What Does Buying the Dip Mean?

What Does Buying the Dip Mean?

A down stock market could create an opportunity for investors to buy the dip. In simple terms, this strategy involves making an investment when stock prices are low.

This is a way to capitalize on bargain pricing and potentially benefit from price increases down the line. But like any other investing strategy, buying the dip involves some risk—as it’s often a matter of market timing.

Knowing when to buy the dip (or when not to) matters for building a solid portfolio while managing risk.

What Does It Mean to Buy the Dip?

To buy the dip is to invest when the stock market is down with the potential to go back up. A dip occurs when stock prices drop below where they’ve normally been trading, but there’s an indication that they’ll begin to rise again at some point. This second part is crucial; if there’s no expectation that the stock’s price will bounce back down the line then there’s little incentive to buy in.

Why Do Stock Dips Happen?

Stock market dips can happen for various reasons, including a macroeconomic downturn, unexpected geopolitical events, or general stock market volatility that causes stock prices to tumble temporarily on a broad scale.

For example, in early 2022, the stock market fell from all-time highs due to several developments, like high inflation, tighter monetary policy, and the economic fallout from the Russian invasion of Ukraine. The S&P 500 Index fell nearly 20% from early Jan. 2022 through May 19, 2022, flirting with bear market territory.

Stock pricing dips can also be connected directly to a particular company rather than overall market trends. If a company announces a merger or posts a quarterly earnings report that falls below expectations, those could trigger a short-term drop in its share price.

What’s the Benefit of Buying the Dip?

If you’re wondering, “why buy the dip?” or “should I buy the dip?” it helps to understand the upsides of this strategy.

Buying the dip is a way to cash in on the “buy low, sell high” mantra that’s so often repeated in investment circles. When you buy into a stock below its normal price, there is a potential – but not a guarantee – to reap significant profits by selling it later if prices rebound.

Example of Buying the Dip

One recent example of a dip and rebound would be the lows the market experienced in the spring of 2020 connected to economic fears surrounding the coronavirus pandemic. The S&P 500 Index declined about 34% in a little over a month, from Feb. 19, 2020, to Mar. 23, 2020. The index then experienced a gradual rise, recouping its losses by Aug. 2020 and increasing 114% through Jan. 2022 from the Mar. 2020 low. If an investor bought at the lower end of the stock market crash, they would have seen substantial gains in the subsequent rally.

On an individual stock level, say you’ve been tracking a stock that’s been trading at $50 a share. Then the company’s CEO abruptly announces they’re resigning—which sends the stock price tumbling to $30 per share as overall investor confidence wavers. So you decide to buy 100 shares at the $30 price.

Six months later, a new CEO has been installed who’s managed to slash costs while boosting profits. Now that same stock is trading at $70 per share. Because you bought the dip when prices were low, you now stand to pick up a profit of $40 per share if you sell. The potential to earn big gains is what makes buying the dip a popular investment strategy for some people.

Risks of Buying the Dip

For any investor, it’s important to understand what kind of risk you’re taking when buying the dip. Timing the market is something even the most advanced investors may struggle with—as it’s impossible to perfectly predict which way stocks will move on any given day. Understanding technical indicators and what they can tell you about the market may help, but it isn’t foolproof.

For these reasons, knowing when to buy the dip is an inexact science. If you buy into a stock low and then are able to sell it high later, then your play has paid off. On the other hand, you could lose money if you mistime the dip or you mistake a stock that’s in freefall for one that’s experiencing a dip.

In the former scenario, it’s possible that a stock’s price could drop even further before it starts to rebound. If you buy in before the dip hits bottom, that can shrink the amount of profits you’re able to realize when you sell.

In the latter case, you may think a stock has the potential to recover but be disappointed when it doesn’t. You’ve purchased the stock at a bargain but the profit you’re able to walk away with, if anything, may be much smaller than you anticipated.

How to Manage Risk When Buying the Dip

For investors who are interested in buying the dip, there are a few things to keep in mind that may help with managing risk.

Understand Market Volatility

First, it’s important to understand how market volatility may impact some sectors or industries over others.

For example, take consumer staples versus consumer discretionary. Staples represent the things most people spend money on to maintain a basic standard of living, like food or personal hygiene products. Consumer discretionary refers to the “wants” people spend money on, like furniture or electronics.

Recommended: How to Handle Stock Market Volatility

In the midst of a recession, people spend more on staples than discretionary expenses—so consumer staples stocks tend to fare better. But that may create a buying opportunity for discretionary stocks if they’ve taken a hit. That’s because as a recession begins to give way to a new cycle of economic growth, those stocks may start to pick back up again.

Consider the Reason for the Dip

Next, consider the reasons behind a dip and a company’s fundamentals. If you’ve got your eye on a particular stock and you notice the price is beginning to slide, ask yourself why that may be happening. When it’s specific to the company, rather than something general happening across the market, it’s important to analyze the stock and try to understand the underlying reasons for the dip—as well as how likely the stock’s price is to make a comeback later.

Buy the Dip vs Dollar-Cost Averaging

Buying the dip is more of a hands-on trading strategy, since it requires an investor to actively monitor the markets and read stock charts to evaluate when to buy the dip or when to sell. If an investor prefers to take a more passive approach or has a lower tolerance for risk, they might consider dollar-cost averaging instead.

Dollar-cost averaging is generally an investing rule worth keeping in mind. With dollar-cost averaging, an individual continues making new investments on a regular basis, regardless of what’s happening with stock prices. The idea here is that by investing consistently over time, one can generate returns in a way that smooths out the ups and downs of the market.

Example of Dollar-Cost Averaging

For example, you might invest $200 every month into an index mutual fund that tracks the performance of the S&P 500. As time goes by and the S&P experiences good years and bad years, you keep investing that same $200 a month into the fund.

Recommended: What to Know About Dollar Cost Averaging

You’ll buy shares during the dips and during the high points as well but you don’t have to actively track what’s happening with stock prices. This may be a preferable strategy if you lean toward a buy and hold investing approach versus active trading or you’re a beginner learning the basics.

The Takeaway

Knowing when to buy the dip can be tricky – timing the market usually is – but there are times when it may pay off for some. If investors maintain an eye on stock market and economic trends, it may help in determining when to buy the dip and how likely a stock or the market will rebound. However, it’s still important to consider the downside risks of timing the market and buying the dip.

If you’re ready to start investing and take advantage of buying the dip, the SoFi app can help. With SoFi Invest®, you can trade stocks and exchange-traded (ETFs) with as little as $5.

Find out how to get started with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN21121

Read more
woman on laptop with notebook

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

Keep reading to understand how to calculate dividend yield, and how to use it as a metric in your investment choices.

How to Calculate Dividend Yield

What is dividend yield, exactly, and how does it differ from dividends?

•   Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

•   Dividend yield refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

What Is the Dividend Yield Formula?

Now to answer the question: How to calculate dividend yield? The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price.

Annual dividend / stock price = Dividend yield (%)

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

Dividend Yield: Pros and Cons

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

•   From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

•   For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

•   Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

   Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

•   A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

•   Investors need to look beyond yield to the type of dividend they might get. And investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

Pros and Cons of Dividend Yield

Pros

Cons

Can help with company valuation. Dividend yield can indicate a more established, but slower-growing company.
May indicate how much income investors can expect. Higher yield may mask deeper problems.
Yield doesn’t tell investors the type of dividend (ordinary vs. qualified), which can impact taxes.

Start investing in dividend
paying stocks and ETFs with SoFi.


The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount.

A company that pays a $1 per share dividend, has a dividend rate of $4 per year. If the share price is $100/share, the dividend yield is 4% ($4 / $100 = 0.04).

The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments. Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

If you’re ready to invest in dividend-paying stocks, consider opening an Active Invest account with SoFi Invest. You can trade stocks, exchange-traded funds (ETFs), IPO shares, and crypto, — right from your phone or laptop, using SoFi’s secure online platform. SoFi doesn’t charge management fees, and SoFi members have access to complimentary financial advice from professionals. Get started today!

Find out how SoFi Invest can help further your financial goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

SOIN0221054

Read more
What 'Do Not Convert to ACH' Means on a Check

What ‘Do Not Convert to ACH’ Means on a Check

Checks seem a pretty mundane bit of banking, but if you’ve ever received one that says, “Do not convert to ACH” on it, you may wonder what’s going on. Is the check valid? Is it some kind of scam?

Let us help you out. Here, we’ll take a closer look at this situation and what to do with that check. We’ll consider:

•   What ACH, check conversion, and check conversion by ACH mean

•   What it means when a check says “Do not convert to ACH”

•   What happens when you cash a check that has those five little words on it

Now, it’s time to dive in.

ACH System 101

ACH stands for Automated Clearing House, which is an electronic system that transfers funds throughout the United States. This network allows individuals and businesses to move money from one financial institution to another. ACH transfers fuel so many of the transactions that make our financial world go around. Every time you set up automatic bill pay or receive your paycheck by direct deposit or write an eCheck, that’s ACH at work. Apps such as PayPal and Venmo also use the ACH network to send and receive money.

All money that flows through the ACH network is transferred electronically and uses bank-level encryption. In other words, transfers are safe and secure. They protect sensitive information such as your bank account number and a financial institution’s name from thieves.

How Does ACH Work?

ACH transfers are initiated by either making a withdrawal or deposit into an account. You can send money to another account on a one-time basis — such as through an ACH debit to a utilities company or transferring money to a friend for your share of a restaurant meal — or opt into recurring payments. For example, some companies allow you to make automatic payments, such as for subscription services. In either case, you give permission for the receiver to initiate a withdrawal from your account.

Now, let’s consider the flipside: You could receive money; that is, get an ACH credit. This happens when people receive a direct deposit of their paycheck or Social Security.

Once you or someone else initiates a transfer, the request will be processed first by your financial institution. You’re probably curious about how long an ACH transfer takes. Once the ACH transfer request is received, the financial institution will complete the request no later than the next business day. You may be able to expedite the request, as well as schedule a transfer for a future date.

Typically, ACH transfers are faster than other types of transactions, though a potential downside is that it’s only available for transfers within the U.S. (That’s one of the distinctions between an ACH vs. wire transfer, incidentally; the latter has global reach.)

What Is Check Conversion?

Check conversion refers to the process of transforming a check payment into an electronic payment. This usually happens at one of these three points:

•   Point of Purchase (POP), meaning when a purchase is made, say, at a store

•   Accounts Receivable Conversion (ARC), when a business receives a check by mail and then processes it electronically

•   Back Office Conversion (BOC), or when a check is processed electronically after acceptance at, say, the office of a retail location

What Does Conversion to ACH Mean?

Now that you know the different junctures at which conversion may be started, let’s get down to the nitty gritty of just what the “conversion to ACH” process means. Simply put, it describes the fact that a paper check will be converted to a payment that’s processed through the ACH network. In other words, even though a paper check was written and used as payment, it will become an electronic ACH transfer.

Recommended: How to Cash a Check with No Fees

Why Might a Check Be Converted to ACH?

The main reason why a check may be converted is to save time and money when processing payments. Plus, converting a check payment to ACH could be more efficient, as it can help financial institutions detect potential fraud earlier, make fewer mistakes, and even result in fewer returned payments. The service of ACH transfers is typically free to consumers.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1.25% APY on your cash!


Can a Check Be Converted to ACH?

While some may think that checks and ACH are separate entities, in truth, a check can be converted to ACH in many cases. (Unless, that is, the check itself says “do not convert to ACH.”) When converted, processing typically moves swiftly and securely; there’s no check to get lost or be forged, for instance.

Here’s how the conversion usually happens: When the check gets deposited in a checking account, the payment details are captured from the check. Then, the check itself will be stored securely by the financial institution — unless you have the physical check and are making a mobile deposit. If the check is converted in person, then the original check will be voided and given back to the payer.

If the check was converted for ACH, it will typically appear on a bank statement as a direct payment (or withdrawal) in the same section as ATM withdrawals or other forms of electronic payments. It could also appear as a check payment — some banks include a scanned image of the check or include the payment details.

Recommended: How Much are the Average ATM Fees?

What Does It Mean When a Check Says ‘Do Not Convert to ACH’?

When a check says “do not convert to ACH,” it means that the payer does not want to make a payment electronically. Instead, the payment needs to be processed manually from one financial institution to another through the check collection system.

More specifically, it means the financial institution will contact the other financial institution to request the funds, which is then delivered through a local clearinghouse exchange or other form organization like the Federal Reserve Bank.

What Is the Benefit to the Drawee if a Check Says ‘Do Not Convert to ACH’?

Checks that say “Do not convert to ACH” may sometimes be printed when a payer is issuing multiple checks; for example, if a class action suit is being paid out. In this case, perhaps the check issuer does not want the much faster electronic processing of their checks. Perhaps it suits them to have a slower payment process.

What Is the Difference Between ACH and a Check?

The difference between ACH and check payments is the network in which they’re processed. ACH payments are processed electronically through the ACH network, whereas non-converted paper checks are processed through a manual process. In many cases, ACH transfers are processed faster than paper checks, though most checks can be processed within one business day, though you may have to wait for it to clear.

The Takeaway

When it comes to getting paid, the ability to convert a check to or use the ACH network is most likely the most efficient way. That’s because this electronic payment system allows financial institutions to process transactions more quickly and securely compared to paper checks.

Unfortunately, there’s not much you can do if the check you receive says “Do not convert to ACH,” however rare they may be. It’s unlikely that you will receive one in today’s world, but if you do, deposit it and allow the extra time required for it to transform into available cash.

Most of us love the conveniences of banking today, and if you want to make a good thing even better, why not bank with SoFi? Sign up for a new bank account with direct deposit, and you’ll be able to access your paycheck up to two days early. Other benefits: a super-competitive 1.25% APY and no account fees at all. That means you keep more of your money, and it grows faster!

Bank smarter with Sofi.

FAQ

Can an ACH payment be declined?

Yes, an ACH payment may be declined or rejected for a few reasons, the most common one being that the payer doesn’t have enough funds in their account for the transfer. Other reasons include the account was closed by the time the transfer took place, the funds have been frozen, or the payer has stopped the payment request.

What does “ineligible for conversion” mean on a check?

If a check says “ineligible for conversion,” it means the check can’t be converted to an ACH payment. This may be due to the paper the check was printed on. The payee needs to either cash or deposit the actual check at a local branch.

Why would a bank reject a check?

There are several reasons a bank would reject a check, including:

•   You don’t have an account at the bank where you want to cash the check

•   You don’t have proper identification to show to the bank

•   The amount may be too large for the financial institution to process

•   The check is void (for example, the check is old and the payment is no longer valid)

•   The signature on the check doesn’t match what the bank has on file


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® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Photo credit: iStock/fizkes
SOBK0322025

Read more
Differences Between a Deposit and Withdrawal

Differences Between a Deposit and Withdrawal

If you’re wondering what is the difference between a deposit and a withdrawal, the truth is that they are exact opposites: A deposit is money put into a bank account for safekeeping until you need it. A withdrawal is money that’s taken out of your account. At the most basic level, one of these transactions is about getting money and the other is all about paying, or spending.

But that’s not the full story about deposits vs. withdrawals. You have many choices when it comes to getting money into your account and taking it out. Read on for more about how deposits and withdrawals work, their similarities, and their differences. Once you know the different ways that funds can flow through your accounts, you’ll be that much savvier a financial customer.

What Is a Deposit?

A deposit, from the ancient Latin word deponere, means to “place in the hands of another.” In terms of banking, a deposit means you put your money in the hands of a brick-and-mortar or online bank to safely hold it for you. Deposits add to your funds, which helps your bank accounts pay your bills or stash your cash until you are ready to spend it. This influx of money can happen in a few different ways, which we’ll review in a moment.

How a Deposit Works

A deposit involves adding cash or check(s) to your bank account. You can do this in person at a bricks-and-mortar branch of your bank, at ATMs in your bank’s network or, for checks, by using a bank’s mobile app.

You can also receive a deposit by electronic transfer from one bank account to another account (whether yours or someone else’s). For example, if you are paid by direct deposit, that moves money from your employer directly into your account. Or perhaps you receive a government benefit this way. In addition, you might receive funds via a P2P service, like PayPal or Venmo, and could then move the money into your checking or savings account.

Worth noting: Both bricks-and-mortar and online banks offer many different kinds of deposit accounts. You could consider a high-interest checking or savings account at a traditional or online bank, or, if you don’t need to access the money every day, you may want to look into a money market account or a certificate of deposit (CD).

Whether you are a college student with birthday gift money you want to save or a parent raising a growing family, you can find a place to safely put your money and track it until you need it.

Types of Deposits

There are many ways to put money into your bank account today. A generation or two ago, only cash or a check could do the trick, but now you have many options to top up the funds in your bank. To be specific, here are the ways to make a deposit and give your bank account an infusion of cash:

•   Cash deposit at one of your bank’s ATMs or branches

•   Check deposit at one of your bank’s ATMs or branches

•   Check deposit electronically via your bank’s mobile phone app

•   Payroll direct deposit

•   Electronic funds transfer from a linked savings or checking account or via mobile payment services such as PayPal, Venmo, Cash App, or Zelle

What Is a Withdrawal?

Now, let’s take a look at the other vital aspect of banking: withdrawing, or taking money out of your account. You can do that several ways, including using your debit card at an ATM, requesting the money in person from a bank teller, writing a check, scheduling an electronic bill payment, having the money transferred via a payment app, and wiring the money to someone.

As you may know, some of these methods of withdrawing funds can involve fees. If you use an out-of-network ATM, for instance, you can get hit with a charge. Some companies add a surcharge if you sign up for the convenience of electronic payments vs. writing a and mailing a check.

How a Withdrawal Works

The difference between a withdrawal and deposit is that withdrawals draw, or take, money out of your bank account. You might withdraw cash from your bank account to put in your niece’s Bat Mitzvah card, write a check (or authorize an electronic payment) to pay the electricity bill, or use a P2P service to pay a friend back.

Any funds removed count as a withdrawal. Depending on your bank’s checking account terms, you may have limited or unlimited withdrawals. Often, there are savings account withdrawal limits. In the past, the number was typically six per month, though these restrictions have largely been eased in recent years.

Types of Withdrawals

Let’s take a closer look at how to withdraw or debit funds from your bank account. Know these ways to get money out when you need it.

•   Cash withdrawal at ATM with a bank or prepaid debit card (though there will likely be ATM limits to the amount you may withdraw)

•   Cash withdrawal in person at one of your bank’s branches

•   Checks written from your account

•   Cardless withdrawals of cash using phone app at ATMs in your bank network

•   Bank-issued cashier’s check in person or online

•   Cashing a certificate of deposit (CD) at bank (if this is done before the maturity date, you may owe an early withdrawal fee)

•   Funds transfer from brokerage account

•   Electronic funds transfer from a linked savings or checking account or via mobile payment P2P services such as PayPal, Venmo, Cash App, or Zelle

•   Electronic bill pay (recurring or not)

Similarities and Differences Between Deposits and Withdrawals

Deposits and withdrawals are two of the most common banking terms. Here are the differences and similarities you should know. It comes down to deposit (plus) vs. withdraw (minus). Check this chart for more details.

Differences

Deposits

Withdrawals

Adds to bank account balance
Immediately reflected in bank account balance
Transaction can only be done at in-network ATMS
Cashier’s checks can be managed at your bank branch

How Deposits and Withdrawals Are Similar

Here’s what these two kinds of banking transactions have in common.

•   Both can be done in person at ATM or branch in your bank’s network (except for check withdrawals, which can only be completed in person or online).

•   Both can involve electronic funds transfer from a linked bricks-and-mortar, an online savings or checking account, or via mobile payment services, such as PayPal, Venmo, Cash App, or Zelle.

How Deposits and Withdrawals Are Different

Now, let’s take a look at some of the key ways in which these transactions are different.

•   A withdrawal leaves you with less money in the bank while a deposit puts more money in the bank. In this way, they are opposites.

•   A withdrawal will immediately be reflected in your account balance, while a deposit may take longer to show up, until the funds clear.

•   Cash deposits generally have to be made at your bank or bank’s branded ATM network locations, while cash withdrawals can be made at any ATM. (But beware, if the ATM is out of your bank’s network, you could be charged an ATM fee by both the ATM owner and your bank.)

•   Check deposits have to be made at your bank or bank’s branded ATM network locations, or via a bank’s mobile phone app.

•   Check withdrawals via cashier’s checks, on the other hand, are likely only available in person at one of your bank’s or credit union branches. Alternatively, you could request one online from your brick-and-mortar or online bank or credit union.

The Takeaway

Now you know the difference between a deposit and a withdraw. They are inverse transactions: While a deposit adds funds to your account and boosts your balance, a withdrawal whisks money away, subtracting an amount from the funds you have on balance. There are many ways to conduct each of these transactions today, largely due to tech offering new options. You can now do your banking in person or use an array of digital tools to send or receive money.

SoFi can make banking much better than basic. Our high interest bank accounts are super-convenient to set up and use, and we offer a hyper-competitive 1.25% APY. You can also write checks, set up bill pay, and have access to 55,000+ (fee-free) ATMs worldwide. Oh, and did we mention? No account fees, period.

See how much your money can grow with SoFi.

FAQ

What is a cash withdrawal?

A cash withdrawal involves converting funds you are holding in an account (perhaps an investment plan, a trust, or a pension) into cash that you can then deposit elsewhere or use.

What is a cash deposit?

A cash deposit is money that you add to your bank account. It could come via an electronic transfer, an ATM deposit, or currency that you hand off to a bank teller.

What is the difference between a deposit and a withdrawal?

The difference between a deposit and a withdrawal is that a deposit adds funds to your bank account while a deposit takes funds away.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://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.

Photo credit: iStock/Eva-Katalin
SOBK0222015

Read more
apple cut in half

Guide to Environmental, Social, and Governance (ESG) Investing

When it comes to making investment decisions, more and more individuals and organizations consider environmental, social, and governance (ESG) factors. ESG investing focuses on companies that are considered to be leaders in sustainability and have a positive impact on the environment and society.

If you’re interested in ESG investing, it’s essential to understand the nuances, benefits, and risks of this growing trend. It would help if you did the research to make sure you invest in companies that align with your values and follow ESG standards.

ESG Definition

ESG, which stands for environmental, social, and governance, refers to non-financial criteria that investors use to determine whether companies are socially and environmentally responsible.

There is, however, no universally shared set of ESG criteria used by all investors or financial firms to evaluate a company’s soundness or risk along these lines. Nonetheless, the following are some of the most common factors that investors consider when evaluating ESG standards.

Recommended: Investing for Beginners: Basic Strategies to Know

Environmental

The environmental component of ESG criteria might include metrics on a company’s energy emissions, waste, and water usage. Investors may also focus on the risks and opportunities associated with the impacts of climate change on the company and its industry.

Some company information that environmentally conscious investors may evaluate include:

•  Pollution and carbon footprint

•  Water usage and conservation

•  Renewable energy integration (such as solar and wind)

•  Climate change policies

Recommended: How to Invest in EV Stocks

Social

The social component of ESG generally describes the impact of a company’s relationships with people and society. Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially-conscious investors’ decisions on buying into a specific corporation.

Some other social factors can include:

•  Employee pay, benefits, and perks

•  Diversity, equity, and inclusion

•  Commitment to social justice causes

•  Ethical supply chains (e.g., no sweatshops, conflict-free minerals, etc.)

Recommended: Stakeholder vs. Shareholder: What’s the Difference?

Governance

The governance component of ESG generally focuses on how the company is run. Investors want to know how the board of directors, company, and shareholders relate to one another.

Some additional governance factors that investors evaluate include:

•  Executive compensation, bonuses, and perks

•  Diversity of the board of directors and management team

•  Transparency in communications with shareholders

•  Rights and roles guaranteed to shareholders

Recommended: Explaining the Shareholder Voting Process

What Is ESG Investing?

ESG investing is a type of strategy that considers environmental, social, and governance factors when making investment decisions. Investors use these criteria to screen potential investments; if a business’s operations don’t follow ESG standards, investors may avoid putting money into the company.

There are several reasons people and institutions might choose to invest in companies that prioritize ESG factors. For some, it is a way to align their values with their investment portfolio. Others believe that companies that take ESG factors into account are likely to be more financially successful in the long run.

But, as mentioned above, there is no agreed-upon set of standards for what makes a company ESG friendly. Companies committed to ESG operations may publish sustainability reports to give investors some insights into the firm. Additionally, third-party organizations have stepped in to create ESG scores for companies and funds based on their adherence to various ESG factors.

How ESG Scores Work

ESG scores – sometimes called ESG ratings – are designed to measure a company’s environmental, social, and governance performance. Investors use them to assess a company’s risks and opportunities concerning these three areas.

An ESG score is calculated by analyzing a company’s data on environmental, social, and governance policies and practices from various sources, like SEC filings, government databases, and media reports.

A high ESG score means a company manages ESG risks better than its peers, while a low ESG score means the company has more unmanaged ESG risks. Evaluating a company’s ESG score, along with financial analysis, can give investors a better idea of the company’s long-term prospects.

Some of the most prominent ESG score providers are MSCI, Morningstar Sustainalytics, and S&P Global.

ESG vs SRI vs Impact Investing

ESG investing is sometimes called sustainable investing, impact investing, or socially responsible investing (SRI). However, impact investing and socially responsible investing are often viewed differently than ESG investing.

Some of the differences between the three investment strategies are:

•  ESG investing focuses on a company or fund’s environmental, social, and governance practices and traditional financial analysis.

•  Socially responsible investing eliminates or selects investments according to specific ethical guidelines. Investors following an SRI strategy may avoid investing in companies related to gambling and other sin stocks, along with companies that may damage the natural environment.

•  Impact investing is generally done by institutional investors and foundations. Impact investing focuses on making investments in companies or projects specifically designed to generate positive social or environmental impact.

Types of ESG Investments

Investors can make ESG investments in the stocks and bonds of companies that adhere to ESG criteria or have high ESG scores. Other potential investment vehicles are mutual funds and exchange-traded funds (ETFs) with an ESG strategy.

Stocks

Buying stocks of companies with environmental, social, and governance commitments can be one way to start ESG investing. However, investors will often need to research companies that have ESG credibility or rely on third-party agencies that release ESG scores.

Recommended: How to Analyze a Stock

Bonds

The bonds of corporations involved in ESG-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Recommended: How to Buy Bonds: A Guide for Beginners

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds that provide exposure to ESG companies and investments. A growing number of index funds invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security. However, not all ESG funds follow the same criteria and may focus on different aspects of environmental, social, and governance issues.

Recommended: A Beginner’s Guide to Investing in Index Funds

Benefits of ESG Investing

ESG investing has several benefits, including:

•  Improving long-term financial performance: A growing body of evidence suggests that companies with solid ESG ratings may be good investments. They tend to outperform those with weaker ratings, both in share price performance and earnings growth.

•  Mitigating risk: ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses.

•  Creating social and environmental impact: By investing in companies that are leading the way on environmental, social, and governance issues, investors can help drive positive change and make a positive impact on society.

These potential benefits are increasing the popularity of ESG investing. According to Bloomberg, global ESG assets may surpass $41 trillion by the end of 2022 and reach $50 trillion by 2025, up from $22.8 trillion in 2016.

How to Start an ESG Investment Portfolio

If you are interested in creating an ESG portfolio, you can start by contacting a financial advisor that can help you shape your investment strategy.

However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

•  Open a brokerage account: You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities. SoFi Invest® offers an active investing platform where you can start building your ESG portfolio.

•  Pick your assets: Decide what type of investment you want to make, whether in a stock of a company, an ESG-focused ETF or mutual fund, or bonds.

•  Do your research: It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

•  Invest: Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification will help to reduce your risk and maximize your returns.

ESG Investing Strategies

ESG investing can be different based on values and financial goals. It’s therefore essential to start with your investment goals and objectives when crafting an ESG investing strategy. Consider how ESG factors can help you achieve these goals.

It’s also crucial to understand the data and information available on ESG factors; this will vary by company and industry. When researching potential ESG investments, you want to make sure a company has a clear and publicly-available ESG policy and regularly discloses its ESG performance. Additionally, it can be helpful to look at third-party scores to determine a company’s ESG performance.

The Takeaway

If you want to learn more about ESG investing, several resources are available online and from financial advisors. Doing your research and talking to a financial advisor can help you determine if ESG investing is right for you.

There is no “right” way to invest in ESG companies. What matters most is that you are comfortable with the companies you are investing in and believe in their ability to create long-term value.

Investors interested in making ESG investments can use the SoFi app to help. With SoFi Invest®, you can trade stocks and ETFs to build an ESG portfolio. And if you’re not ready to pick stocks and ETFs by yourself, SoFi’s automated investing tool will build a portfolio for you with no SoFi management fee.

Get started investing with SoFi Invest


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

SOIN20138

Read more
TLS 1.2 Encrypted
Equal Housing Lender