Investing Archives

Jun

2025

Investing in Chinese Stocks

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

Table of Contents

Can You Invest in Chinese Stocks?
What Are the Best Chinese Stocks to Buy?
How Can Foreigners Invest in the Chinese Stock Market?
Pros & Cons of Buying Chinese Stocks
Are Chinese Stocks Undervalued?
FAQ

China represents a part of the global investor marketplace known as the “emerging markets,” or countries that are headed toward first-world status and undergoing a period of rapid growth. China has the second-largest economy in the world and is rapidly growing. Economists estimate that the country will overtake the United States to become the largest economy in the years to come.

Some prominent macro investors have expressed positive sentiments about emerging market opportunities. In spite of the potential opportunities, investing in foreign stocks can be confusing, scary, and in some cases impossible.

Key Points

• China is the world’s second-largest economy, and investing in Chinese stocks may attract the interests of certain investors

• Delisting of certain Chinese companies from U.S. stock exchanges introduces investment risks.

• China’s long-term economic outlook may make Chinese stocks appealing to some, depending on their objectives.

• Investing in Chinese stocks may provide an option for international diversification, spreading risk and potentially enhancing portfolio protection.

• U.S. investors can access Chinese stocks through ETFs, mutual funds, or direct purchases via brokerage firms.

Can You Invest in Chinese Stocks?

The short answer is yes, investors located in the U.S. and elsewhere do generally have the capability of trading international stocks, including investing in Chinese stocks. The details aren’t always so simple, though.

The majority of Chinese stocks can only be traded on Chinese exchanges, including the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange.

There are ways for foreign investors to participate in these markets, either directly or through various types of investment vehicles or intermediaries. For the most part, buying Chinese stocks is technically not unlike buying U.S. stocks. Investors may only need to search for specific securities or utilize a special intermediary firm in addition to their standard brokerage. Investors in the U.S. should also be aware that delisted Chinese stocks may or may not return to exchanges.

What Are the Best Chinese Stocks to Buy?

For investors in the U.S., choices may be limited. If there are a limited number of Chinese stocks that can be purchased directly on a stock exchange, then it’s just a matter of evaluating stocks on the list choosing whichever ones seem most attractive.

How Can Foreigners Invest in the Chinese Stock Market?

To buy and sell stocks on foreign exchanges, investors often have to contact their brokerage firms and ask if they allow participation in foreign markets. If the answer is yes, the firm could then consult with a market maker, known as an affiliate firm. Affiliate firms, which are located in the country where foreign investors want to buy stocks, help facilitate these types of transactions.

The easiest way for many investors to gain exposure to the Chinese stock market might be to purchase shares in an emerging markets mutual fund or exchange-traded funds (ETFs) that includes some stocks from publicly-traded companies based in China.

To do this, investors can look for funds that track a Chinese index. Some examples include:

• Shenzhen Composite Index, which tracks the Shenzhen Stock Exchange

• Shanghai Shenzhen CSI 300 Index, which tracks parts of the Shanghai and Shenzhen exchanges

• Shanghai Stock Exchange Composite Index, which tracks the Shanghai Stock Exchange

As far as the actual process of buying Chinese stocks is concerned, doing so will look like buying any other stock. This holds especially true for those buying an ETF or mutual fund. Buying individual Chinese securities may involve an extra step with an affiliate firm, as mentioned earlier.

In either case, investors have to first open a brokerage account, decide which securities they would like to own, then create appropriate buy orders.

Pros & Cons of Buying Chinese Stocks

While the decision ultimately lies with an individual investor, there are both pros and cons of global investments, including Chinese stocks. Here, we will explore both perspectives.

Pros of Buying Chinese Stocks

Factors like a long-term outlook, China’s response to the recent health crisis, and international diversification can make Chinese stocks appealing to some investors.

Long-term Time Horizon

Some investors believe that Chinese investments have a positive long-term outlook— regardless of any short-term political concerns (more on that in Cons of Buying Chinese Stocks, below).

China’s Response to the COVID-19 Pandemic

After the COVID-19 pandemic shut down most major economies in the world for an extended period of time, many areas saw contracting economic growth and continued to struggle. China, on the other hand, responded quickly and was able to reopen its economy sooner than many others, marking the country as a champion of growth throughout the pandemic and beyond.

International Diversification

Some investors choose to invest in the stocks of different countries as a way to further diversify their portfolios. The rationale: An investor could be diversified within and across different industries, but if something were to negatively affect the economy of the country those industries are in, it might not matter.

Cons of Buying Chinese Stocks

There are a few reasons why some investors might choose to avoid Chinese stocks.

Delisting of Some Chinese Companies

In recent times, executive orders have removed some Chinese stocks from American stock exchanges, including a Chinese oil firm named Cnooc (CEO) and China Mobile (CHL).

Growth Limits

Though there’s been economic growth in China, some believe the nature of the Chinese government could stifle innovation going forward. Which industries survive and which ones don’t can sometimes be determined by a simple forced government decision. One perspective is that China’s best growth days are behind it.

Are Chinese Stocks Undervalued?

It is impossible to say for certain. From a long-term perspective, if someone assumes that China will keep growing at a similar pace as it has in the past, then Chinese stocks in general could be viewed as undervalued. But there could also be some sectors that are currently overvalued, some stocks more undervalued than others, and so on.

The Takeaway

China is considered to be one of the strongest emerging market economies, leading some investors to see potential for returns there. Foreign investors have several options if they want to invest in Chinese stocks. Doing so may not be any different than buying stocks in one’s home country. And because of its large economy, there may be other stocks affected by China as well, even if they aren’t Chinese stocks.

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FAQ

Can American investors invest in Chinese stocks?

Yes, investors located in the U.S. and elsewhere do generally have the capability of trading international stocks, including investing in Chinese stocks. The details aren’t always so simple, though, and there may be additional considerations to make.

What are the risks of investing in Chinese stocks?

There is the possibility that Chinese stocks could be delisted off of stock exchanges, and there may also be concerns related to Chinese firms’ growth potential that investors should take into account.

Why might investors find Chinese stocks attractive?

China is the world’s second-largest economy, and many investors believe that there is a lot of room for growth and the generation of potential returns from Chinese stocks. They can also offer the potential for portfolio diversification.

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

SOIN-Q225-138

Jun

2025

What Is a Market Maker?

By Inyoung Hwang | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off

Table of Contents

How Market Makers Work
How Market Makers Earn Money
What Are Designated Market Makers (DMMs)?
FAQ

Market makers are trading firms that continuously provide prices at which they will buy or sell securities. Market makers are typically banks, brokerage firms or proprietary trading firms. Unlike traditional investors, they’re not in the business of betting whether the price of an asset will go up or down. They also don’t tend to hang on to securities for very long. Instead, market makers profit off the tiny price spreads that come from buying and selling securities rapidly.

Because they stand ready to do both sides of a trade, market makers are considered to be liquidity providers. Liquidity is the ease with which an asset can be bought or sold without affecting its price.

Key Points

• Market makers continuously provide prices for buying and selling assets, ensuring liquidity and market stability.

• Market makers earn profits through the bid-ask spread, a small margin between buying and selling prices.

• In liquid markets, bid-ask spreads are narrow; in volatile markets, spreads widen to manage risk.

• Market makers frequently use hedging strategies to protect against price fluctuations and reduce risk.

• Payment for order flow allows brokerage firms to offer zero-commission trading, benefiting retail investors with potential price improvements.

How Market Makers Work

In both stock and equity options trading, there are at least a dozen different exchanges. In order to provide prices across multiple exchanges, market makers rely on algorithms and ultra-fast computer systems to make sure their price quotes reflect the supply and demand for a security in the market.

Because of their use of such technology, market makers are sometimes called high-frequency traders. Here’s a closer look at the role market makers play in financial markets today.

💡 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.

How Market Makers Earn Money

Market makers seek to profit off the difference in the bid-ask spread, or the difference between the price at which an asset can be bought and the price at which it can be sold.

Overview of Bid-Ask Spreads

Here’s a hypothetical example of how market making works.

Let’s say a firm provides a quote for $10-$10.05, 100×200. That means they’re willing to buy 100 shares for $10, while simultaneously offering to sell 200 shares at the price of $10.05. The first part of the offer is known as the bid, while the latter is known as the ask. The prices that market makers set are determined by supply and demand in the market.

This means an investor or broker executing on behalf of a client can buy shares from the market maker at $10.05. And another investor looking to sell shares, can do so at $10 to this market maker. The difference of 5 cents is how the market maker locks in a profit. While making pennies on each trade sounds miniscule, it can be massively profitable at huge volumes.

Bid-ask stock spreads tend to narrow when markets are more liquid and widen when markets are less liquid. This is because during periods of volatility, sellers are more inclined to sell while buyers are more likely to stay put, anticipating lower prices in the near future.

Because bid-ask spreads tend to widen during periods of stock volatility, it also means market makers are able to capture bigger profits when markets are turbulent. Additionally, because of the risk of holding onto securities while making markets on them, market makers often hedge their bets by getting exposure to other assets or shorting securities in separate trades.

Overview of Payment for Order Flow

Another way some market makers earn revenue is through a practice known as payment for order flow (PFOF). This is when retail brokerage firms send retail client orders to market makers who then execute the orders.

So let’s say for example, a mom-and-pop investor at home puts in a buy or sell trade via their brokerage account. The broker then bundles that order with other client orders and sends them to an electronic market making firm, which then fulfills the orders.

Market makers pay fees to brokerage firms for sending those orders, and this is how brokerage firms have been able to offer zero-commission trading to retail clients in recent years.

Payment for order is common and legal, but it’s come under controversy over the years with some critics saying the practice incentivizes brokers to boost revenue, rather than find the best prices for their customers. Market makers are required by regulatory rules to execute client orders with “best execution,” but execution quality can be defined by price, speed, or liquidity.

Defenders of PFOF argue that retail investors get “price improvement,” when customers get a better price than they would on a public stock exchange.

Recommended: Brokerage Accounts Explained

What Are Designated Market Makers (DMMs)?

Designated market makers are trading firms on the New York Stock Exchange who are in charge of ensuring orderly trading of stocks listed on the New York Stock Exchange. Each company that chooses to list on the Big Board picks a DMM for its shares.

DMMs are supposed to add a human touch to stock exchange trading in today’s electronic markets. In contrast, the Nasdaq Stock Exchange, the second-biggest venue for U.S. equities, doesn’t have DMMs for its listed companies and trading is instead completely electronic.

Famous for wearing distinctive blue-colored jackets on the floor of the NYSE, DMMs used to be known as “specialists” back in the day. There used to be dozens of specialist firms in the 1980s, but these days there are just a handful of DMMs active on the NYSE floor.

The Takeaway

Market makers are intermediaries who provide prices all day in two-sided markets, where both bids to buy and offers to sell are quoted. Instead of making long-term bets on whether an asset will rise or fall, they make money from holding on to assets for short periods and profiting off their tiny bid-ask spreads. Market makers rely on high volumes in order to generate significant revenue.

Market makers are also sometimes called high-frequency traders because they use ultra-fast technology and algorithms to connect to multiple exchanges and quote numerous prices continuously. They’re considered important participants in modern financial markets because they speed up the pace at which transactions take place, particularly in stock and equity options trading.

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

FAQ

What do market makers do in the stock market?

Market makers continuously provide prices for buying and selling assets, helping to ensure liquidity and market stability.

How do market makers generate profits?

Market makers earn profits through the bid-ask spread, a small margin between buying and selling prices.

What is a designated market maker?

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

SOIN-Q225-136

Jun

2025

A man sitting at a table looks at a tablet while doing technical analysis for upcoming trades.

What Is a Clearinghouse?

By Inyoung Hwang | invest, Investing | Comments Off

Table of Contents

How Clearinghouses Work
Are Clearinghouses “Too Big to Fail?”
Clearinghouses in Stock Trading
Clearinghouses in Derivatives Trading
FAQ

A clearinghouse is a financial institution that acts as a middleman between buyers and sellers in a market, ensuring that transactions take place even if one side defaults. If one side of a deal fails, a clearinghouse can step in to fill the gap, thus reducing the risk that a failure will ripple across financial markets. In order to do this, clearinghouses ask their members for “margin,” or collateral that is held to keep them safe from their own actions and the actions of other members.

While often described as the “plumbing” behind financial transactions, clearinghouses became high profile after the 2008 financial crisis, when the collapse of Lehman Brothers Holdings Inc. exposed the need for steady intermediaries in many markets. Regulations introduced by the Dodd-Frank Act demanded greater clearing requirements, turning the handful of clearinghouses in the country into some of the most systemically important entities in today’s financial system.

Key Points

• Clearinghouses act as intermediaries in financial markets, ensuring transactions complete even if a party defaults.

• Clearinghouses manage the clearing and settlement process, transferring assets and funds between parties.

• Margin requirements and default funds help provide layers of protection against financial instability.

• Clearinghouses gained prominence after the 2008 financial crisis, enhancing market stability.

• Regulators have raised concerns that clearinghouses may be too big to fail, concentrating financial risk.

How Clearinghouses Work

Clearinghouses handle the clearing and settlement for member trades. Clearing is the handling of trades after they’re agreed upon, while settlement is the actual transfer of ownership, or delivering an asset to its buyer and the funds to its seller.

Other responsibilities include recording trade data and collecting margin payments. The margin requirements are usually based on formulas that take into account factors like market volatility, the balance of buy-versus-sell orders, as well as value-at-risk, or the risk of losses from investments.

Because they handle investing risk from both parties in a trade, clearinghouses typically have a “waterfall” of potential actions in case a member defaults. Here are the layers of protection a clearinghouse has for such events:

1. Margin requirements by the member itself. If market volatility spikes or trades start to head south, clearinghouses can put in a margin call and demand more money from a member. In most cases, this response tends to cover any losses.

2. The next buffer would be the clearinghouse’s own operator capital.

3. If these aren’t enough to staunch the losses, the clearinghouse could dip into the mutual default fund made up from contributions by members. Such an action however could, in turn, cause the clearinghouse to ask members for more money, in order to replenish the collective fund.

4. Lastly, a resolution could be to try to find more capital from the clearinghouse itself again — such as from a parent company.

Are Clearinghouses “Too Big to Fail?”

Some industry observers have argued that regulations have made clearinghouses too systemically important, turning them into big concentrations of financial risk themselves.

These critics argue that because of their membership structure, the risk of default in a clearinghouse is spread across a group of market participants. And one weak member could be bad news for everyone, especially if a clearinghouse has to ask for additional money to refill the mutual default fund. Such a move could trigger a cascade of selling across markets as members try to meet the call.

Other critics have said the margin requirements and default funds at clearinghouses are too shallow, raising the risk that clearinghouses burn through their buffers and need to be bailed out by a government entity or go bankrupt, a series of events that could meanwhile throw financial markets into disarray.

Clearinghouses in Stock Trading

Stock investors may have learned the difference between a trade versus settlement date. Trades in the stock market aren’t immediate. Known as “T+2,” settlement happens two days after the trade happens, so the money and shares actually change hands two days later.

In the U.S., the Depository Trust & Clearing Corporation (DTCC) handles the majority of clearing and settling in equity trades. Owned by a financial consortium, the DTCC clears trillions in stock trades each day.

Clearinghouses in Derivatives Trading

Clearinghouses play a much more central and pivotal role in the derivatives market, since derivatives products are typically leveraged, so money is borrowed in order to make bigger bets. With leverage, the risk among counterparties in trading becomes magnified, increasing the need for an intermediary between buyers and sellers.

Prior to Dodd-Frank, the vast majority of derivatives were traded over the counter. The Act required that the world of derivatives needed to be made safer and required that most contracts be centrally cleared. With U.S. stock options trades, the Options Clearing Corp. is the biggest clearinghouse, while CME Clearing and ICE Clear U.S. are the two largest in other derivatives markets.

The Takeaway

Clearinghouses are financial intermediaries that handle the mechanics behind trades, helping to back and finalize transactions by members. But since the 2008 financial crisis, the ultimate goal of clearinghouses has been to be a stabilizing force in the marketplace. They sit in between buyers and sellers since it’s hard for one party to know exactly the risk profile and creditworthiness of the other.

For beginner investors, it can be helpful to understand this “plumbing” that allows trades to take place and helps ensure financial markets stay stable.

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

FAQ

What does a clearinghouse do?

Clearinghouses handle the clearing and settlement for trades on the markets. Clearing is the handling of trades after they’re agreed upon, while settlement is the actual transfer of ownership, or delivering an asset to its buyer and the funds to its seller.

What role do clearinghouses play in the markets?

Since the financial crisis in 2008 and 2009, clearinghouses largely play a stabilizing role, while also clearing trades.

What protections help stabilize the markets as it relates to clearinghouses?

Margin requirements and default funds provide layers of protection against financial instability.

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

SOIN-Q225-134

Jun

2025

Understanding the Permanent Portfolio Strategy

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

Table of Contents

What Is the Permanent Portfolio?
Building a Permanent Portfolio
Alternatives to the Permanent Portfolio
FAQ

The permanent portfolio investment strategy involves creating an investment portfolio that is equally diversified among four asset classes. It was introduced by investment advisor Harry Browne in his 1981 book, Inflation-Proofing Your Investments. The goal of the permanent portfolio is for it to perform well during both economic booms and recessions.

It aims to provide both growth and low volatility. Historically the strategy has been successful. But engaging in the strategy requires a bit of legwork, like learning how to build the portfolio, and considering the pros and cons of the strategy.

Key Points

• A permanent portfolio strategy includes investments in U.S. stocks, Treasury bills, long-term Treasury bonds, and gold to form the four equally diversified asset classes.

• The strategy hopes to generate returns across different economic environments.

• The strategy was designed with the goal of achieving steady growth while maintaining low volatility.

• Annual rebalancing is necessary with the permanent portfolio to keep each asset class at a 25% allocation.

• The conservative nature of the permanent portfolio may result in lower returns compared to more stock-heavy portfolios.

What Is the Permanent Portfolio?

The permanent portfolio is diversified equally with precious metals, Treasury bills, government bonds, and growth stocks. The allocation is as follows:

• 25% U.S. Stocks

• 25% Treasury Bills

• 25% Long-Term Treasury Bonds

• 25% Gold

Although these investments can be volatile and incur losses, their values are not strongly correlated, so by holding some of each, investors may be able to prevent significant losses. The idea is that at least one asset in the portfolio is always working. Each asset class tends to (but does not necessarily) perform well in different conditions:

• Stocks tend to perform well during times of economic prosperity and are good for growth.

• Gold tends to protect from currency devaluations, perform well during inflation, and do fine during growth periods.

• Bonds are a safe investment that perform well during deflationary times and do fine during growth periods.

• Cash might protect from losses during recessions and deflationary times, and is liquid.

Gold and bonds are generally safe havens during a recession and inflationary times, while the stock market provides growth during economic booms. Cash is stable and creates a source of funding for rebalancing and downturns.

Another way of looking at it is by categorizing the four asset classes into four economic conditions:

• Prosperity: Stocks perform well during prosperous times, as public sentiment is positively correlated to stock market increases.

• Inflation: Gold investments perform well during inflationary times because the purchasing power of the dollar decreases, so people flock to gold as a safe haven.

• Deflation: When the price of goods and services decreases, deflation occurs. Long-term bonds perform well in this environment because interest rates decrease, which increases the value of older bonds.

• Recession: Cash is good to hold during a recession while other assets are at a low. Investors can buy up assets while they’re down and still have some money on hand if they need it.

Rather than trying to time the market and moving funds around accordingly, the permanent portfolio is a simple set-it-and-forget-it strategy for long-term investing.

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Historical Performance

The permanent portfolio has historically performed as it’s designed to. It grows steadily over time and doesn’t experience significant losses during market downturns. For example, during the 1987 market crash, utilizing the permanent portfolio would have only incurred losses of 4.5%, while a 60/40 portfolio would have dropped 13.4%.

In general, the permanent portfolio has a somewhat lower return than a 60/40 portfolio, but it carries less risk and volatility.

The permanent portfolio had an average annual return of 8.69% between 1978 and 2017, while the 60/40 portfolio earned 10.26%, and the 100% U.S. stock portfolio earned 11.50%. Within that time frame, the permanent portfolio outperformed the other two several times within five-year periods.

Note, of course, that historical performance is not indicative of future performance.

Pros of the Permanent Portfolio

There are several upsides to building a permanent portfolio:

• Simple, set-it-and-forget-it strategy. Once it’s set up, investors only need to rebalance their portfolio about once a year.

• Avoiding significant losses through diversification while gaining returns over time. The portfolio is designed to minimize volatility but still increase in value over the long term.

• Although assets such as stocks can grow significantly, they can also have significant downturns.

Cons of the Permanent Portfolio

Like any investment strategy, the permanent portfolio does come with some downsides:

• Stocks tend to grow more over time than the other assets included in the portfolio, so investors miss out on some of that growth by only having a 25% stock allocation.

• The permanent portfolio includes only U.S. stocks, so investors miss out on exposure to emerging markets and international stocks. When Browne developed the permanent portfolio, international stocks were not a popular investment, so he would not have included them in his allocation.

• Another potential con is that the permanent portfolio only includes Treasury bonds. Other types of bonds can also be good choices for diversification.

• Although cash is a fairly safe asset to hold during a depression, that type of downturn doesn’t happen often. By holding such a large amount of cash, investors miss out on growth opportunities.

• Overall, the permanent portfolio is fairly conservative, so investors could see higher returns using another strategy. Allocating more to stocks and alternative investments is likely to provide greater growth, but will carry greater risk.

💡 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.

Building a Permanent Portfolio

Although the permanent portfolio strategy outlines the percentage of funds to allocate to different asset classes, investors still need to select specific assets to invest in. For example, investors might choose individual stocks for their portfolio, or they might invest in ETFs that include solely U.S. stocks or bonds. The upside of ETFs is they are easy to buy and sell, they minimize fees, and they provide diversification.

Managing a permanent portfolio is fairly simple once it’s set up. It’s a good idea to rebalance the portfolio at least once a year to ensure that the 25% allocations remain the same. If one area of the portfolio has grown or declined, investors can rebalance to even them out.

The Variable Portfolio

Some investors may decide that the permanent portfolio is too safe for them and they’d prefer a strategy conducive to higher growth. Using the variable portfolio method, investors put 5% to 10% of their money into riskier or more experimental investments. That way, the majority of holdings are still in the steady growth permanent portfolio, but investors can play around with some alternative investments as well.

Alternatives to the Permanent Portfolio

Although the permanent portfolio has its merits and has performed well historically, it isn’t the right choice for everyone. Some investors might want to allocate more of their portfolio to stocks, while others might want to diversify into more types of assets. There are many investing strategies out there to choose from, or investors can create their own.

Just because a particular strategy has performed well in the past doesn’t mean it will continue to do so in the future. It’s important for investors to do their own research and due diligence to decide what works best for their own goals and risk tolerance.

Below are some of the most popular strategies:

60/40

The 60/40 strategy is popular, especially among retirees, because it has performed well over the past century.

It involves creating a portfolio with 60% stocks and 40% bonds. Similar to the permanent portfolio, the 60/40 gives investors exposure to the growth of the stock market while reducing risk and volatility with the inclusion of bonds.

The benefit of the 60/40 strategy compared to the permanent portfolio is that it has a large stock allocation, but some still consider the 40% bond allocation too high. There has also been discussion in recent years about whether the 60/40 portfolio will continue to be a successful strategy in the coming decades.

There are downsides, too, which include the fact that a 60/40 portfolio will likely not provide the same returns as one more invested in stocks. Depending on your specific investing goals, that’s something to keep in mind. It’s also possible that stock and bond values could decline at the same time, leading to a fall in the overall value of the portfolio.

Business Cycle Investing

Those looking for an intermediate-term strategy might want to use the business cycle investing strategy for some or all of their portfolio. Using this strategy, investors keep track of the business cycle and adjust their investments according to which stage of the cycle the nation is in.

Different industries and types of assets do better within each stage of the cycle, so investors can make predictions about when to buy and sell each asset and invest accordingly. To execute this strategy effectively, it is a good idea to have an understanding of past market contractions and their catalysts. This strategy requires more time, research, and effort than long-term, set-it-and-forget-it strategies, but can be successful for those willing to put in the work.

It could be unsuccessful if investors aren’t able to stay on top of the news and happenings related to the business cycle, and are able to readjust their holdings and allocations accordingly. It requires a more active approach, in other words, which may not be suited for each individual investor.

Rule of 110

Investors subtract their age from 110 to figure out what percentage of their money to allocate to stocks and bonds. For example, a 40-year-old would create a portfolio of 70% stocks and 30% bonds. As the investor gets older, they rebalance their portfolio accordingly.

Dollar-Cost Averaging

Here, investors put the same amount of money toward any particular asset at different points in time. Rather than putting all of their money into the markets at once, they space it out over time. Utilizing the dollar-cost averaging strategy allows investors to average out the amount they pay for that asset over time. Sometimes they buy low and sometimes they buy high, but they aren’t attempting to time the market or predict what will happen.

Lump Sum Investing

With the most basic strategy of all, investors put all of their available cash into the stock market right away. There’s no waiting for a particular time or trying to figure out what else to invest in. The theory behind this is that the overall trend line of the stock market continues to go up over the long term, even if it has downturns along the way. This might be a choice for investors who simply want to take advantage of stock market growth and aren’t afraid of volatility.

Alternative Investments

In addition to stocks and bonds, investors may want to consider diversifying into alternative investments, which could include real estate, franchises, or farmland. While some alternative investments carry a lot of risk and require research, they can also come with significant growth. Conversely, alternative investments tend to be very risky and speculative, and could see significant losses as well. The risks associated with alternative investments are something all investors should consider.

The Takeaway

The permanent portfolio involves equally allocating your investments to four specific asset classes. Those classes include precious metals, Treasury bills, government bonds, and growth stocks. While this method has proven beneficial for some investors in the past, it has its potential downsides, and won’t be the right strategy for everyone.

Once you’ve decided what your investing strategy is going to be and created some personal financial goals, you’re ready to start building your portfolio.

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

FAQ

How is the permanent portfolio allocated?

The permanent portfolio is diversified equally with precious metals, Treasury bills, government bonds, and growth stocks. Each asset class gets 25% within the permanent portfolio.

Who invented the permanent portfolio strategy?

The permanent portfolio strategy was introduced by investment advisor Harry Browne in his 1981 book, Inflation-Proofing Your Investments, with the goal of the permanent portfolio is for it to perform well during both economic booms and recessions.

What are some alternate strategies to the permanent portfolio?

Some potential alternatives to the Permanent Portfolio strategy that investors may check out include the 60/40 strategy, lump-sum investing, or the Rule of 110.

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

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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SOIN-Q225-151

Jun

2025

What Are Unicorn Companies?

By Inyoung Hwang | Investing, Terminology | No Comments

Table of Contents

Top 10 Most Valuable Unicorns
Characteristics of Unicorn Companies
Why Are Unicorns Declining?
How Do Unicorns Get Valued?
How to Invest in Unicorns
Risks of Investing in Unicorns
Alternative to Unicorns in Startup Terminology
FAQ

The term “unicorn” was coined by venture capitalist Aileen Lee in 2013, to describe startup companies that reached a $1 billion post-money valuation.

The catchphrase — from the title of her article, “Welcome to the Unicorn Club: Learning From Billion-Dollar Startups” — was immediately and widely adopted, as it conveyed both the rarity and the somewhat mythical status of companies that hit the $1 billion benchmark.

Back in 2013, Lee counted 39 unicorns in the U.S. It was still considered exceptional for a private company to grow to that size without having an initial public offering or IPO.

Today, there are about 1200 to 1400 so-called unicorns globally, depending on the criteria used to identify these companies. But owing to a confluence of factors, including tighter capital markets, the number of unicorns has declined steadily in the last decade.

Key Points

• A unicorn is a startup that reached a post-money valuation of at least $1 billion.

• The term was coined by venture capitalist Aileen Lee in 2013. At the time it was an apt way to describe startups that attained a mythical level of success without an IPO.

• While unicorns are associated with Silicon Valley, unicorns can be found worldwide.

• Countries with the highest number of unicorns include the U.S., China, India, U.K., and France.

• Globally, the number of unicorns peaked in 2021, and has declined since then.

Top 10 Most Valuable Unicorns

As of January 2025, there are some 1,258 unicorns worldwide, with a cumulative business valuation of roughly $4.4 trillion, according to research by CB Insights, a business analytics platform.

Unicorns can be exciting for investors because they can represent rapid — even seemingly magical — growth. But are unicorns actually good investments? It’s important for investors to remember that, by definition, these companies haven’t yet come under the scrutiny of public markets.

Below is a chart of the unicorn companies with the highest valuations globally, according to CB Insights, as of January 2025.

Company	Valuation	Date Added	Country	Industry
SpaceX	$350 billion	12/1/2012	U.S.	Space
Bytedance	$300 billion	4/7/2017	China	Media & Entertainment
OpenAI	$300 billion	7/22/2019	U.S.	Enterprise Tech
Stripe	$70 billion	1/23/2014	U.S.	Fintech
SHEIN	$66 billion	7/3/2018	Singapore	Consumer Retail
Databricks	$62 billion	2/5/2019	U.S.	Enterprise Tech
Anthropic	$61.5 billion	2/3/2023	U.S.	Enterprise Tech
xAI	$50 billion	5/6/2024	U.S.	Enterprise Tech
Revolut	$45 billion	4/26/2018	U.K.	Financial Services
Canva	$32 billion	1/8/2018	Australia	Enterprise Tech

Source: CB Insights, as of January 31, 2025.

Characteristics of Unicorn Companies

The increase in the number of unicorns over time has meant that these companies come from a range of industries, sectors, and regions.

Unicorns by Industry

According to Crunchbase, as of June 2025, the top seven sectors with the largest number of unicorns are as follows:

• Software (894)

• Financial services (404)

• Information technology (383)

• Science and engineering (387)

• Data and analytics (379)

• Internet services (299)

• AI (283)

Unicorns by Geography

While the Bay Area’s Silicon Valley is still synonymous with startups, unicorns have gone global.

Top 5 Countries With the Most Unicorns

Country	Number of Unicorns
United States	702
China	302
India	119
U.K.	104
France	34

Source: Wikipedia, as of April 13, 2025

Age and Success Rate of Unicorns

Lately, U.S. unicorns have tended to be older when they enter the stock market. When Aileen Lee coined the term in 2013, the median age of a tech IPO company was nine years, data from University of Florida shows. Going back further in time, during the height of the dot-com bubble in 1999, the median age was four years.

Fast forward to 2023, and the median age jumped to 12.5 years.

In addition, while unicorn status may sound impressive, it doesn’t always translate to long-term success. According to a 2023 analysis by Bain Capital, less than 1% of the 2,500 unicorns they tracked worldwide generated $1 billion or more in revenues or cash — “a truer measure of sustainable success,” the report noted.

When it comes to who’s founding these unicorns, there has been some increase in diversity. Back in 2012 or 2013, when Aileen Lee did her initial IPO research, no unicorns had female founding CEOs. However, by 2024, 124 startups founded or co-founded by a woman became unicorns.

Why Are Unicorns Declining?

Owing to the range of criteria used to define and analyze unicorn companies, it can be difficult to pinpoint and track specific trends. One thing is clear, however: The rapid growth in the number of unicorn companies peaked several years ago and has declined steadily since then.

According to PitchBook, some 629 startups reached unicorn status in 2021. By 2024, though, only about 100 companies hit that mark worldwide, with 58 in the U.S.

What is contributing to the decline?

• Access to private capital. As mentioned above, companies are waiting longer before they go public, often because startups can continue to get investments from venture-capital firms (VCs) and private-equity funds in their later stages. Some prefer that option over the risky, complex process of having an IPO.

• Less capital for new ventures. One of the knock-on effects of private funds being tied up for longer is that new ventures are struggling to find capital they need.

• Late-state funding is less available. In addition, VCs are less inclined to provide funding at later stages.

Meanwhile, tech investing remains a bright spot for investors hungry for growth opportunities. Companies focused on artificial intelligence (AI) technologies were 44% of unicorns in 2024, according to CBInsights, a 7x increase over the previous decade.

How Do Unicorns Get Valued?

Many startups — even ones of unicorn size — are not profitable. Investors put in money under the assumption that profits will eventually come, and that’s why businesses may rely on longer-term forecasting. Similar to how it works when it comes to growth vs. value stocks, valuation metrics like price-to-sales ratios may be used in order to measure the company’s worth.

Investors may also come up with valuations by comparing unlisted firms with similar businesses that are publicly traded. Hence, a rising stock market may also lead to higher valuations for privately held companies, although overvaluation is an ongoing concern with many startups.

How to Invest in Unicorns

Accredited investors — those with $200,000 in annual income or $1 million in assets — can get exposure to unicorns by putting money into venture-capital funds: capital pools that invest in private companies. In recent years, they’ve attracted not just venture-capitalists, but also hedge funds, asset-management firms like mutual funds as well as sovereign wealth funds.

It’s important for would-be investors to bear in mind that it can take years for even a successful startup or unicorn to make a successful exit, either via an IPO, SPAC, direct listing, or an acquisition. On average, it takes eight years for a unicorn to exit, according to data by VisualCapitalist.

Can Average Investors Invest in Unicorns?

Unicorns don’t generally accept modest investments from individual or retail investors.

Jay Clayton, former chairman of the Securities and Exchange Commission, argued that smaller investors should get access to private-market investments. The fact that companies are staying private for longer has also made it true that individual investors are missing out more on businesses in their early stages.

But skeptics note that private markets don’t have the same disclosure requirements that public markets require, a situation that could leave retail investors in the dark about a company’s financials and increase the risk of fraud. Mutual funds can put up to 15% of assets in illiquid assets, but often they don’t allocate that much to private companies since these investments are tougher to sell.

Deep-pocketed retail investors can get in early with some startups via angel investing — when individuals provide funding to very young businesses. But these fledgling businesses tend to have valuations far below $1 billion.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Risks of Investing in Unicorns

Not all unicorns successfully transition into stock market stars. Some see their valuations dip in late private funding rounds. Some have even scrapped IPO plans at the last minute. Others disappoint after their debut in the public markets, finding that first-day pop in trading elusive or underperforming in the weeks after the IPO.

How do you know whether a unicorn is destined to be the next market darling or flame-out? There is no way to know for sure, but there are a number of risks when it comes to unicorn investing. Here are some:

• Lack of Profitability: Many unicorns offer deeply discounted services in order to supercharge growth. While venture capitals are used to subsidizing startups, public market investors may be tougher on these models.

• Market Competition: No matter how great an idea is and how much funding they bring in, there are always competitors. If another company has superior marketing, more users and higher sales, even a unicorn could stumble.

• Consumer/Business Need: Just because a founder has a cool idea and they can build it, doesn’t mean anybody will spend money on it. The true test of product relevance lies in actual market performance.

• Management Team: Who are the company’s founders, and what is the culture they are creating at their startup? Many startups fail, and a founder’s management style and lack of experience can be cited as major reasons why.

• Regulatory Changes: Some unicorns represent new business models or disrupt existing industries. Such changes may come with regulatory oversight that makes operating difficult.

Alternative to Unicorns in Startup Terminology

The surge in private-market tech investing has led to a new vernacular that’s specific to startup valuations. Here’s a table that covers some popular lingo.

List of Unicorn Terminology

Startup Term	Definition
Pony	Company worth less than $100 million
Racehorse	Company that became unicorns very quickly
Unitortoise	Company that took a long time to become a unicorn
Narwhal	Canadian company with a valuation of at least $1 billion
Minotaur	Company that has raised $1 billion or more in funding
Undercorn	Company that reached a $1 billion valuation then fell below it
Decacorn	Company with a valuation of at least $10 billion
Hectocorn	Company with a valuation of at least $100 billion
Dragon	Company that returns an entire fund, meaning the single investment paid off as much as a diversified portfolio

The Takeaway

While they started out as rarities, unicorns have since multiplied. For investors, unicorn companies may appear to be a good way to diversify and get access to a high-growth business. But it’s important to remember that many unicorns are unprofitable businesses that secure $1 billion valuations by making very long-term projections.

It’s important to look closely at a new company’s management team, history, as well as financials before investing in it. Whether you’re a new or seasoned investor, researching which stocks to buy and when to buy them can be time-consuming and challenging.

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

FAQ

What is the biggest unicorn company?

A handful of unicorns have reached a valuation of $100 billion or more while still private, including SpaceX, ByteDance, and OpenAI.

What is the difference between a unicorn and a startup?

A unicorn is a startup, or private company that is VC funded, that reaches a $1 billion valuation before going public. Not all startups become unicorns.

Are unicorns risky?

Yes, like many startups that have yet to prove themselves in the public marketplace, unicorns come with a risk of failure. Their pre-market valuation may seem impressive, but isn’t a guarantee of success in terms of generating revenue or cash, or besting the competition.

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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

Mutual Funds (MFs): 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 clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

SOIN-Q225-096

Investing in Chinese Stocks

Can You Invest in Chinese Stocks?

What Are the Best Chinese Stocks to Buy?

How Can Foreigners Invest in the Chinese Stock Market?

Pros & Cons of Buying Chinese Stocks

Pros of Buying Chinese Stocks

Long-term Time Horizon

China’s Response to the COVID-19 Pandemic

International Diversification

Cons of Buying Chinese Stocks

Delisting of Some Chinese Companies

Growth Limits

Are Chinese Stocks Undervalued?

The Takeaway

FAQ

Can American investors invest in Chinese stocks?

What are the risks of investing in Chinese stocks?

Why might investors find Chinese stocks attractive?

What Is a Market Maker?

How Market Makers Work

How Market Makers Earn Money

Overview of Bid-Ask Spreads

Overview of Payment for Order Flow

What Are Designated Market Makers (DMMs)?

The Takeaway

FAQ

What do market makers do in the stock market?

How do market makers generate profits?

What is a designated market maker?

What Is a Clearinghouse?

How Clearinghouses Work

Are Clearinghouses “Too Big to Fail?”

Clearinghouses in Stock Trading

Clearinghouses in Derivatives Trading

The Takeaway

FAQ

What does a clearinghouse do?

What role do clearinghouses play in the markets?

What protections help stabilize the markets as it relates to clearinghouses?

Understanding the Permanent Portfolio Strategy

What Is the Permanent Portfolio?

Historical Performance

Pros of the Permanent Portfolio

Cons of the Permanent Portfolio

Building a Permanent Portfolio

The Variable Portfolio

Alternatives to the Permanent Portfolio

60/40

Business Cycle Investing

Rule of 110

Dollar-Cost Averaging

Lump Sum Investing

Alternative Investments

The Takeaway

FAQ

How is the permanent portfolio allocated?

Who invented the permanent portfolio strategy?

What are some alternate strategies to the permanent portfolio?

What Are Unicorn Companies?

Top 10 Most Valuable Unicorns

Characteristics of Unicorn Companies

Unicorns by Industry

Unicorns by Geography

Age and Success Rate of Unicorns

Why Are Unicorns Declining?

How Do Unicorns Get Valued?

How to Invest in Unicorns

Can Average Investors Invest in Unicorns?

Risks of Investing in Unicorns

Alternative to Unicorns in Startup Terminology

List of Unicorn Terminology

The Takeaway

FAQ

What is the biggest unicorn company?

What is the difference between a unicorn and a startup?

Are unicorns risky?

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