Investing Archives

May

2025

The Basics of Electronic Trading

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Electronic trading refers to the process of conducting trades in financial markets through an online broker-dealer using the internet. These trades can take place in the stock, bond, options, futures, or foreign exchange (FOREX) markets. Electronic trades can only be conducted during standard market hours: between 9:30 am and 4 pm Eastern Standard Time on weekdays. Traders can create orders after markets close, but the orders won’t be executed until the next trading day.

This represents a big change from the way the stock exchange worked prior to the internet, when traders would gather in one central place like The New York Stock Exchange (NYSE) and buy and sell stocks in person. With advances in digital technology, that’s no longer necessary, and the age of electronic trades now dominates.

Key Points

• Electronic trading enhances convenience and reduces costs, allowing easy access to financial markets.

• Investors should consider platform features, fees, and alignment with investment goals.

• Market, limit, and stop-loss orders help manage investments effectively.

• Tax implications include capital gains and losses from trading activities.

• Risks involve lack of guidance, quick market changes that investors are unable to keep up with, and accumulating fees.

How to Start Electronic Trading

Many investors today will only ever engage in online stock trading. Traders no longer need a personal broker whom they have to call on the phone each time they want to buy or sell a security.

Instead, investors can now open an online brokerage, create an account, and start placing trades. But choosing a platform is only step one in electronic stock trading. After that, you’ll need to decide what stocks to trade, what type of orders to use, what expenses will be involved (if any), and how trading might affect your tax liability.

Choose an Electronic Trading Platform

There are many electronic trading platforms to choose from. They are all similar in many ways, with general ease of use: Signing up and getting started can take less than an hour, with perhaps a few days of wait time involved for identity or “know your customer” verification.

Among the various platforms, there are slightly different features or different options as far as the user experience is concerned. Not too long ago, most platforms charged a commission fee for each buy or sell order executed, and there was a minimum amount of money needed to create a new account.

Recently, many brokerages have eliminated trading fees, and few still require account minimums, although there may be other costs associated with your investments. It’s important to understand what you’re being charged, because even small amounts add up over time and can reduce investment returns.

Research Stocks or ETFs

There are thousands upon thousands of securities to choose from, and many different types of markets and exchanges. When first starting out, it’s easy to get overwhelmed by all the choices.

Thankfully, online brokerages offer tools to help investors get started. There is also an abundance of free information online about investing. There are numerous sources that provide news and analysis on a daily basis to help investors learn and stay informed about new market opportunities.

Recommended: Investing Guide 101

Determine Which Type of Order to Use

It might be common to assume there are only two types of orders: a buy order and a sell order. In actuality, there are many different types of orders.

The type of order that likely comes to mind for most new investors is known as a market order. This is simply an order to buy or sell a security at whatever price it’s trading at right now.

Another type of buy order is a limit order. This is an order to buy at or below a specific price. The order can remain on the books for a day, sixty days, or until canceled, and will be filled whenever the security falls to the specified price.

This can help investors wait to buy a security at a cheaper price without having to monitor things. Limit orders also help protect against sudden spikes in price. If a market order is used just before a large price increase, an investor could pay more for a security than expected.

A stop-loss order can help traders limit losses. Like a limit order, a stop-loss gets triggered when a security falls to a specific price. But as you might have guessed, unlike a limit buy order, a stop-loss order will initiate a sell when triggered.

Consider Tax Implications

Buying securities usually doesn’t invoke any tax liability. But selling does generate a taxable event. Selling at a gain often requires an investor to pay capital gains tax, while selling at a loss could result in a capital loss, which investors can sometimes use to reduce their taxable income.

The subject of taxes and investing is long and involved. New investors might want to consider researching the tax implications of buying and selling securities on their own and consult with a tax professional.

The Risks of Online Trading

In addition to the convenience that electronic trading offers investors, it does come with some risks. The main caveat of online trading is that it gives investors the opportunity to try new strategies (like options trading) or explore new types of investments without the benefit of expert guidance.

All investments come with the risk of loss, meaning you can lose all the money you’ve invested, or more, in some cases. It’s important to balance the opportunities with the downsides when electing to explore new investments.

The Takeaway

The era of online or electronic trading is here to stay, thanks to its lower cost structure as well as the overall convenience and ease-of-use that online platforms provide for investors. Now investors can set up and manage a wide range of portfolios — from day trading to retirement — right from their own computers.

Electronic trading does have its limitations, though. Things move quickly, fees can add up, and sometimes there are investment options available that require more time and expertise, which may not be available through an online platform.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-034

May

2025

Tips on How to Choose The Right ETF

By Inyoung Hwang | invest, Investing | Comments Off

Exchange-traded funds, or ETFs, are tradable funds that investors can buy and sell on stock exchanges all day. They typically hold a basket of assets, such as stocks or bonds, and mirror the moves of another underlying index. Since its start almost three decades ago, the ETF industry has taken the financial world by storm, and there are thousands of different ETFs on the market that investors can choose from.

But each investor is different, and some ETFs likely won’t be a good fit for their portfolio or strategy. Learning to choose or pick ETFs that do fit your strategy can take some practice, but it’s good to have some guidelines in mind.

Key Points

• Choose ETFs with asset classes that align with your personal risk tolerance.

• You can narrow the focus within a selected asset class to find an ETF that offers specific exposure.

• ETFs may offer exposure to different strategies, such as leveraged, inverse, and smart-beta ETFs.

• Consider costs, primarily the expense ratios, when selecting an ETF.

• It’s a good idea to evaluate an ETF’s size, liquidity, and past performance, but do not rely solely on past results.

How Do I Pick an ETF?

There’s no right or wrong way to pick an exchange-traded fund (ETF), but you can follow a process to help you determine which securities may be the best fit for you. A solid place to start is by picking an asset class.

Step 1: Pick the Asset Class

Because the performance of an ETF is so closely tied to an underlying index, investors need to first decide which underlying asset class they want exposure to. The main asset classes are stocks, bonds, currencies, and commodities.

Risk is generally inversely correlated to return. So riskier assets have the potential to deliver greater returns, while less-risky assets tend to deliver reliable, albeit smaller, returns. Stocks are considered to be a riskier, more volatile asset class. Commodities even more so. Meanwhile, bonds tend to be less risky, but also deliver more muted returns.

Keep in mind, just because an investor buys an ETF that gives them exposure to one asset class, that doesn’t preclude them from buying another that invests in another market. In fact, it’s a healthy portfolio diversification strategy to allocate one’s money into different asset classes, a practice known as asset allocation.

Step 2: Narrow the Focus

Once an investor has chosen their asset class, they can dive deeper within that market. When it comes to stock ETFs, this usually involves picking an industry — like technology or financial — that they’d like to get greater exposure to. Equity ETFs may also focus on a specific attribute a stock can have. Or dividend ETFs, which hold shares of companies with regular payouts.

For bond ETFs, investors can decide between funds that invest in U.S. government bonds versus bonds issued by countries abroad, as well as investment-grade (higher quality) company debt versus high-yield (junk) bonds.

More recently, thematic ETFs have taken off. These are stock funds that tend to be much narrower than the traditional sector ETF. They can focus on a niche subsector, like robotics, electric cars, or blockchain, or even modern trends, like the gig economy or working from home.

There are pros and cons to thematic ETFs: while they’re often marketed as a convenient way to wager on an investment story, they also tend to underperform the broader market. Thematic ETFs have also been criticized for being too narrow and not offering the wide breadth that ETFs were originally designed to offer.

Step 3: Explore Different ETF Strategies

ETFs began as a way to provide investors access to broad markets with a single investment. Since then, however, the popularity of the industry has led to the creation of numerous different kinds of ETFs, some of which employ complex strategies.

Here are some of the different ETF types:

• Leveraged ETFs allow investors to make magnified bets on different assets or markets. So instead of replicating the move of the underlying index exactly, leveraged ETFs will produce a move that’s 2x or 3x.

• Inverse ETFs let investors wager against an asset, so shorting or betting that the price of a market will go down. So if on a given day, the underlying market goes down, the inverse ETF’s price will go up.

• Actively Managed ETFs invest in assets without following an index. While ETFs are usually a form of passive investing — the strategy of tracking another index — actively managed ETFs are like stock-picking strategies packaged into a tradable fund.

• Smart-Beta & Factor ETFs use a rules-based system — such as stock weightings, valuations, or volatility trends — to choose the investments in a fund. These funds are often considered a hybrid between passive and actively managed ETFs.

• Currency-Hedged ETFs are funds that let investors wager on a basket of overseas stocks, while mitigating the risk that stems from currency fluctuations.

Step 4: Look at ETF Costs

A fundamental reason why ETFs have become so influential is their low cost. Low ETF fees have compressed costs across the board in asset management. The average expense ratio of most ETFs has fallen over time. Expense ratios are a percentage of assets subtracted each year. So, an expense ratio of 0.45% means that the charge is $4.50 for every $1,000 invested each year.

Because the vast majority of ETFs tend to be passive, they tend to be much cheaper than mutual funds, many of which are still actively managed. More complex ETFs like leveraged funds, or actively managed ones, tend to have higher expense ratios. But some passive ETF fees have hit rock-bottom levels.

Step 5: Other Ways to Analyze ETFs

While profitability can make an investment look more attractive, it shouldn’t be the only factor investors use when determining which ETF to buy. That’s because in investing, past performance is not indicative of future results.

For ETFs, another key measure of performance is how well it tracks the underlying index. Tracking errors, when a move in the ETF veers from one by the market it’s designed to track, can come up from time to time, particularly in leveraged funds or ones that invest in stocks overseas.

Looking at the assets under management (AUM) can be a helpful way to pick an ETF. A larger AUM can signal an ETF’s popularity, which in turn makes it more likely that it’s liquid, or easy to trade without impacting prices.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

How to Find an ETF’s Holdings, Prospectus, and Fact Sheet

Another touted perk of ETFs is their transparency. Investors can look up what’s exactly in a fund by going to the ETF provider’s website and searching for the fund. Contacting the ETF provider directly for this information is also possible. ETF providers are required to update this information regularly.

Securities and Exchange Commission (SEC) regulation also requires that ETF providers make an ETF’s prospectus easily available. The prospectus has information about the ETF including its investment objective, the risks, fees, as well as expenses. For investors interested in an ETF, one of the most important things they can do is research the fund by carefully reading the prospectus.

Similarly, ETF fact sheets act like quick summaries of the fund, giving key information like performance, the top holdings, and other portfolio characteristics. ETF providers typically produce fact sheets every quarter and make them available on their website.

The Takeaway

Choosing an ETF from the thousands out there can seem daunting, but taking a step-by-step approach can help individuals sort through the multitude of options. A key step investors can take in researching ETFs is reading the fund’s prospectus, where they’ll find vital information on the investment objectives as well as potential risks.

Considerations include which asset class an investor wants to invest in; how broad or narrow of an exposure they want; costs — which are usually shown as expense ratios. And lastly, an ETF’s size can give clues on the popularity and liquidity of the fund. One ETF, on its own, can provide some diversification. However, some people choose to use a number of ETFs as building blocks to assembling a well-balanced portfolio.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

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 https://sofi.app.link/investchat. 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.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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SOIN-Q225-043

May

2025

What Do Investment Bankers Do?

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

Investment banking is a specialized area of the financial services industry that focuses on aiding governments, corporations, and other entities to raise capital and complete mergers and acquisitions. The term “investment banker” refers to an individual who works for an investment bank that offers these services.

Investment banking is typically considered to be a prestigious career, and becoming an investment banker can be lucrative for those willing to complete the necessary education and training.

Key Points

• Investment bankers do a number of things, such as raising capital through initial public offerings, bond issuance, and equity financing.

• Investment bankers are also known for assisting in mergers and acquisitions for companies.

• They also offer financial advisory services to clients.

• Conducting investment research for informed decisions is another key component of an investment banker’s job description.

• Investment bankers also manage asset investments for optimal returns.

What Is an Investment Banker?

Investment bankers work for investment banks, which are effectively middlemen between entities that need capital and entities that provide it. In simpler terms, investment bankers help their clients to expand and grow their businesses or operations.

Another way to think of an investment banker is as a financial advisor to governments, corporations, and other businesses. As part of their professional duties, they may guide clients in making financial decisions that directly or indirectly affect their bottom line.

Investment bankers are most often associated with Wall Street, though they work in cities throughout the world. Some of the largest investment banks in the United States include Goldman Sachs & Co., Morgan Stanley, J.P. Morgan, Bank of America Merrill Lynch, and Blackstone.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Do Investment Bankers Do?

Investment bankers play an important role in helping companies achieve their financial goals. When a corporation is planning an upcoming expansion project, for instance, its board may turn to an investment bank for help. An investment banker can analyze the company’s financial situation to determine the best way to meet its needs.

In terms of the specific tasks an investment banker may carry out, that depends largely on the type of clients they work with.

Assisting With Initial Public Offerings

Investment bankers can play a critical role in helping clients secure capital. Depending on the client, this can be done through a variety of means, including the launch of an initial public offering (IPO).

An initial public offering, or IPO, allows private companies to offer shares of their stock to the public for the first time. The investment banker assists by creating a prospectus explaining the details of the IPO, marketing it to potential investors, and navigating Securities and Exchange Commission (SEC) compliance rules.

Investment bankers are often key to whether the company’s IPO is a success. They help determine the initial price of the offering, which is critical. Pricing too high could scare off investors, while going too low could undercut the capital their clients raise.

Bond Issuance

Government agencies and corporations often use bonds as a fundraising tool. For example, if a city government needs money to improve local roads, they might issue a municipal bond to fund the project. Investors purchase the bonds on the bond market, giving the government the capital it needs to complete the road updates. Investors can hold onto the bond and earn interest on it, or they can sell it to another investor.

As with an IPO, an investment banker’s role in issuing bonds may include preparing the bond issuance documents, setting a price, submitting it to the SEC for approval, and marketing the bond to investors to raise capital.

Equity and Debt Financing

Equity and debt financing are two other ways that companies can tap into funding. With equity financing, companies raise capital by selling an ownership share in the business. Venture capital and private equity are common examples of equity financing.

Debt financing involves taking out loans or lines of credit, without giving up ownership stakes. An investment banker can help companies assess which type of financing makes more sense for their business model, and help them work through the process of securing the funding.

For example, investment bankers may work with startups to pitch angel investors, while they might help more established companies compare and select loan options.

Mergers and Acquisitions

Another common task that investment bankers assist companies with is mergers and acquisitions. In a merger, two companies enter into an agreement to become a single business entity. Each company is treated as an equal in the transaction. An acquisition, on the other hand, involves one company purchasing another.

In either type of arrangement, companies may use investment bankers to oversee the process. This could involve negotiating the terms of a merger or acquisition and reporting the details of the transaction to the SEC to ensure compliance. When a company considers an acquisition, investment bankers can also help identify and vet potential targets.

Investing and Asset Management

While investment bankers’ duties primarily revolve around raising capital for their clients, there are other services they may perform. This can include things like:

• Investment research and analysis

• Buying and selling securities

• Offering advisory services

• Asset management

These services are similar to what a personal financial advisor might offer their clients.

💡 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.

How to Become an Investment Banker

If you’re interested in a career in investment banking, there are a few things to know.

In terms of education, a bachelor’s degree is typically a minimum requirement for most investment banker jobs. Though some investment banks may look for candidates that have earned a higher degree of education, such as an MBA or a graduate-level degree in finance.

Aside from education, there are certain skills that may help you be successful as an investment banker. Those include:

• Ability to perform under pressure

• Good communication skills

• Solid marketing skills

• Firm grasp of financial markets and modeling

• Strong attention to detail

Depending on your responsibilities, you may also need a securities license. That may include completing one or more of the following licensing exams:

• Series 7 General Securities Representative Qualification Examination (GS)

• Series 79 Investment Banking Representatives Exam

• Series 63 Uniform Securities Agent State Law Exam

Before you can take these exams, you first have to be employed and sponsored by a FINRA-member firm or other self-regulatory organization member.

Taking and passing the Securities Industries Essentials (SIE) Exam could help improve your chances of being hired as an intern or junior employee. That process begins early, with many banks hiring summer interns more than a year ahead of the start of the program.

How Much Do Investment Bankers Earn?

Investment bankers generally earn above-average salaries. Even at the entry level, it’s possible to make $100,000 or more, and salaries for top Wall Street bankers can easily range into the millions or tens of millions. But investment banking is one of the hardest jobs on Wall Street. So, if you’re not prepared to routinely work 100-hour weeks or constantly be on-call for your clients, it may not be the job for you.

The Takeaway

Investment bankers work primarily with institutional investors, governments, and corporations rather than individual investors. But you can still benefit from the work investment bankers do behind the scenes indirectly.

Investment bankers may work in a variety of roles, such as helping facilitate IPOs, or mergers and acquisitions. It can be a lucrative career path, too, but generally requires a graduate-level education, and additional licensing.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What is an investment banker?

An investment banker is a financial professional that works for an investment bank, and generally, helps their clients to expand and grow their businesses or operations.

What are some common things that investment bankers do?

Investment bankers do a number of things, including issuing bonds, facilitating initial public offerings, managing investors’ portfolios and assets, and more.

How much are investment bankers paid?

Careers in investment banking tend to be lucrative, with salaries typically in the six figures, and ranging well into the millions. It is, however, a difficult and time-intensive job, with some people working 80-, 90-, or even 100-hour weeks.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/fizkes

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-057

May

2025

What Is Deflation and Why Does It Matter?

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Deflation is the opposite of inflation. It occurs when the prices consumers pay for goods and services go down. That means that consumers can purchase more with the same amount of money.

There are many factors that cause deflation, which happens when the supply of goods and services is higher than the demand for them. While deflation can have some benefits to consumers, it’s often a sign of trouble for the overall economy.

Key Points

• Deflation, marked by falling prices, can lead to economic stagnation and business closures.

• Government interventions, including fiscal and monetary policies, help combat deflation and stabilize the economy.

• Deflation often follows financial crises and is influenced by consumer confidence, technology, and lower production costs.

• Negative impacts include reduced business revenues, increased unemployment, and decreased consumer demand.

• The Great Depression exemplifies how deflation caused business failures and unprecedented unemployment.

What Happens During Deflation?

In addition to knowing what inflation is, it’s important to understand how it impacts the economy. In a deflationary economy, prices gradually drop and consumers can purchase more with their money. In other words, the value of a dollar rises when deflation happens.

It’s important not to confuse deflation with disinflation. Disinflation is simply inflation decelerating. For example, the annual inflation rate may change from 5% to 3%. This variation still means that inflation is present, just at a lower rate. By contrast, deflation lowers prices. So, instead of prices increasing 3%, they may drop in value by 2%.

Although it may seem advantageous for consumer purchasing power to increase, it can accompany a recession. When prices drop, consumers may delay purchases on the assumption that they can buy something later for a lower price. However, when consumers put less money into the economy, it results in less money for the service or product creators.

The combination of these two factors can yield higher unemployment and interest rates. Historically, after the financial crises of 1890, 1893, 1907, and the early-1930s, the United States saw deflationary periods follow.

How Is Deflation Measured?

Economists measure deflation the same way they measure inflation, by first gathering price data on goods and services. The Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) record and monitor this type of data in the United States. They collect pricing information that they then put into buckets reflecting the types of goods and services consumers generally use.

While these buckets do not include every product and service, they offer a sample of items and services consumed. In the United States, economists incorporate these prices into an indicator known as the Consumer Price Index (CPI).

Then, economists can compare the CPI to previous years to determine whether the economy is experiencing inflation or deflation. For example, if the prices decrease in a period compared to the year before, the economy is experiencing deflation. On the other hand, if prices increase compared to the previous year, the economy is experiencing inflation.

What Causes Deflation?

Deflation comes from a swing in supply and demand. Typically, when demand dwindles and supply increases, prices drop. Factors that may contribute to this shift include:

Rising Interest rates

When the economy is expanding, the Federal Reserve may increase interest rates. When rates go up, consumers are less likely to spend their money and may keep more in high-interest savings accounts to capitalize on the increase in rates.

Also, the cost of borrowing increases with the rise of interest rates, further discouraging consumers from spending on large items.

Decline in Consumer Confidence

When the country is experiencing economic turbulence, like a recession, consumers spend less money. Because consumers tend to worry about the direction of the economy, they may want to keep more of their money in savings to protect their financial well-being.

Innovations in Technology

Technological innovation and process efficiency ultimately help lower prices while increasing supply. Some companies’ increase in productivity may have a small impact on the economy. While other industries, such as oil, can have a drastic impact on the economy as a whole.

Lower Production Costs

When the cost to produce certain items, such as oil, decreases, manufacturers may increase production. If demand for the product stagnates or decreases, they may then end up with excess supply. To sell the product, companies may drop prices to encourage consumer purchases.

Why Does Deflation Matter?

Although falling prices may seem advantageous when you need to purchase something, it’s not always a good sign for the economy. Many economists prefer slow and unwavering inflation. When prices continue to rise, consumers have an incentive to make purchases sooner, which further boosts the economy.

One of the most significant impacts of deflation is that it can take a toll on business revenues. When prices fall, businesses can’t make as much money.

The drop in business profits makes it challenging for companies to support their employees, leading to layoffs or pay cuts. When incomes go down, consumers spend less money. So deflation can create a domino effect impacting the economy at many different levels, including lower wages, increased unemployment, and falling demand.

Deflation During The Great Depression

The Great Depression is a significant example of the potential economic impact of a deflationary period. While the 1929 stock market crash and recession set this economic disaster off, deflation heavily contributed to it. The rapid decrease in demand along with cautious money hoarding led to falling prices for goods and services. Many companies couldn’t recover and shut down. This caused record-high unemployment in the United States, peaking at 25%, and in several other countries as well.

During this time, the economy continued to experience the negative feedback loop associated with deflation: cash shortages, falling prices, economic stagnation, and business shutdowns. While the United States has seen small episodes of deflationary periods since the Great Depression, it hasn’t seen anything as substantial as this event.

How to Manage Deflation

So, what can the government do to help regulate inflation? For starters, the Federal Reserve can lower interest rates to stimulate financial institutions to lend money. The Fed may also purchase Treasury securities back to increase liquidity that may help financial institutions loan funds. Those initiatives can increase the circulation of the money in the economy and boost spending.

Another way to manage deflation is with changes in fiscal policy, such as lowering taxes or providing stimulus funds. Putting more money in consumers’ pockets encourages an increase in spending. This, in turn, creates a chain effect that may increase demand, increase prices, and move the economy out of a deflationary period.

The Takeaway

Deflation refers to a period that can be thought of as the opposite of inflation. It occurs when the prices consumers pay for goods and services go down, which means that consumers can purchase more with the same amount of money.

When the economy is experiencing some turbulence, some investors may choose to keep their money in savings. On the other hand, other investors may see falling prices as an opportunity to purchase securities at a discount, either to hold or to sell when the economy recovers. Like any other investment strategy, investors must base their investment decisions on their personal preferences since there are no guaranteed results.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Photo credit: iStock/eclipse_images

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q225-051

May

2025

Investing in Small-Cap Stocks

By Ashley Kilroy | Growing Wealth, invest, Investing, Terminology | Comments Off

Small-cap stocks are stocks in smaller companies, typically those worth between $250 million and $2 billion. Small-cap stocks often have high growth potential, which could make them an attractive investment. However, while these stocks may provide the opportunity to see higher returns over time, they also come with higher volatility and risk levels.

For investors considering adding small-cap stocks to their portfolios, it’s essential to understand how these stocks work and the advantages and disadvantages that come with this type of investment.

Key Points

• Small-cap stocks have a market capitalization of $250 million to $2 billion, offering significant growth potential.

• Higher risks and volatility are common due to less established business models and financial challenges.

• Limited analyst coverage can lead to undervaluation, presenting investment opportunities.

• Financial institutions may not heavily invest, affecting market liquidity and trading ease.

• Diversifying through mutual funds or ETFs can help mitigate risks and balance returns.

What Are Small-Cap Stocks?

Small-cap stocks are shares of companies with a market cap between $250 million and $2 billion, and are usually moderately young companies. Small-cap stocks typically have some growth potential, but they may not have a longstanding market history. Therefore, these stocks are considered to be riskier than mid-cap stocks or large cap stocks.

Understanding Market Capitalization

Market capitalization, or market cap, is a measure of an individual company’s value. The market cap represents the value of total outstanding shares. Investors can use this value to compare similar companies as well as consider future growth predictions.

To calculate a company’s market cap, multiply the total number of outstanding shares by the current share price. For example, let’s say a company has 15 million outstanding shares at a share price of $25 per share. Using this calculation, the company’s market cap would be $375 million.

Due to share price fluctuations, the market cap fluctuates over time. To find the number of outstanding shares, investors can review the “capital stock” numbers on a company’s balance sheet. This information is updated during the quarterly filings with the Securities and Exchange Commission (SEC).

Are Small-Cap Stocks a Good Investment?

Small-cap stocks may be a good investment as part of a diversified portfolio, but there are risks. The market cap of a company can give investors an idea of the risk and reward of purchasing individual stocks. Purchasing small-cap stocks may be riskier than buying stocks of larger companies because the companies are often still in growth mode. In addition, small-cap companies often have fewer resources than large-cap companies, and may have less access to liquidity.

Due to these factors, any market dip can negatively impact small-cap stocks. Conversely, smaller companies often have higher upside potential, and small-cap growth stocks may deliver higher returns than their peers. Still, investors who choose these investments may have to weather market volatility along the way to growth.

Pros of Investing in Small-Cap Stocks

There are several benefits to allocating some of your portfolio into small-cap stocks.

Growth Potential

When comparing large-cap stocks to small-cap stocks, small-cap stocks tend to have a higher growth potential over the long-term. For much of the stock market’s history, small-cap stocks had higher returns than large-cap stocks, and other asset classes.

This growth potential makes small-cap stocks an attractive investment choice for investors. They tend to perform particularly well after recessions, during periods of economic expansion.

They’re Often Undervalued

Analysts usually spend less time analyzing small-cap stocks, so they get less attention from investors, which can lead to lower demand — and lower prices. Therefore, investors may be able to leverage the inefficiencies of the market for potentially better returns.

Financial Institutions Don’t Increase Stock Prices

Specific regulations may not allow financial institutions such as hedge funds and mutual funds to heavily invest in small-cap stocks. Therefore, it’s unlikely that large investments from financial institutions will artificially increase the stock price.

Cons of Investing in Small-Cap Stocks

While small-cap stocks have their benefits, there are also several drawbacks that investors should consider.

High Risk

Investing in small-cap stocks tends to have significant risk for investors. Since they’re often younger companies, small-cap companies do not always have a time-tested business model. If the company’s management can not make appropriate adjustments to the business model, it may yield poor financial or operational results.

Also, because small-cap companies may lack the resources such as capital or access to financing that larger companies have, they may struggle to expand the business or fill in cash flow gaps, especially if the economic conditions tighten.

Research May Be Time-Consuming

Due to the limited availability of research and analysis done on small-cap stocks, investors may have to spend a significant amount of time researching each investment option.

Minimal Liquidity

Small-cap stocks tend to have less liquidity than large cap company stocks. Since there are fewer shares available, investors may not be able to purchase the stock. Conversely, investors may not be able to sell their shares at a reasonable price. The liquidity of small-cap stocks adds to the risk of investing in this type of stock.

How to Invest in Small-Cap Stocks

Investors can purchase small-cap stocks through a brokerage firm or an individual investment account. Since there’s often less public information available about small-cap stocks, investors must do their own due diligence in researching companies to understand their potential risks and returns.

Investors who don’t have the time or expertise to determine which individual small-cap stocks to buy can invest in small-cap companies by purchasing mutual funds or exchange-traded funds (ETFs) that track a broader range of small-cap indexes. Some funds may also have unique characteristics within them, such as growth- or value-oriented stocks.

Buying mutual funds and ETFs allow investors to pool funds with other investors to sell and buy buckets of market securities. This type of investing aims to mitigate risks by diversifying investments. Instead of investing in a single company, fund investors are purchasing shares in dozens or hundreds of companies. Investing in mutual funds and ETFs is more of a passive investment strategy that doesn’t require investors to make trades actively.

💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Diversifying With Small-Cap Stocks

Even though small-cap mutual funds and ETFs provide diversification within a specific asset class, investors can further reduce their risk exposure by expanding portfolio diversification into a broader mix of assets.

Depending on market conditions, different types of stocks may perform differently. The concept can apply to stocks of companies that vary in sizes. Depending on what the market is doing, small, medium, and large companies may either beat the market returns or underperform.

When diversifying a portfolio, investors may start by determining their investment goals, risk tolerance, and time horizon. Then, by assessing these factors, they can decide an appropriate asset allocation to determine the portfolio’s percentage that may include stocks. A typical example is a portfolio composed of 60% stocks and 40% bonds.

Investors use the same factors (time horizon, goals, and risk tolerance) to decide the mix of stocks that will go into the portfolio’s stock percentage portion. Then, as market fluctuations happen, allocations of the portfolio will perform inversely.

For instance, as small-cap stocks are rising, mid-cap stocks may fall. In this case, small-cap stock prices’ upward movement can offset the decrease in mid-cap stock prices, thus mitigating losses.

The Takeaway

Small-cap stocks are shares of companies with market caps ranging from $250 million to $2 billion. Although small-cap stocks have the potential for long-term growth, they tend to come with more risk. With this in mind, building a diversified portfolio with a broader range of investments can help minimize your risk exposure.

But, attempting to build an entire portfolio from scratch and keep it balanced can be time-consuming and a risky venture if you’re an average investor. Instead, many investors choose to get small-cap exposure by purchasing mutual funds and exchange-traded funds (ETFs), which mimic the returns of indices that track stocks meeting certain criteria.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What is a small-cap stock?

Small-cap stocks are shares of companies with market capitalizations between $250 million and $2 billion, making them relatively small.

What are some of the advantages to investing in small-cap stocks?

The primary advantages of investing in small-cap stocks are the potential for growth, share values tend to be relatively low, and share prices may not get pumped up due to large institutional investor activity.

What are the risks of investing in small-cap stocks?

Small-cap stocks tend to be riskier investments than some of their larger counterparts. They may take additional time to research and study, and they may also lack the same levels of liquidity as larger-cap stocks.

About the author

Ashley Kilroy

Photo credit: iStock/Erikona

SoFi Invest®

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Determine Which Type of Order to Use

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The Risks of Online Trading

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Investing in Small-Cap Stocks

What Are Small-Cap Stocks?

Understanding Market Capitalization

Are Small-Cap Stocks a Good Investment?

Pros of Investing in Small-Cap Stocks

Growth Potential

They’re Often Undervalued

Financial Institutions Don’t Increase Stock Prices

Cons of Investing in Small-Cap Stocks

High Risk

Research May Be Time-Consuming

Minimal Liquidity

How to Invest in Small-Cap Stocks

Diversifying With Small-Cap Stocks

The Takeaway

FAQ

What is a small-cap stock?

What are some of the advantages to investing in small-cap stocks?

What are the risks of investing in small-cap stocks?

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