Financial Topics Archives | Page 262 of 781

Sep

2023

Inherited 401(k): Rules and Tax Information

By Ashley Kilroy | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

When you inherit a 401(k) retirement account, there are tax rules and other guidelines that beneficiaries must follow in order to make the most of their inheritance.

Inheriting a 401(k) isn’t like getting a simple inheritance, e.g. cash, property, or jewelry. How you as the beneficiary must handle the account is determined by your relationship to the deceased, your age, and other factors.

Understanding the tax treatment of an inherited 401(k) is especially important, as 401(k) accounts are tax-deferred vehicles, so regardless of your status as a beneficiary you will owe taxes on the withdrawals from the account, now or later.

What Is an Inherited 401(k)?

As the name suggests, an inherited 401(k) is an employer-sponsored retirement plan that is bequeathed to an individual, either a spouse or a non-spouse.

When an individual sets up their 401(k) to begin with, they generally fill out a beneficiary form. This form may include their spouse (if the account holder was married), children, siblings, or others.

In most cases, when the account holder of a 401(k) dies, the account is automatically bequeathed to the surviving spouse, unless the will specifies otherwise. This is not the case if your partner dies and you weren’t married. In that case, the 401(k) does not pass to the surviving partner, unless they are officially designated as an account beneficiary.

What to Do If You’re Inheriting a 401(k)

The rules for inheriting a 401(k) are different when you inherit the account from a spouse versus someone who wasn’t your spouse. Depending on your relationship, you’ll have different options for what you can do with the money and how those options affect your tax situation.

Remember, a 401(k) is a tax-deferred retirement account, and the beneficiary will owe taxes on any withdrawals from that account, based on their marginal tax rate.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Inheriting a 401(k) From a Spouse

A spouse has a number of options when inheriting an IRA. But be careful; there are a number of wrinkles given that the rules have changed in the last few years.

• You could rollover the inherited 401(k) into your own 401(k) or into an inherited IRA: For most spouses, taking control of an inherited 401(k) by rolling over the funds is often the smartest choice. A rollover gives the money more time to grow, which could be useful as part of your own retirement strategy. Also, rollovers do not incur penalties or taxes. (But if you convert funds from a traditional 401(k) to a Roth 401(k) or a Roth IRA, you will likely owe taxes on the conversion to a Roth account.)

Also remember that once the rollover is complete, traditional 401(k) or IRA rules apply, meaning you’ll face a 10% penalty for early withdrawals before age 59 ½.

And when you reach age 73, you must start taking required minimum distributions (RMDs). Because RMD rules have recently changed, owing to the SECURE Act 2.0, it may be wise to consult a financial professional to determine the strategy that’s best for you.

Recommended: How to Make a Will

• Take a lump sum distribution: Withdrawing all the money at once will not incur a 10% early withdrawal penalty as long as you’re over 59 ½, but you’ll owe income tax on the money in the year you withdraw it — and the amount you withdraw could put you into a higher tax bracket.

• You can reject or disclaim the inherited account, passing it to the next beneficiary.

• Last, you could leave the inherited 401(k) where it is: If you don’t touch or transfer the inherited 401(k), you are required to take RMDs if you’re at least 73. If you’re not yet 73, other rules apply and you may want to consult a professional.

Inheriting a 401(k) from a Non-Spouse

The options for a non-spouse beneficiary (e.g. a child, sibling, etc.) are far more limited. For example, as a non-spouse beneficiary you cannot rollover an inherited 401(k) into your own retirement account.

• You can “disclaim” or basically reject the inherited account.

• If the account holder died in 2019 or earlier, you can take withdrawals for up to 5 years — as long as the account is empty after the 5-year period. If the account holder died in 2020 or after, you have 10 years to withdraw all the funds. You must start taking withdrawals starting no later than Dec. 31 of the year after the death of the account holder. These rules are known as the 5-year and 10-year rules.

• A positive point to remember: If you are a non-spouse beneficiary and younger than 59 ½ at the time the withdrawals begin, you won’t face a 10% penalty for early withdrawals.

The exception to this rule is if you’re a minor child, chronically ill or disabled, or not more than 10 years younger than the deceased, you can take distributions throughout your life.

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

How RMDs Impact Inherited 401(k)s

If the account holder died prior to Jan. 1, 2020, anyone can use the so-called “life expectancy method” to withdraw funds from an inherited IRA. That means taking required minimum distributions, or RMDs, based on your own life expectancy per the IRS Single Life Table (Publication 590-B).

But if the account holder died after Dec. 31, 2019, the SECURE Act (also known as the “Setting Every Community Up for Retirement Enhancement Act of 2019”) outlines different withdrawal rules for those who are defined as eligible designated beneficiaries.

What Is an Eligible Designated Beneficiary?

To be an eligible-designated beneficiary, and be allowed to take RMDs based on your own life expectancy, an individual must be one of the following:

• A surviving spouse

• No more than 10 years younger than the original account holder at the time of their death

• Chronically ill

• Disabled

• A minor child

Individuals who are not eligible-designated beneficiaries must distribute (i.e. withdraw) all the funds in the account by December 31st of the 10th year of the account owner’s death.

Eligible-designated beneficiaries are exempt from the 10-year rule: With the exception of minor children, they can take distributions over their life expectancy.

Minor children must take any remaining distributions within 10 years after their 18th birthday.

How to Handle Unclaimed Financial Assets

What if someone dies, leaving a 401(k) or other assets, but without a will or other legally binding document outlining the distribution of those assets?

That money, or the assets in question, may become “unclaimed” after a designated period of time. Unclaimed assets may include money, but can also refer to bank or retirement accounts, property (e.g. real estate or vehicles), physical assets such as jewelry.

Unclaimed assets are often turned over to the state where that person lived. However, it is possible for relatives to claim the assets through the appropriate channels. In most cases, it’s incumbent on the claimant to provide supporting evidence for their claim, since the deceased did not leave a will or other documentation officially bequeathing the money to that person.

The Takeaway

Inheriting a 401(k) can be a wonderful and sometimes unexpected financial gift. It’s also a complicated one. For anyone who inherits a 401(k) — spouse or otherwise — it can be helpful to review the options for what to do with the account, in addition to the rules that come with each choice.

In some cases, the beneficiary may have to take required distributions (withdrawals) based on their age. In some cases, those required withdrawals may be waived. In almost all cases, withdrawals from the inherited 401(k) will be taxed at the heir’s marginal tax rate.

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Sep

2023

What Is a Candlestick Chart?

By MP Dunleavey | Growing Wealth, Investing | Comments Off

What Are Candlestick Charts?

Candlesticks are price chart units that show the high, low, opening, and closing prices of a stock or security within a specified time period. Overtime, the candles create patterns that traders can use to predict price movements, trends, and reversals.

Most candlesticks consist of a body and upper and lower wicks, which are also known as shadows or tails.

Candlestick charts are commonly used, along with line charts, bar charts, and point-and-figure charts.

Understanding Candlestick Charts

Candlesticks originated in Japan, perhaps in the 19th century, as a means of tracking the prices of certain assets and commodities. When candlestick charts were introduced in the West, they originally were called Japanese candlestick charts.

The candlestick itself consists of an open area called the “real body,” which shows the range between the open and close prices, with the price movements in the specified time period shown as vertical lines or wicks (also called shadows) on either end of the body. The wicks indicate the high and the low for that period.

When the real body is filled in with black or red it means the close was lower than the open. When it’s white (blank) or green, the close was higher than the open. On most platforms, traders can alter the colors to whatever is easiest for them to read. Some candlestick charts are black and white.

Traders can set the desired time period they want to analyze; often a candlestick represents the price movements during a trading day. Candlestick patterns are formed by a series of candles within a designated interval (e.g. days or weeks).

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Candlestick Charts vs Bar Charts

Like candlestick charts, bar charts show security price changes over time. Many traders think candlestick charts are easier to read; the thicker candle bodies make it easy to see the distinction between the opening and closing price and the high and low.

Bar charts are also often not color coded, making it more difficult to see price trends. However, some traders prefer the cleaner aesthetic of a bar chart.

What Do Candlestick Charts Tell Investors?

Candlestick charts are composed of candles lined up next to one another, each of which shows price movement between the specified time period. Because candles show price changes in certain time periods, traders can use charts to see trends and try to predict price changes.

Candlestick patterns can show that a negative or positive price continuation is likely, or that a price trend may reverse. Even a single candlestick can help traders decide whether to buy or sell.

Some investors use fundamental analysis of an investment to make trading decisions. But that in-depth analysis is typically not of interest to a day trader.

Day traders often use what is called technical analysis in an attempt to detect patterns in a security’s performance. Although this method is common in the financial industry, many debate the validity of these patterns and whether they can be predictive, or help investors anticipate a security’s future performance in any way.

Recommended: Understanding the Risks of Day-Trading

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How to Read Candlestick Charts

Owing to the four main components of a single candlestick — the opening price, closing price, the high and the low — candlestick charts convey a lot of information. Essentially you have five data points in each candlestick:

• The opening price (indicated by the top of the real body)

• The closing price (the bottom of the real body)

• The high (the upper wick)

• The low (the lower wick)

• Whether the day’s closing price was higher or lower than the previous close.

Components of a Candlestick

Real Body

As described above, the part of the candle between the top and bottom borders is called the candle body, or real body. This represents the opening and closing prices of the time period that the candle depicts.

The candle body is more important than the wicks or shadows, because the wicks show high and low trades, which may be significantly different from the majority of the day’s trades. A longer candle body shows a stronger price trend in either direction.

Upper Wick

The vertical line above the candle body is the upper wick or shadow. The top of the shadow the highest price the security was traded at during the set time period. A long upper shadow indicates a bearish price direction: It means traders are unsuccessfully attempting to increase prices.

Lower Wick

The line below the candle body is the lower wick. The bottom of the wick marks the lowest price of the security during the set time period. If a wick is short, it means the opening or closing price was near the high and low trades.

Range

The range is the difference between the top and bottom of the real body. If the close was lower than the open, the real body is filled in (usually black or red. If the close was higher than the open, the real body is hollow or green (or another color of the trader’s choice).

While these are the components of a traditional or standard candlestick chart, some candlestick charts have candles without a top or bottom or wicks.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Candlestick Chart Time Frames

Traders can select the time frame that each candle represents. One commonly used time frame shows the opening price, closing price, and high and low for a single day. Each candle in the chart would show the price movement in one day.

A trader could see that a stock price declined significantly over the course of the day, which could result in a continuing decline in the coming days.

The most commonly used time frames are:

• 1-minute (M1)

• 5-minute (M5)

• 15-minute (M15)

• 30-minute (M30)

• 1-hour (H1)

• 4-hour (H4)

• Daily (D1)

• Weekly (W1)

• Monthly (M1)

Shorter time frames essentially allow traders to zoom in on the price action of the chart. For example, an H1 chart would have four times the candles of an H4 chart, so traders can look more closely at price changes.

Types of Candlesticks

Candlesticks are created by price movements throughout the specified time period. Taken as a cluster, candlesticks form patterns traders use for analysis and trend prediction.

Bearish and Bullish Candles

There are two main patterns: bearish (the security’s price is likely to decline) and bullish (the security’s price is likely to rise). These reflect the common terms for bullish and bearish market conditions.

No pattern is a guarantee of a price change or of a security’s performance. Candlestick charts are therefore used more as indicators of potential price trends.

Doji Candles

If the price closes exactly where it opened, there is no candle body. This is called a doji and is marked with a cross. A doji candlestick is rare, but when it shows up it can be a predictor of a price reversal.

Marubozu

The marubozu is essentially the opposite of the doji. It has a long candle body and no wicks or shadows. This type of candle indicates that the price didn’t trade beyond the range of the open and closing prices.

Types of Candlestick Patterns

Certain candlestick patterns can help traders make short-term predictions about price movements. Although a single candle indicates whether buying or selling action is strong, it doesn’t necessarily mean that the long-term price will continue in that direction. This is why traders look at different time periods to get a sense for longer-term trends, and to understand support and resistance levels.

There are many ways to read candlestick charts, depending on trading strategy and time frame.

At first glance, candlestick charts can appear pretty random. But there are many bullish and bearish patterns traders can identify in order to try to predict price movements. It’s important to remember that patterns are not guarantees of future price movement.

Bearish Engulfing Pattern

If there are more sellers than buyers when a chart has been trending upward, traders will see a long red candlestick after a small green one. This can indicate that prices may decline.

Bullish Engulfing Pattern

The opposite pattern will occur if the price is trending downward but then a long green candlestick appears in the chart. This may indicate that prices will continue to increase.

Bearish Evening Star

The evening star pattern is uncommon, but considered a strong indicator of future price declines when it does show up. It’s generally a three-day candlestick pattern.

• The first day is a large white or green candle, indicating a clear rise in price.

• The second day shows a smaller candle, indicating a more modest price increase.

• The third day is a long red candle that opens at a lower price than the previous day, and closes near the middle of the first candle’s range.

Morning Star

The reverse of the evening star is the morning star, a bullish indicator. The first candlestick in this pattern is long and red, the second is short and lower than the first, and the third is a long green candlestick that closes above the center of the first, indicating an upward price trend.

Bearish Harami

This is a two-candle pattern. If traders see a small red or black candle body that fits completely within the previous day’s candle body, it could indicate a price reversal. Price action continuing downward after the small candle could indicate a longer-term downward trend.

Bullish Harami

A bullish harami is a three-day pattern that may indicate a reversal of a bearish trend. If there are two black or red candles, indicating the downward trend, followed by a small white or green candle that fits completely within the body of the previous candle, that may signal a bullish turn.

Harami Cross

The harami cross can be bearish or bullish. With a bearish harami cross, there is a long candle that’s part of a downtrend and it’s followed by a doji.

With a bullish harami cross, there is a long candle that’s part of an upward trend, also followed by a doji.
In either case, the doji could signal a reversal of the trend.

Falling Three Methods

This is a bearish pattern that includes five candlesticks. Typically there is one day with a strong downward trend, followed by three small green candle bodies that stay within the boundaries of the first candle, followed by another long red candle. The falling three methods may signal an interruption of the trend, but not a full-on reversal.

Hammer

If the price significantly decreases but then makes a comeback and ultimately closes near the high, this is called a hammer. The hammer pattern has a small body and a long lower wick. It’s a bullish signal because it shows that the price was declining but then traders pushed it back up.

Hanging Man

The hanging man pattern is the opposite of the hammer. It is also referred to as an inverted hammer. This pattern looks like a square lollipop. If traders are attempting to spot the top or bottom of a market, they often use hammer and hanging man patterns as indicators.

Shooting Star

A shooting star takes shape when a security opens, the price rises significantly over the trading period, but then closes near the opening price, signaling a reversal.

To really be considered a shooting star pattern, this particular candlestick — with the short real body, long top wick, and hardly any bottom wick — must occur within an upward price trend.

Gaps

A gap is a window of time in which there are no trade transactions. Gaps in a chart can indicate support and resistance levels, which can be followed by a further bullish or bearish trend.

The Takeaway

Candlestick charts are a way of condensing price information about a security into a fairly simple diagram that looks like a candle with two wicks. The candle’s “real body” shows the range between the open and close prices. The wicks are the vertical lines at the top and bottom of the real body, indicating the high and the low for that period.

Candlesticks can be grouped together into patterns that traders can interpret as signals of price trends that are either bearish or bullish. Often it’s best to use tools like this with other types of technical indicators.

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Sep

2023

Understanding Low-Float Stocks

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

Table of Contents

Stock Float: Quick Recap
What Are Low-Float Stocks?
Floating Stock Example Calculation
Understanding Shares Outstanding
Benefits of Trading Low-Float Stocks
Importance of Low-Float Stocks
6 Reasons for Low-Floating Shares
Evaluating Low-Float Stocks
How to Trade Low-Float Stocks
FAQ

Low-float stocks are companies with a relatively small number of shares available for public trading. It doesn’t mean the company has very few shares in total.

A company’s float, or floating shares, are those available after subtracting closely held and restricted shares from all outstanding shares. In some cases, a company has a lower float, meaning there are relatively few shares for the public to trade.

low-float stocks are considered more volatile and have higher spreads. But a company’s float can change owing to various conditions.

Stock Float: Quick Recap

The float of a stock measures the number of shares of a particular stock. It indicates the number of shares of stock available for trading. The measure doesn’t include closely held shares, those owned by controlling investors, employees, or company owners.

Calculating floating stock requires looking at a company’s balance sheet and taking the total number of shares of a company and subtracting any restricted and closely held shares.

Stock indexes, such as the S&P 500, often use floating stock as the basis for figuring out the market cap (the total value of outstanding shares in dollars) of a company.

Recommended: Investing 101 Guide

What Are Low-Float Stocks?

A company’s float is the total number of shares outstanding, minus closely held and restricted shares.

Some larger corporations have very high floats in the billions, and investors typically consider a float of 10 to 20 million shares as a low-float. But there are companies with floats of less than one million, and you can find even lower-float stock trading on over-the-counter exchanges (OTC).

Companies with a low-float frequently have a large portion of their equity held by controlling investors such as directors and employees, which leaves only a small percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.

Because low-float stocks have fewer shares available, investors may have difficulty finding a buyer or seller for them. This may make the stocks more volatile, which appeals to day traders. The bid/ask spread of low-float stocks tends to be high as well.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Floating Stock Example Calculation

If a trader looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”

Looking at fictional Company A, the company’s balance sheet shows outstanding shares and floating stock shares:

• 50 million shares outstanding

• 45 million float shares

This is a high-float stock, with 90% of the stock available for trade. By contrast, Company B has:

• 2 million shares outstanding

• 475,000 float shares

This is a 23.75% float, and could serve as a signal for day traders to look at other factors to determine whether they want to invest in the stock.

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Understanding Shares Outstanding

Another stock market term that helps explain low-float stocks is shares outstanding. Shares outstanding refers to the total number of shares issued by a company, including those that can’t be traded.

The float is the number of shares that’s the percentage of the shares outstanding available for public trade. This is known as the float percentage. Companies might have numerous shares outstanding, but only a small percentage of floating stock.

The amount of floating stock a company has typically changes over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a stock split or reverse split, this will also increase or decrease floating shares.

Benefits of Trading Low-Float Stocks

Essentially, low-float stocks primarily benefit day traders who are interested in earning large profits in a short time.

By their nature, low-float stocks are volatile. There are relatively few low-float stocks in the marketplace, and their prices tend to go up and down easily and quickly. Moreover, every trade of a low-float stock issue can have a larger impact on the value of the stock than it would on a security with a higher float.

For example, when good news hits a security with a limited supply, it doesn’t take much for it to have a huge impact on the share price. A low-float stock can see big gains when demand skyrockets. Conversely, if bad news comes to the same security, its price can nosedive rapidly.

The dramatic volatility in investing in low-float companies, can lead to a greater level of risk. But an experienced and highly skilled day trader might be delighted to take on this volatility challenge in exchange for potential continuous gains in a short trading session.

Importance of Low-Float Stocks

If you’re interested in investing in a particular company, it’s important to understand its stock float. You don’t want to overlook this detail while performing your due diligence on an issuing company.

The size of a stock float can change over time, which would affect the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.

6 Reasons for Low-Floating Shares

Low-float stocks tend to have higher spreads and higher volatility than a comparable higher-float stock. You may find it hard to enter or exit positions in stocks that have a low float. What are some specific instances that could account for low-floating shares?

1. Special Purpose Acquisition Companies (SPACs)

Certain shares may be trading at a low float because the company that’s issuing the stock is part of a special purpose acquisition company (SPAC). A SPAC is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO).

Typically, experienced business executives in the same industry as the SPAC’s target acquisition become the founders of a SPAC. A SPAC could take as long as a number of years to complete. And, even when the new company does go public, there may be fewer shares available for public purchase because they’re held by founders of the SPAC or other officers and insiders close to the deal.

2. The Company Is Family Operated

Another reason for low-float shares could be that the company is family owned. In these cases, a family likely would own a significant share of the company’s shares and would influence important decisions, like electing a chairman and CEO. In particular, if a family-operated company is small to midsize, there may be few shares left for the public to buy.

In fact, family-owned or operated businesses are all around us — including well-known names like BMW, Samsung, and Wal-Mart Stores. About 35% of all companies in the S&P 500 index are family controlled, and 118 of the top family-owned companies in the world are based in the U.S., according to the 2023 Global Family Business Index.

3. Stock Buybacks

If a company buys back some of its shares, that may affect its float by reducing the number of shares available for trading; there’s even a name for it: float shrink.

Regular share buybacks, along with dividend payments, are two ways that a company may reward shareholders. Another reason for a share buyback could be for a company to gain better control of its strategic initiatives without needing to consult its shareholders.

4. Company Has Donated Shares to Its Charitable Foundation

If a company founder has donated a large percentage of its shares to an associated charitable foundation, this could result in a lower float, if the foundation has held onto the shares which are then excluded from the overall float count.

5. Initial Public Offerings (IPOs)

In another scenario, a company might be involved in an initial public offering (IPO), in which its shares are considered privately held until the IPO is complete. Once the new shares are made publicly available for trade, a stock could be considered low float because a high percentage of shares are still restricted for a period of time.

6. Stock-Based Compensation

Some companies have initiatives that reward their employees with company stock; either as part of an incentive program or combined with their regular pay. A company also could have an equity compensation program in place as a way of rewarding employees, executives, and directors of a company with equity in the business.

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Evaluating Low-Float Stocks

Not every low-float stock represents a good buy, but it is a popular strategy for day traders. To evaluate a low-float stock, day traders often look at several other factors.

High Relative Volume

The relative volume shows a stock’s current volume in comparison to earlier periods in a company’s history. This is important to investors because it can affect a stock’s liquidity. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell.

They may also find themselves unable to take advantage of news catalysts with a significant buy or sell the move. If a stock’s price changes, but there isn’t a lot of trading volume, it may not be a good pick.

News Catalysts

Positive or negative news about a company frequently makes a low-float stock increase or decrease in a short amount of time.

Day traders keep a close eye on the stock market and corporate news to see which stocks likely would make moves. A news event can cause a low-float stock to move anywhere from 50% to 200% in a single day, as they are in low supply.

Float Percentage

This is the percentage of the total shares of stock available for trading. Each trader has their preferences, but most look for a percentage between 10% and 25%.

How to Trade Low-Float Stocks

When trading a low-float stock, a trader might buy and sell the same stock multiple times in a single day. Then, move on to a different low-float stock the next day in an extreme form of market timing.

Many traders will plan out their profit targets and support and resistance ahead of time and stop losses to reduce risk. As with any trade, traders can look at technical indicators like candlestick charts and moving averages to see whether a stock looks bullish or bearish.

A good strategy pays attention to technical analysis and rather than simply buying or selling based on rumors or news.

Finding low-float Stocks

Finding and evaluating stocks to trade requires some knowledge and experience. Several platforms offer the ability to trade low-float stocks. Some of these platforms allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for stocks with a float of less than 50 million and a relatively high volume.

Penny stocks less than $5 are very popular with day traders. Traders can also look to watchlists for ideas about which low-float stocks to trade.

• Reuters’ Free Scanner: Free to register. Users can find low-float stocks by scanning with the filter “float.”

• Trade Ideas: This site has multiple low-float stocks lists for the U.S. market. It highlights stocks that are moving so that traders can capitalize on opportunities.

• Stock Screeners: There are many other stock-screening tools you can use to find low-float stocks — such as Benzinga Pro, which lets you “search and filter stocks by any attribute.”

Some Risks to Know

Every investment comes with risks, but low-float stocks present some particular challenges. Day trading is inherently very risky and can result in significant losses (as well as gains). So, other types of investments are often a better fit for those with a low appetite for risk.

Low-float stocks can have high volatility; their price can change within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, this volatility could wipe out a large portion of their portfolio. Low-float stocks could also present substantial profit opportunities; traders might see gains of 50% to 200% in a single day.

Looking at both the news and technical indicators is crucial for trading success. Trading low-float stocks requires a daily look at market news, as the stocks that look like a promising trade one day may not be ideal the next.

The Takeaway

The term “low-float,” as it pertains to stocks, refers to the amount of shares available to trade in the public market after the appropriate number of shares are allocated to founders, officers of the company, and other inside investors.

It’s important for investors to be aware of the amount of a company’s low-floating stock, as it can reflect the stock’s liquidity. If a stock has relatively few available issues, it might be harder for traders to sell it.

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

FAQ

Is a low-float stock good?

When a company’s stock is considered low float, there are fewer shares available for public trading. That can increase volatility for some investors, while others (like day traders) may be able to leverage changes in the share price.

How important is a stock’s float?

Understanding why a company may have a higher or lower float is an important factor for investors to take into consideration, because it can reveal (or be tied to) other aspects of the company’s management or status.

Are low-float stocks good for day trading?

Low-float stocks can garner huge profits for day traders when a particular industry, sector, or company is in high demand. But when demand shifts, low-float stocks can be risky.

What’s the difference between high- and low-float stocks?

You can find a company’s float by taking the total number of shares outstanding and subtracting the number of shares that are closely held or restricted. If the remainder is a high percentage of the outstanding shares, that’s considered a high-float stock — which can indicate the stock has a certain amount of liquidity.

If the remainder is a small percentage of the outstanding shares, that indicates a low-float stock, which generally has a higher spread, lower liquidity, and may be more volatile.

Photo credit: iStock/damircudic

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.

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Sep

2023

Guide to Morningstar Ratings

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

Morningstar is a highly regarded financial services firm whose mission revolves around providing investors with the research and tools, including Morningstar ratings, they need to make informed decisions in their portfolios.

Those tools, used by individual investors as well as institutional investors and financial advisors, include Morningstar fund ratings, which can help investors gauge how well various mutual funds and exchange-traded funds (ETFs) have performed over time.

What are Morningstar Ratings?

In simple terms, the Morningstar ratings system is a tool investors can use to compare financial securities such as mutual funds and ETFs. And if you’re wondering whether Morningstar ratings are legitimate, the answer is yes. Even FINRA, the Financial Industry Regulatory Authority, uses Morningstar ratings.

Morningstar reviews of mutual funds and ETFs reflect different metrics, depending on which ratings system is being applied. The main Morningstar ratings investors may turn to learn more about a particular investment are the Star Ratings and Analyst Ratings. (Morningstar also has a separate ratings system for individual stocks.)

These ratings can be helpful to investors for a variety of reasons — whether they’re trying to diversify their portfolio, or some research into socially responsible investing, and trying to find securities that fit their strategy.

How Morningstar Ratings Work

As Morningstar itself describes, the ratings system uses a methodology based on specific categories and risk-adjusted return measures. The company will only rate a fund that’s been around for more than three years. Morningstar also updates its ratings on a monthly basis.

You can use these ratings to select from the funds available in your 401(k), or to decide which funds to add to an IRA or a taxable brokerage account.

Recommended: Investing in Growth Funds

The “Star Rating” Explained

The Morningstar Star Rating system, more simply referred to as star rating, is a quantitative ranking of mutual funds and ETFs. Introduced in 1985, the star rating looks backward at a fund’s past performance, then assigns a rating from one to five stars based on that performance.

As mentioned, Morningstar reviews ETFs and mutual funds with a record of more than three years, so newer funds do not receive a star rating until they’re reached this milestone. The rating methodology utilizes an enhanced Morningstar risk-adjusted return measure. Specifically, the star ratings system looks at each fund’s three-, five-, and 10-year risk-adjusted returns.

Star ratings can serve as a report card of sorts for comparing different funds, based on how they’ve performed historically. The Morningstar ratings are not forward-looking, as past performance is not a foolproof indicator of future behavior. But investors can use the ratings system as a starting off point for conducting fund research when deciding where to invest.

If you’re looking for a tool to help you compare mutual funds or exchange-traded funds at a glance based on past performance, the star rating system can help.

The “Analyst Rating” Explained

The Morningstar Analyst Rating takes a different approach to ranking funds and ETFs. Instead of looking backward, the qualitative analyst rating looks forward to assess a fund’s ability to outperform similar funds or a market benchmark. Rather than using stars, funds receive a rating of Gold, Silver, Bronze, Neutral or Negative, based on the analyst’s outlook for performance.

The firm does not update analyst ratings as frequently as star ratings. Morningstar reviews for analyst ratings are reevaluated at least every 14 months. The firm typically assigns analyst ratings to funds with the most interest from investors or the most assets.

When ranking funds, analysts look at three specific metrics:

• People

• Process

• Parent

Performance is also taken into account within the People and Process pillars. In order to earn a Gold, Silver or Bronze rating, an analyst must determine that an active fund can beat its underlying benchmark when adjusted for risk.

Generally speaking, these Morningstar reviews go into more detail, in terms of the analysis, ranking, and comparison of funds. If you’re an active trader or a buy-and-hold investor you might use the Morningstar analyst ratings to get a feel for what a particular mutual fund might do next, which can be helpful when an investor is, for example, trying to pick an ETF.

How Morningstar Measures Volatility

Morningstar uses a few key volatility measurements as it aims to minimize risk and maximize returns through strategic diversification. Chief among those measurements are standard deviation, mean, and the Sharpe ratio.
It’s a somewhat complicated process, but using these three measurements in tandem helps Morningstar get a handle on volatility and make appropriate ratings decisions.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Example of a Morningstar Rating

Morningstar star ratings are free to access for investors on the company’s website, and it’s relatively easy to find plenty of examples of Morningstar ratings on the platform. For instance, to find a star rating for a particular fund or ETF you’d simply search for it using its name or ticker symbol. You can also view Morningstar ratings and picks for funds by category, such as small-cap funds or U.S. index funds.

Here’s an example of a Morningstar rating for the Calvert International Responsible Idx I fund (CDHIX). This fund, which is in the foreign large-blend category and is an index fund, has a four-star rating from Morningstar. You can see at a glance that the fund has an expense ratio of 0.29%, a minimum investment of $100,000 and just over $867 million in assets, as of August 2023.

Are Morningstar Ratings Accurate?

Morningstar fund ratings are designed to be a guide to use as you invest, rather than the absolute word on how well a fund is likely to perform. That’s to say that there’s always going to be risk involved when investing, so don’t expect any rating to be a sure-thing.

So, how well do Morningstar ratings perform over time and are they an accurate guide for investing?

According to Morningstar’s own analysis of its ratings system, the star ratings can be a useful jumping-off point for investors. That analysis resulted in three key findings:

• Funds with higher star ratings tend to have lower expense ratios and be cheaper for investors to own

• Higher rated funds tend to be less volatile and experience less dramatic downward swings when the market is in flux

• Funds that received higher star ratings tended to produce higher returns for investors compared to funds with lower ratings

The analysis didn’t look specifically at how star ratings and fund performance aligned through different bull and bear markets. But the ultimate conclusion Morningstar drew is that the Star Ratings tend to steer investors toward cheaper funds that are easier to own and stand a better chance of outperforming the market.

Use Expense Ratios

According to Morningstar, fees are one of the best predictors of future performance, at least for Star Ratings. For funds and ETFs, that means it’s important to consider the expense ratio, which represents the cost of owning a fund annually, calculated as a percentage of fund assets.

Actively managed funds typically carry higher expense ratios, as they require a fund manager to play an important role in selecting fund assets. Passively managed funds and ETFs, on the other hand, often have lower expense ratios.

So which one is better? The answer is that it all comes down to performance and returns over time. A fund with a higher expense ratio is not guaranteed to produce a level of returns that justify higher fees. Likewise, a fund that has a lower expense ratio doesn’t necessarily mean that it’s a poor investment just because it’s cheaper to own. Morningstar’s research found that the average one-star fund cost significantly more than the average five-star fund.

As you do your own research in comparing funds and ETFs, consider both performance and cost. This can help you find the right balance when weighing returns against fees.

How Should Investors Use Morningstar Ratings?

How much do Morningstar ratings matter in the grand scheme of things? The answer is, it depends on what you need from investment research tools.

Morningstar reviews of mutual funds and ETFs can be helpful for comparing investments, especially if you’re just getting started with the markets. Morningstar is a respected and trusted institution and both the Star and Analyst Ratings are calculated using a systematic approach. The reviews aren’t just thrown together or based on a best guess.

They’re designed to be a guide and not a substitute for professional financial advice. So, for instance, you may use them to compare two index funds that track the same or a similar benchmark. Or you may use them to compare two ETFs that are representative of the same market sector.

Risks of Morningstar Ratings

Morningstar Ratings are not an absolute predictor of how a mutual fund or ETF will perform in the next five minutes, five days, or five years. After all, there’s no way to perfectly predict how any investment will perform as the market changes day to day or even minute-to-minute.

One risk to avoid with Morningstar ratings is relying on them solely as your only research tool and not doing your own independent research. Again, that means checking expense ratios as well as looking at the underlying assets of a particular fund and its investment strategy (i.e. active vs. passive) to determine how well it aligns with your goals and risk tolerance.

Looking only at Morningstar reviews without doing your own due diligence could cause you to invest in funds that aren’t the best fit for your portfolio. Or you may overestimate how well a fund will perform, only to be disappointed later. For those reasons, it’s important to look under the hood, so to speak, to ensure that you fully understand what you’re investing in before buying in.

Morningstar Ratings for Funds

As discussed, Morningstar’s rating system mostly focuses on funds, including index funds, mutual funds, and ETFs. The company also has a ratings system for individual stocks, but its bread and butter is its focus on funds. And, as a quick refresher, it uses a data-driven, quantitative methodology for determining those rankings.

Also, as it bears repeating, a good Morningstar rating does not mean that an investment is risk-free.

Other Investment Risk Rating Providers

Morningstar is just one of many companies that offers investment ratings. An internet search will likely yield many results. But it’s a list that includes many familiar names, such as Bloomberg, Nasdaq Market Data Feeds, S&P Global Market Intelligence, MarketWatch, Thomson Reuters, and others.

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

Trading Stocks With SoFi

Having research tools can help you make educated decisions about where and how to invest. Morningstar Ratings are one tool you can use. When you’re ready to invest and apply the knowledge you’ve acquired, the next step is opening an online brokerage account. But keep in mind that there are many ratings services on the market, and that Morningstar’s ratings are far from the only research tool out there.

It’s also important for investors to keep in mind that all investments involve risk, whether they’re highly-rated or not. Be sure to do your due diligence before investing, but know there’s always a chance that things could turn sour on you.

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

FAQ

How reliable are Morningstar ratings?

Morningstar ratings are generally considered to be high-quality in the financial industry, but that doesn’t mean that its ratings are always spot-on. All investing involves risk, and even a high rating doesn’t guarantee that an investment will pan out.

Is a Morningstar rating of “5” good?

Morningstar uses a scale of one to five “stars” to rate investments, with five stars being the highest, or best-quality investment. So, yes, a five-star rating is generally considered good, although not risk-free.

Sep

2023

Guide to Investing in a Bear Market: 8 Investing Strategies

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

While it may seem counterintuitive to invest during a bear market — a prolonged market decline typically of 20% or more — in fact there are opportunities during downturns, if you know where to look and what strategies to use.

Market conditions during a bear market are unusual, and securities may behave in different ways. By knowing which bear market investing strategies might make sense, it’s possible to mitigate losses and possibly realize some gains.

Also, for investors with a long-term wealth-building goal, it’s important to remember that bear markets are often relatively short. So rather than panic, it can help to look for potential investment opportunities that may be beneficial.

How to Invest in a Bear Market: 8 Options

Some investors may be tempted to sell assets during a bear market, content to keep their money in cash while the markets seem to slide. However, there are some bear market investing strategies investors may want to consider.

1. Invest Defensively

The first of these bear market strategies involves buying assets that may increase in price when the overall financial markets decline. Many factors influence which investments perform well during a bear stock market.

Investors may shift their portfolios to defensive stocks, to bigger and more mature companies, and companies in sectors with constant demand such as utilities and food. These may be good assets to hold during bear markets because these stocks tend to hold steady, even in a downturn.

Defensive investments may provide consistent income through dividend payouts (more on that below) while experiencing less volatile share price action during market downturns. Buying assets like these at the beginning of a downturn can be beneficial.

2. Consider Dollar-Cost Averaging

Using a dollar-cost averaging strategy isn’t limited to bear markets; it’s a time-honored practice among many buy-and-hold investors.

Dollar-cost averaging is when you buy a set dollar amount of an investment at regular intervals (e.g. weekly, monthly, quarterly), regardless of whether the markets are up or down. That way, when prices are lower you buy more; when prices are higher you buy less. Otherwise, you might be tempted to buy less when prices drop, and buy more when prices are increasing, based on your emotions.

For example, if you invest $100 in Stock A at $20 per share, you get 5 shares. The following month, say, the price has dropped to $10 per share, but you stay the course and invest $100 in Stock A — and you get 10 shares. Now you own 15 shares of stock A at an average price of $13.33.

💡 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.

3. Use Short Strategies

One of the more sophisticated bear market trading strategies is placing bets that will rise in value when other investments lose value. This might involve, for example, purchasing put options contracts on stocks that may decline in value. A put option allows investors to benefit from falling share prices.

Shorting stocks to speculate on falling stock prices is another strategy investors can employ. When investors short a stock, they sell borrowed shares and hopefully repurchase them at a lower price. The investor profits when the price they pay to buy back the shares is lower than the price at which they sold the borrowed shares.

Alternatively, investors might consider inverse exchange-traded funds (ETF) as the overall market declines. An inverse ETF tracks a market index and, through complex trading strategies, looks to produce the opposite result of the index. For example, if the S&P 500 index declines, an inverse ETF that tracks the index will hopefully increase in value.

However, using put options, inverse ETFs, and other short strategies involves many nuances that may be complicated for some investors. They are very risky trading strategies that could compound losses if the bets do not work out. Interested investors ought to conduct additional research before considering this strategy.

4. Hold for the Long Haul

During a bear market, it’s not always necessary to do anything special. Investors with a long time horizon sometimes choose to hold on and stay the course, even when a portfolio declines in value. Taking a long-term perspective may pay off well over many years, as the market as a whole tends to trend upward over time.

For example, the bear market that began in December 2007 was over by March 2009, lasting about a year and a half. But the bull market that followed lasted almost eleven years; the S&P 500 index recouped its losses from the bear market by March 2013, and from March 2009 through February 2020, the S&P 500 increased just over 400%

💡 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.

Get up to $1,000 in stock when you fund a new Active Invest account.*

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

5. Diversify Your Holdings

It also helps if investors have a well-diversified portfolio during any market. Diversifying typically ensures that all of an investor’s eggs are not in one basket, which can help mitigate the risk of loss, since you’re not overexposed in one sector or asset class.

One easy way to accomplish portfolio diversification might be to buy structured securities like ETFs or index funds.

6. Focus on Dividend Stocks

One way to invest during a bear market is to focus on stocks that provide income, i.e. dividend-paying stocks. Typically, these companies are bigger, more established, and growth oriented. And, clearly, they have the ability to give investors a regular payout.

A dividend is a portion of a company’s earnings that is paid to its shareholders, as approved by the board of directors. Companies usually pay dividends quarterly, but they may also be distributed annually or monthly.

Most dividends are paid in cash, on a per-share basis. For example, if the company pays a dividend of 50 cents per share, an investor with 100 shares of stock would receive $50.

Many investors who rely on dividend-paying stocks do so as part of an income investing strategy — which also serves investors during a downturn.

7. Look Toward Growth

While value stocks are generally considered undervalued relative to their actual worth, growth stocks are shares of companies that have the potential for higher earnings, often rising faster than the rest of the market. In addition, growth stocks have shown historic resilience in market downturns.

These companies tend to reinvest their earnings back into their business to continue their company’s growth spurt. Growth investors are betting that a company that’s growing fast now, will continue to grow quickly in the future.

To spot growth stocks, investors look for companies that are not only expanding rapidly but may be leaders in their industry. For example, a company may have developed a new technology that gives it a competitive edge over similar companies.

Recommended: Value vs. Growth Stocks

8. Consider Laying Low

If none of the above bear market strategies appeals to you, there is always the option of “playing dead,” as the saying goes. This derives from the advice given to those in the wilderness who might face a live bear: to not panic or do anything rash or risky.

In the same way, some investors believe the best way to handle a bear market is to stay calm, moving a portion of your portfolio into more secure and stable investments like Treasury bills, bonds, and money market funds.

What Causes a Bear Market and How Long Do They Last?

The causes of bear markets can vary. Sometimes a weak economy is the main cause — e.g. low employment, low productivity, disappointing corporate earnings. But a bear market might also be the result of a sudden shock, like the brief bear market that hit during the early days of the pandemic.

Other events that can spark a bear market might include geopolitical crises, a paradigm shift (e.g. the growth of the digital workforce), or government actions that impact taxes, interest rates, and so forth.

Bear Markets Run Short

As noted above, bull markets generally last far longer on average than bear markets — about 1,752 days for the average bull market versus 363 days for the average bear.

This is another factor to bear in mind if you’re thinking about investing in a bear market. Developing smart bear market investing strategies has to take into account the shorter time frames as well as the unusual market conditions.

Bear Market Investing vs Bull Market Investing

For those investing for the long term, the only real difference between a bear market and a bull market will be a temporary dip in the value of their portfolio. The main goal will be to stay the course. As mentioned, long-term investors often make regular, recurring purchases of financial assets.

During bull markets, a common investment strategy is to buy and hold. This tends to work because bull markets are characterized by most asset classes rising in unison.

However, investors may have to be a little more active with their portfolios during bear markets. Some investors choose to increase the amount of money they put into their investments during market downturns. Their overall strategy remains the same, but buying more assets at lower prices lets them acquire a larger number of assets overall.

For those with a higher risk tolerance looking to make short-term gains (often referred to as speculators), a mix of strategies might be employed. Speculators may look to short the market using puts or inverse ETFs, or research assets likely to increase in value due to current bear market trends.

Invest With SoFi

When the financial markets are in turmoil and your portfolio seems to be in the red, you may be tempted to panic. You may want to sell off your assets to mitigate further losses, content to pocket the cash. However, this sort of strategy may be short-sighted for most investors as it locks in your losses.

Also, you may be setting yourself up to miss a potential rally by getting out of the markets. After all, bear markets are often relatively short-lived and are followed by bull markets.

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

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.

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

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

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