You may have heard mention of preferred shareholders or preferred stocks in investment circles. And you may have wondered: How do I get preferred stocks? Preferred stocks are available to individual investors. That being said, there is a type of preferred stocks that may be out of reach to most, and that’s participating preferred stocks.
Here’s a look at what participating preferred stock is, as well as when one might have the option to own participating preferred stock and what the benefits of participating preferred stock are.
What Is Preferred Stock?
Preferred stock shares characteristics of both common stocks and bonds. Preferred stocks allow investors to own shares in a given company and also receive a set schedule of dividends (much like bond interest payments).
Because the payout is predictable and expected, there isn’t the same potential for price fluctuations as with common stocks — and thus there’s less potential for volatility. But, the shares may rise in value over time.
Shares of preferred stock tend to pay a fixed rate of dividend. Preferred stocks have dividend preference; they’re paid to shareholders before dividends are paid out to common shareholders.
These dividends may or may not be cumulative. If they are, all unpaid preferred stock dividends must be paid out prior to common stock shareholders receiving a dividend.
For example, if a company has not made dividend payments to cumulative preferred stock shareholders for the previous two years, they must make two years’ worth of back payments and the current year’s dividend payments to preferred shareholders before common stock shareholders are paid any dividend at all.
Because of the fixed nature of the dividend, the investments themselves tend to behave more like how a bond works. When an investment pays a fixed and predictable rate of interest, they tend to trade in a smaller and more predictable bandwidth. Compare that to stocks, whose future income stream and total return on investment are less predictable, which lends itself to plenty of price disagreement in the short-term.
Preferred stockholders do not typically enjoy voting rights at shareholder meetings. But, preferred stock shareholders are paid out before common shareholders in a liquidity event.
Participating Preferred Stocks
Participating preferred stock takes on all of the above features, but they may receive some bonus benefits, such as an additional dividend payment. This additional payment may be triggered when certain conditions are met, often involving the common stock. For example, an additional dividend may be paid out in the event that the dividend paid to common shareholders exceeds a certain level.
Upon liquidation, participating preferred shareholders may receive additional benefits, usually in excess of what was initially stated. For example, they may have the right to get back the value of the stock’s purchasing price. Or, participating preferred shareholders may have access to some pro-rata cut of the liquidation proceeds that would otherwise go to common stock shareholders.
Non-participating preferred stocks do not get additional consideration for dividends or benefits during a liquidation event.
For those with access, participating preferred stock is an enticing investment. That said, the average individual investor may not have the chance to invest in participating preferred stock. This type of stock is typically offered as an incentive for private equity investors or venture capital firms to invest in private companies.
The Takeaway
Preferred stock offers some benefits that common stock does not — such as a regular dividend schedule and the potential to increase in value without threat of volatility. Participating preferred stock offers investors even more potential benefits, including additional dividends and the opportunity to participate in liquidity events. However, participating preferred stocks are generally an option only for private equity investors or venture capitalists.
Though an investor might not have the chance to get involved with this particular investment opportunity, there are other ways to trade stocks online and invest in the market. SoFi Invest® offers both active investing and automated investing options to suit every type of investor.
Take a step toward reaching your financial goals with SoFi Invest.
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.
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.
Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside, and typically occur within a range from a couple of days to a couple of weeks. While day traders typically stay invested in a position for minutes or hours, swing traders invest for several days or weeks. Still, swing trading is a more short-term strategy than investors who buy and hold onto stock for many months or years. But it’s important to bear in mind the potential risks, costs, and tax implications of this strategy.
Generally, a swing trader uses a mix of technical and fundamental analysis tools to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds, and other market instruments that exhibit pricing volatility.
It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.
Cost and Tax Implications
A swing trading strategy is somewhere in between a day-trading strategy and trend-trading strategy. They have some methods in common but may also differ in some ways — so it’s important to know exactly which you plan to utilize, especially because these shorter-term strategies have different cost and tax factors to consider.
Frequent trades typically generate higher trading fees than buy-and-hold strategies, as well as higher taxes. Unless you qualify as a full-time trader, your short-term gains can be taxed as income, rather than the more favorable capital gains rate (which kicks in when you hold a security for at least a year).
How Swing Trading Works
Swing trading can be a fairly involved process, utilizing all sorts of analysis and tools to try and gauge where the market is heading. But for simplicity’s sake, you may want to think of it as a method to capture short-to-medium term movements on share prices.
Investors are, in effect, trying to capture the “swing” in prices up or down. It avoids some day trading risks, but allows investors to take a more active hand in the markets than a buy-and-hold strategy.
With that in mind, swing trading basically works like this: An investor buys some stock, anticipating that its price will appreciate over a three-week period. The stock’s value does go up, and after three weeks, the investor sells their shares, generating a profit.
Conversely, an investor may want to take a short position on a stock, betting that the price will fall.
Either way there are no guarantees, and swing trading can be risky if the stocks the investor holds move in the opposite direction.
Day Trading vs Swing Trading
Like day traders, swing traders are highly interested in the volatility of the market, and hope to capitalize on the movements of different securities.
Along with day traders and trend traders, swing traders are active investors who tend to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks–a process that can seem complicated, but is essentially trying to see if price charts can give clues on future direction.
The goal, then, is to identify patterns with meaning and accurately extrapolate this information for the future.
The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals — the overall health of the company behind the stock.
Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment — they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.
Pros and Cons of Swing Trading
Pros and Cons of Swing Trading
Pros
Cons
Less time intensive
Expenses & taxes
Income potential
Time
May help to avoid market dips
Efficacy
Pros of Swing Trading
To understand the benefits of swing trading, it helps to understand the benefits of long-term investing — which may actually be the more suitable strategy for some investors.
The idea behind set-it-and-forget-it, buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time, or have a positive average annual return. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.
1. Time and Effort
Further, long-term investing may require less time and effort. Dips in the market can provide the opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.
Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. Whereas day traders must keep a minute-by-minute watch on the market throughout the trading days, swing trading does not require that the investor’s eyes be glued to the screen.
Nonetheless, swing trading requires a more consistent time commitment than buy-and-hold strategies.
2. Income
Compared to long-term investing, swing trading may create more opportunity for an investor to actively generate income.
Most long-term investors intend to keep their money invested — including profits — for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income, and they tend to be more comfortable with the risks this strategy typically entails.
3. Avoidance of Dips
Finally, it may be possible for swing traders to avoid some downside. Long-term investors remain invested through all market scenarios, which includes downturns or bear markets. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips. That said, markets are highly unpredictable, so it’s also possible to get caught in a sudden downturn.
Cons of Swing Trading
Though there is certainly the potential to generate a profit via swing trading, there’s also a substantial risk of losing money — and even going into debt.
As with any investment strategy, risk and reward are intrinsically related. For as much potential as there is to earn a rate of return, there is potential to lose money.
Therefore it is smart to be completely aware of — and comfortable with the risks, no matter which investing strategy you decide to use.
1. Expenses & Taxes
A good rule of thumb: Don’t trade (or invest) money that you can’t afford to lose.
Additionally, it can be quite expensive to swing trade, as noted above. Although brokerage or stock broker commissions won’t be quite as high as they would be for day traders, they can be substantial.
Also, because the gains on swing trades are typically short-term (less than a year), swing investors have to keep an eye on their tax bill as well.
In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not, and doing so at a margin that outpaces any losses.
2. Time
Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day. What can start as a hobby can easily morph into another job, so keep the time commitment in mind.
3. Efficacy
Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.
In the short term, stock prices do not necessarily move on fundamental factors that can be researched. Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult, if not impossible, to do.
Swing Trading Example
Here’s a relatively simple example of a swing trade in action.
An investor finds a stock or other security that they think will go up in value in the coming days or weeks. Let’s say they’ve done a fair bit of analysis on the stock that’s led them to conclude that a price increase is likely.
Going Long
The investor opens up a position by purchasing 100 shares of the stock at a price of $10 per share. Obviously, the investor is assuming some risk that the price will go down, not up, and that they could lose money.
But after two weeks, the stock’s value has gone up $2, and they decide to close their position and sell the 100 shares. They’ve capitalized on the “swing” in value, and turned a $200 profit.
Of course, the trade may not pan out in the way the investor had hoped. For example:
• The stock could rise by $0.50 instead of $2, which might not offer the investor the profit she or he was looking for.
• The stock could lose value, and the investor is faced with the choice of selling at a loss or holding onto the stock to see if it regains its value (which entails more risk exposure).
Going Short
Swing traders can also take advantage of price drops and short a stock that they think is overvalued. They borrow 100 shares of stock from their brokerage and sell the shares for $10 per share for a total of $1,000 (plus any applicable brokerage fees).
If their prediction is correct, and the price falls to $9 per share, the investor can buy back 100 shares at $9 per share for $900, return the borrowed shares, and pocket the leftover $100 as profit ($1,000 – $900 = $100).
If they’re wrong, the investor misses the mark, and the price rises to $11 per share. Now the investor has to buy back 100 shares for $11 per share for a total of $1,100, for a loss of $100 ($1,000 – $1,100 = -$100).
Swing Trading Strategies
Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules.
Channel Trading
One such strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.
In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.
When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.
When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.
MACD
Another method used by swing traders is moving average convergence/divergence, or “MACD.” The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period EMA.
Traders are seeking a shift in acceleration that may indicate that it is time to make a move.
Other Strategies
This is not a complete list of the types of technical analysis that traders may integrate into their strategies.
Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock. Trading around earnings season may also present an opportunity to capitalize on a swing in value.
Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment. Traders can use multiple swing trading methods simultaneously or independently from one another.
Swing Trading vs Day Trading
Traders or investors may be weighing whether they should learn swing trading versus day trading. Although the two may have some similarities, day trading is much more fast-paced, with trades occurring within minutes or hours to take advantage of very fast movements in the market.
Swing trading, conversely, gives investors a bit more time to take everything in, think about their next moves, and make a decision. It’s a middle-ground between day trading and a longer-term investing strategy. It allows investors to get into some active investing strategies, but doesn’t require them to monitor the markets minute by minute to make sure they don’t lose money.
Swing Trading vs Long-Term Investing
Long-term investing is likely the strategy that involves the least amount of risk. Investors are basically betting that the market, over the long term, will be higher several years from now, which is typically true, barring any large-scale downturns. But it doesn’t give investors the opportunity to really trade based on market fluctuations.
Swing trading does, albeit not as much as day trading. If you want to get a taste for trading, and put some analysis tools and different strategies to work, then it may be worth it to learn swing trading.
Is Swing Trading Right for You?
Whether swing trading is a good or wise investing strategy for any individual will come down to the individual’s goals and preferences. It’s good to think about a few key things: How much you’re willing to risk by investing, how much time you have to invest, and how much risk you’re actually able to handle on a psychological or emotional level — your risk tolerance.
If your risk tolerance is relatively low, swing trading may not be right for you, and you may want to stick with a longer-term strategy. Similarly, if you don’t have much to invest, you may be better off buying and holding, effectively lowering how much you’re putting at risk.
Active Investing With SoFi
Swing traders invest for days or weeks, and then exit their positions in an effort to generate a quick profit from a security’s short-term price movements. That differentiates them from day traders or long-term investors, who may be working on different timelines to likewise reap market rewards.
Swing trading has its pros and cons, too, but can be a way for investors to try out trading strategies at a slower pace than a day trader.
There are also different methods and strategies that swing traders can use. There is no one surefire method, but it might be best to find a strategy and stick with it if they want to give swing trading an honest try. Be aware, though, that it carries some serious risks — like all stock trading.
The SoFi Invest® stock trading app offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks and ETFs. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. Please see terms and conditions here.
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
Is swing trading actually profitable?
Swing trading can be profitable, but there is no guarantee that it will be. Like day trading or any other type of investing, swing trading involves risk, though it can generate a profit for some traders.
Is swing trading good for beginners?
Many financial professionals would likely steer beginning investors to a buy-and-hold strategy, given the risks associated with swing or day trading. However, investors looking to feel out day trading may opt for swing trading first, as they’ll likely use similar tools or strategies, albeit at a slower pace.
How much do swing traders make?
It’s possible that the average swing trader doesn’t make any money at all, and instead, loses money. That said, some swing traders can make thousands of dollars. It depends on their skill level, experience, market conditions, and a bit of luck.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
Claw Promotion: 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.
Many first-time investors might wonder, “how do I buy shares of an investment?” Between opening an account, researching an investment, and placing a trade, buying those first shares can feel tricky. But with some practice, it’s possible to learn the ropes in no time.
Owning a piece of the stock market can be an exciting endeavor. After all, with the purchase of stock shares, an investor does technically become part owner of a business, which is why stocks are also referred to as equities.
How to Buy Stocks in 5 Steps
Here are step-by-step instructions for becoming an investor, including what to know about how to buy shares in a company.
Step One: Research and Think About What You Want to Buy
In the journey that is learning how to buy shares, what better place to start than with a little research? Before making any investment decisions, like opening and funding accounts, it can make sense first to sit down, pour a cup of hot coffee, and dig into the options. Mapping out a plan for what shares to buy is a great initial step.
To begin, investors may want to decide whether they’re interested in buying shares of individual stocks or shares of a fund, such as an exchange-traded fund (ETF).
Individual Stocks
A stock represents a share of ownership in a publicly traded company. Many companies offer both common and preferred stock, although most new investors are interested in common stocks. Common stock provides its shareholders with voting rights and access to dividend payments.
Stocks can provide a return on investment in two ways. The first is through price appreciation, which is the value of a stock increasing over time. The second is through dividend payments to shareholders, if applicable.
Although this is an oversimplification, the idea is that as the whole company grows, so does investors’ piece of the pie. Ideally, shareholders are able to reap the benefit of a company’s wealth building over time. However, it’s very difficult to predict which stocks will be successful (because it’s hard to predict which businesses will be profitable in the future).
It’s common for companies not to match investor expectations. Due to the unpredictability of the future, individual stock returns can be particularly volatile. But, buying individual stocks also provides a chance at higher rewards — if investors are able to pick shares that are exceptional performers. It’s why it is often said that individual stocks are “high risk, high reward.”
Funds
A fund, whether an ETF or a mutual fund, can be thought of as a bundle of investments. Often, these investments are stocks, but they could also be bonds, real estate holdings, or some combination of all. For example, it’s possible to buy a mutual fund or ETF that holds the stocks of the 500 “leading” companies in the U.S. (or even thousands of stocks across the globe).
An important thing to understand here is that investing in a fund is an investment in that fund’s underlying holdings. If a fund is invested in 500 stocks, for example, the fund is absolutely an investment in the stock market.
An investment in an ETF or mutual fund that invests in a wide range of stocks is generally considered less risky than owning an individual stock. That’s because it’s much more likely that a single company fails than the entire economy.
That said, owning an equity ETF or mutual fund is still certainly considered to be risky, as investors are still very much involved in the capricious stock market. Investors must be prepared for the occasional ride of stock market volatility, including the likelihood of ups and downs in value.
That said, broad, diversified mutual funds and ETFs can provide an easy way to gain exposure to the stock market (and other markets, as well). In investing, diversification means buying lots of different investments as protection in the event that one fails. With the purchase of just one share of some funds, it may be possible to invest across the entire U.S. or even the world in a diversified way. Depending on where investors choose to open their accounts, they may have access to ETFs or mutual funds or both.
Step Two: Determine What Type of Account to Open
One big decision is whether to open an account that is specific for retirement, or a general investing account.
Sometimes, general investing accounts are called brokerage accounts. A brokerage account is simply a place where people can buy and sell investments. But again, this term may be used as a catchall for general investment accounts. Investment and brokerage accounts can be used for any (legal) purpose, and there are no limitations for use (unlike with retirement accounts).
Retirement accounts can potentially also be opened as brokerage accounts — if opened at a brokerage bank. But, in a way, retirement accounts stand separate from regular brokerage or investment accounts. The reason for this? Retirement accounts receive special tax treatment.
This unique tax treatment is why money saved and invested for the long-term is kept separate from money that isn’t. It’s also why so many rules determined by the IRS surround the use of retirement accounts, such as contribution limits and income limits.
To keep it simple, investors may want to open a non-retirement brokerage or investment account, especially if they’re already covered by a retirement plan through work. For a retirement account, investors could open a Roth IRA, Traditional IRA, or a SEP IRA, or Solo 401(k), if they’re self-employed. If investors opt to go the retirement route, they may want to check with a certified tax professional to ensure they qualify.
Step Three: Decide Where to Open an Account
When it comes to deciding where to open an account, new investors have plenty of options.
Before diving into them all, it’s helpful to remember that minimizing fees is the name of the game. Why? When calculating potential returns on investment, account holders may want to subtract any investing-related fees from potential investment earnings. Big fees can mean that investments have to work that much harder just to break even.
Here are some options an investor might consider:
• A low-cost brokerage: One option is to open an account at a low-cost brokerage. Depending on the firm, there may be account and trading fees (although the lowest cost brokerages have largely eliminated these in order to be competitive with the new financial tech companies).
• An online trading platform: Another popular option is to use an online trading platform, such as SoFi Invest®. SoFi Invest offers investment accounts with no minimums. Investors can buy shares of stocks and ETFs right from an app. It’s also possible to buy fractional shares, which are partial shares of a stock.
• A full-service brokerage firm: The third option for buying shares is to use a full-service brokerage firm. These firms tend to offer expanded services, such as a designated advisor, broker, or wealth manager. Naturally, these services tend to come with associated costs, which means it might not be right for an investor who wants to buy just their first few shares.
Once an investor has made a decision, the share-buying process can be relatively seamless. Most accounts can be opened entirely online.
During the application process, investors will need to provide information like their Social Security number, dates of birth, and address. Additionally, it may be required for investors to answer some questions about their current financial situation.
Step Four: Fund Your Account With Cash
A good next step in buying shares is to fund the account with cash. Depending on the institution, investors may be able to set up a link with an existing checking or savings account while they fill out the account application. It can be helpful to be prepared with the account and routing number for the bank that will feed funds into the new investment account.
If the financial institution does not offer this option upfront, there’s no need to worry. Generally, an investor can simply log back into their account and look for instructions on how to fund the account. For example, there may be a section called “transfer from another account” that allows users to hook up an external bank account via an electronic link.
Setting up an electronic transfer with a current bank account will likely be the fastest way to fund the account. If an investor is unable to set up an EFT or other automatic link to their checking account, it may be possible to mail a physical check directly to the investment institution.
Another funding option is to sign up for an automated monthly transfer. In this way, money is invested regularly (without the need to remember to do so).
It may take a few days for the cash to arrive in its new location.
Step Five: Place a Trade
That time has come! It’s now time to place a trade. When first learning how to buy shares, this part may feel unfamiliar (but it will only get easier with practice.)
Before diving in, many new investors prefer to identify the ticker symbol of the shares they’d like to buy. A ticker is the shorthand symbol used to identify an investment. Tickers are a combination of letters, usually in upper case.
Assuming an investor is logged into the new account (and it’s already funded with cash), it’s possible to navigate to the area of the dashboard that says either buy, sell, or trade. Once there, the investment platform gives users a screen that allows them to place an order. Here, investors can indicate what they would like to buy and specify how many shares.
If buying a stock or an ETF, investors also need to indicate the order type. Both stocks and ETFs trade on an exchange, like the New York Stock Exchange or the NASDAQ. On these exchanges, prices fluctuate throughout the day. Mutual funds do not trade on an open exchange and their value is calculated once per day.
There are many different types of orders. During that first share purchase, new investors may want to stick to the basics: either a market order or a limit order.
• A market order focuses on speed. Said another way, the order will go through as soon as possible. The order can fill quickly, but it may not be instantaneous. Therefore, the price could change slightly from the original quote. If an investor places a market order, they may want to have a slight cash cushion to protect from any erratic changes in price. If placing a market order while the market is closed, the order is typically filled at the market’s open, at whatever the prevailing price per share is at that time.
• A limit order, however, focuses on pricing precision. With a limit order, investors name the parameters for the order. For example, an investor could say that they only want to purchase a stock if it falls below $70 per share. Therefore, the order is placed if and only if the stock falls below $70 per share. This means it’s possible a limit order won’t get filled (if it doesn’t reach the investor’s pre-selected price parameters).
A limit order may be more appealing to a trader, while a long-term investor may gravitate toward a market order. The benefit of a market order is that it allows an investor to get started right away.
Another step is to review during this process is the actual share order. Once the trade is then executed, voila — the investor now officially owns the share (or shares).
The Takeaway
Going from “how do I buy shares?” to being a bona fide investment pro takes time. There’s lots to learn along this financial journey. But, if the end goal is building up one’s wealth, then the learning curve can be well worth the mental investment. All you have to do to start is decide what you want to buy and where you want to open an account. From there, you’ll simply follow the prompts to open an account and get it funded, so you can start placing trades.
As mentioned, one option you might consider to start your stock-purchasing journey is SoFi Invest. SoFi’s Active Investing platform lets investors choose from an array of stocks, ETFs, or fractional shares.
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.
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.
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.
Claw Promotion: 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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
In a world where it can seem hard to make and stretch a dollar (hello, inflation!), isn’t it nice to know that there’s a way to earn money without any effort? That would be by collecting interest on a savings account. Your financial institution pays you for the privilege of using the cash you have on deposit, pumping up your wealth without the least bit of work on your part.
Knowing how to calculate interest helps you more effectively compare savings accounts.
While the basic concept may sound simple, understanding the different rates offered on interest-bearing accounts (typically savings accounts, though some checking accounts may earn a bit too) can get complex.
Here, you’ll learn the ins and outs of how interest works. For those trying to grow their money to achieve financial goals, it’s helpful to know how to calculate interest on a savings account. This knowledge can help you determine how much money earned in interest you can expect. It can also aid you when you are deciding which savings account best meets your needs.
Read on for insights, including:
• What is interest?
• How do interest rates work?
• How is savings interest calculated?
• What is compound vs. simple interest?
• What is an APY vs. monthly interest rate?
• What’s a good savings account interest rate?
What Is Interest?
Interest is the amount of money that a bank pays a depositor who is keeping their money with the financial institution. While that money remains accessible to the account holder, the bank uses money on deposit for other purposes, such as lending it out for a mortgage loan. One way banks can make money is via the differential between the interest they pay for money on deposit (say, 3%) and the interest they charge when someone else borrows it (say, 6% on a home loan).
Understanding Interest Rates
In comparing savings accounts at different banks (or even within the same bank), consumers may notice that interest rates can vary with the type of account. What’s more, interest rates posted by the Federal Reserve may vary considerably from the interest rates banks offer their customers.
Tasked with maintaining economic stability, the Fed uses signals such as employment data and inflation to determine its rates. During economic slowdowns, the Fed typically lowers rates to reduce the cost of borrowing and incentivize big businesses to spend more, stimulating the economy. Conversely, when the economy appears to be growing too quickly, the Fed may raise rates, increasing the cost of borrowing in order to slow spending. This has been the case in recent years, with the Fed repeatedly raising rates in an effort to bring inflation down.
How does this play into the interest rate consumers might earn on their own savings? There are a number of factors that determine the interest rate a bank posts:
• The target federal funds rate, set by the Fed, is one such cue.
• Banks, however, set their own interest rates and these may vary depending on factors such as promotions the bank may have in place to attract new customers or incentivize greater account balances, as well as how much work an account takes to administer.
This last factor is why checking accounts, which are often used for a higher volume of everyday transactions, often pay less interest than savings accounts, where customers are more likely to let their money sit and accrue.
• Interest rates also change over time, so the posted rate when an account is opened may not remain the same.
• Banks may also have tiered interest rates, where account holders earn different rates of interest depending how much they have in their account, or balance caps, in which an interest rate can only be earned up to a certain amount.
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Interest Calculation Formula
Calculating interest involves some not-too-complex math; in fact, it’s primarily multiplication you need to use. The formula looks like this:
P x R x T = simple interest
P stands for the principal, or the amount on deposit.
R stands for the interest rate, expressed as an annual rate usually, in decimal form.
T stands for time, or how long the money is held by the bank.
How to Calculate Savings Interest
Now, consider how this formula could be used to calculate the interest earned on savings you deposit at a financial institution.
If you deposited $5,000 in a bank for one year at a 3% interest rate, the simple interest after one year would be, using the PxRxT formula:
5,000 x .03 x 1 = $150
So, by calculating savings interest, you see that you’ve earned $150. To put it another way, at the end of one year, your $5,000 would have grown to $5,150.
This, of course, represents simple interest. When putting your money in the bank today, you may well earn compound interest. Read on to see how that works and grows your cash even more.
Quick Money Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.
Simple vs Compound Interest
When you earn interest on the principal amount alone, such as in the example above, it’s called “simple interest.”
But the reason savings accounts can be such an effective tool for growing money is that not only is interest earned on the amount deposited, but the interest also earns interest. This is called compounding.
Depending on the account, interest may compound daily, monthly, or quarterly. Each time this happens, the interest earned to date becomes part of the principal, and the amount of interest earned from the compounding date onwards will be based on both the principal plus the interest earned to date. You might think of it as accelerating your money’s growth as time passes.
Here’s what compound interest looks like in action, using the same $5,000 initial deposit, but that 3% interest compounds on a monthly basis.
• After one month, the account would have $5,000 plus interest totalling one-twelfth of the 3% annual interest, $12.50.
• The next month, the interest would be calculated on $5,012.50, adding $12.53 to the principal for a new total of bringing the new principal to about $5,025.03, and so on.
• At the end of the year, the account would have $5,152.08.
• After 10 years, monthly compounding will grow that initial $5,000 to $6,746.77, without adding a single penny more to the account.
Compounding means you earn interest on the interest you’ve already earned.
Here’s a chart showing the difference simple vs. compound interest can make at a rate of 3% on $5,000 deposit:
Time
Simple Interest
Interest Compounded Daily
Account opened
$5,000
$5,000
1 year
$5,150
$5,152.27
5 years
$5,796.37
$5,809.14
10 years
$6,719.58
$6,749.21
20 years
$9,030.56
$9,110.37
It may not seem like a huge difference, but adding to the principal regularly can grow your money faster. In addition, seeking out a higher interest rate can of course boost your cash faster as well.
APY vs Monthly Interest Rate
Calculating compound interest can get complicated; the equation involves more complicated math. But some banks simplify an account holder’s potential earnings into a single rate called the annual percentage yield, or APY. The APY factors in both the interest rate and the effect of compounding into an actual rate of return over the course of one year. To calculate how much interest will be earned on a savings account using the APY, simply multiply the principal by the APY.
This simplicity makes APY a more helpful rate to use when comparing interest rates for different accounts or banks, because it includes the effect of compounding, regardless of how frequent. Banks will usually post this information because the APY is higher than the stated interest rate. A savings account interest calculator can be helpful when calculating interest on savings accounts and to see how different rates of compounding will affect earnings.
What Is a Good Savings Account Interest Rate?
What is a good savings account interest rate will vary with the times. During the 1980s, the interest rates on savings accounts were around 8%, while from 2018 to 2021, the average was barely one-tenth of one percent, which could hardly keep pace with inflation.
As you shop around for the right account at the right rate, you may find that online banks offer among the higher rates. Since they don’t have bricks-and-mortar locations, they can pass their savings on to their clients. As of March 2023, online banks were offering in the 3% to 4% range, while some of the big traditional banks were still offering just a fraction of a percentage point.
Questions to Ask When Considering a Savings Account
It’s hard to dispute the appeal of earning money on savings. But in addition to knowing how to calculate interest on a savings account, there are other considerations that could affect the flexibility and ease with which that account will help a person achieve their goals. Some account holders may find they need multiple bank accounts to meet both their everyday and long-term financial needs and goals.
Here are some things to consider.
Will You Be Penalized for Everyday Transactions?
Savings accounts typically provide higher interest rates than checking accounts because they require less work for the bank to administer since they’re not meant to be used for everyday transactions.
But savings accounts may limit the number of transactions or transfers account holders can make in a month, or charge a fee for such actions. The Federal Reserve’s Regulation D, which imposed a six-transaction-per-month limit, was loosened during the COVID-19 pandemic. Some banks now follow the new rule; others don’t. Inquire at a potential new home for your funds before opening a savings account.
Is There a Minimum Balance?
Some banks incentivize or penalize customers to encourage them to keep more money in their accounts. For example, an account may be subject to fees unless the balance is maintained above a certain amount. Tiered savings accounts provide a higher rate of interest on bank balances above certain levels.
Can the Money Be Accessed Easily?
Some types of savings accounts provide higher interest rates but limit access to the money for a predetermined earnings period. For example, a certificate of deposit (CD) is a savings vehicle that holds an investor’s money for a certain period of time. At the end of that term, the account holder is paid the original principal plus the interest earned. There may be penalties imposed on early withdrawals from a CD.
Can the Account Help Achieve Money Goals?
Earning interest is a key way a savings account can help savers achieve their financial goals. But they might have multiple reasons for saving, from being able to afford a vacation or other luxuries to ensuring they have enough money in an emergency fund for unforeseen circumstances. If that’s the case, it’s helpful to be able to know at a glance what is saved towards each need. At some banks, separate accounts might need to be opened for each purpose, while others may provide tools to organize your savings within a single account.
How to Streamline Your Savings
High interest rates can indeed be a compelling motivator for opening a savings account. And knowing how to calculate interest on an account is a helpful tool for finding the right financial product. But incurring fees to make necessary transactions or losing flexibility in other ways may negate the benefits of earning interest.
With a SoFi Checking and Savings online banking account, members can earn a competitive APY and not pay any account fees. Plus, SoFi members can access the Allpoint network of more than 55,000+ fee-free ATMs as well as use Vaults and Roundups to help grow their wealth. Plus, whether online or using the SoFi app, members can spend, save, and earn all in one convenient place.
SoFi Checking and Savings: The smart, simple way to bank.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
A debit combines some of the features of an ATM card and a credit card to give you an easy way to access cash and pay for purchases. For many people, tapping, swiping, or entering their digits online has become a favorite way to conduct everyday financial transactions.
Debit cards resemble credit cards, but they don’t involve a line of credit or accruing interest charges; the money spent is deducted directly from your checking account. This (and other features) can be a benefit or a downside, depending on your particular situation.
Here, learn more about the ins and outs of debit cards and how to use them most efficiently, including:
• What is a debit card?
• How do debit cards work?
• Where can you use a debit card?
• What are the differences between a debit card vs. an ATM card?
• What are the differences between a debit card vs. a credit card?
Debit Cards Defined
A debit card is a payment card that allows you to spend money without carrying cash.
When you use a debit card, the funds are your own, so there’s nothing to pay back later.
Most debit cards look just like credit cards. They typically feature an account number on the front, along with the cardholder’s name and the expiration date.
There will likely also be a smart chip on the front, along with a logo in the lower right-hand corner that tells you which payment network the card is connected to (such as Visa, Mastercard, or Discover). On the back you’ll likely see a place to sign, as well as a three-digit security code (CCV).
But there are some major differences between debit cards and credit cards.
When someone uses a credit card the money is borrowed. Credit card holders receive a bill every month for what they owe, and the balance must be paid in full or they can be charged interest.
When you use a debit card to get cash or make a purchase, the money comes directly from an account you have with a bank or some other type of financial institution. The funds are your own, so there’s nothing to pay back later.
How a Debit Card Works
Now that you know what a debit card is, here’s how a debit card typically works:
• You tap, swipe, or insert the card at a terminal and enter your PIN (personal identification number) in many cases. The PIN adds a level of security to the transaction.
• The information is communication (the amount of your purchase) and your bank verifies that the funds are available in your checking account. The transaction is approved in that case, or it will be denied if you don’t have enough funds available.
• In a similar way, a debit card can allow you to deduct funds from an ATM.
Worth noting: Debit cards may have spending limits capping the amount you can use in a single day, even if you have more than that amount on deposit. Check with your financial institution to learn what may apply.
Features of a Debit Card
Debit cards have many features that make them an asset to managing your financial life:
• Safer than carrying cash
• More convenient that using checks, plus no fee for ordering checks
• Quick and easy way to make purchases or access cash
• Accepted for purchases by many vendors
• Does not charge interest since it draws directly from your checking account
• Typically don’t charge fees
• May offer cash back rewards
• May have daily spending limits
How Do You Get a Debit Card?
If you don’t already have one, you may wonder how people get debit cards. These are the steps to getting a debit card:
1. Open a checking account: Checking accounts (whether at a bank, credit union, or online financial institution) typically come with a debit card that can be used to get cash at ATMs or to make purchases.
A brick and mortar bank may be able to issue customers a new debit card right away. With an online institution, it might take a few days for the card to come by mail. Card holders also receive a personal identification number (PIN), which is a security code they’ll use with their account.
2. Activate the card: Typically, you can activate a new debit card at the financial institution’s website, at one of its ATMs, or by calling a designated phone number and answering or keying in some basic identifying information.
3. Start using your card. You should be ready to start tapping, swiping and entering your card’s digits online to make purchases.
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Where Can You Use a Debit Card?
A debit card can be used to make withdrawals at an ATM, to make in-person or online purchases, and to make automatic payments for recurring bills.
Each type of transaction works a bit differently. Here are tips for using your debit card.
At the ATM
One of the great conveniences a debit card has to offer is that it can be used to get cash (or make a deposit, transfer funds, or just view your account balance) just about anywhere there’s an ATM.
You just push your debit card into the slot, and enter your PIN to get access to your account. Once you finish and retrieve your receipt and debit card, it’s a good idea to double check that the machine has returned to its welcome screen before turning it over to the next user.
If you use an ATM that’s not in your bank’s network, you could end up paying a non-network fee to your bank and an ATM surcharge to the ATM’s owner. If you’re overseas, you might also be charged a foreign transaction fee.
If you’re a big-time ATM user, you might be able to avoid those fees by scouting out in-network ATM locations in your area or where you are going to be traveling ahead of time. Or you might open an account at a financial institution that doesn’t charge fees and/or reimburses certain fees.
Quick Money Tip: Fees can be a real drag when you’re trying to save money. SoFi’s high-yield checking account has no account fees, including overdraft coverage up to $50.
In-Person Purchases
The process for using a debit card to purchase goods or services can be a little different from one merchant to the next.
Typically a customer will be asked to swipe, insert, or tap their debit card themselves at a card reader on the counter, then may be prompted to authorize the purchase, either by entering their PIN or by signing as they would with a credit card.
Either way, the money to pay for the purchase comes out of the card holder’s account, though the transactions are processed somewhat differently.
The transaction method also may affect any points or other rewards a card holder is hoping to earn on a purchase. Some programs reward PIN purchases only, some reward signature purchases only, and some reward both.
A retailer also may allow customers making a PIN transaction to ask for cash back on top of the total amount of their purchase, so they don’t have to make a separate trip to an ATM. However, you may be charged a small fee for this convenience.
Online Purchases
Can you use a debit card online? Usually, yes, even if you do not see “debit card” listed as a payment method when you want to buy something online. But if there’s a credit network logo on the front of your debit card, you should be able to use your card for the transaction.
When a merchant’s website asks for a payment method, debit card users can choose “credit card,” then enter their debit card account number, expiration date, and three-digit security code (CCV) to have the purchase processed as a signature transaction. (A PIN transaction won’t be a payment option online.)
Automatic Payments
A debit card also can be used to make automatic payments on monthly bills, such as student loans, car loans, subscriptions and memberships, and utility bills.
To set up automatic debit payments, the card holder provides the company with a debit card account number, expiration date, and CCV, and authorizes future electronic withdrawals. The payment can be the same amount every month, or, if the amount is likely to vary a bit from month to month (as utility bills generally do), the card holder can specify a range.
With automatic debit payments, card holders give businesses permission to take payments from their account, which is different from arranging with the bank to make authorized recurring payments. In both cases, however, it can be important to track those payments and be sure the transactions are accurate.
Is There a Difference Between a Debit Card and an ATM Card?
There are differences between a debit card and an ATM card to note:
• A debit card can be used to make withdrawals at an ATM, but it also can be used to make purchases and to pay bills.
• An ATM card can be used only to get funds from a checking or savings account at an ATM machine.
Is it Better to Use a Credit Card or Debit Card?
As with most financial tools, it’s up to each individual to decide what works best for them. Here are some ways to evaluate the pros and cons of using a debit card vs. a credit card.
Budgeting
Using a debit card for a majority of transactions may make it easier to stick to your budget, because you can spend only what you have in your account. You aren’t borrowing money as you would with a credit card, so you may find yourself paying more attention to every purchase and whether you can really afford it.
With a credit card, it can be tempting to pay now and worry about the bill later. If you’re super disciplined about paying off your entire credit card balance every month, that might work for you.
But if, like many Americans, you’re likely to carry forward a balance on your credit card (or cards) every month, the debt could eventually grow out of control with interest.
Convenience
Both debit and credit cards are easy to use, but there are a few ways in which debit cards may have an edge when it comes to convenience.
• It’s easier and cheaper to get quick cash with a debit card. You can get a cash advance with a credit card, but you may have to pay a hefty fee and a higher interest rate on the advance. And with a cash advance you could be charged interest starting on the day you receive the money — there’s no grace period as there is when you make a purchase with a credit card.
• You may be able to get a physical cash advance when making a purchase. That benefit usually isn’t available with a credit card.
• It’s generally easier to get a debit card than a credit card. Most financial institutions will automatically give customers a debit card when they open an account. Getting a credit card can be harder, especially if you’re under 18, don’t have any verifiable income, have a poor (or no) history with credit, or lack the typically required identification documents. The requirements are tougher for credit cards because lenders want to be sure their borrowers are capable of repaying their debts.
Penalty Fees
No matter what kind of card you use — debit or credit — you could face a penalty fee if you spend more money than you currently have available.
With a debit card, you may incur an overdraft fee if you spend more than you have in your account (when making a signature purchase, for example, or when using autopay).
With a credit card, you could face an over-limit fee (if you push your balance over your credit limit), a late-payment fee if you fail to make your minimum monthly payment, or a returned payment fee if for some reason your payment isn’t accepted.)
Rewards
Credit cards can be more likely to offer extra perks than debit cards, such as cash-back rewards or points that can be used for travel, though some debits do offer points and rewards.
Spending Limits
One of the things that can make a debit card really useful is that it’s difficult to spend more than you have. But that also can be a drawback if you need to make an expensive purchase. Even if you have a hefty amount of money in your account, you may encounter a daily spending limit when using a debit card.
Those daily limits are meant to protect account holders by limiting the amount fraudsters could spend with a stolen debit card. But if you aren’t aware you have a limit or don’t know what the limit is, you could get an unpleasant surprise when making a major purchase. Don’t know what a debit card’s limit is? Ask your bank.
If you find out you have a debit limit and feel it’s too low, you may be able to request an increase.
Of course, credit cards have spending limits, too, in the form of available credit. Those who go over their credit limit could have their card declined or they might have to pay a fee. Credit card users can check their monthly statement online or in person, or call customer service to see where they stand.
Building Credit
This may seem like a bit of irony, but even though consumers may be trying to be financially responsible by using a debit card whenever they can, they won’t be directly helping their credit score.
Lenders often use credit scores to determine if a person qualifies for a loan or credit card, or a better interest rate when borrowing money. It reflects an individual’s past credit history and shows how well they’ve handled credit in the past.
When someone uses a debit card to pay for goods and services, the money is coming from their own account, so it doesn’t impact their borrowing record. If you use a debit card to stay out of debt and to make car or student loan payments on time, though, it might indirectly help your credit standing.
Safety
A debit card is linked to your bank account, so if a thief gets hold of your physical card or just your card number, any money they take is yours — not the bank’s, as would be the case with a stolen credit card.
And that could cause a lot of problems if you don’t notice and report the problem swiftly, according to the Federal Trade Commission (FTC) .
Debit card use is protected by the Electronic Fund Transfer Act (EFTA), which gives consumers the right to challenge fraudulent charges. But card holders have to act with some speed to get full federal protection.
And those protections aren’t quite as substantial as the federal law that covers credit card theft, the Fair Credit Billing Act (FCBA).
If your debit card is lost or stolen, you could have zero liability if you report it before any unauthorized charges occurred. If you report a lost or stolen card within two business days, your loss may be limited to $50. But if you wait more than 60 calendar days after you receive your statement to make a report, you could lose all the money a thief drains from any account linked to your debit card.
That may sound scary, but if your debit card is backed by a credit card network (like Visa or Mastercard), you likely have the same “zero liability” protections credit card users have.
Debit Card Alternatives
If you don’t have a debit card or prefer not a use one, here are some options:
• Cash. It’s still a form of payment that’s accepted at many retail locations.
• A check. For paying bills or making purchases (typically from smaller vendors), you may be able to write a check.
• Prepaid cards (also called prepaid debit cards in some cases). Available at various retail stores, these cards hold the amount of cash you put on them. Some are meant for one-time use; others can be reloaded with additional funds through an app, direct deposit, money transfer, or with cash at a store that offers this service.
Prepaid cards usually work at any ATM or retail location that accepts the card’s payment network. However, there are pros and cons of prepaid debit cards. They tend to come with more fees and fewer protections than traditional debit cards.
Banking With SoFi
Debit cards are typically offered along with a checking account. You can use a debit card to quickly get cash, either from an ATM or by using the cash back function offered by many merchants. You can also use your debit card to purchase goods and services, and even use it for autopay. Because you are using the cash you have on deposit, you don’t accrue any interest fees, but you are likely not establishing your credit either. These cards can be a convenient aspect of your daily financial life.
Looking for a debit card that provides perks and protections but frowns on account fees? SoFi Checking and Savings may be the right choice for you. Open an account and receive a World Debit Mastercard®, which offers contactless payment, purchase protection, and a cash back rewards program. And, withdrawing cash is fee-free at 55,000+ Allpoint Network ATMs worldwide.
SoFi: Helping you spend smarter.
FAQ
Are there debit card fees?
Typically, debit card use does not incur fees. However, if you use it at a non-network ATM to withdraw cash, you could be hit with a fee. Also, if you overdraft your account when swiping, that could incur charges. Lastly, the checking account that it’s connected to may or may not be fee-free.
What do the numbers on a debit card mean?
The numbers on a debit card are similar to the numbers on a credit card: They identify the industry issuers involved and uniquely capture your account number.
Are debit cards safe?
Debit cards are typically safe, but they can be stolen or lost, which could allow someone to make unauthorized transactions. Plus, the hackers of the world are usually at work, trying to steal people’s information. That said, using a PIN helps protect transactions, and if you report the loss or theft of your debit card within two business days, your liability should be capped at $50. Some cards offer zero-liability protection.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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