Financial Topics Archives

Jul

2025

What Is Know Your Customer (KYC) for Financial Institutions?

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

There are banking regulations in place that are known as KYC. The definition of KYC is “know your customer,” and these rules provide guidelines for financial institutions to know more about their customers.

This isn’t just a matter of curiosity but of national security and crime prevention. Banks need to protect themselves from unwittingly participating in illicit activities.

For example, if a criminal uses a bank for illicit purposes, such as money laundering, the financial institution could be held accountable. It’s the bank’s responsibility to always know who their customers are. That way, they can help avoid being involved in criminal activity.

KYC plays an important role in financial institutions maintaining accurate information about their clients. KYC procedures and anti-money laundering (AML) laws can work together to minimize risk. Read on to learn more about know your customer regulations.

Key Points

• Know Your Customer (KYC) law requires financial institutions to verify customer identities.

• The purpose of KYC is to help prevent money laundering, terrorism financing, and fraud.

• The KYC process includes the Customer Identification Program, Customer Due Diligence, and Enhanced Due Diligence.

• Under KYC, there is monitoring and annual reviews of customer activities.

• Compliance with KYC generally enhances a financial institution’s reputation and integrity.

3 Components of KYC

There are three main parts of a KYC compliance framework, which were instituted under the USA Patriot Act in 2001: customer identification, customer due diligence, and enhanced due diligence. Each phase of the process of this kind of financial regulation gets more intensive according to the estimated risk that the potential client might pose.

Customer Identification Program (CIP)

The first of the three main KYC requirements is to identify a customer. (Incidentally, some people refer to KYC as know your client vs. know your customer.)

Organizations must verify that a potential customer’s ID is valid and doesn’t contain any inconsistencies. The person must also not be on any Office of Foreign Assets Control (OFAC) sanctions lists.

An organization also needs to know if their prospective customer is “politically exposed.” A politically exposed person (PEP), such as a public figure, is thought to be more susceptible to corruption than the average individual, and is therefore considered high-risk, requiring special attention.

As part of their AML/KYC compliance program, all financial institutions are required to keep records of their Customer Identification Program (CIP) as mandated by the Financial Crimes Enforcement Network (FinCEN).

FinCEN works under the guidance of the department of Treasury and is charged with guarding the financial system against illicit activity and money laundering.

The following information will satisfy the minimum KYC requirements for a Customer Identification Program:

• Customer name (or name of business)

• Address

• Date of birth (not required for businesses)

• Identification number

For individuals, the customer’s residential address must be validated. US Postal Office boxes are not accepted. Individuals with no physical residential address can use an Army Post Office box (APO), Fleet Post Office Box (FPO), or the residential or business street address of their next of kin.

For business banking customers, the address provided for know your customer laws can be the principal place of business, a local office, or another physical location utilized by the business.

The ID number for most individuals will be their social security number or Taxpayer Identification Number (TIN).

For business entities, the number will usually be their Employer Identification number (EIN). Foreign businesses without ID numbers can be verified by alternative government-issued documents.

Customer Due Diligence (CDD)

Due diligence includes:

• Collecting all relevant information on a customer from trusted sources

• Determining what the customer will be using financial services for

• Maintaining ongoing surveillance of the situation to further verify that customer activity remains in line with recorded customer information.

The goal of this phase of the know your customer process is to assess the risks a potential customer might pose and assign them to one of three categories — low-, medium-, or high-risk.

Several variables — including the customer’s expected cash transactions, the type of business, source of income, and location — will help determine the customer’s risk level.

Other categories for assessing risk include the customer’s business industry, whether they use a foreign or domestic account, and their past financial history. The customer is also screened against politically exposed persons (PEP) and the Office of Foreign Assets Control’s (OFAC) sanctions lists.

Enhanced Due Diligence (EDD)

Enhanced due diligence (EDD) involves increased monitoring of customers deemed to be high-risk. This may include customers from high-risk third countries, those with political exposure, or those that have existing relationships with financial competitors.

Conducting enhanced due diligence on high-risk business entities requires identifying all beneficiaries of those entities when they open an account. Customers that are legal entities are those that have had legal documentation filed with a Secretary of State or other state office, and include:

• Limited liability companies (LLC)

• Corporations

• Business trusts

• General partnerships

• Limited partnerships

• Any other entity created via filing with a state office or formed under the laws of a jurisdiction outside of the US

On May 11, 2018, a new AML/KYC requirement came into effect. This change to KYC laws states that all banking and non-banking firms subject to the Bank Secrecy Act (BSA) must verify the identity of beneficiaries of legal entity customers when they open an account.

Firms must also develop risk profiles and continually monitor these customers. This must be done regardless of what risk category the customer falls into.

Due diligence is an ongoing process and requires financial institutions to constantly update customer profiles and monitor account activity.

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5 Key Steps Involved in Know Your Customer?

There are five main steps of complying with the know your customer rule, which is part of how banks are regulated. These include:

1. Customer Identification Program (CIP)

As mentioned above, the first step is to ensure that a prospective client’s ID is valid, real, and consistent. The address and other details must be checked. The applicant must be screened to be sure they are not on any OFAC sanctions list and their PEP status must be investigated.

2. Customer Due Diligence (CDD)

The next step of due diligence involves researching and vetting the customer’s intentions regarding the financial services they are seeking.

3. Enhanced Due Diligence (EDD)

Further scrutiny may determine that some applicants are considered risky. If the customer is deemed high-risk, additional ongoing screening is required to make sure activity doesn’t cross any lines.

4. Account Opening

If verification is successful and a client is eligible, the customer can open a bank account, with some clients requiring closer monitoring than others.

5. Annual Review

Once an account is opened, the institution will conduct an annual review of their activity. The higher the risk category a customer falls into, the more often their activities will be reviewed.

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4 Key Elements of a KYC Policy?

KYC compliance involves four key elements. When gathering KYC information, organizations must:

1. Identify Their Customers

In this step, the financial institution will gather information about the customer’s identity.

2. Verify That the Customer’s ID Is True and Valid

The identification documents will be checked against independent sources to make sure identity theft isn’t occurring

3. Understand Their Customer’s Source of Funding and Activities

In this step, a review of the customer’s activities and background can shed light on how likely it is that the client would do reputational damage or could commit crimes that involve money laundering or the financing of terrorism.

4. Monitor the Activities of Their Customers

Monitoring of customer activities is an ongoing process, particularly for high-risk clients. Most firms review clients based on their level of risk.

Low-risk clients might only be reviewed once every two or three years, moderate-risk clients every one to two years, while high-risk clients tend to be reviewed once a year or even once every six months.

Why Does KYC Matter?

KYC procedures matter because they are an important screening step. Their implementation can help verify customers and assess and minimize risk.

The KYC process provides guardrails and can help protect against such crimes as money laundering, terrorism funding, and other illegal activities.

Is KYC Successful?

KYC programs are seen as improving a financial institution’s reputation and integrity, though it can add a layer to a prospective client’s application process and banking life.

As the banking landscape evolves quickly with technological advances, banks are finding new ways to track customers and comply with protective KYC and other guidelines. For instance, the use of artificial intelligence (AI) in banking may be able to perform some of these functions.

AML vs KYC

KYC and AML are both ways that financial institutions comply with regulations designed to inhibit terrorism financing and money laundering.

• AML is the more general practice of an institution seeking to identify and stop such activity.

• KYC is one aspect of AML, focusing on customer identification and verification.

AML and KYC Similarities	AML and KYC Differences
Designed to inhibit money laundering, including terrorism financing	FKYC focuses on customer identification, while AML has a wider scope
Both are implemented by financial institutions to comply with government guidelines	KYC represents one aspect of larger AML procedures

The Takeaway

KYC, or know your customer, is a regulation that helps financial institutions prevent fraud by their customers. KYC involves constant check-ups and ongoing measures to ensure customer information and account profiles are kept up-to-date.

Wherever you decide to bank, know that teams are likely to be at work, ensuring compliance with KYC regulations.

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FAQ

What is a KYC procedure in banking?

KYC procedures in banking are regulations that involve a financial institution verifying potential clients’ identities and backgrounds and monitoring their activity if they become customers. This can be one of the ways a bank ensures that it’s not being used in criminal activity such as money laundering.

Do all banks require KYC?

Yes. FinCen, or the US Financial Crimes Enforcement Network, requires financial institutions and their customers to adhere to KYC regulations.

Why is KYC mandatory in banks?

KYC is an important measure as banks work to know their customers and make sure accounts are not being used for illegal purposes. KYC regulations are one way that the government seeks to prevent money laundering and terrorism financing.

Photo credit: iStock/Andrii Yalanskyi

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Jul

2025

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Can You Get Unemployment Deferment for Student Loans?

By Ashley Kilroy | Debt Payoff, Student Loans, student_loan | Comments Off

If you’ve lost your job, you may be able to defer your student loan payments. The unemployment deferment and repayment options available can depend on the type of loans you have.

For instance, if you have federal student loans, one option is the unemployment deferment program offered by the Department of Education. The program allows eligible federal loan borrowers who are out of work or cannot find full-time employment to postpone payments on existing educational debts.

Read on to learn how unemployment deferment works, plus other alternatives, including deferment opportunities for private student loans.

Key Points

• Unemployment deferment allows you to pause student loan payments if you are unemployed and meet specific criteria.

• To qualify, you must be receiving unemployment benefits and have federal student loans; private loans may have different policies.

• Deferment can last up to three years, but interest may still accrue on certain types of loans.

• You must apply for deferment through your loan servicer, providing proof of unemployment.

• Consider other options like forbearance, income-driven repayment, or refinancing if deferment is not available.

What Is Unemployment Deferment?

For anyone who has federal student loans, student loan deferment allows eligible borrowers to put student loan payments on hold for a predetermined period.

Unemployment deferment is awarded to eligible federal student loan borrowers who are seeking unemployment benefits or who are unable to find full-time work.

Those who qualify can temporarily pause putting money toward student loans for up to three years for federal loans, assuming that they continue to meet all the requirements.

It’s important to note that if you have unsubsidized loans or Direct PLUS Loans, interest will continue accruing during any deferment period. This means the balance owed on outstanding loans would keep growing. So, over the life of the loan, a short-term savings from deferring repayment could mean owing more in the end.

In general, interest won’t accrue on federal subsidized loans.

What Types of Student Loans Are Eligible for Unemployment Deferment?

If you’re unemployed with student loans, federal student loan unemployment deferment is available for Direct Loans, FFEL Program Loans, and Perkins Loans. Here are a few specific examples of loans that may qualify.

• Direct Loans

• Federal Family Education Loans (FFEL Loans)

• Stafford Loans

• Perkins Loans

• PLUS Loans

• Direct Consolidation Loans

In addition, if a borrower received federal student loans before July 1, 1993, they may qualify for other deferments.

Private loans from private lenders are not eligible for the federal unemployment deferment program. However, some lenders may provide economic hardship programs for borrowers.

Borrowers can contact their loan servicer for details on any hardship repayment or deferment programs they may offer.

Who Is Eligible for Unemployment Deferment?

Deferring payments on federal student loans isn’t automatic. Borrowers first need to apply with supporting documentation to determine if they’ll be eligible for a student loan unemployment deferral.

Borrowers first need to apply with supporting documentation to determine if they’ll be eligible for a student loan unemployment deferral.

Generally, an applicant can qualify either by providing proof of eligibility to receive employment benefits or by demonstrating that a diligent search for full-time employment is underway.

In the second case, certifying that you’re registered with an employment agency (whether privately owned or state run) can help show that an active search for work is being carried out.

Applicants seeking unemployment deferment under the searching full-time employment category may receive a deferment period for only six months.

If you need to extend the deferment past that time, you’ll have to submit a new application certifying that you’ve made at least six attempts to find full-time employment. The deferment period cannot exceed three years.

To pursue unemployment deferral, you must first fill out the unemployment deferment form at StudentAid.gov — answering questions about your job search, current unemployment benefits, and understanding of what loan deferment entails.

What About Private Student Loan Deferment?

Although private lenders aren’t legally required to offer unemployment deferment options, some do.

It’s worth keeping in mind, though, that private loans typically still accrue interest during the approved deferment period (even refinanced student loans with lenders who honor grace periods).

In other words, the total student loan balance would continue to grow even while payments are suspended. This is one of the basics of student loans.

Over the life of the loan, this could add to what the borrower owes overall. Some private lenders allow borrowers to make interest-only payments during a forbearance to help avoid interest capitalization.

Even with the accrual of interest and limited options, deferment is preferable to defaulting on student loans.

Borrowers with private student loans can contact their lender to learn if special deferment is available for those who are unemployed.

Advantages and Disadvantages of Unemployment Deferment

So, what are the potential pros and cons of pursuing an unemployment deferment on student loans? These are some of the advantages and disadvantages you may want to think over:

These are some of the advantages and disadvantages you may want to think over:

Advantages

Whether a borrower has been laid off due to an economic downturn or they have recently graduated and are struggling to find employment, unemployed deferment is one way to help ease the financial pressure of repaying student debt in the short term.

For borrowers in need of financial relief, student loan unemployment deferment can help temporarily lower monthly expenses. This can be especially helpful if an unemployed borrower would otherwise run the risk of student loan default.

Defaulting on loans can have a negative impact on your credit history, complicating your ability to pursue mortgage or other loans in the future.

And, with student loans, simply not paying them does not erase the amount owed or the interest that can keep accruing.

If a borrower has only subsidized student loans, the unemployment deferment program comes at no additional cost because interest does not accrue.

And, while it’s completely fine to apply for a deferral, borrowers are typically expected to use the approved deferment period to find a new job; some unemployment protection programs from private lenders even have stipulations to that effect.

Disadvantages

In the case of unsubsidized federal student loans, taking a deferment will increase the total amount owed on the loan. And even if a borrower decides to make interest-only payments, they’re not not chipping away at the principal amount.

Unemployed student loan borrowers may want to weigh whether the short-term savings tied to reduced or suspended loan payments are worth owing more money on those loans later on.

When a borrower does eventually find employment and the deferment ends, the future payments on their student loan payments may be higher each month — to cover the additional accrued interest.

For someone who is just adjusting to a new job, higher loan payments may come as a shock and could be hard to budget for.

Understanding the long-term implications of applying for student loan unemployment deferment can help borrowers to decide whether this sort of program is the right for the current and future financial situations.

Alternatives to Unemployment Deferment

For federal student loan borrowers who don’t qualify for unemployment deferment, there may be other ways to handle student loans during a job loss.

Forbearance and income-driven repayment plans are two potential options:

Forbearance

Similar to deferment, federal or private loan forbearance temporarily suspends or reduces loan payments.

However, while principal payments are postponed, interest will continue to accrue, no matter what type of loans you have. To see if you qualify, contact your loan servicer.

Because forbearance does not suspend the accrual of interest on a student loan, it can make sense to consider other options, such as income-driven repayment.

Income-Driven Repayment

Income-driven repayment plans calculate loan payments based on a borrower’s current income and family size. They also, typically, stretch the loan repayments over 20 or more years.

Although this type of plan may trim monthly loan payments, it could cost borrowers more in interest over the life of the loan. Once your financial or employment situation improves, you may want to switch to an alternative repayment plan.

Public Service Loan Forgiveness (PSLF) Program

Having been previously employed in certain public sector jobs may also qualify some borrowers for student loan forgiveness if unemployed.

By definition, loan forgiveness means that the remaining amount owed is forgiven — the borrower is no longer bound to pay it back.

Eligible federal student loan borrowers who’ve completed 10 years of employment with a qualifying job — such as a public school teacher, some non-profit employees, Americorps recipient, or government worker — might be eligible for the Public Service Loan Forgiveness (PSLF) Program.

If you think you may qualify for the federal forgiveness program and your goal is to lower your monthly payments, you may still want to switch to an income-driven repayment plan while the PSLF application is being reviewed in order to lower your monthly payments.

Student Loan Refinancing

After exhausting federal program options, or if none are quite the right fit, borrowers with federal or private student loans may want to look into refinancing student loans.

When you refinance student loans, you replace your loan or loans with one new private loan. Qualified borrowers may either get a lower monthly payment or help reduce the total interest paid over the life of the loan. Note: You may pay more interest over the life of the loan if you refinance with an extended term.

It’s important to be aware that by refinancing federal student loans with a private lender, borrowers give up benefits and protections such as federal unemployment deferment, PSLF, and income-driven repayment.

Lenders that offer refinancing options usually look at applicants’ qualifying financial attributes — including employment status, credit history, and income. So, refinancing student loans is not necessarily available to all who apply.

The Takeaway

There are numerous possible student loan repayment options for unemployed borrowers who qualify, including deferment, income-driven repayment, federal student loan forgiveness programs, and student loan refinancing. One good place to start is by calling your loan provider to review all options you may qualify for.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

What if I am unemployed and can’t pay my student loans?

If you’re unemployed and can’t pay your student loans, contact your loan servicer immediately to discuss options like deferment, forbearance, or income-driven repayment plans. These can temporarily reduce or pause payments, helping you manage your debt until you regain employment.

What qualifies for deferment on student loans?

Deferment on student loans is available if you are enrolled at least half-time in an eligible school, unemployed, facing economic hardship, or serving in the military during a war or national emergency. Check with your loan servicer for specific eligibility criteria and application processes.

Can you get unemployment if you owe student loans?

Yes, you can receive unemployment benefits even if you owe student loans. Student loan debt does not disqualify you from unemployment assistance. However, it’s important to manage both by contacting your loan servicer to explore options like deferment or forbearance.

About the author

Ashley Kilroy

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

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SOSLR-Q225-065

Jul

2025

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Understanding Cash in Lieu of Fractional Shares

By Matthew Warholak | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Cash in Lieu?
Why Investors Receive Cash in Lieu
Example of Cash in Lieu
How Brokers Handle Cash in Lieu Payments
How Is Cash in Lieu of Fractional Shares Taxed?
Potential Downsides of Cash in Lieu
Strategies to Minimize the Impact of Cash in Lieu
How to Report Cash in Lieu of Fractional Shares
FAQ

It’s not uncommon for publicly-traded companies to restructure based on changing market conditions or their stock price. When companies merge, acquire competitors, or split their stock, it can raise the question of how to consolidate or restructure the company’s outstanding shares.

If such a corporate action generates fractional shares for investors, the company’s leadership has a few options for how to proceed: They could distribute the fractional shares to shareholders, round up to the nearest whole share, or pay cash in lieu of fractional shares. Investors need to be aware of cash in lieu because it can affect a portfolio and taxes.

Key Points

• Cash in lieu of fractional shares is a payment method where investors receive cash instead of fractional shares due to corporate actions like stock splits or mergers.

• Companies may opt for cash in lieu to simplify management and avoid dealing with fractional shares after events such as stock splits or acquisitions.

• Receiving cash in lieu is taxable, and investors must report it as capital gains, calculating their cost basis accurately to determine tax obligations.

• Corporate actions like stock splits, mergers, and spinoffs can lead to fractional shares, prompting the need for cash in lieu payments to investors.

• Understanding how cash in lieu of fractional shares works helps investors navigate the complexities of corporate actions and their financial implications.

What Is Cash in Lieu?

Cash in lieu is a type of payment where the recipient receives money instead of goods, services, or an asset.

In investing, cash in lieu refers to funds received by investors following structural company changes that unevenly disrupt existing stock prices and quantities. Instead of receiving fractional shares after a stock split or a merger, investors receive cash.

Following corporate actions like a stock split or a merger, the newly-adjusted stock supply can be uneven and often results in fractional shares. Rather than holding or converting fractional shares to whole shares, some companies opt to aggregate and sell all of the partial shares in the open market — where investors can buy stocks. After the sale of these shares, the company will pay cash to the investors who did not get fractional shares.

The company’s board ultimately determines how the company will maintain or return value to investors. Opting to distribute cash in lieu is a company’s method of disposing of fractional shares and returning the cash balance to investors that’s proportionate to prior holdings.

Why Investors Receive Cash in Lieu

Investors can receive cash in lieu for various reasons involving company restructuring that affects the number of outstanding shares, stock price, or both.

The following events can lead to investors receiving cash in lieu of fractional shares.

Stock Split

A stock split may occur when a company’s board of directors determines that the company’s high share price may be too high for new investors. The company will then execute a stock split to lower the stock’s price by issuing more shares at a fixed ratio while maintaining the company’s unchanged value. Companies will often approve a stock split so its share price looks more attractive to more investors and gains more liquidity and marketability.

Depending on the predetermined ratio, a stock split could generate fractional shares. For example, a 3-to-2 stock split would create three shares for every two shares each investor holds. If you own five shares of the stock, you would have 7.5 shares after the split. Thus, a stock split would cause any investor with an odd number of shares to receive a fractional share.

However, if a company’s board isn’t keen to hold or deal with fractional shares, it will distribute investors’ whole shares and liquidate the uneven remainders, thus paying investors cash in lieu of fractional shares.

Conversely, a company may execute a reverse stock split because its stock price is too low, and they want to raise it. If stock prices get too low, investors may become fearful of buying the stock, and it may risk being delisted from exchanges.

When a stock undergoes a reverse stock split, investors usually receive one share for a specific number of shares they own, depending on the reverse split ratio. For example, a stock valued at $3.50 may undergo a reverse 1-for-10 stock split. Every ten shares are converted into one new share valued at $35.00. Investors who own 33 shares, or any number not divisible by ten, would receive fractional shares unless the company decides to issue cash in lieu of fractional shares.

Companies may notify their shareholders of an impending stock split or reverse split on registration statements with regulators, such as Forms 8-K, 10-Q, or 10-K, as well as any settlement details if necessary.

Merger or Acquisition

Company mergers and acquisitions (M&As) can also create fractional shares. When publicly-traded companies combine or are bought, investors will often receive stock as part of the deal using a predetermined ratio. These stock purchase deals often result in fractional shares for investors in all involved companies.

In these cases, it’s rare for the ratio of new shares received to be a whole number. Companies may opt to return full shares to investors, sell fractional shares, and disburse cash in lieu to investors.

Spinoff

Suppose an investor owns shares of a company that spins off part of the business as a new entity with a separately-traded stock. In that case, shareholders of the original company may receive a fixed amount of shares of the new company for every share of the existing company held. Depending on the structure of the spinoff, investors may receive cash in lieu of fractional shares of the new company.

Example of Cash in Lieu

An example of cash in lieu could look as such:

Let’s say a company decides to do a stock split, 3-for-2, and you own 101 shares. Your cost basis for those shares, or what you initially paid for them, is $50, for a total of $5,050. After the split, you’d have 151.5 shares priced at $33.33 each.

But if the company doesn’t want to issue fractional shares, what it could do is issue your 151 whole shares, and cash in lieu for the remaining 0.5 shares. That would amount to $16.66.

How Brokers Handle Cash in Lieu Payments

In the event that an investor is issued cash in lieu of a fractional share, the investor’s brokerage may simply process the cash and deposit into the investor’s brokerage account in the form of a cash balance after deducting any fees or other charges that may apply.

How Is Cash in Lieu of Fractional Shares Taxed?

Like many other forms of investment profits, cash in lieu of fractional shares is taxable, even though the payment occurred without the investor’s endorsement or action. Investors will pay a capital gains tax on the payment.

However, if you have a tax-advantaged account, like a 401(k) or individual retirement account (IRA), you do not have to worry about reporting or paying taxes on the gains of cash in lieu payment.

Some investors may simply report the payment on the IRS Form 1040’s Schedule D as sales proceeds with zero cost and pay capital gains tax on the entire cash settlement. Investors should also receive a 1099-B, too, for their tax paperwork. However, the more accurate and tax-advantageous method would apply the adjusted cost basis to the fractional shares and pay capital gains tax only on the net gain.

Potential Downsides of Cash in Lieu

The downsides of receiving cash in lieu of fractional shares include the potential tax ramifications, and the fact that investors are liquidating shares that they may otherwise have rather held onto.

Cash in lieu is a taxable event, which means investors may need to pay capital gains taxes. And it’s possible that they could miss out on appreciation if that partial share were to gain value — though there’s no guarantee that would happen.

Strategies to Minimize the Impact of Cash in Lieu

Typically, the impact of cash in lieu isn’t likely to be big for most investors. If they do receive cash in lieu, it’s likely due to the liquidation of a partial share, which probably isn’t going to amount to a significant amount of cash.

That said, if it is something investors want to avoid, the simplest strategy would be to avoid owning partial shares, and be aware of pending changes with a company whose shares you do own — so, knowing a stock split is coming, or the possibility of a merger or acquisition. That could give you a chance to reallocate your portfolio and make necessary changes.

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

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How to Report Cash in Lieu of Fractional Shares

As noted above, if you receive cash in lieu of fractional shares, you’ll have to pay capital gains taxes on the windfall. To ensure you’re paying the right amount of tax, you’ll have to take a few extra steps to determine your cost basis and accurately report the cash in lieu payment.

Gather Your Documents

Investors may receive the cash through their investment broker and an IRS Form 1099-B at year-end with a “cash in lieu” or “CIL” notation. To accurately report your cash in lieu payment, you’ll need the Form 1099-B, your original cost basis, the date you purchased the stock, the date of the stock split or other corporate action, and the reason why you received the cash in lieu of fractional shares.

Calculate Your Cost Basis

Calculating the cost basis for cash in lieu of fractional shares is a little tricky due to the share price and quantity change. The new stock issued is not taxable, nor does the cost basis change, but the per-share basis does.

Consider the following example:

• An investor owns 15 shares of Company X worth $10.00 per share ($150 value)

• The investor’s 15 shares have a $7.00 per share cost basis ($105 total cost basis)

• Company X declares a 1.5-to-1 stock split

After the stock split, the investor is entitled to 22.5 shares (1.5 x 15 shares = 22.5 shares) valued at $6.67 each ($150 value / 22.5 shares = $6.67 per share), but the company states they will only issue whole shares. Therefore, the investor receives 22 shares plus a $3.34 cash in lieu payment for the half share ($6.67 x 0.5 = $3.34 per half share).

The investor’s total cost basis remains the same, less the cash in lieu of the fractional shares. However, the adjusted cost basis now factors in 22 shares instead of 15, equaling a $4.77 per share cost basis ($105 total cost basis / 22 shares = $4.77 cost basis) and a $2.39 fractional share cost basis.

Finally, the taxable “net gain” for the cash payment received in lieu of fractional shares equates to:

$3.34 cash in lieu payment – $2.39 fractional share cost basis = $0.95 net gain.

So, rather than paying capital gains taxes on the $3.34 payment, you pay taxes on the $0.95 gain. You report this figure on the IRS Form 1040’s Schedule D.

The Takeaway

It’s not always possible to anticipate a company’s actions, like a merger or stock split, and how it will affect shareholders’ stock. If the company doesn’t wish to deal with fractional shares, shareholders need to understand the alternative payments, such as cash in lieu of fractional shares, and how it affects them.

While cash in lieu can be burdensome, knowing the nuances of the payment and how it is taxed may benefit your portfolio. Though you may receive cash in lieu of fractional shares, investors may still consider fractional shares to add to their investment portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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FAQ

Is cash in lieu of fractional shares taxable?

If you receive cash in lieu of fractional shares, the cash is taxable. The payment can be taxed as a short-term or long-term capital gain, depending on how long you’ve held the stock.

Is cash in lieu a dividend?

Investors can receive cash in lieu of fractional shares for a dividend payment. However, cash in lieu is not a dividend and is not taxed like a dividend.

Is cash in lieu a capital gain?

Cash in lieu is treated as a capital gain because the IRS considers it a stock sale. When you receive cash in lieu of fractional shares, you may have to pay capital gains taxes on the payment.

What is a cash in lieu settlement?

A cash in lieu settlement is an agreement between two parties in which one party agrees to pay the other party an agreed-upon amount of cash instead of some other form of payment or consideration.

Do all brokerages issue cash in lieu the same way?

Not necessarily. You can check with your brokerage to get the specifics of their process, but it’s possible that some brokerages will issue cash in lieu differently than others.

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

SOIN-Q225-152

Jul

2025

What Is a Limit Order and How Does It Work?

By Rebecca Lake | Growing Wealth, Investing, Terminology | No Comments

Table of Contents

Limit Order Defined
How Do Limit Orders Work?
Types of Limit Orders
How to Set a Limit Order
When a Trader Might Use a Limit Order
Pros and Cons of Using Limit Orders
Limit Order vs Market Order
Limit Orders vs Stop Orders
What Happens If a Limit Order Is Not Filled?
Limit Orders and Price Gaps
Advanced Strategies for Using Limit Orders
FAQ

Limit orders are a type of market order that gives investors the opportunity to trade stocks or other securities at a specified price. Doing so allows traders or investors to garner some form of price protection — it allows them to sell only at a price at which they won’t take a loss, or purchase securities at a price they’re comfortable with.

Limit orders can be used as a part of a broader investment or trading strategy, but can be fairly advanced for some investors.

Key Points

• Limit orders allow investors to buy or sell securities at a specific price or better, ensuring price protection.

• Buy limit orders set a maximum price; sell limit orders set a minimum price.

• Advantages of limit orders include price protection, convenience, and reduced risk of emotional trading.

• Disadvantages involve the risk of non-execution and missing out on better prices.

• Stop-limit orders combine stop and limit features, offering additional control over trade execution.

Limit Order Defined

As noted, a limit order allows investors to buy or sell securities at a price they specify or better, providing some price protection on trades.

When you set a buy limit order, for example, the trade will only be executed at that price or lower. For sell limit orders, the order will be executed at the price you set or higher. By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

How Do Limit Orders Work?

In the simplest terms, limit orders work as a sort of restriction that an investor can choose (to either buy or sell) with “limits” on a minimum or maximum price. An investor places an order to buy a stock at a minimum price, for instance, or places an order to sell at a maximum price, in an effort to seek returns, while limiting losses.

There are two types of limit orders investors can execute: buy limit orders and limit sell orders. An important thing to know is that while a limit order specifies a desired price, it doesn’t guarantee the trade will occur at that price — or at all.

When you set a limit order, the trade will only be executed if and when the security meets the terms of the order — which may or may not happen, depending on the overall market conditions. So, when an investor sets a limit order, it’s possible to miss out on other investing opportunities.

Types of Limit Orders

As mentioned, there are two types of limit orders investors can execute: buy limit orders and limit sell orders. But there’s another, a sort of combination of the two, to be aware of.

1. Buy Limit Order

For buy limit orders, you’re essentially setting a ceiling for the trade — i.e., the highest price you’d be willing to pay for each share. If a trader places a buy limit order, the intention is to buy shares of stock. The order will be triggered when the stock hits the limit price or lower.

For example, you may want to buy shares of XYZ stock at $15 each. You could place a buy limit order that would allow the trade to be carried out automatically if the stock reaches that purchase price or better.

2. Sell Limit Order

For sell limit orders, you’re setting a price floor — i.e., the lowest amount you’d be willing to accept per share. If a trader places a limit order to sell, the order will be triggered when the stock hits the limit price or higher. So you could set a sell limit order to sell XYZ stock once its share price hits $20 or higher.

3. Stop-Limit Order

A stop-limit order is a combination of a stop order and a limit order. Stop-limit orders involve setting two prices. For example: A stock is currently priced at $30 and a trader believes it’s going to go up in value, so they set a buy stop order of $33.

When the stock hits $33, a market order to buy will be triggered. But with a stop-limit order, the trader can also set a limit price, meaning the highest price they’re willing to pay per share — say, $35 per share. Using a stop-limit order gives traders an additional level of control when they’re executing a strategy.

Stop-limit orders can also help traders make sure they sell stocks before they go down significantly in value. Let’s say a trader purchased stock XYZ at $40 per share, and now anticipates the price will drop. The trader doesn’t want to lose more than $5 per share, so they set a stop order for $35.

If the stock hits $35 — the stop price — the stock will be triggered to sell. However, the price could continue to drop before the trade is fully executed. To prevent selling at a much lower price than $35, the trader can set a limit order to only sell between $32 and $35.

How to Set a Limit Order

When placing a limit order with your brokerage firm, the broker or trading platform might ask for the following information:

• The stock or security

• Is it a buy or sell order

• Number of shares to buy or sell

• Stock order type (limit order, market order, or another type of order)

• Price

When setting up a limit order, the trader can set it to remain open indefinitely, (until the stock reaches the limit price), or they can set an expiration date.

Limit Order Example

Here’s an example of how a limit order might work: Say a trader would like to purchase 100 shares of stock XYZ. The highest price they want to pay per share is $26.75. They would set up a limit buy order like this:

Buy 100 shares XYZ limit 26.75.

As noted above, the main upside of using limit orders is that traders get to name a desired price; they generally end up paying a price they expect; and they can set an order to execute a trade that can be executed even if they are doing other things.

In this way, setting limit orders can help traders seize opportunities they might otherwise miss because limit orders can stay open for months or in some cases indefinitely (the industry term is “good ‘til canceled,’ or GTC). The limit order will still execute the trade once the terms are met.

When a Trader Might Use a Limit Order

There are several reasons why a trader or investor might want to use a limit order.

• Price protection. When a stock is experiencing volatility, you may not want to risk placing a market order and getting a bad price. Although it’s unlikely that the price will change drastically within a few seconds or minutes after placing an order, it can happen, and setting a limit order can set a floor or a ceiling for the price you want.

• Convenience. Another occasion to use a limit order might be when you’re interested in buying or selling a stock, but you don’t want to keep a constant eye on the price. By setting a limit order, you can walk away and wait for it to be executed. This might also be a good choice for longer-term positions, since in some cases traders can place a limit order with no expiration date.

• Volatility. Third, an investor may choose to set a limit order if they are buying or selling at the end of the market day or after the stock market has closed. Company or world news could be announced while the market is closed, which could affect the stock’s price when the market reopens. If the investor isn’t able to cancel a market order while the market is still closed, they may not be happy with the results of the trade. A limit order can help prevent that.

Limit orders can also be useful when the stock being traded doesn’t have a lot of liquidity. If there aren’t many people trading the stock, one order could affect the price. When entering a market order, that trade could cause the price to go up or down significantly, and a trader could end up with a different price than intended.

Pros and Cons of Using Limit Orders

Each type of order has pros and cons depending on the particular situation.

Pros of Limit Orders

Some advantages of limit orders include naming your price, and taking a set-it-and-forget-it approach.

• The trader gets to name their price. One of the chief reasons traders rely on limit orders is to set baselines for profits and losses. They won’t end up paying a price they didn’t expect when they buy or get a price below their target when it’s time to sell.

• The trader can set the order and walk away. Day trading can be time-consuming, and it requires a significant amount of knowledge. Investors who use limit orders don’t have to continuously watch the market to get the price they want.

• Insulate against volatility. Volatility can cause you to make emotional decisions. Limit orders can give traders more control over their portfolio and ward off panic-buying or selling.

• Ride the gaps. Stock prices can fluctuate overnight due to after-hours trading. It’s possible to benefit from price differences from one day to another when using limit orders.

For example, if a trader places a buy limit order for a stock at $3.50, but the order doesn’t get triggered while the market is open, the price could change overnight. If the market opens at $3.30 the next morning, they’ll get a better price, since the buy limit order gets triggered if the stock is at or below the specified price.

Cons of Limit Orders

Conversely, limit orders can have some disadvantages.

• The order may never be executed. There may not be enough supply or demand to fulfill the order even if it reaches the limit price, since there could be hundreds or even thousands of other traders wanting to buy or sell at the specified price.

• The stock may never reach the limit price. For example, if a stock is currently priced at $20, a trader might set a limit order to buy at $15. If the stock goes down to $16 and then back up to $20, the order won’t execute. In this case, they would miss out on potential gains.

• The market can change significantly. If a trader sets a shorter-term limit order, they might miss out on a better price. For example, if a stock a trader owns is currently priced at $150, the trader may choose to set a sell limit order at $154 within four weeks. If the company then makes a big announcement about a new product after that period, and the stock’s price spikes to $170, the trader would miss out on selling at that higher price.

• It takes experience to understand the market and set limit orders. New investors can miss out on opportunities and experience unwanted losses, as with any type of investment.

Limit Order vs Market Order

Limit orders differ from market orders, which are, essentially, orders to buy a security immediately at its given price. These are the most common types of orders. So, while a market order is executed immediately regardless of terms, limit orders only execute under certain circumstances.

Limit orders can also be set for pre-market and after-hours trading sessions. Market orders, by contrast, are limited to standard trading hours (9:30am to 4pm ET).

Remember: Even though limit orders are geared to a specific price, that price isn’t guaranteed. First, limit orders are generally executed on a first-come-first-served basis. So there may be orders ahead of yours that eliminate the availability of shares at your limit price.

And it bears repeating: There is also the potential for missed opportunities: The limit order you set could trigger a trade. But then the stock or other security might hit an even better price.

In other words, time is a factor. In today’s market, computer algorithms execute the majority of stock market trades. In this high-tech trading environment, it can be hard as an individual trader to know when to buy and sell. By using certain types of orders, like limit orders, traders can potentially limit their losses, lock in gains, and avoid swings in the market.

Though limit orders are commonly used as a part of day trading strategies, they can be useful for any investor who wants some price protection around their trades. For example, if you think a stock is currently undervalued, you could purchase it at the current market price, then set a sell limit order to automatically sell it when the price goes up. Again, the limit order can stay open until the security meets your desired price — or you cancel the order.

However, speculating in the market can be risky and having experience can be helpful when deciding how and when to set limit orders.

When to Consider a Market Order vs a Limit Order

If you’re trying to parse out when a market order or a limit order is the best tool to use, consider the following.

A trader might want to use a market order if:

• Executing the trade immediately is a priority

• The stock is highly liquid

• They’re only trading a small number of shares

• The stock has a narrow bid-ask spread (about a penny)

A trader might want to use a limit order if:

• They want to specify their price

• They are trading an illiquid stock

• They want to set a long-term trade (or even walk away for their lunch break and still have the trade execute)

• They feel a stock is currently over- or undervalued

• The stock has a large bid-ask spread

• They are trading a larger number of shares

Limit Orders vs Stop Orders

There is another type of order that can come into play when you’re trying to control the price of a trade: a stop order. A stop order is similar to a limit order in that you set your desired price for a stock, say, and once the stock hits that price or goes past it, a market order is triggered to execute the purchase or sale.

The terms of a limit order are different in that a trade will be executed if the stock hits the specified price or better. So if you want to sell XYZ stock for $50 a share, a sell limit order will be triggered once the stock hits $50 or higher.

A stop order triggers a market order once XYZ stock hits $50, period. By the time the order is executed, the actual stock price could be higher or lower.

Thus with a stop order there’s also no guarantee that you’ll get the specified price. A market order is submitted once the stop price is hit, but in fast-moving markets, the actual price you pay might end up being higher or lower.

Stop orders are generally used to exit a position and to minimize losses, whereas limit orders are used to capture gains. But two can also be used in conjunction with each other with something called a stop-limit order.

What Happens If a Limit Order Is Not Filled?

A limit order can only be filled if the stock’s price reaches the limit price or better. If this doesn’t happen, then the order is not executed, and it expires according to the terms of the contract. An order can be good just for a single trading day, for a certain period of time, or in some cases it’s possible to leave the limit order open-ended using a GTC (good ‘til canceled) provision.

So if you placed a buy limit order, but the stock does not reach the specified price or lower, the purchase would not be completed and the order would expire within the specified time frame.

And if you’re using a sell limit order, but the security never reaches the specified sell price or higher, the shares would remain in your trading account and the order would expire.

Limit Orders and Price Gaps

Price gaps can occur when stocks close at one price then open at a different price on the next trading day. This can be attributed to after-market or pre-market trading that occurs after the regular market hours have ended. After-hours trading can impact stock price minimally or more substantially, depending on what’s spurring trades.

For example, say news of a large tech company’s planned merger with another tech giant leaks after hours. That could send the aftermarket trading markets into a frenzy, resulting in a radically different price for both companies’ stocks when the market reopens. Pricing gaps don’t necessarily have to be wide, but large pricing swings are possible with overnight trading.

Limit orders can help to downplay the potential for losses associated with pricing gaps. Placing a buy limit order or limit sell order may not close the gap entirely. But it may help to mitigate the losses you may experience when gaps in pricing exist. Whether the gap is moving up or down can determine what type of limit order to place and where to cap your limit price.

Advanced Strategies for Using Limit Orders

Seasoned investors may utilize more advanced strategies with limit orders. But note that it takes some practice and a solid understanding of what you’re doing to ensure you’re not taking undue risk.

Combining Limit Orders With Technical Analysis

Utilizing technical analysis strategies — which involve analyzing chart movements to try and get a sense of what a stock might do next — is one advanced strategy that investors can utilize. It’s fairly advanced, and requires some homework and analysis skills, but paired with limit orders, it may be a way for investors to incorporate new methods into their overall strategy.

Again, though: This is advanced, and doesn’t guarantee results.

Setting Conditional Limit Orders

Investors may also want to look at the possibility of using conditional limit orders to fine-tune their strategy. Conditional limit orders allow investors to set order “triggers” based on price movements, and there are several types: Contingent, one-triggers-the other, one-cancels-the-other, and one-triggers-a-one-cancels-the-other. So, they all sort of relate and can rely on each other.

The Takeaway

Limit orders can be an effective and efficient way for investors to set price caps on their trades, and also give them some protection against market swings. Limit orders offer other advantages as well, including giving traders the ability to place longer- or shorter-term trades that will be executed even if they’re not continuously watching the market. This can potentially protect investors against losses and potentially lock in gains.

That said, limit orders are complicated because they don’t guarantee that the trade will be executed at the set price. The stock (or other security) could hit the limit price — and there might not be enough supply or demand to complete the trade. There is also the potential for some missed opportunities, if the price you set triggers a trade, and subsequently the stock or other security hits an even better price.

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

Can I specify the price for a limit order?

Yes, investors can specify the price for a limit order. In fact, the price typically is the limit in a limit order, representing either a price ceiling or a price floor.

How long does a limit order stay active?

Generally, a limit order will stay active indefinitely, unless an investor cancels it or specifies otherwise. That means that if the limit is never reached, the order will not execute, and the limit order will remain active until the limit is reached.

Can I cancel a limit order once it’s placed?

Investors can cancel standing limit orders as long as conditions haven’t arrived that have led to the order being actively executed. The cancellation process will depend on the specific exchange an investor is using, however.

What happens if the market price doesn’t reach my limit price?

If the market price of a stock does not reach the limit price — either a price floor or price ceiling — then the limit order will not execute, and the limit order will remain active until it does.

Can I place a limit order outside of regular trading hours?

It’s possible to place limit orders outside of regular trading hours, depending on the rules of a given exchange, and what market conditions dictate. The order itself, of course, won’t execute until the market opens, assuming that the limit is reached.

Are there any fees associated with limit orders?

There may or may not be fees associated with limit orders, and it’ll depend on the specific exchange or brokerage an investor is using. Note that some brokerages may charge higher fees for limit orders than market orders — but some may charge no fees at all.

Are limit orders guaranteed to be executed?

No, there is no guarantee that a limit order will be executed, as it will only execute if the limit price is reached. If the limit is not reached, the order will remain active but not execute.

About the author

Rebecca Lake

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

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

SOIN-Q225-155

Jul

2025

9 Investment Risk Management Strategies

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Investment Risk Management?
How to Quantify Risk
Common Risk Management Techniques
Calculating Risk Tolerance
Basic Risk Management Techniques
Advanced Risk Management Techniques
FAQ

All investing involves some level of risk, and how much any individual investor is willing to take on will depend on their risk tolerance. There are also numerous investment risk strategies out there that they can use to try and limit losses while pursuing returns.

But it all comes down to the specific investor. Some have higher risk tolerances, and think less about investment risk management than others. Either way, investors can take measures to help protect themselves against the inevitability of a correction or a bear market by using various risk management strategies.

Key Points

• Nine strategies for investment risk management are outlined, including diversification, consistent investing, and stop-loss orders.

• Knowing one’s personal risk tolerance can help shape investment choices, prevent emotional reactions, and aid in capital preservation.

• Diversification across assets and sectors may help smooth out a portfolio’s risk profile.

• Beta measures stock volatility relative to the market, aiding in risk management.

• Professional risk analysis can offer precise risk assessment, portfolio alignment, and stress testing.

What Is Investment Risk Management?

Risk management, in investing, refers to the attempt to reduce the amount of risk within a portfolio. It’s important to realize that you’re never going to completely rid yourself of risk; every investment, no matter how “safe” it’s claimed to be, is risky to some degree. But there are strategies that investors can use to try and reduce the risks that might threaten the value of their portfolio.

In a similar vein to how businesses attempt to manage risks to their operations, investors try to manage risks as well. There are some basic and broad strategies for doing so, such as dollar-cost averaging or diversification, along with some more targeted and specific strategies.

How to Quantify Risk

Quantifying risk can be tricky, as measuring something that is somewhat unmeasurable by normal methods is difficult. But financial professionals do spend a lot of time and resources finding ways to measure both quantitative and qualitative risks for investors.

Some of the factors that are taken into account when quantifying risk include volatility, but for individual companies and stocks, there can be any number of risks related to credit, interest rates, metrics related to the strength of the broader economy, and more.

Common Risk Management Techniques

As noted, perhaps the simplest and most common risk management techniques for investors are dollar-cost averaging, and diversification.

Dollar-cost averaging, in practice, involves investing relatively small amounts of money or capital over a long period of time. That means an investor is buying at different prices, and over time, the cost basis averages out, rather than buying at a lump-sum single price.

Diversification, further, involves buying a wide range of investments, including different types of securities, from different industries and different geographies. Theoretically, a well-diversified portfolio may be cushioned from steeper losses if a single industry suffers a decline. But, of course, there are no guarantees with investing.

Calculating Risk Tolerance

Before learning more about the numerous risk management strategies out there, it can be helpful to get a deeper understanding of the level of risk a person is comfortable taking when building an investment portfolio.

That includes thinking deeply about an investor’s risk tolerance, which is usually determined by three main factors:

Risk capacity: How much can the investor afford to lose without it affecting actual financial security? Risk capacity can vary based on age, personal financial goals, and an investor’s timeline for reaching those goals.

Need: How much will these investments have to earn to get the investor where they want to be? (An investor who is depending heavily on investments may be faced with a careful balancing act between taking too much risk and not taking enough.)

Emotions: How will the investor react to bad news (with fear and panic? or clarity and control?), and what effect will those emotions have on investing decisions? Unfortunately, this can be hard to predict until it happens.

So, why is risk management important? Those who are able to preserve their capital during difficult periods will have a larger base to grow from when the market regains steam. With that in mind, here are some strategies investors sometimes use to manage the risk in their portfolio.

Basic Risk Management Techniques

As noted, there are some relatively basic risk management techniques for investors to use, such as diversification and asset allocation — but there are several others, too.

1. Reevaluating Portfolio Diversification and Asset Allocation

You’ve probably heard the expression “don’t put all your eggs in one basket.” Portfolio diversification — a strategy involving allocating money across many asset classes and sectors — could help with avoiding disaster in a downturn. If one stock tanks, others in different classes might not be so hard hit, as noted.

Investors might want to consider owning two or more mutual funds that represent different styles, such as large-cap, mid-cap, small-cap, and international stocks, as well as keeping a timeline-appropriate percentage in bonds. Those nearing retirement might consider adding a fund with income-producing securities.

But investors should beware of overlap. Investors often think they’re diversified because they own a few different mutual funds, but if they take a closer look, they realize those funds are all invested in the same or similar stocks.

If those companies or sectors struggle, investors could lose a big chunk of their money. Investors could avoid overlap by simply looking at a fund’s prospectus online.

To further diversify, investors also may want to think beyond stocks and bonds. Exchange-traded funds (ETFs), commodities, and real estate investment trusts (REITs) are just a few of the possibilities.

Investors could also diversify the way they invest. For instance, an investor might have a 401(k) through their employer, but also open a traditional IRA or Roth IRA online through a financial company.

2. Lowering Portfolio Volatility

One of the easiest ways to help reduce the volatility in a portfolio is to keep some percentage allocated to cash and cash equivalents. This may keep an investor from having to sell other assets in times of need (which could result in a loss if the market is down).

The appropriate amount of cash to hold may vary depending on an investor’s timeline and goals. If too much money is kept in cash for the long-haul, it might not earn enough to keep up with inflation.

There are other options, however. Here are a few.

Rebalancing

The goal of portfolio rebalancing is to lower the risk of severe loss by keeping a portfolio well-diversified. Over time, different assets have different returns or losses based on the movements of the market. Rebalancing helps get things back to the mix the investor wants based on personal risk tolerance.

Rebalancing can often feel counterintuitive because it can mean letting go of investments that have appreciated in value (the ones that have been fun to watch) and buying investments that are declining in value.

Forgetful investors may even be able to sign up for automatic rebalancing. Without rebalancing, a portfolio’s mix may become stock heavy or sector heavy, which may significantly increase risk.

Buying bonds

Unless investors are regularly rebalancing their portfolio (or are having it done automatically), their mix may be skewing more toward stocks than they think. Those who are concerned about market volatility might want to rebuild the bond side of their portfolio.

Bonds might not be completely safe investments, but bonds with a lower duration can still play a defensive role in a diversified portfolio. And bonds often can be used to produce a steady stream of income that can be reinvested or used for living expenses.

Municipal bonds can generate tax-free income. Bonds, bond ETFs, and treasuries can all serve a purpose when the market is going down.

Beta

The beta of a stock is a measure of the interrelationship between the stock and the stock market. A beta of one, for example, means the stock will react in tandem with the S&P 500. If the beta is below one, the stock is less volatile than the overall market.

A beta above one indicates the stock will have a more marked reaction. So, replacing high beta stocks with lower beta names could help take some of the menace out of market fluctuations.

3. Investing Consistently

For those looking for quick returns, picking the “right” stock and selling it at the “right” time is everything. Using a dollar-cost averaging strategy is different. It’s all about patience, discipline, and looking at the long term. And it can help investors keep emotions out of the process.

With dollar-cost averaging, investors contribute the same amount at regular intervals (usually once or twice a month) to an investment account. When the market is down, the money buys more shares. When the market is up, it buys fewer.

But because markets generally rise over time, investors who can keep their hands off the stash might build a pretty nice pot of money over the long-term — especially compared to what they might get from a savings account or money market account.

Some investors hand over their cash every month and don’t pay much attention to where their 401(k) plan administrator or the bank with their IRA might put it. But carefully choosing the companies represented in a portfolio — focusing on those with sustained growth over time — could help make this strategy even stronger.

4. Getting an Investment Risk Analysis

For years, financial professionals have mostly labeled investors’ risk tolerance as “aggressive,” “moderate,” or “conservative.” Those can be fairly subjective descriptions. The term “moderate,” for example, might mean one thing to a young investor and another to an older financial professional.

An investor might not even know how they’ll react to a market slump until it happens. Or a person might feel aggressive after inheriting some money but conservative after paying a big medical bill.

To help with clarity, many in the financial industry are now using software programs that can help pinpoint an investor’s attitude about risk, based on a series of questions. They can also better determine how an investor’s current portfolio matches up to a particular “risk score.”

And they can analyze and stress test the portfolio to show just how the client’s investments might do in a downturn similar to the ones that occurred in 2000 or 2008.

Identifying an investor’s current position and goals might make it easier to create a more effective plan for the future. This could involve identifying the proper mix of assets and realigning existing assets to relieve any pressure points in the portfolio.

5. Requiring a Margin of Safety

“Buy low, sell high!” is a popular mantra in the financial industry, but actually making the concept work can be tricky. Who decides what’s high and what’s low?

Value investors may implement their own margin of safety by deciding that they’ll only purchase a stockif its prevailing market price is significantly below what they believe is its intrinsic value. For example, an investor who uses a 20% margin of safety would be drawn to a stock with an estimated intrinsic value of $100 a share but a price of $80 or less per share.

The greater the margin of safety, the higher the potential for solid returns and the lower the downside risk. Because risk is subjective, every investor’s margin of safety might be different — maybe 20%, 30%, or even 40%. It depends on what that person is comfortable with.

Determining intrinsic value can take some research. A stock’s price-to-earnings ratio (P/E) is a good place to start. Investors can find that number by dividing a company’s share price by its net income, then compare the result to the P/E ratio posted by other companies in the same industry.

The lower the number is in comparison with the competition, the “cheaper” the stock is. The higher the number, the more “expensive” it is.

6. Establishing a Maximum Loss Plan

A maximum loss plan is a method investors can use to cautiously manage their asset allocation. It’s designed to keep investors from making bad decisions based on their anxiety about movements in the market.

It gives investors some control over “maximum drawdown,” a measurement of decline from an asset’s peak value to its lowest point over a period of time, and it can be used to evaluate portfolio risk.

This strategy calculates a personal maximum loss limit and uses that percentage to determine appropriate asset allocation, but that asset allocation won’t necessarily be a good fit for someone else. It isn’t a one-size-fits-all plan.

Here are the basic steps:

1. Based on historic market numbers, the investor chooses an assumed probable maximum loss for equities in the stock market. For example, since 1926, there have been only three calendar years in which the S&P 500’s total return was worse than -30%. The worst year ever was 1931, at -44.20%. So the investor might choose 40% as a probable maximum loss number, or maybe 35% or 30%.

2. Next, based on personal feelings about market losses, the investor chooses the maximum amount they are willing to lose in the coming year. Again, it’s up to the individual to determine this number. It could be 20% or 30%, or somewhere in between.

3. Finally, the investor divides that personal portfolio maximum loss number by the assumed probable maximum loss number. (For example, .20 divided by .35 = .57 or 57%.)

In this example, the investor’s target equity asset allocation would be 57% when market valuations are average (or fair value).

The investor might raise or lower the numbers — and be more aggressive or conservative — depending on what’s happening in the market.

Advanced Risk Management Techniques

Beyond the aforementioned risk management techniques, some investors may want to dig a little deeper and use some more advanced tactics. That could include the following.

7. Using Hedging Strategies With Options

For investors who are comfortable with options contracts, which can be difficult to understand and utilize for many investors, there are strategies that can be employed to further try and lower a portfolio’s overall risk profile. For instance, investors can use certain types of options to try and protect their portfolio from sudden price declines and lessen their potential losses.

In many cases, this could entail using a put option strategy that could provide protection against a stock or asset’s price decline. Purchasing a put option effectively gives the investor the “option” to sell an asset for a potential profit if the price falls below a certain level, called the strike price.

However, the investor could see losses if the asset price moves in an adverse direction. Since options are considered a higher risk investment, they’re typically best for experienced investors.

8. Implementing Stop-Loss Orders

Stop-loss orders can also be used to an investor’s advantage if used properly. Stop-loss orders are orders that are fulfilled by a brokerage when certain conditions are met, generally, when a stock or asset’s value hits a certain specified level. In that case, the order is executed, and an investor’s holdings are liquidated without any additional input from the investor.

For instance, if an investor wants to limit their potential losses, they could specify a stop-loss order if a holding loses 10% of its value. In that case, if the asset loses 40% of its value, the investor’s losses are limited to 10%.

9. Understanding Risk-Adjusted Returns

Risk-adjusted returns give investors an idea of both their overall return, and what risks were taken on in order to achieve or generate those returns. This is advanced, as discussed, and may not necessarily be something that most investors worry about. But there are many methods for calculating risk-adjusted returns, and depending on how intricate your investment strategy is, it can be helpful to understand if the risks an investor is assuming is worth the potential return generated.

The Takeaway

Risk management, and implementation of risk management strategies, is critical for most investors. All investments involve some level of risk, and instead of ignoring it, it can be helpful to gauge your individual risk tolerance, and choose risk management strategies that mesh with your tolerance.

Whatever strategy an investor chooses, risk management is critical to attempting to keep potential losses to a minimum. Remember: As losses get larger, the return that’s necessary just to get back to where you were also increases. It takes an 11% gain to recover from a 10% loss. But it takes a 100% gain to recover from a 50% loss. That makes playing defense every bit as important as playing offense.

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 does diversification help manage investment risk?

Diversification involves investing in different assets, industries, geographies, and more, and can help manage investment risk by diluting a portfolio’s holdings so that a downturn in one specific area does not lead to outsized losses.

What is the best way to measure investment risk?

It’s difficult to say what the best way to measure investment risk is, but perhaps the simplest could be to calculate standard deviation, which gives an investor an idea of how far from a statistical average or mean an asset’s value could deviate. Note, however, that standard deviation does have its limitations.

How often should I rebalance my portfolio?

How often you rebalance your portfolio will depend on your specific investment goals and strategy, but in general, it may be a good idea to rebalance at least once or twice per year.

What role do bonds play in reducing investment risk?

Bonds may act as a counterweight to stocks in a portfolio, as their values do not fluctuate nearly as much as stocks, and they can be less volatile and subject to market forces. So, a portfolio that is concentrated heavily in stocks may see its value drop or rise with the overall market, but one that is more concentrated in bonds would remain relatively stable.

What are the common mistakes investors make in risk management?

Some common mistakes investors make in regard to managing risk include forgetting or forgoing due diligence, making emotional or kneejerk investment decisions, trying to time the market, and not properly diversifying their portfolio.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

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.

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 emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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

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.

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

SOIN-Q225-156

What Is Know Your Customer (KYC) for Financial Institutions?

3 Components of KYC

Customer Identification Program (CIP)

Customer Due Diligence (CDD)

Enhanced Due Diligence (EDD)

5 Key Steps Involved in Know Your Customer?

1. Customer Identification Program (CIP)

2. Customer Due Diligence (CDD)

3. Enhanced Due Diligence (EDD)

4. Account Opening

5. Annual Review

4 Key Elements of a KYC Policy?

1. Identify Their Customers

2. Verify That the Customer’s ID Is True and Valid

3. Understand Their Customer’s Source of Funding and Activities

4. Monitor the Activities of Their Customers

Why Does KYC Matter?

Is KYC Successful?

AML vs KYC

The Takeaway

FAQ

What is a KYC procedure in banking?

Do all banks require KYC?

Why is KYC mandatory in banks?

Can You Get Unemployment Deferment for Student Loans?

What Is Unemployment Deferment?

What Types of Student Loans Are Eligible for Unemployment Deferment?

Who Is Eligible for Unemployment Deferment?

What About Private Student Loan Deferment?

Advantages and Disadvantages of Unemployment Deferment

Advantages

Disadvantages

Alternatives to Unemployment Deferment

Forbearance

Income-Driven Repayment

Public Service Loan Forgiveness (PSLF) Program

Student Loan Refinancing

The Takeaway

FAQ

What if I am unemployed and can’t pay my student loans?

What qualifies for deferment on student loans?

Can you get unemployment if you owe student loans?

Understanding Cash in Lieu of Fractional Shares

What Is Cash in Lieu?

Why Investors Receive Cash in Lieu

Stock Split

Merger or Acquisition

Spinoff

Example of Cash in Lieu

How Brokers Handle Cash in Lieu Payments

How Is Cash in Lieu of Fractional Shares Taxed?

Potential Downsides of Cash in Lieu

Strategies to Minimize the Impact of Cash in Lieu

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

Invest with as little as $5.

How to Report Cash in Lieu of Fractional Shares

Gather Your Documents

Calculate Your Cost Basis

The Takeaway

FAQ

Is cash in lieu of fractional shares taxable?

Is cash in lieu a dividend?

Is cash in lieu a capital gain?

What is a cash in lieu settlement?

Do all brokerages issue cash in lieu the same way?

What Is a Limit Order and How Does It Work?

Limit Order Defined

How Do Limit Orders Work?

Types of Limit Orders

1. Buy Limit Order

2. Sell Limit Order

3. Stop-Limit Order

How to Set a Limit Order

Limit Order Example

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When a Trader Might Use a Limit Order

Pros and Cons of Using Limit Orders

Pros of Limit Orders

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