or high employee turnover as weaknesses.

Opportunities

Opportunities are potential external factors that a company may be able to take advantage of. For example, suppose a pharmaceutical company specializes in manufacturing a particular type of drug, and that drug is expected to be approved by regulators in another country. In that case, that could be seen as an opportunity to enter a new market. However, it’s important to note that the existence of an opportunity and the reality of a company seizing it are two different things.

Threats

Threats are external factors that may harm a company. For a company specializing in oil and petroleum products, the rising trend of electric vehicles (EVs), renewable energy tech, and shifting consumer trends toward sustainable practices could pose a significant threat. This trend may threaten an entire industry, especially with the growth in renewable energy and green investing.

Other examples include a company’s most significant product becoming obsolete (like film and digital cameras did once smartphones became widespread) or a significant competitor encroaching on its business.

How to Use a SWOT Analysis

The best way to use a SWOT analysis will vary depending on the specific situation and goals of the investor conducting the analysis. However, some general tips on how to use a SWOT analysis effectively include:

•  Clearly define the purpose of the SWOT analysis.

•  Gather as much relevant information as possible. This may involve conducting market research or analyzing data.

•  Be honest and objective in your assessment. It is important to avoid bias or personal opinion when conducting a SWOT analysis.

•  Periodically review and update the SWOT analysis. As the market environment changes, the SWOT factors will affect the company. Investors want to regularly review and update a SWOT analysis to ensure it remains relevant.

Additionally, investors can gather internal and external data to use the SWOT analysis framework.

💡 Recommended: Using Fundamental Analysis to Choose Stocks

Internal

As noted above, strengths and weaknesses refer to a company’s internal operations. These are the resources and experiences readily available to a company. The following are some common internal factors that investors consider when determining a company’s strengths and weaknesses:

•  Financial resources: Revenue, earnings, and investments

•  Physical resources: facilities and equipment

•  Intangible assets: brand name, trademarks, patents, and copyrights

•  Human resources

External

External forces influence and affect every company. They may present opportunities or threats to a company or potential investment. External factors are typically things a company doesn’t directly control, such as the following:

•  Market trends: new products and technology advancements

•  Economic trends: local, national, and global financial and economic trends

•  Demographics

•  Regulations

💡 Recommended: Understanding Economic Indicators

Example of a SWOT Analysis

For investors interested in conducting a SWOT analysis, here is an example of one by looking at Netflix.

Netflix Strengths

One of Netflix’s main strengths is its brand recognition — Netflix has become synonymous with online video streaming. The general public sometimes uses “Netflix” to mean all streaming.

Like Netflix, Amazon, Apple, Meta, and Nike all have strong brands as one of their key strengths. These corporations also have the following strengths:

•  Amazon: The e-commerce giant has developed an industry-leading logistics and distribution network that ensures quick delivery times to customers

•  Apple: The technology company invests substantial resources into the research and development of its products and services.

•  Meta: The social media company, formerly known as Facebook, has a diversified portfolio of business units – like Facebook, WhatsApp, and Instagram – that gives it a substantial market share.

•  Nike: The apparel company creates strong marketing and advertising campaigns to target more customers.

While Netflix does have many competitors that are threatening its business, the company still has several other strengths because they were the first big player in the streaming space. Additionally, the company produces a lot of exclusive content not available on any other streaming platform.

Netflix Weaknesses

A potential weakness for Netflix is its high debt levels. The company’s debt rose from shy of $1 billion in 2014 to more than $16 billion in 2020. The company increased its borrowing as it shifted from licensing content to becoming a large television and movie production studio. However, this debt level may constrict future growth, especially in a rising interest rate environment.

Netflix Opportunities

One opportunity that Netflix may consider is adding an ad-based model with a lower-priced subscription tier. This opportunity could help the company gain increased revenue from advertisements on its platform while also attracting subscribers interested in signing up for the service at a lower price.

Netflix Threats

The visible threats to Netflix would likely be their competitors, including Hulu, Amazon Prime, Disney+, and HBO Max. They also have a recognizable, trusted name and plenty of exclusive content not available on other platforms. Disney+, in particular, has gained a large number of subscribers since it was made available.

Additionally, Netflix faces threats from macroeconomic factors, like rising inflation and the tightening of consumer spending. Because of the prevalence of competitors and the increasing cost of a Netflix subscription, consumers may be willing to cancel their subscriptions.

How Can Investors Use SWOT Analysis?

There are several ways that investors can use SWOT analysis. One way is to use it as a tool to screen companies. For example, an investor could use a SWOT analysis to determine companies with a solid competitive position and are well-positioned to take advantage of opportunities in the market.

Investors can also use SWOT analyses to monitor a company’s performance. An investor may conduct periodic SWOT analyses to track a company’s progress in its competitive position and growth prospects.

The Takeaway

Even if they don’t know what a SWOT analysis is, investors usually consider at least one of the four areas of strengths, weaknesses, opportunities, and threats when making investment decisions. However, investors can leverage a SWOT analysis to look at all four factors from a systematic, big-picture perspective, providing investment insights that might have been missed otherwise. That is the essence of SWOT analysis.

While SWOT analysis won’t eliminate investment risks, it is one more way for an investor to be as informed as possible before making any financial decision.

The SoFi Invest® investment app offers a variety of options so you can invest in line with your personal risk preferences and financial goals. With SoFi Invest, you can trade stocks and ETFs for as little as $5.

Find out how SoFi Invest can help you choose investments that suit your needs.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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 Lending Corp and/or its affiliates.
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What Is a Governance Token?

What Is a Governance Token?

A governance token is a cryptocurrency that gives its holders a right to vote on proposed changes to a blockchain network. This innovation is seen as a necessary step toward keeping certain crypto projects, particularly those within the decentralized finance (DeFi) ecosystem, decentralized. The idea is that rather than a single person or group controlling the direction of a platform, a community of users can influence decisions in a process known as governance.

While not unique to DeFi, governance tokens have become a key attribute of the DeFi ecosystem. Stick with us in this crypto guide to learn more about the question “what is a governance token.”

What Are Governance Tokens Used For?

Governance tokens give users of a particular blockchain protocol certain rights — such as the right to vote on proposed changes to the network. This could include granting token holders the ability to create new proposals or to spend tokens in an attempt to alter an existing proposal.

Other examples of uses for governance tokens might include:

•   Voting for changes to a network’s fee structure

•   Implementing changes to a project’s user-interface

•   Changing a network’s reward structure

•   Revising the amount of funding that developers receive

Governance tokens can have other functions in addition to granting voting rights to holders. Most DeFi tokens have governance features built into them, and most of them can also be used for things like staking crypto and yield farming.

Examples of Governance Tokens

As mentioned, most governance tokens are involved in the DeFi space in one way or another. Community governance is a key function that helps to keep DeFi decentralized. Most DeFi protocols run on the Ethereum blockchain.

Here are some examples of popular governance tokens.

Compound

Compound (COMP) is an ERC-20 utility token running on Ethereum. The protocol is a DeFi lending/borrowing platform. COMP holders have a chance to vote for changes to the network via the compound governance dashboard.

💡 Recommended: What Is Compound Finance (COMP)?

Yearn.finance (YFI)

Yearn.finance (YFI) is also a DeFi protocol hosted on Ethereum that offers lending, borrowing, and trading services. The platform has different products like Earn, Zap, Vaults, and APY. Users can earn YFI tokens by locking up crypto funds in smart contracts that run on Curve and Balance (other DeFi trading platforms). This allows users to participate in what’s known as yield farming.

Yield farming is the act of locking up funds in a DeFi protocol to earn interest. The more value that users lock up, the more tokens they earn as rewards.

Maker (MKR)

Based on Ethereum, Maker is responsible for creating the DAI stablecoin. MKR holders can vote on new proposed changes to the Maker DAO network inside the Maker Voting Dashboard. DAI has been praised for being one of the few stablecoins that are intended to be decentralized. It has also been integrated into some games, wallets, and DeFi apps.

💡 Recommended: What Is Maker (MKR) Cryptocurrency?

Synthetix Network Token (SNX)

Synthetix is a decentralized exchange (DEX) for synthetic assets. Also known as “synths,” these are tokens that are designed to mirror the price of a real-world asset. Whether it be bonds, stocks, commodities, or fiat currencies, users can trade synths in an effort to gain exposure to the price of a particular asset. This can be beneficial for those who might not have access to traditional capital markets.

SNX, the native token of the Synthetix Network, functions like a stablecoin in that it is pegged to an external asset at a one-to-one ratio. However, rather than being tied to a single currency, Synthetix allows users to mint a synthetic asset that will be backed by SNX. SNX holders can also influence the direction of the platform going forward.

Aave (AAVE)

Aave is a DeFi platform for borrowing, lending, and earning interest on crypto. Much like its peers, Aave runs on a series of smart contracts that manage the platform’s financial operations. Users can borrow funds and pay interest, or lock up crypto to earn interest. AAVE is the network’s native token, and it gives holders a say in the platform’s future development.

Governance Token vs Utility Token

When trying to answer the question “what is a governance token,” it’s useful to think of it as an improved type of utility token. Utility tokens usually have a single specific use case only.

For example, Binance coin (BNB) is used to give discounts on trading fees to traders who use the Binance crypto exchange. Holders may get to vote on which tokens they’d like to see listed on the exchange, but that’s very different from voting on a fundamental change to the protocol of a specific blockchain; which is a function of a governance token.

A governance token offers the best of both types of tokens. It can be used for various purposes, while also giving a share of network governance to those who hold it. In fact, many governance tokens adhere to the ERC-20 token standard, which is a set of criteria that utility tokens minted on the Ethereum network must abide by.

Governance Tokens: Potential Advantages and Disadvantages

While the idea of a governance token may sound almost perfect in theory, in practice governance tokens have their advantages and disadvantages.

Potential Advantages:

•   Decentralization. Governance tokens allow developers to keep projects decentralized. Without this type of governance structure in place, DeFi platforms would be only collections of smart contracts that no one could control.

•   More effective and inclusive development processes. Developers can arrive at conclusions and implement changes after receiving guidance from the community, instead of needing to figure out everything on their own.

•   Community involvement. Governance gives a project’s community a reason to come together to help improve the platform.

Potential Disadvantages:

•   Potential for a takeover. Individuals or groups with large amounts of capital can sometimes acquire enough governance tokens to make unilateral decisions affecting the network. This can defeat the whole purpose of a governance token, which is to keep decision-making decentralized and democratic.

•   Selfish decisions. Just because people have the ability to vote doesn’t mean they will always act in the best interest of their own community. A real-time example: In 2020, Maker experienced a flash crash that caused many of its investors to lose large sums of cash. Initially, the Maker community — represented by current holders of MKR governance tokens — voted to reimburse investors. Six months later, the community rescinded the vote; none of Maker’s investors could reclaim any of the money they lost.

•   No real accountability. Ultimately, there’s no legitimate accountability when it comes to democratic crypto governance. If a decision is deemed to be wrong or appears to go against the best interest of many users, there’s no clear person or party to blame or hold accountable.

The Takeaway

A governance token is not a unique type of token. Rather, a governance token may be any token that gives its holder a share of influence over how a crypto network is governed. In addition to their use in the decentralized finance sector, governance tokens may also be utilized on social media platforms that are decentralized.

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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 Lending Corp and/or its affiliates.


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How to Buy Mutual Funds Online

How to Buy Mutual Funds Online

In the past, most people worked one-on-one with financial advisors and brokers to help build and manage their portfolios. Often, through these financial professionals, investors could buy and sell mutual funds. However, online investing has changed this model quite a bit. In fact, it can be quite cost-effective to buy mutual funds online yourself.

A mutual fund can help you create a balanced and diversified portfolio so you don’t have to spend your days poring over the stock market. Thus, it helps if investors know what mutual funds are and know how to buy mutual funds online.

What Are Mutual Funds?

Mutual funds are a type of investment vehicle made up of a pool of money from many different investors. The money in the fund is then used to buy various assets, such as stocks, bonds, and other securities. When you buy a share of a mutual fund, you’re buying a fraction of all the securities in the fund. By doing this, you benefit from diversification.

For most beginning investors looking to put money into an investment portfolio, it would be difficult, expensive, and time-consuming to buy enough individual stocks and bonds to create a balanced portfolio.

Buying shares of a fund, on the other hand, gives you access to more diversity. So, if one of the assets in your mutual fund tanks, that loss could be balanced out by other securities that may be still performing well. On the other hand, if you only had your savings invested in the stocks of two or three companies, and the shares of one of those companies crash, you’ll take a more significant loss.

Mutual funds are overseen by portfolio managers who monitor the holdings in the fund, make adjustments, and rebalance the fund as necessary to achieve higher returns for their investors.

The funds can be actively managed or passively managed. An actively managed fund is one in which securities might be more heavily traded with the hopes of bringing high returns. In contrast, a passively managed fund tracks an established index, like the S&P 500, making smaller adjustments to align with the index’s performance.

💡 Recommended: Active vs. Passive Investing: Differences Explained

What Are Some Examples of Mutual Funds?

There are many different types of mutual funds that are made and managed to give investors access to different investment strategies. Here are a few categories of mutual funds:

Asset class funds

These are funds designed around the concept of investing in similar types of assets with similar risks, such as small-cap growth stocks or high-yield bonds. These mutual funds help you diversify over a single asset class and are just one part of a balanced portfolio.

Industry funds

Industry funds, sometimes called sector funds, invest in a mix of securities within a specific market or industry, such as technology, oil, or agriculture. Like asset class funds, they help you invest in a range of companies within a specific area.

Target date funds

Target date funds work a little differently than asset and industry funds. They are a set-it-and-forget-it investment tool designed to help you grow your investments over a set period. Many investors use target date funds to help build wealth for retirement.

For instance, a forty-year target date fund will carry higher risk securities, like stocks, in the early years of the time horizon with the goal of potentially high returns. Then, the fund will steadily shift towards lower-risk investments, like bonds, designed to preserve capital over time. These can be a good option for those who don’t want to spend a lot of time managing their 401(k)s or IRAs.

Exchange traded funds

Exchange-traded funds (ETFs) are similar to mutual funds. Both are professionally managed investment funds and offer investors slices of the portfolio. However, investors trade ETFs on a stock exchange, and like a stock, its value changes throughout the day. In contrast, a mutual fund is only priced once a day based on its net asset value (NAV) and is bought and sold through its sponsor.

💡 Recommended: ETFs vs. Mutual Funds: Learning the Difference

Pros of Buying Mutual Funds

Diversification

By investing in a mutual fund, you can spread your investment across a broad range of industries, companies, and sectors, which can help to mitigate risk.

Professional Management

Mutual funds are managed by professional portfolio managers who have the experience and expertise to make investment decisions on your behalf.

Reinvestment

Investors can take advantage of dividend, interest, and other income reinvestment in a mutual fund. For example, when a mutual fund pays out dividends, investors can usually reinvest the money without any fees. This can help investors grow wealth by compounding returns.

Convenience

Mutual funds offer a degree of convenience, as you don’t have to do extensive research and select individual investments.

Cons of Buying Mutual Funds

High Fees

The investment fees associated with mutual funds can be high, eating into your investment returns. Because mutual funds are professionally managed, they will charge fees to cover the management and operation expenses.

High Investment Minimums

Many mutual funds have investment minimums, requiring you to invest anywhere between $500 to $5,000 to participate in the fund. This can be an issue for investors who don’t have the initial capital to join the mutual fund.

Liquidity

Mutual funds can be illiquid because they can only be bought and sold once daily. This means that it can be challenging to get your money out when you need it.

Complexity

Mutual funds can be complex, making it difficult for investors to understand what they are buying.

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What Are the Best Performing Mutual Funds?

Determining the best performing mutual funds depends on an individual’s financial goals and risk tolerance. The best performing mutual fund for short-term growth probably won’t be the best mutual fund for long-term growth.

Before choosing a mutual fund to invest in, consider your investment goals, how much risk you’re comfortable taking on, and how involved you want to be in managing your portfolio. Working with a professional can often help you clarify your goals and choose mutual funds that work for you.

How to Invest in Mutual Funds Online

You can invest in mutual funds through an online brokerage firm or the investment firms that offer and manage them.

One advantage of dealing directly with the financial firms that offer the mutual funds is that they have no sales commissions or brokerage fees. This means that these fees will not eat into your investments. However, these mutual funds will still have management fees that investors need to consider.

Additionally, if you invest in a mutual fund directly through an investment firm, your mutual fund options are limited to that company’s various offerings.

Once you decide on whether you want to deal with an online brokerage or directly with a mutual fund provider, you can follow these steps to invest in mutual funds online:

Step 1: Open an Account

To invest in mutual funds online, you will need to open an account with a broker or financial firm that offers this service. Depending on the company, you may be able to open an account as an individual or as part of an employer-sponsored retirement plan.

💡 Recommended: How to Open a Brokerage Account

Step 2: Research

Next, you want to determine what type of mutual fund investment best suits your goals and risk tolerance. As mentioned above, there are many types of mutual funds available, each with different characteristics. It’s important to research and choose the mutual fund you wish to purchase.

Step 3: Invest

Once you have chosen the funds you want to invest in, you will need to fund your account and make your investment. Investors can only execute mutual fund transactions once per day after the market closes, and it typically takes one to two days for the transaction to close.

The Takeaway

Investing in mutual funds allows investors to diversify their holdings in a single product. Mutual funds offer options focusing on asset classes, time horizons, and risk tolerances for investors of all experience levels. Fortunately, investors can easily buy and sell these products through online brokerages and investment firms.

However, mutual funds have drawbacks in that their transactions are executed only once per day after the market closes. In contrast, exchange-traded funds (ETFs) trade throughout the day on stock exchanges, with many shares exchanging hands at various prices as buyers and sellers react to changes in the market. With SoFi Invest®, you can trade ETFs and individual stocks with no commissions for as little as $5.

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FAQ

Can I buy mutual funds on my own?

Investors can buy and sell mutual funds through an online broker or directly from a mutual fund company.

How can I buy mutual funds directly online?

There are a few different ways to buy mutual funds online. One way is to go through a broker that offers online trading. Another way is to use a mutual fund company’s website. You can buy a mutual fund once you have an account through an online brokerage or investment firm. Mutual fund purchases are executed once per day after the market closes, and it typically takes one to two additional days for the transaction to close.

What is the best way to buy mutual funds?

There is no best way to buy mutual funds. Depending on your preferences, you can buy and sell a mutual fund through an online brokerage firm or directly from the fund’s financial company. Additionally, investors can work with financial advisors to buy and sell mutual funds.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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 Lending Corp and/or its affiliates.
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What Are the 11 S&P 500 Sectors?

What Are the Different S&P 500 Sectors?

The S&P sectors represent the different categories that the index uses to sort the companies it follows. S&P refers to Standard & Poor; the S&P 500 index tracks the movements of 500 large-cap US companies. A number of mutual funds and exchange-traded funds (ETFs) use this index as a benchmark.

The Global Industry Classification System (GICS) has 11 stock market sectors in its taxonomy. It further breaks down these 11 sectors into 24 industry groups, 68 industries, and 157 sub-industries.

Understanding how the S&P sectors work and break down further can help both institutional and retail investors manage risk through different economic cycles by allocating their portfolio across multiple sectors. For example, cyclical stocks and cyclical sectors tend to fare well when the economy booms. During a recession, however, defensive stocks may outperform them. However, it’s also possible for all 11 sectors to trend in the same direction.

Examining the 11 Sectors of the S&P

Here’s a look at the S&P Sector list:

1. Technology

Technology represents the largest S&P sector. This sector includes companies involved in the development, manufacturing, or distribution of tech-related products and services. For example, companies in the technology sector may produce computer software programs or electronics hardware or research and develop of new technologies.

Tech stock investments are typically cyclical, in that they usually perform better in stronger economies. But during the coronavirus pandemic, many tech stocks saw a boost as demand for things like video-conferencing platforms and cloud storage increased as more companies adopted remote work.

The technology sector includes a number of growth stocks, which are companies that reinvest most or all of their profits in expansion versus paying dividends. Examples of the biggest tech stocks include:

•   Facebook (META)

•   Apple (AAPL)

•   Microsoft (MSFT)

•   Alphabet (GOOG)

•   IBM (IBM)

2. Health Care

The next largest of the S&P sectors is health care. This sector includes pharmaceutical companies, companies that produce or distribute medical equipment, and supplies and companies that conduct health care-related research.

The health care sector also includes alternative health companies. For example, GW Pharmaceuticals is a drug developer focused on cannabis. The company develops medical marijuana products to treat various health conditions. As such, it’s generally considered part of the health care sector.

Recommended: Cannabis Investing 101

More traditional examples of healthcare sector companies include:

•   CVS (CVS)

•   Johnson & Johnson (JNJ)

•   UnitedHealth Group (UNH)

•   Thermo Fisher Scientific (TMO)

•   Regeneron (REGN)

Health care stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.

3. Financials

The financials sector covers a variety of industries, including banking and investing. Banks, credit unions, mortgage companies, wealth management firms, credit card companies and insurance companies are all part of the financial sector.

Financial services companies are usually categorized as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or can not keep up with credit card payments. But this can be subjective, as mortgage companies may benefit during recessionary periods if lower interest rates spur home-buying activity.

Some of the biggest names in the financial sector include:

•   Visa (V)

•   JPMorgan Chase (JPM)

•   Bank of America (BAC)

•   PayPal Holdings (PYPL)

•   Mastercard (MA)

4. Real Estate

Real estate is a relatively new addition to the S&P sectors list. This sector includes real estate investment trusts (REITs) as well as realtors, developers and property management companies. REITs invest in income-producing properties and pay 90% of profits out to investors as dividends.

Investing in real estate can be a defensive move as this sector is largely uncorrelated with stocks. So if stock prices fall, for example, investors may not see a correlating drop in real estate investments as property generally tends to appreciate over time.

Examples of real estate companies in the S&P 500 include:

•   Digital Realty (DLR)

•   American Tower (AMT)

•   Prologis (PLD)

•   Simon Property Group (SPG)

•   Boston Properties (BXP)

5. Energy

The energy sector includes companies that participate in the production and/or distribution of energy. That includes the oil and gas industry as well as companies connected to the development or distribution of renewable energy sources.

Energy stock investments can be more sensitive to economic movements and supply-demand trends compared to other sectors. For example, gas and oil prices declined in 2020 as stay at home orders kept drivers off the roads. Gas prices shot up in 2021, however, following the Colonial Pipeline hack which sparked fears of fuel shortages.

Some of the biggest energy sector companies include:

•   Exxon Mobil (XOM)

•   Royal Dutch Shell (SHEL)

•   Chevron (CVX)

•   Conocophillips (COP)

•   Halliburton (HAL)

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6. Materials

The materials sector includes companies connected to the sourcing, processing or distribution of raw materials. That includes things like lumber, concrete, glass, and other building materials.

Materials is one of the cyclical S&P sectors, as it can be driven largely by supply and demand. During a housing boom, for example, the materials sector may benefit from increased demand for lumber, plywood and other construction materials.

Material stocks in the S&P 500 include:

•   Dupont (DD)

•   Celanese (CE)

•   Sherwin Williams (SHW)

•   Air Products & Chemicals (APD)

•   Eastman Chemical (EMN)

7. Consumer Discretionary

The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers.

Examples of stocks that fit into the consumer discretionary sector are:

•   Starbucks (SBUX)

•   AMC (AMC)

•   Best Buy (BBY)

•   Home Depot (HD)

•   Nike (NKE)

Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. That’s why they’re considered cyclical in nature.

8. Industrials

The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. For example:

•   Honeywell (HON)

•   3M (MMM)

•   Stanley Black & Decker (SWK)

•   Delta Airlines (DAL)

•   Boeing (BA)

Industrials are often considered to be cyclical stocks, again because of how they react to changes in supply and demand. The airline industry, for example, saw a steep decline in 2020 as air travel was curtailed due to the coronavirus pandemic.

9. Utilities

Utilities represent one of the core defensive S&P sectors. This sector includes companies that provide gas, electricity, water, and other utilities to households, businesses, farms, and other entities.

Since these are essentials that people typically can’t do without, they’re generally less sensitive to major shifts in the economic cycle. They also often pay dividends to their investors.

Examples of utilities stocks include:

•   AES (AES)

•   UGI (UGI)

•   CenterPoint Energy (CNP)

•   Duke Energy (DUK)

•   Dominion Energy (D)

10. Consumer Staples

Consumer staples stocks represent things consumers regularly spend money on. That includes groceries, household products and personal hygiene products. The consumer staples sector is also a defensive sector because even when the economy hits a rough spot, consumers will continue spending money on these things.

From an investment perspective, consumer staples stocks may not yield the same return profile as other sectors. But they can provide some stability in a portfolio when the market gets shaky.

Companies that are recognized as some of the top consumer staples stocks include:

•   General Mills (GIS)

•   Coca-Cola (KO)

•   Procter & Gamble (PG)

•   Conagra Brands (CAG)

•   Costco Wholesale (COST)

11. Communications

Last but not least on the list of S&P sectors is communications. This sector spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also includes companies responsible for producing movies and television shows.

The communications sector can be hard to pin down in terms of whether it’s cyclical or defensive. In a down economy, for example, people may continue to spend money on phone and internet services but cut back on streaming services. So there’s an argument to be made that the communication sector is a little of both.

Companies that belong to this sector include:

•   Comcast (CMCSA)

•   AT&T (T)

•   Dish Network (DISH)

•   Discovery Communications (WBD)

•   Activision Blizzard (ATVI)

The Takeaway

Knowing what the S&P sectors are and which types of industries or sub-industries they represent can help investors achieve diversification through different types of investments. While some financial experts liken the sectors to a pie, with 11 individual slices, it may be more helpful to think of them as a buffet from which investors can pick and choose. You can either purchase stocks within or across sectors, or look for funds that can provide that diversification for you.

If you’re ready to start building a well-rounded portfolio that includes a sampling of market sectors, it’s easy to open a brokerage account on the SoFi Invest stock trading platform. SoFi Invest offers access to financial planners and educational resources that can help you make informed decisions.

Photo credit: iStock/izusek


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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 Lending Corp and/or its affiliates.
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Margin Trading: What It Is and How It Works

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

There are IRAs, 401(k)s, 403(b)s, stocks, bonds, common stock, preferred stock, index funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and a lot more. And that does not even touch all the ways you can invest, like selling short and fractional sales; or the various order types like limit orders, stop orders, and stop-limit orders.

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

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

Margin trading might seem a more complicated than some other ways to invest in the stock market, but it’s a method that many investors favor — especially by experienced investors.

What Is Margin Trading?

Margin trading is an advanced investment strategy in which you trade securities using money that you’ve borrowed from your broker to magnify your return. Margin is essentially a loan where you can borrow up to 50% of your security purchase, and as with most loans, a margin loan comes with an interest rate and collateral.

Trading on margin is similar to “buying on credit.” Using margin for a trade is also known as leveraging.

The margin interest rate depends on how much you borrow and your relationship with the broker. Cash and stock are popular forms of collateral typically used by margin traders and are based on the account’s size and type of security being traded. Traders must also maintain a margin balance, known as the maintenance margin, in their accounts to cover potential losses. We cover the topics of interest, maintenance margin, and other details in the section, “How Does Trading on Margin Work?”

Margin trading is a bit more complicated (and risky) than some other ways to invest in the stock market, but it’s a method that numerous traders favor — especially the more experienced ones.

Below, we dive into how using margin is different from other ways of investing. We explore the potential advantages and risks of margin trading, along with the regulations and other ins and outs of margin trading. And, if you feel ready to use this technique, we discuss how to get started.

How Does Trading on Margin Work?

There are different ways to buy stocks, funds, bonds, and other securities. You might buy one share of a company at its full price. You might buy a fractional share, which means you purchase a portion of a share of stock, not the entire share. Or, you might put $10 a week into an ETF that’s comprised of stocks from a particular industry or sector that you like.

Margin trading is a little different from these approaches. Trades are made using some of your money and someone else’s, usually a brokerage firm’s. Here’s how it works.

•   As the investor, you take out a loan from your broker on an investment that you hope will rise in value, with the aim of seeing a return. When you sell the investment, you return the borrowed funds to the broker, and you keep the profits. Or, you may short stocks on margin, in which case you hope that the value declines,

•   For example, say you wanted to buy $5,000 worth of stock in an asset that you believe has had a big year in revenue. You could use $2,500 of your own money. The brokerage firm might lend you $2,500 to make up the difference; so the total investment would be $5,000 for an initial cost to you of only $2,500.

•   To execute such a trade, you’d need to open a margin account with a brokerage firm. The broker, as well as FINRA, generally require a minimum deposit to open a margin account, and the account balance acts as collateral against the loan.

•   In addition, the loan typically includes interest. The person borrowing the money for the margin trade is responsible for the amount owed plus interest. If the stock drops in value, the investor would still be responsible for the $2,500 plus any interest on the loaned amount.

•   On the flip side, if the stock goes up instead of down, and you used a margin account, then your purchasing power and potential could increase.

You can also use a margin account for shorting stock. This means that you sell a security you do not own. An investor can borrow a security, then sell it; then buy it back later for less money. A short-seller is betting on, and profiting from, a drop in a security’s price.

Margin exposes the investor to potentially greater gains or losses and is a riskier way to invest than not using margin.

The Language of Trading on Margin

As we said above, margin trading is slightly different from some other ways to invest; such that, it’s developed its own set of related terms. Before you embark upon margin trading, it might help to familiarize yourself with some of them.

Margin Account

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

Financial Industry Regulatory Authority (FINRA)

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

Minimum Margin

FINRA rules set a dollar amount that must be deposited based on the kind of margin trading to be executed. The amount may vary depending on the purchase amount of the investment and brokerage firm policies. And, it’s possible that brokerages might set higher minimums than FINRA does.

Initial Margin

The initial margin for new accounts is set at 50% by Regulation T of the Federal Reserve Board . Under FINRA rules, this amount must be $2,000 or 100% of the purchase price of the margin securities, whichever is less. This means that a $10,000 trade, for example, would require an initial margin of $5,000. Some brokerages might even ask for more than 50% as part of the initial margin. Keep in mind that this is FINRA’s rule; some brokerages may require a higher minimum margin.

Maintenance Margin

The maintenance margin specifies the amount of money that investors are required to keep in their margin accounts. According to the U.S. Securities and Exchange Commission (SEC), “FINRA rules require this ‘maintenance requirement’ to be at least 25 percent of the total market value of the securities purchased on margin (that is, ‘margin securities’).” This might mean investors might need to add cash to their margin accounts if the price of their investment drops significantly. For short sales, the minimum requirement is $2,000.

Margin Call

A margin call happens when the value of an investor’s margin account dips below the brokerage’s maintenance margin. The “call” is a request for the investor to meet the maintenance margin and usually happens when a security the investor purchased decreases in value. If you get a margin call, you may bring the account up to the minimum amount by depositing more funds, or assets, into the account, or selling off some securities in the account.

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

Potential Benefits of Margin Trading

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

•   Possible lower interest rates. Benefits of margin loans might include lower interest rates — than other types of loans, such as personal loans — and the lack of a set repayment schedule. Margin loans are meant to be used for investing and generally should not be used for other purposes, although they can be.

•   Diversification. You could also use margin trading to diversify your portfolio.

•   Selling short. Another potential advantage might be a complicated trading method called short selling. Margin trading might make it possible for you to sell stocks short. Short selling differs from most other investment strategies in that investors make a bet that a stock’s price will fall.

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

While the benefits of being able to buy more investments — and potentially make more money — might seem appealing to some investors, there are also some potential risks to using margin. It might be worth considering these before you decide if trading on margin is right for you.

Potential Risks of Margin Trading

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

   For example, if an investor purchases $20,000 worth of stock with a cash account, the most they can lose is $20,000. If that same investor uses $10,000 of their own money and a margin — essentially a loan — of $10,000 and the stock loses value, they may actually end up owing more money than their initial $10,000.

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

•   The SEC warns investors that they must sell some of their stock, or deposit more funds to cover a margin call. If you get a margin call, it is your responsibility to deposit more funds, add securities or sell holdings in your account. If you don’t meet the margin call after a number of warnings from your broker, then the broker has the right to sell all or some of the current positions to bring the account back up to minimum value.

How to Get Started With Margin Trading

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

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

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

Once the margin account has been opened and the minimum margin amount supplied, the SEC advises investors to read the terms of their account to understand how it will work.

The SEC advises investors to protect themselves by

•   Understanding that your broker charges you interest for borrowing money,

•   Knowing how the interest will affect the total return on your investments,

•   Recognizing that not all securities can be purchased on margin,

•   Comprehending the details about how a margin account works, and

•   Being aware of possible outcomes should the price of assets purchased on margin decline.

Does Margin Trading Work for Your Goals?

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

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

Margin trading can seem a little more complicated than some other approaches to investing. As the investor, it is up to you to decide if the potential risks are worth the potential rewards, and if this strategy aligns with your goals for the future.

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

See how SoFi margin trading may work for you.

FAQ

What is a margin call?

A margin call occurs when the investor does not keep the minimum amount in their margin account. If the account balance falls below the minimum amount, the broker typically will ask the account owner to deposit more funds, or assets, in the account to meet the minimum requirement.

What is a margin rate?

A margin rate is the interest rate that applies when an investor trade on margin. Margin rates can vary from broker to broker. Many brokerages use a tiered rate schedule based on the amount of the margin loan.

How popular is margin trading?

Margin trading as an investment strategy is not particularly popular; but neither is it unpopular. It’s just risky. Because of the potential risks involved, professional traders tend to use it more than individual investors. And it is generally not recommended for beginners.

What happens if you don’t have the money to meet a margin call?

If you get a margin call, it is your responsibility to deposit more funds into your account. If you don’t meet the margin call after a number of warnings from your broker, then the broker has the right to sell all or some of the current positions to bring the account back up to minimum value.


*Borrow at 2.5% through 5/31/22 and 5% starting 6/1/22. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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 Lending Corp and/or its affiliates.
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