What is a Time Horizon?

In short, it is the expected time available to achieve a financial goal. An investing time horizon can be thought of in a few different ways. First, an investing time horizon can refer to the amount of time that an investor is planning on holding an investment. Or, investors can think of a time horizon in terms of how long they are working on or towards a goal.

Why is Time Horizon Important?

Understanding your investment goals and timeline is an important step in determining the right investments. That’s because some investments are more appropriate for longer time horizons, while others are better for the short-term.

Investing Archives | Page 68 of 221

Sep

2023

Importance of Time Horizons for Investing

By Amanda Holden | Growing Wealth, invest, Investing | Comments Off

An investment time horizon is the amount of time available to work towards a financial goal, and it is an important reference point when deciding how to invest.

Sep

2023

Benefits, Drawbacks, and Options of a Self-Directed 401(k) Plan

By Brian O'Connell | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Self-directed 401(k) accounts aren’t as common as managed or target-date 401(k) plans, but they can be of real value for DIY-minded investors.

What is a self-directed 401(k)? These 401(k) plans — which may be employer-sponsored or available as a solo 401(k) for self-employed individuals — expand account holders’ investment choices, giving them more control over their own retirement plans. Instead of being limited to a packaged fund, an investor can choose specific stocks, bonds, mutual funds, and sometimes even alternative investments, in which to invest their retirement money.

What Is a Self-Directed 401(k) Account?

The key promise of self-directed 401(k) plans is control. They allow retirement plan savers to basically act as a trustee for their own retirement funds.

A self-directed 401(k) plan offers expanded investment choices, from stocks, bonds, funds, and cash, to alternative investments like Real Estate Investment Trusts (REITs) and commodities.

For a plan holder who believes they have the investment know-how to leverage better returns than a managed fund or target-date fund, a self-directed 401(k) can be an appealing choice.

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

Who Is Eligible for a Self-Directed 401(k)?

As long as your employer offers a self-directed 401(k), and you have earned taxable income for the current calendar year, you can enroll.

Alternatively, if you are self-employed and own and run a small business alone, with no employees (aside from a spouse), and your business earns an income, you are also eligible. You can search for a financial institution that offers self-directed plans, which might include a solo 401(k).

This is one of the self-employed retirement options you may want to consider.

How to Set Up a Self-Directed 401(k)

Setting up a self-managed 401(k) plan can be fairly straightforward. Once a 401(k) account is established, employees can fund it in the following ways:

• Plan transfer. An employee can shift funds from previous or existing 401(k) plans and individual retirement accounts (IRAs). However, Roth IRAs can’t be transferred.

• Profit sharing. An employee receiving funds from a company through profit sharing can use that money to open a self-directed 401(k) plan — up to 25% of the profit share amount.

• Direct plan contributions. Any income related to employment can be contributed to a self-directed 401(k) plan.

Recommended: How to Manage Your 401(k)

Pros and Cons of Self-Directed 401(k)s

Like most investment vehicles, self-managed 401(k) plans have their upsides and downsides.

Pros of Self-Directed 401(k) Plans

These attributes are at the top of the self-directed 401(k) plan “advantages” list:

• More options. Self-directed 401(k) plans allow retirement savers to gain more control, flexibility, and expanded investment choices compared to traditional 40k plans, putting their money exactly where they want — without relying on established funds.

• Tax deferral. Like regular 401(k) plans, all self-directed 401(k) plan contributions and asset gains are tax-deferred.

• Employee matching. Self-directed 401(k) plans make room for employer matching plan contributions, thus potentially paving the way for more robust retirement plan growth.

• Plan diversity. Account holders can invest in assets not typically offered to 401(k) plan investors. Alternative investments like real estate, gold, silver and other commodities, and private companies are allowed, thus lending additional potential for diversity to self-directed 401(k) plans.

Cons of Self-Directed 401(k) Plans

These caveats and concerns are most often associated with self-directed 401(k) plans:

• Higher-risk investments. Historically, alternative investments like precious metals and real estate come with more volatility — and hence more risk — than stocks and bonds.

• Diversification is on you. You’ll need to choose among stocks, bonds and funds to augment your self-directed 401(k) plan asset allocation.

• Higher fees. Typically, self-directed employer retirement plans cost employees more to manage, especially if an investor makes frequent trades.

• Larger time investment. Since self-directed 401(k) plans offer access to more investment platforms, savers will likely need to spend more time doing their due diligence to research, select, and manage (especially in the area of risk assessment) their plan options.

How Much Money Can be Put in a Self-Directed IRA?

The amount an investor can contribute to a self-directed IRA is the same as the amount that can be contributed to a traditional IRA savings account. For 2023, the limit is $6,500. Those aged 50 and older can also make an additional catch-up contribution of $1,000 in 2023.

For a self-directed 401(k), the amount that can be contributed is the same as the contribution limits for a traditional 401(k). For 2023, the limit is $22,500. For those age 50 and older, there is the option of making an additional catch-up contribution of up to $7,500. That means an individual 50 or older could contribute as much as $30,000 to a self-directed 401(k) in 2023.

Recommended: IRA vs 401(k)

Common Self-Directed 401(k) Investments

The ability to choose from an expanded list of investment categories is an intriguing benefit for a 401(k) plan holder who believes they have the investment know-how to leverage better returns from investments like self-directed 401(k) real estate, precious metals, or shares of private companies, among other eligible alternative investments.

For any retirement saver looking to leverage those options, the key is understanding what potential opportunities and what risks those extra self-directed investment vehicles bring to the table. Here’s a closer look at two of the more common alternative investments linked to self-directed 401(k) plans.

Real Estate Investment Trusts (REITs)

Investing in real estate simply means investing in residential or commercial properties, or real estate funds, with the goal of income generation. A self-directed 401(k) plan allows for real estate investing outside of the plan holder’s personal residence.

Examples of residential properties include:

• Single-family homes

• Condos

• Townhouses

Examples of commercial real estate include:

• Multi family homes

• Office or retail buildings

• Storage facilities and warehouses

To invest in real estate with a self-directed 401(k) plan, an investor would use their 401(k) funds to purchase the property, as well as to pay for maintenance, taxes, and other property-related expenses.

Real estate can be cyclical in nature, and can require large amounts of cash when investing in direct real estate properties. Thus, risk of investment loss is real and must be treated prudently by self-directed 401(k) real estate investors.

Precious metals

Investing in “hard commodities” like gold, silver, titanium, copper, zinc, and bronze, among other metals, are allowable with self-directed 401(k) plans. Self-directed 401(k) plan participants can either invest in precious metals directly, like buying gold bullion or coins, or invest in precious metals via stocks or precious metal funds.

Precious metal investing can be high risk, as gold, silver, and other metals can be highly volatile in value. As with real estate, investors have to be able to ride out chaotic market periods for commodities — but for some, the potential payoff may be worth it.

Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules

While the list of investment vehicles that are included in a self-directed 401(k) plan are substantial, regulatory rules do prohibit specific investment activities tied to several of those asset classes. The following investment strategies and associated transactions, for example, would not pass muster in self-directed 401(k) plans.

Real Estate with Family Ties

While investing in real estate is allowed in a self-directed 401(k) plan, using that real estate for extended personal gain is not allowed. For example, that could include buying an apartment and allowing a family member to live there, or purchasing a slice of a family business and holding it as a 401(k) plan asset. Neither of these scenarios is allowed under 401(k) plan regulatory rules.

Loans

Self-directed 401(k) plan consumers may not loan any plan money to family members or sign any loan guarantees on funds used in a self-directed 401(k) plan.

No Investment Benefit Beyond Asset Returns

Self-directed 401(k) plan holders cannot earn “extra” funds through transactions linked to plan assets. For example, a plan holder can buy a real estate property under 401(k) plan rules but he or she cannot charge any management fees nor receive any commissions from the sale of that property.

Basically, a self-directed 401(k) plan participant cannot invest in any asset category that leads to that plan participant garnering a financial benefit that goes beyond the investment appreciation of that asset. That means not using 401(k) funds to purchase a personal residence or investing in assets like investments of collectibles (i.e. vehicles, paintings or jewelry or real estate properties that the plan participant personally uses.

Manage Your Retirement Savings With SoFi

While self-directed 401(k) plans can add value to a retirement fund, self-directed retirement planning is not for everyone.

This type of account requires more hands-on involvement from the plan holder than a typical target-date or managed fund might. Additionally, investing in alternative investments like precious metals, real estate, and other risk-laden investment vehicles, require a realistic outlook on downside risk and a healthy knowledge of how investments work beyond stocks, bonds, and funds.

In the meantime, you might want to consider rolling over any old 401(k) accounts to an IRA rollover to better manage your retirement savings overall.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

What is the difference between an individual 401(k) and a self-directed 401(k)?

A self-directed 401(k) gives account holders more investment choices, as well as more control over their own retirement plans. Instead of being limited to a packaged fund as they would be with an individual 401(k), an investor can choose specific stocks, bonds, mutual funds, and even alternative investments, in which to invest their retirement money.

Can I roll my traditional 401(k) into a self-directed 401(k)?

Yes. You can shift funds from a previous or existing 401(k) plan or individual retirement account (IRA) into a self-directed 401(k). The exception is a Roth IRA, which can’t be transferred.

How is a self-directed 401(k) taxed?

Like regular 401(k) plans, all self-directed 401(k) plan contributions and asset gains are tax-deferred until withdrawn. With self-directed 401(k)’s, there is a 10% tax penalty for early withdrawals (before age 59 ½), the same as with traditional 401(k)s.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

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

SOIN0723152

Sep

2023

41 Things to Do With Your Tax Refund

By Pam O’Brien | Growing Wealth, invest, Investing | No Comments

If you got a tax refund this year, you may be tempted to spend it all on something fun. And, there’s certainly nothing wrong with that.

But before you get too impulsive, you may also want to think about how that refund might be able to help you get to the next level in life. In fact, smart use of your tax refund check may draw you closer to reaching financial security.

So what should you do with the refund you received? Read on for a mix of smart, practical, and also fun, ways to spend your tax refund.

How Should I Spend my Tax Refund?

With the average taxpayer getting a refund of roughly $3,000 for each of the past several years, you may have a nice lump sum of money to play with. Here are a whopping 41 “how should I use my tax refund?” ideas to consider for both your long-term and short-term financial goals.

💡 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.

1. Unloading Your High-Interest Debt

If you have credit card or other high-interest debt, a tax refund can be a great way to reduce your balance, or even wipe it out completely.

Doing this will help you stop throwing money away on interest charges each month. And, if you manage to wipe out that debt completely, you’ll have one less financial responsibility to deal with monthly.

2. Starting an Emergency Fund

How are you fixed for life’s unexpected emergencies? If you were to lose your job, would you have about three-to-six months of living expenses at the ready? How about a car or home repair? Would you be able to cover that? Taking that tax refund and stashing it away in an emergency fund may save you in a pinch. Your future self may thank you.

3. Saving for Your Kid’s College Education

If you have kids, using your tax refund to start a 529 college savings plan could be a great first step toward dealing with the rising cost of college education. Money in these funds grows tax-free.

Additionally some states and 529 savings plans enable you to deduct your contributions from your state income taxes, so these contributions could save you tax dollars in the future.

4. Improving Yourself

When you get your tax refund, you could use it to make yourself more marketable to future employers. That could mean investing in additional or new career training, attending conferences, joining professional organizations, earning an MBA, or pursuing networking events.

This could all work toward creating a new you, and possibly a bigger paycheck with bigger tax refunds in the future.

5. Planning for Retirement

Does your company offer to match your retirement savings in your 401(k)? If so, you could take advantage of this “free money” by investing your tax refund in your retirement plan. Doing this could potentially increase your contribution level to maximize the benefit your employer offers.

If you don’t have a 401(k), you could use your tax refund to open an Individual Retirement Account (IRA), or add to an existing one, keeping in mind that there are annual limits to how much you can put into a retirement account each year.

6. Becoming a Homeowner

You could also use your tax refund to help fund a down payment on a new home. Offering a larger down payment will reduce your mortgage, which means you’ll pay less in interest. That could translate into lower monthly payments and paying less for the home overall.

7. Making Much-Needed Repairs

Already own a house? You might consider using your refund to make repairs and/or upgrades that could make your home more functional and also more re-sellable.

8. Starting an Investment Plan

If you’ve been putting off any serious investing until you have some available cash, now might be your chance. Of course, it’s important to do your research before making any investments, but this could be the time to start financially planning for the future.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

9. Paying Monthly Fees Up Front

Do you have subscriptions to streaming services? How about a gym membership? If possible, you could pay the annual fee in one fell swoop, which is often cheaper than paying month-to-month. It will also mean one or two less bills to pay each month.

10. Gifting a Loved One

The IRS sets a limit on the gifts you are able to give to family members and others without having to pay a gift tax. That limit is $18,000 for 2024 and $17,000 for 2023 per recipient.

This means that you can give the person up to that much without triggering taxes.

11. Going on Vacation

If you’re thinking about what to do with a tax refund that might also be fun, consider taking a trip with some of the money. Then, you won’t get stuck paying for your vacation on a credit card like you might have in the past — and potentially paying even more due to interest charges.

12. Buying Things That Will Save You Money

If only you had a smart thermostat in your home, you could save on your electricity, A/C, and heating every month. Or, if you got a good oven, you would cook more and wouldn’t eat out as much. If you purchased a set of weights, you could cancel your expensive gym membership. You may want to think about ways you can spend your tax refund that will end up saving you money on an everyday basis, and then make those investments.

13. Making Appointments You’ve Been Putting Off

When thinking about what to do with your tax refund, you might consider spending it on services that you may have been delaying but could improve your life. For instance, if you’ve had some back pain and need to get it checked out, you could use the money to see your doctor or chiropractor. Using your tax refund to take care of your health is generally always a good idea.

14. Funding Your Business Idea

Have you always wanted to start a small business? Then now may be the time. When you’re thinking about what to do with a tax refund, you might want to put it toward getting your business up and running. You may even be able to avoid taking out a loan to start your venture.

15. Donating It

If there’s an organization you believe in and want to support, you might consider donating your tax refund to that group. You’ll not only be doing good, but you may also be able to deduct your donation on your taxes next year for a win-win.

16. Making Extra Mortgage Payments

If you’re contemplating what to do with your tax return, you could always make extra payments towards your mortgage (just be sure it goes toward the principal, not interest). Reducing your principal can help you save significant money in interest over the long haul.

17. Purchasing Life Insurance

Signing up for a term life policy when you have the resources to do so can be a smart idea, especially if you are married and/or have children. That way, you will know that your loved ones are protected should anything happen to you.

18. Hiring an Estate Planning Attorney

This is another way you can plan for the future. If you have a spouse or young children, an estate planning attorney can help you devise an estate plan that protects them in the event that you pass away. This could include designating guardians and setting up a trust for your children.

19. Purchasing Renter’s Insurance

While your landlord is protected if something happens to their property, you are not. If you’re thinking about what to do with your tax refund that could save you money in the long run, you might consider buying a renter’s insurance policy.

This kind of policy will typically cover the cost of your belongings should anything happen, and also help protect you if someone gets injured in your home, since they can make a claim with the insurance company instead of coming after you.

20. Paying for a Subscription-Canceling Service

A subscription-canceling service can help you figure out which subscriptions you can cancel, and may even be able to negotiate with your service providers to lower your monthly bills. The fee for this service might ultimately save you money — not to mention all that time you would have spent on hold trying to do this yourself.

21. Taking a Class

Education can improve your life in so many ways. You could take a class in a subject that interests you, or to learn a new hobby, like photography or watercolor painting. If you look for courses at your local community college or adult ed program, you may be able to save significantly on tuition.

22. Hiring a Financial Advisor

If you don’t know what to do with money when it comes to saving, investing, and becoming financially stable, you may want to use your tax refund to hire a financial advisor. To find an advisor, you can ask family and friends for recommendations. You can also consult industry associations, such as the National Association of Personal Financial Advisors and the Financial Planning Association.

23. Signing Up for a Meal Subscription Service

Do you eat out all the time? Then it might make sense to put your tax refund towards a meal service that sends you ingredients and simple recipes each week. While it’s typically not as cheap as going to the grocery store, these services can make cooking at home easy and convenient. Eventually, after you learn some good recipes, you can likely cancel and switch to completely DIY meals instead.

24. Saving for Holiday Gifts

During the holidays, are you always short on cash to buy gifts for your family and friends? Even if you get your tax refund early, you might want to put some of it aside in an interest-bearing account until your favorite stores and websites are running sales. For example, you can save big by waiting for Amazon Prime Day, Black Friday, or Cyber Monday.

25. Investing in Your Health

When it comes to what to do with a tax refund, you might want to use it to improve your health and wellness. You could sign up for a gym, hire a nutritionist, purchase exercise equipment, or get a personal trainer. You may end up saving much more in the long run on your healthcare bills.

26. Investing in Your Children’s Needs

If your children need new clothes or school supplies, or you think they could benefit from summer camp or after-school lessons, then you may want to put your tax refund towards those costs.

27. Investing in Your Pets

Does your dog need a teeth cleaning? Have you been putting off getting your cat an MRI because it’s too expensive? Then you could finally take care of some of their needs with your tax return. You could also purchase pet insurance, which could save you money on your vet bills.

28. Purchasing a Car

Is your car always breaking down? Does it guzzle gas? Do you normally use Ubers? Then purchasing a new or used car with your tax refund could save you money over time. If you currently rely on public transportation, owning a car can also open you up to new job opportunities that may have been inaccessible before.

29. Paying Off Your Car Loan

If you’re wondering what to do with a tax refund, you could always make advance payments on your car loan. If you’re paying high interest every month, paying the loan off early could save you significant money. And, if you pay it off in full, you won’t have to worry about that annoying monthly payment anymore.

30. Investing in a Second Income Stream

You can take your tax refund and start making money with it by investing in a new income stream. For example, you could start drop shipping with Amazon, which involves buying items at a discount from a wholesaler then selling them at a profit. Or, you could fix up your spare bedroom and start renting it out on Airbnb.

31. Investing in REITs

If you want to start investing in real estate but don’t have the funds to buy a property, you could invest in real estate investment trusts (REITs) instead. REITs are companies that own, operate, and finance real estate that produces an income. If you put your money into the right REIT, you may see healthy returns. Just remember that no investment is risk-free. Research the pros and cons of REITs before you decide to go this route.

32. Investing in Crowdfunded Real Estate

Another way to get into real estate with your tax refund is to consider investing in crowdfunded real estate. On crowdfunded real estate platforms, you can generally invest for less and potentially reap the benefits of buying into the real estate market. However, there is also the possibility you could lose money, so weigh the benefits and drawbacks carefully. If you decide to go ahead, just be sure to thoroughly investigate any platform before investing on it.

33. Funding a Startup

While investing in startups can definitely be very risky, the rewards could potentially be high. When you’re looking into what to do with a tax refund, you might want to check out services that let you invest in small businesses. Again, make sure you do due diligence and check out the service fully before you sign up with it.

34. Saving for Next Year’s Tax Payment

If you do freelance work or you’re an independent contractor, you may have to make estimated payments every quarter. You could get a head start on your taxes by saving your refund and then using it to make those estimated payments on time.

35. Hiring an Accountant

If you believe you could have gotten a higher tax refund this year, then you may want to put aside your refund so you can use it to hire a good accountant to help you file next year’s tax return. The additional tax savings could far exceed the accountant’s fee.

36. Moving to a Better Rental

In the past, it may have been hard to move to a better rental because you didn’t have the funds necessary — like the first and last month’s rent and security deposit — to make it happen. Now that you have your refund, you might be able to make it a reality. You’ll want to make sure, however, that the rent works with your budget.

37. Getting Dental Insurance

You may have been delaying going to the dentist because it’s too expensive. Or, you might need dental work done, but can’t afford it. If so, you may want to put your tax refund towards purchasing dental insurance for the year. Then, you can take care of your teeth.

38. Buying New Clothes

The right clothes can make a big difference in your day. You not only have to wear the right clothes in a professional setting, but being comfortable in what you’re wearing can give you more confidence as well. It can be a good idea to look for deals, however, so you don’t spend your entire tax refund on a fancy pair of shoes or designer coat.

39. Purchasing Stocks

While investing in the stock market can be risky, if you buy shares in a company with a solid track record that pays dividends, you may end up making money on dividends as the company grows. You can always talk with your financial advisor about how to carefully invest in stocks.

40. Investing in Bonds

If you want to invest your tax refund, but don’t have much tolerance for risk, you might consider investing the money in bonds such as Treasury bonds. These are fixed-income investments that typically make regular interest payments to investors. On the maturity date, your principal investment will be returned to you.

41. Pampering Yourself

Whether you filed on time or missed the deadline and filed late, tax time can be stressful. If you have some tension to work out, you may want to use some of your refund to reward yourself for getting it all done. You could get a massage to help release tension in your shoulders, or splurge on a day at the spa.

The Takeaway

While your tax return may feel like “free money,” it’s really your money given back to you by the government. Uncle Sam was merely holding on to it for a while. It’s yours, so it can be a good idea to be smart with it. For instance, you could use it to save for a house or to invest in your future.

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).

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

Sep

2023

What Are IPO Proceeds?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Initial public offerings (IPO) are a common tool for companies to raise capital, and the funds raised in an IPO are known as IPO proceeds.

When investors purchase IPO stocks, the company gets to keep the proceeds, after paying underwriters, the exchange, and others that helped with the IPO process.

By opening up to public investment, a previously private company can bring in significant funds that can be used for various activities, rather than turning to debt as a means of expansion.

Companies can use the capital brought in through an IPO in a variety of ways, but they must disclose their plans to investors.

Key Points

• Initial public offerings (IPOs) are a common tool for companies to raise capital, with proceeds known as IPO proceeds.

• Companies must disclose their plans to investors for how they will use the proceeds.

• Common uses for IPO proceeds include paying off debt; funding additional research and development; and general corporate purposes.

• Companies must file an S-1 with the Securities and Exchange Commission (SEC) to disclose how they intend to use the proceeds.

• While companies get to keep most of their IPO proceeds, a portion also goes to investment banks, accountants, lawyers, and others who helped them with the IPO process.

IPO Proceeds Defined

When a company holds an initial public offering (IPO) they must publish their plans for how they will use the proceeds. This helps investors understand how the company will use their money, and decide whether they agree with the company’s plans before they invest.

This is important because even though the IPO process is highly regulated, it’s also highly risky. Some companies that issue their stock for the first time can see the stock price soar; others can see it plunge. It’s also possible for the IPO to have an IPO pop, or price spike, before dropping. This kind of volatility is common to IPOs, which is why investors must proceed with caution.

Companies preparing for an IPO file an S-1, a several-hundred-page document, with the Securities and Exchange Commission (SEC) which includes a disclosure about the planned use of IPO proceeds.

They must also show investors a business plan. Potential investors can evaluate the business plan and see if they think they will receive a satisfactory return on their investment if they buy stock in that IPO.

While companies get to keep most of their IPO proceeds, a portion also goes to all investment banks, accountants, lawyers, and others who helped them with the IPO process, including valuing the company and setting an IPO cutoff price. According to PWC, underwriting fees alone eat up 3.5% to 7% of IPO proceeds.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

[ipo_launch]

What Are IPO Proceeds Used For?

There are a few areas where companies tend to spend IPO proceeds. Generally companies mention multiple uses in their S-1 filings, and it may also be something that they discuss with investors during their IPO roadshow. These might include:

General Corporate Purposes

General corporate purposes is a very common area companies talk about in their use of proceeds statements. It is a broad category that covers a lot of uses such as capital expenditures, operating expenses, and working capital, and getting more money for this is a major reason that many companies go public. Companies can use this term to describe broad activities without going into detail about their plans.

This allows them to keep their plans private and also lets them keep their options open and decide exactly how to spend money at a later date. Some companies do go into greater detail about the meaning of their general corporate purposes statement.

Research & Development

Companies might also use proceeds from an IPO to fund research and development. They spend funds developing new products and services, which can take years and significant amounts of money. Since R&D is so expensive, it is a major reason companies choose to hold IPOs.

Without R&D, some companies might struggle to keep up with competition and stay relevant in their industry. Some companies go into detail about the types of R&D projects they plan to work on using IPO proceeds, while others keep their plans vague.

Company Growth

Companies often choose to hold an IPO to raise funds for company growth. Company growth plans often appear in their business plan, and can include capital expenditures, working capital, sales and marketing plans to help a company grow its reach and revenue.

Companies want to create long-term, sustainable growth so that a company can stay in business for a long time. Like other uses of IPO proceeds, companies may go into detail about their plans for company growth expenditures or they may keep their plans vague.

💡 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.

Acquisitions

Companies can use IPO proceeds to merge with or acquire other businesses, something that can be very expensive. Without holding an IPO a company might not have the funds required to complete an acquisition. Acquisitions and mergers can help a company grow their customer base, eliminate competition, and expand their product and service offerings.

When a company includes an acquisition in its S-1 filing, they must state which company they intend to acquire. If they don’t yet have a company in mind to acquire, they can just list acquisitions as one possible use of IPO proceeds. A company does not have to state the exact company they are interested in acquiring if it will harm the potential of the acquisition plan.

Some companies take a unique path to acquisitions using IPO proceeds, known as a “blank check” IPO or special purpose acquisition company (SPAC). Companies create a shell company that they take public with an IPO and then use the IPO proceeds to complete an acquisition.

Debt Repayment

Another common use of IPO proceeds is to pay off debt. By paying off any existing debts, companies no longer have interest payments, so they reduce their operating costs, and they can also gain access to more funds from loans. Although it can be beneficial to a company to pay off their debts, this use of IPO proceeds is not popular with investors.

Other uses of IPO Proceeds

In addition to the uses described above, there are many other ways companies can use IPO proceeds, including paying taxes and charitable actions.

SEC Requirements on IPO Proceeds

The SEC requires companies file a “use of proceeds” section in their S-1 IPO submission. The S-1 explains to investors the goals of the IPO and what the company plans to do following the IPO, including how they will use proceeds. Requirements for what must be included in the S-1 are fairly broad, so companies can choose how much to share with potential investors, and they have a lot of choice about how they can use IPO proceeds.

There are several specific requirements for what must be included in the S-1, a document scrutinized by investors as part of their IPO due diligence. The “use of proceeds” section must include a brief outline of how proceeds from an IPO will be used. The requirements for what the brief outline includes are broad, giving companies a lot of freedom in what they want to disclose. Companies are allowed to use broad statements about planned use of funds, such as listing the categories described above.

Later sections in the S-1 submission require companies to go into greater detail about spending plans if they plan to use funds for certain activities. Just because a company states they plan to use funds in a certain way doesn’t legally bind them to actually use the funds in that way. However, companies need to inform investors that plans may change later if that is the case.

The Takeaway

With many companies going public per year, knowing how a company is going to use its IPO proceeds — the funds earned from the public offering itself — is important if you’re thinking about investing in that company’s IPO. You can find that and other useful information about a planned IPO in a company’s S-1.

Common uses for IPO proceeds include paying off debt; funding additional research and development; general corporate purposes, and more.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

FAQ

Who gets the proceeds from an IPO?

When a company holds an IPO, they receive money from banks and institutional investors who have agreed to invest prior to the start of the IPO. The company receives proceeds from the initial sale of stock. Any money exchanged after the IPO from the sale of stock doesn’t go directly to the company.

What are secondary IPO proceeds?

Primary proceeds are those made from the initial sale of stock in an IPO. Secondary IPO proceeds are those made in the stock market following the IPO.

How does an IPO raise money?

An IPO raises money by offering shares of stock in a company to institutional and retail investors. When investors purchase those stocks, the company gets to keep the proceeds, after paying underwriters, the exchange, and others that helped with the IPO process.

Photo credit: iStock/Charday Penn

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

SOIN0623078

Sep

2023

What Is an IPO Roadshow?

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

Before a company can sell its shares on an exchange, it first needs to go through the Initial Public Offering (IPO) process. One of the most critical steps in this process is the IPO roadshow, in which the company pitches itself to potential investors.

A roadshow presentation can take place in-person, with meetings in cities across the country, or the company can offer an online event instead. Either way, the goal is the same: to generate interest in the company that will encourage investors to buy in.

Key Points

• An IPO roadshow is a series of meetings or presentations in which key members of a private company pitch the initial public offering to prospective investors.

• Digital roadshows have become increasingly popular and offer an advantage of increased efficiency compared to traditional roadshows.

• The purpose of an IPO roadshow is to generate interest in a company among prospective investors in order to raise capital.

• Virtual IPO roadshow presentations have the potential to reach a broader audience, rather than being limited to a handful of cities.

• Buying IPO stock can help diversify an investment portfolio, but is typically high risk and requires due diligence.

What Is a Roadshow?

In general, a roadshow is a series of meetings or presentations in which key members of a private company, usually executives, pitch the initial public offering, or IPO, to prospective investors. Effectively, the company is taking its branding message on the road to meet with investors in different cities, hence the name.

The IPO roadshow presentation is an important part of the IPO process in which a company sells new shares to the public for the first time. Whether a company’s IPO succeeds or not can hinge on interest generated among investors before the stock makes its debut on an exchange.

There are also some cases where company executives will embark on a road show to meet with investors to talk about their company, even if they’re not planning an IPO.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

[ipo_launch]

How Roadshows Work

Typically, the roadshow is the third step in the IPO process, following the selection of an underwriter to oversee the process and the completion of due diligence. At this point, the Securities and Exchange Commission (SEC) reviews all of the documents submitted in connection with the IPO, while the company and the underwriting team get ready for the roadshow.

The underwriters and executives taking part in the IPO roadshow work together to decide which cities to visit, which investors to target, and which information to include in the roadshow presentation.

A typical IPO roadshow presentation highlights the most important information the company wants investors to know, including:

• The company’s history and its plans regarding the IPO

• Details about the top executives

• The current vision and mission statement

• Financial performance and earnings history

• Future sales projections and anticipated growth

• IPO goals

A roadshow IPO presentation may include digital media, such as videos or a slideshow. Investors have a chance to ask questions during a Q&A session following the presentation.

The roadshow tour for an IPO can last anywhere for two to four weeks, depending on how many stops the company makes along the way.

New Digital Roadshows

Virtual roadshows have become an increasingly popular alternative to the traditional IPO roadshow. The pandemic forced companies to rethink the way they meet with investors, resulting in a growing number of roadshows taking place online only.

Digital roadshows mean companies forgo a chance to meet with prospective investors face-to-face, but they offer an advantage in terms of increased efficiency. Company executives and underwriters save money and time, since they’re not traveling. Virtual IPO roadshow presentations also have the potential to reach a broader audience, rather than being limited to just a handful of cities.

If a company schedules multiple presentations in a single day, using a virtual format, they can complete the roadshow move through the IPO process more quickly. This could make it easier to determine the price of an IPO if there’s less opportunity for pricing to be affected by volatility. Pricing the IPO typically happens at the conclusion of the road show.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Importance of Roadshows

The IPO roadshow presentation is an opportunity for a company to convince investors that buying stock in their company is a good investment opportunity. The main purpose of an IPO is generally to raise capital and companies can’t do that without interest from investors.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence. While individual investors aren’t included in the IPO roadshow process, they can follow the coverage, to understand new details that might emerge about the company.

Pros and Cons of a Roadshow

If the company goes public and no one buys its shares, then the IPO ends up being a flop, which can affect the company’s success in the near and long term. If the company experiences an IPO pop, in which its price goes much higher than its initial offering price, it could be a sign that underwriters mispriced the stock.

A roadshow is also important for helping determine how to price the company’s stock when the IPO launches. If the roadshow ends up being a smashing success, for example, that can cause the underwriters to adjust their expectations for the stock’s IPO price.

On the other hand, if the roadshow doesn’t seem to be generating much buzz around the company at all, that could cause the price to be adjusted downward.

In a worst-case scenario, the company may decide to pull the plug on the IPO altogether or to go a different route, such as a private IPO placement.

The Takeaway

The IPO roadshow presents an opportunity for a new company to convince investors to invest in their organization. The main purpose of an IPO is to raise capital and companies can’t do that without interest from investors.

While individual investors typically don’t have access to roadshows, eligible investors may still participate in IPO trading. Buying IPO stock can help you to diversify your investment portfolio, and may present growth opportunities — but IPO shares are typically high risk. The key is doing your research to find the right companies to invest in as they go public.

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

FAQ

What is the purpose of a roadshow?

The purpose of an IPO roadshow is to generate interest in a company among prospective investors. The company executives and underwriting can meet with investors in-person or virtually to share details about the IPO, the company’s financials and its goals.

How long after the roadshow is the IPO?

The IPO can take place as little as two weeks after the roadshow is completed. The actual timing depends on a number of factors, including whether the underwriters determine that a price adjustment is needed or if any snags come up involving the filing of key documents.

Are IPO roadshows public?

The IPO roadshow process typically focuses on institutional investors, rather than retail investors. So the roadshow presentations have traditionally been private affairs. But with more companies opting to host virtual roadshows, there’s potential for the general public to be able to view IPO presentations online.

Photo credit: iStock/FreshSplash