What is a Quiet Period?

For investors living in the era of “fake news,” it probably isn’t hard to imagine the chaos which might ensue if there weren’t any rules regarding the marketing of IPOs.

The SEC regulates the sale of securities to ensure that it is done fairly and investors receive accurate information. One of the ways it does this is by restricting the type of communication a company is allowed to do during the time leading up to and following an IPO.

When a company decides to issue an Initial Public Offering (IPO) there are numerous legal and financial steps they go through in preparation.

These include preparing a prospectus and filing an IPO registration statement with the Securities and Exchange Commission. The prospectus is a publicly available document which includes:

•   A description of the company’s business and assets
•   Information about the company’s management team
•   A description of the security being offered in the IPO
•   Independently certified financial statements

The quiet period is a time when company executives, board members, management, and employees cannot publicly promote the company or its stock. Investment bankers and underwriters also cannot put out buy or sell recommendations.

It starts when the company files the registration statement, including a recommended offering price for the security, and lasts for 30 days.

During this time, the SEC looks over all the documentation and approves the registration. The quiet period allows the SEC to complete the review process without bias or interruption and ensures that the company doesn’t attempt to hype, manipulate, or pre-sell their stock.

Companies are allowed to discuss information already in the prospectus during the quiet period, and oftentimes they will go on a “road show” to present this information and get a sense for the potential market. Activities generally avoided during the quiet period are advertising campaigns, conferences, and press interviews.

Some companies are now choosing to confidentially file for IPOs and only release information a few weeks before the sale. The confidential filing had only been allowed for companies with revenue under $1 billion since the 2012 JOBS Act and was extended to all companies in 2017.

This option allows businesses to avoid negative media attention, and if there are any changes in the stock market between the time they file and their planned IPO date, they can adjust their plans accordingly—and without scrutiny.

A study conducted at The Wharton School of The University of Pennsylvania showed that media coverage during a quiet period can result in negative outcomes for investors, so the confidential filing process could potentially help improve those outcomes.

Another quiet period takes place each quarter, during the month before a company files its quarterly earnings report. Similar to the pre-IPO quiet period, executives and management must be careful not to publicly say anything which could be perceived as insider information.

History of the Quiet Period

The quiet period was enacted in 1933 as part of the Securities Act. Prior to the 1929 stock market crash, the Federal Government didn’t regulate the sales or marketing of securities.

This was handled by each individual state. The goal of the Securities Act was to prevent fraudulent activity and marketing hype, as well as to ensure that potential investors across the nation were all presented with the same materials prior to an IPO.

The Securities and Exchange Commission (SEC) became the central regulating party. Companies were now required to register with the SEC and put together a prospectus document outlining the company’s team, assets, finances, and the security being offered in the IPO.

Since the SEC must act as a neutral party when vetting a company’s registration materials, the quiet period allows them to perform this task unbiased. It also gives investors the chance to assess the prospectus and IPO pricing in order to make informed purchasing decisions.

A few amendments have been made to the Securities Act regarding the quiet period since the 1930s. These include the recognition that companies may have made public statements prior to filing their registration, and clarifications about the type of marketing and communications a company is still allowed to do.

In the early 2000s the SEC modernized the rules of the quiet period to include clarifications about digital and online communications.

Other recent changes have made the rules more lax, such as permitting the solicitation of accredited investors. Perhaps one day the quiet period may no longer be enforced, but for now it is still an important part of the IPO process.

Violation of the Quiet Period

Violation of the quiet period is called “gun-jumping.” If the SEC deems a statement made by a company is in violation of the quiet period, consequences can include:

•   A delayed IPO
•   Liability for violating the Securities Act
•   Requirement to disclose the violation in the company’s prospectus

What to do During a Quiet Period

Quiet periods can be a good time to assess whether you’re interested in investing in a company’s IPO. Seasoned investors look to profit at the end of the quiet period, called the quiet period expiration.

At this time the stock price and trading volume can see drastic movement up or down, since a flood of information gets released from analysts.

Unbiased prospectus information about recent filings can be viewed on the SEC website. It’s a good idea to read the prospectus so you can judge for yourself whether a company’s mission, team, and financials look like a sound investment.

One of the keys to building a successful long term portfolio is diversification. By mixing investments from higher and low risk, new and established companies, you can likely reduce the risk of a single investment having an outsized effect on your performance.

IPOs have the potential to be lucrative investments, but can also turn out to be extremely volatile and could lose value. A good way for new investors to add recent IPO stocks to their portfolios is through an IPO ETF.

ETFs include multiple stocks and are generally rebalanced over time, so investors can hope to gain access to growing companies while diversifying their risk.

Don’t Keep a Lid on Your Investments

If you have questions or want to discuss your investment strategies and portfolio, the SoFi Invest team is here to help. Investing in IPOs can be risky and takes time.

If you’re looking for an efficient way to add some of the newest IPO stocks to your portfolio, let SoFi do the heavy lifting using the Automated Investing platform.

Or, if you love doing your own IPO homework, the SoFi Active Investing platform can give you access to stocks of newly public companies.

Learn more about SoFi Invest®.


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.
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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 . The umbrella term “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.

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What is a Market-On-Open Order?

Have you ever wanted to place a trade while the market was technically closed? (Because let’s be honest, the market’s hours of 9:30 am to 4:00 pm EST aren’t particularly convenient for anyone working a 9-to-5.)

Or, have you ever wanted to place a trade on a stock or exchange-traded fund (ETF) that executes as the bell rings the market to open for the day? A market-on-open (“MOO”) order might be your answer. An “MOO” order is one that will execute at the open of the market at the prevailing price.

This is not to be confused with after-hours and pre-hours trading, where trades are actually executed during hours that market exchanges are technically closed.

As you might be catching on, buying or selling a security on an exchange isn’t hard, but it’s also not as simple as clicking a button without a thought as to how it happens.

Even within a relatively easy-to-use online dashboard or trading platform, investors still need to make some decisions about the details of each transaction.

Overview of Market-On-Open Orders

Here’s an overview of market-on-open orders, including some reasons you might want or need to use a market-on-open order, the risks and benefits of a MOO order, and how to place a MOO order if you ultimately decide it’s right for your trade.

A market-on-open order is an order to be executed at the day’s opening price. Just as the name implies, MOO orders are only to be executed when the market opens.

To fully understand how a MOO order works, it may help to first understand both securities exchanges and the different ways that trades can be executed. The latter is generally referred to as an “order type” or “market order.”

Securities exchanges are marketplaces where securities such as stocks, ETFs, and options are bought and sold. In the United States, there are currently fifteen national securities exchanges registered with the SEC, including the New York Stock Exchange, the NASDAQ, and the Chicago Board Options Exchange. Next, order types. Order types can be put into one of two broad categories: market orders and limit orders.

Market Order

A market order is an order to buy or sell at the best available price at the time. Generally, a market order focuses on speed and will be executed as close to immediately as possible.

But, securities that trade on an exchange experience price fluctuations throughout the day, so the investor may end up with a price that is higher or lower than the last-quoted price.

Limit Order

A limit order is an order to buy or sell a stock at a specific price. A limit order is triggered at the limit price or within $0.25 of it. At the next price, the buy or sell will be executed.

Therefore, limit orders can be made at a designated price, or very close to it. While limit orders do not guarantee execution, they may help ensure that an investor does not pay more than they can (or want to) afford for a particular security.

For example, an investor can indicate that they only want to buy a stock if it hits or drops below $50. If the stock’s price doesn’t reach $50, the order is not filled.

Therefore, a market-on-open order is a specific version of a market order. Because it is a market order, it will happen as close to immediately as possible, and at the open of the market. The order will be filled no matter the opening price of investment.

Beyond market and limit orders, there are many other order types, such as stop orders, stop limit orders, buy stop orders, and so on.

With each order type, the investor is providing specific information on how, and under what circumstances, they would like the order filled. In the world of order types, these are semi-customizable orders with modifications.

A MOO order is not to be confused with after-hours (and sometimes, pre-hours) trading. Some brokerage firms are able to execute trades for investors during the hours immediately following the market closing or prior to the market’s open.

Generally, after-hours trades are done through electronic communication networks (ECNs). Investors can contact their brokerage firm or financial services company of choice to learn more about which types of orders are available for buying and selling. It is possible that some firms may offer order types while others do not.

Investors with something particular in mind may want to shop around between different financial services companies to be certain that they get what they need.

Why Use a Market-On-Open Order?

For one, market exchanges aren’t always open. The New York Stock Exchange (NYSE) and the NASDAQ are both open between 9:30 am and 4:00 pm EST.

There are a number of reasons that a person may want to place a trade outside of these hours. One such reason is convenience. Living in this busy world, it is not hard to imagine a scenario where a person wants to place a trade when they actually have the time (and before they forget).

Traders and investors may use a market-on-open order when they foresee a good buying or selling opportunity at the open of the market. For example, traders may expect price movement in a stock if significant news is released about a company after the market closes.

Good news, such as a company exceeding their earnings expectations, may lead to an increase in the price of that stock. Bad news, such as missing earnings estimates, may lead to a decline in the stock price. Some traders and investors may also watch the after-hours market and decide to place a MOO order in response to what they see.

Let’s look at a hypothetical example: Say that news breaks late in the evening regarding a large scandal within a company.

The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future.

They enter a MOO order to sell their holding as soon as the market is open for trading. Or, maybe they believe that the stock will bounce back throughout the day, so they place a MOO order to buy more stock at the open.

With a MOO order, the investor is committed to buying or selling stock at whatever the price may be at the open, no matter how much it has moved up or down since the previous trading day. The investor must be prepared for unexpected price moves.

Though this won’t apply to the average individual investor, MOO orders may also be used by the brokerage firms to fix errors from the previous trading day. A MOO order may be used to rectify the error as early as possible on the following day.

Risks of MOO Orders

It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different than the price at the previous close. Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different—or it could be a lot different.

Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.

It is very hard to predict the direction any one stock, security, or group of securities will be in the short-term, because short-term price movements can often be based on sentiment, not fundamentals.

Most investors will likely want to avoid trying to weave in and out of the market in the short-term and stick with a long-term plan. Some investors may use MOO orders with the intention of taking advantage of price swings, but the variability of the market could bamboozle a new investor.

Because the order could be filled at a price that is significantly different than anticipated, this may create the problem of not having enough cash available to cover a trade.

How a cash shortage during a market order is handled will typically depend on the brokerage firm and the type of account.

To be safe, it can be smart to make sure there’s a cash buffer available before placing any market order, including a market-on-open order. Contacting your financial services company for more information on how they would handle such a situation might also help.

An alternative option is to use a limit-on-open order, which is like a MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.

With a MOO order, there is also the problem of limited liquidity. Liquidity describes the degree to which a security, like a stock or an ETF, can be quickly bought or sold.

Investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.

But smaller companies can be more illiquid, making them slightly trickier to trade. In the event that there is not enough liquidity for a trade, the order may not be filled, or may be filled at a price that is very different than anticipated.

Getting Started with Investing

Feeling ready to get started? The next step for investors is to choose a brokerage firm or financial services firm, like SoFi Invest®. SoFi Invest provides many options for investors including those who want to control their own investment choices, and those who want more help via an automated investment service.

With SoFi Active Investing, investors buy and sell stocks and ETFs of their choosing. And there are no transaction costs, unlike at many standard brick-and-mortar traders.

Investors who’d like the help of an automated investment service may want to look at SoFi Automated Investing. This service invests according to a person’s goals, tolerance of risk, and investing timeline using low-cost ETFs—and with no additional SoFi fees.

With either SoFi Invest service, help from a certified financial planner (CFP) is never more than a phone call away. Because even the savviest investor may have questions about their investment accounts, transactions, or portfolio strategy from time to time.

Ready to become an investor? Open a SoFi Invest account to start on the active or automated investing track.


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.
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 . The umbrella term “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.

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What is the FDIC & How Does it Work?

These days, if you’re feeling some anxiety about your bank account, it might be because of the fees you’re paying, the low interest you’re getting, or worries about identity theft and cyber fraud.

What you might not be giving much thought to is the prospect of losing all the money you have in your account if your financial institution fails. And that’s because the Federal Deposit Insurance Corporation (FDIC) has made a promise to protect those accounts—up to $250,000—if that should happen.

People might take that guarantee for granted now, which means you might not know much about the FDIC beyond what you’ve seen on signs at the bank when (or if) you go inside.

But there’s a lot of history behind this independent government agency—and, as banking evolves, it’s important to know what it does and doesn’t keep safe.

A Brief History of the FDIC

You might have learned a little about the FDIC back in high school, when you studied the Great Depression. After thousands of banks failed, the FDIC was created in 1933 to boost confidence in the U.S. financial system.

In January 1934, the FDIC began insuring deposits , covering them up to $2,500. That number has increased through the years, of course, most recently with the Emergency Economic Stabilization Act of 2008.

President George W. Bush signed the act to temporarily raise FDIC insurance coverage from $100,000 to $250,000 per depositor during the financial crisis. President Barack Obama made the coverage hike permanent in 2010 with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act .

Okay, enough of the history lesson—what you might want to know is what all that means for you today.
Well, for one thing, since its creation, no depositor has lost any money from an FDIC-insured deposit .

This means that unlike your great-grandparents, you can put your money into an eligible financial institution and know it’s more secure than stuffing it under your mattress. (Yes, that used to be a thing for many savers.)

Also of note: Though it’s the customers’ money that’s covered by the FDIC, the agency is funded by premiums paid for by banks and from earnings on investments in U.S. Treasury securities.

There are rules and limits you should know about, however, if you want to make the most of the FDIC’s coverage. Here are some basics:

Not Every Financial Institution Is Covered by the FDIC

The FDIC insures deposits in most banks and savings associations, but not all of them. Every FDIC-insured depository institution must display an official sign at each teller window or teller station, so that’s an easy way to check.

Or you can find out if your deposits are insured by using the FDIC BankFind tool .
If you’re using an online bank or a mobile-first financial product, the company’s website should contain information about its coverage.

The National Credit Union Administration (NCUA), created by Congress in 1970, covers federally insured credit unions in much the same way as the FDIC, including deposits up to $250,000.

Not Every Account Is Eligible for FDIC Insurance

The FDIC insures all deposit accounts at insured banks and savings associations, including checking, savings, money market accounts, and certificates of deposit (CDs) up to the FDIC’s limits.

Certain retirement accounts may qualify for insurance, as well, but only when placed in certain types of investments and in accordance with all FDIC requirements .

Retirement accounts that are insured (up to $250,000 total at a single institution) include Traditional IRAs, Roth IRAs, and self-directed 401(k) plans.

Money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities isn’t insured—even if you purchased those products from an insured financial institution.

If a Bank Fails, You Should Be Able to Recover Your Money Promptly

When a bank fails, the FDIC has two jobs: First, it pays depositors up to their insurance limit.

Second, as the receiver of the failed bank, it collects and sells the assets of that institution and settles its debts, including claims for deposits in excess of the insured limit.

Because of the FDIC safety net, you won’t likely see fearful customers lining up to get their money the way they did before deposit insurance was established.

Still, when a bank closes, it affects depositors, creditors, and borrowers—and naturally there are questions about automatic deposits and payments, earned interest, outstanding checks, and more. The FDIC states that it will post information as promptly as possible, or you can contact the agency at 877-ASK-FDIC.

Other Options for Your Money

When you’re deciding who to trust with your money, whether it’s $250,000 or $2,500, you might want to go with a financial institution that takes security seriously.

SoFi keeps the hard-earned dollars in your SoFi Money® cash management account safe by partnering with FDIC-insured banks.

That makes SoFi Money customers eligible for up to $1,500,000 of FDIC insurance. (Currently, there are six banks available to accept deposits at $250,000 per bank.)

Learn more about SoFi Money today!


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.
Each business day, cash deposits in SoFi Money cash management accounts are swept to one or more sweep program banks where it earns a variable interest rate and is eligible for FDIC insurance. FDIC Insurance does not immediately apply. Coverage begins when funds arrive at a program bank, usually within two business days of deposit. There are currently six banks available to accept these deposits, making customers eligible for up to $1,500,000 of FDIC insurance (six banks, $250,000 per bank). If the number of available banks changes, or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be lower. For more information on FDIC insurance coverage, please visit www.FDIC.gov . Customers are responsible for monitoring their total assets at each Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. The deposits in SoFi Money or at Program Banks are not covered by SIPC.
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SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.

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What is an Economic Stimulus Package?

Click on your social media channels, turn on the television or radio, scroll through your news apps or pick up a newspaper and—no matter which source you choose—you’ll likely see or hear something about the federal stimulus package designed in response to the COVID-19 challenges.

This is an evolving situation where, even now, Congress is debating about whether additional stimulus dollars should be provided—and, if so, how much? How should the dollars be distributed? Who should oversee the distribution management?

This influx of news can be confusing. To help, here are answers to some questions people may have, including:

•   What is a stimulus package, exactly?
•   When are they created, generally speaking, and why was this one put together, in particular?
•   What major economic stimulus packages have there been in the U.S.?
•   How do they work?
•   Are there different types of them?
•   What pros and cons exist when economic stimulus is provided by the government?

In general, an economic stimulus package is assembled by the government and contains financial measures that are intended to improve, or “stimulate,” an economy that’s struggling.

In the U.S., a federal package needs to be passed by the Senate and the House of Representatives—and then the president can sign it into law.

Economic Theory Behind a Federal Stimulus Package

The foundational theory behind these economic stimulus packages—whether it’s the Roosevelt, Obama or Trump stimulus package—is one developed by a man named John Maynard Keynes in the 1930s.

Keynes was a British economist who created his theory in response to the global depression of the era. His conclusion was that, when a government lowers taxes and increases its spending, this would stimulate demand and help to get the economy out of its depressed state.

More specifically, when taxes are lowered, this helps to free up more income for people; because more is at their disposal, this is referred to as “disposable income.” People are more likely to spend some of this extra money, which helps to boost a sluggish economy.

When the government boosts its spending, this also puts more money into the economy. The hoped-for results are a decreased unemployment rate that will help to improve the overall economy.

Economic theory, of course, is much more complex than that, and so are stimulus packages. Here’s more about different forms of these economic strategies.

Three Stimulus Types

Monetary

To get a bit more nuanced, monetary stimulus is something that occurs when monetary policy is changed to boost the economy.

Monetary policy, meanwhile, is how the supply of money is influenced and interest rates managed through actions taken by a central agency. In the U.S.s, that agency is the Federal Reserve Bank.

Ways in which the Federal Reserve can use monetary policy to stimulate the economy include cutting policy rates, which in turn allows banks to loan money to consumers at lower rates; reducing the reserve requirement ratio, and buying government securities.

When the reserve requirement ratio is lowered, then banks don’t need to keep as much in reserve—which means they have more to lend, at lower interest rates, which makes it more appealing for people to borrow money and get it circulating in the economy.

Fiscal

Fiscal stimulus strategies focus on lowering taxes and/or boosting government spending. When taxes are lowered, this increases the amount of money that people have left over from a paycheck, and that money could be spent or invested.

When money is spent on a greater amount of products, this increases demand for those products—which in turn helps to reduce unemployment because companies need more employees to make and sell them.

If this process continues, then employees themselves become more in demand, which makes it more likely that they can get higher wages—which gives them even more funds to spend or invest.

When the government spends more money, this can increase employment, giving workers more money to spend, which can increase demand—and so, it is hoped, the upward cycle continues.

SoFi has built a Recession Help Center
that provides resources to help guide you
through this uncertain time.


Quantitative Easing

Quantitative easing (QE) is a strategy used by the Federal Reserve when there is a need for a rapid increase in the money supply in the United States and to boost the economy.

For example, on March 15, 2020, the Federal Reserve announced a $700+ billion program in response to COVID-19. In general, QE involves the Federal Reserve buying longer-term government bonds, among other assets.

Pros and Cons of Stimulus Packages

The goal of a stimulus package, based on Keynesian theory is to revive a lagging economy and to prevent or reverse a recession, where the economy is retracting rather than expanding.

This is a more immediate form of relief as the government also uses monetary, fiscal, and QE strategies to boost the overall economy.

Not everyone agrees with these types of economic strategies, and disagreement began as far back as the early 1800s, when a theory was developed by a man named David Ricardo. He believed that, if the government spent more money, consumers would in fact spend less money.

Why? Because they’d be preparing to pay higher taxes to address government deficits. This is referred to as the “Ricardian equivalence” and, although not necessarily proven, policy creators typically consider this when making decisions.

Another economic theory that runs counter to Keynesian theory is the crowding out critique. According to this thinking, when the government participates in a deficit form of spending, labor demands will rise, which leads to higher wages, which leads to lower bottom lines for businesses.

Plus, these deficits are initially funded by debt, which causes an incremental increase in interest rates. This means it would cost more for businesses to obtain financing.

Other criticisms of stimulus spending focus on the timing of when funds are allocated and that central governments can be less efficient at capital allocation, which ultimately leads to waste and a low return on spending.

Previous Economic Stimulus Legislation

Perhaps the most sweeping stimulus bill ever created in the United States was signed into law by President Franklin Delano Roosevelt on April 8, 1935.

Called the Emergency Relief Appropriation Act and designed to help people struggling under the Great Depression, Roosevelt simply called it the “Big Bill”; it is now often referred to as the “New Deal.” Five billion dollars was provided to create jobs for Americans, who in turn built roads, bridges, parks, and more.

The Works Progress Administration (WPA) came out of the New Deal, ultimately employing 11 million workers to build San Francisco’s Golden Gate Bridge, LaGuardia Airport in New York, Chicago’s Lake Shore Drive, about 100,000 other bridges, 8,000 parks, and half a million miles of roads, including highways.

Another agency, the Tennessee Valley Authority, collaborated with other agencies to build more than 20 dams, which generated electricity for millions of families in the South and West.

Additionally, there was the American Recovery and Reinvestment Act (ARRA) in 2009. This was passed into law in response to the Great Recession of 2008 and is sometimes called the “Obama stimulus” or the “stimulus package of 2009.” Its goal was to address job losses.

This Act included $787 billion in tax cuts and credits, as well as unemployment benefits for families. Dollars were also provided for infrastructure, health care, and education, and the total funding was later increased to $831 billion.

Most recently, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was passed by the United States Senate on March 25, 2020. On March 27, 2020, the House of Representatives passed the legislation and the President signed it into law the same day.

Investing When the Market is Down

When the market goes down, it’s natural for investors to think about selling. After all, investing is much more enjoyable when stock values go up. But, selling can often be counterproductive when the market falls.

That’s because investing is a long-term commitment and, given enough time, portfolios often recover. And, many times, it may make sense to invest at this time.

So, rather than impulsively selling off stocks, it can make sense to at least consider investing when stocks are more or less on sale. The hope with this strategy is that the market downturn is temporary and investors will therefore benefit on the upswing. Having said that, buying stock on impulse may not be the best plan, either.

What’s most important is to review reasons for investing in the first place and to then find ways to stick with the plan, given portfolio goals, long-term needs, and current financial situations.

Strategies that can help with decision making include dollar cost averaging and tax loss harvesting. The first is to regularly invest a predetermined amount of money and stick with that, even when the number of shares that amount will purchase varies.

If that amount is $200, for example, that would buy 20 shares of a mutual fund when it’s going for $10 a share. If the market dips and shares are $5, still invest the same amount—but now that investment buys 20 shares. The benefit to this approach is that it involves steady investing over time.

The second strategy, tax loss harvesting, involves selling investments with a loss as a strategy to offset other investment gains. If, for example, an investor buys $5,000 worth of a particular stock at the beginning of a year, and it’s only worth $2,500 at the end of the year, they could sell that stock; buy something similar; and then write off the $2,500 loss for tax purposes.

Meanwhile, the new investment may be one that grows in value. It can help significantly to have the advice of an investment professional when making these kinds of decisions.

No-Cost Financial Planning with SoFi Invest®

With SoFi Invest®, investors have the opportunity to chat with a financial planner at no cost to discuss their short- and long-term goals when it comes to investing.

A financial planner can help investors to build a budget to reach goals, to invest smartly and save for the future, and much more.

If an investor wants to be hands on, they have the option of using SoFi active investing; if they feel better with a hands-off approach, there’s automated investing.

Furthermore, investors can receive up-to-date news through the SoFi app, helping to keep them in the know when they make their investing decisions.

Looking to plan for the future and keep up-to-date with what’s happening now? Stay in the know with the SoFi app or talk to a financial planner at no cost.


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

As the world continues to navigate the coronavirus pandemic, governments and central banks are considering every possible option for keeping the economy afloat.

Even before the outbreak of the new disease, a process called quantitative easing was being considered to help an already flailing world economy.

In 2019 the Federal Reserve lowered interest rates three times in an attempt to keep the economy expanding. It’s been 11 years since the last economic recession, but in just a few months, the markets have collapsed as a result of the pandemic.

Now, unprecedented and uncommon economic measures, including quantitative easing, are being considered to mitigate the global crisis.

What is quantitative easing, and does it work?

Quantitative easing (QE) is a process of economic expansion in which a Central Bank buys existing government bonds and long-term securities to increase the supply of money in the open market and encourage investment and lending.

When the bank purchases these assets, the money they’ve spent gets released into the market.

In the U.S., this central bank is the Federal Reserve. Although it was created by Congress in 1913, the Federal Reserve is separate from the government and runs as an independent bank.

How Does Quantitative Easing Work?

Quantitative easing makes it easier for businesses to borrow money from banks, by essentially lowering the cost of borrowing money.

When the Federal Reserve purchases securities from other banks, it issues a credit to the bank’s reserves, thereby figuratively increasing the money supply. No funds actually change hands in a QE program.

The funds used to purchase the securities are essentially created out of thin air as a credit.

When the Fed purchases treasuries from the government, this also keeps treasury yields low by increasing the demand for them.

When treasury yields stay low, long-term interest rates remain low, which can make it easier for consumers to take out loans for a car, house, or other types of debt.

Banks are required to have a certain amount of money on hand each night when they close their books. This is called the bank reserve requirement. Banks that have over $127.5 million in net transactions must hold 10% in cash or at the Federal Reserve bank.

QE gives banks more than they need to hit this reserve requirement. When banks have extra money, they lend it out to other banks to make a profit. This can also help stimulate the economy.

In addition to making it easier for banks to give out loans, QE keeps the value of the U.S. dollar lower, which in turn lowers the cost of exports and makes stocks attractive to foreign investors.

All of these factors can help to keep the economy running during challenging times.

When Interest Rates Aren’t Enough

While Congress controls government spending and tax rates, the Federal Reserve controls short-term interest rates, which are the main tool used to prevent or lower the impacts of a recession.

More specifically, the Fed adjusts the rate that banks have to pay to one another to loan money that is held in Federal Reserve accounts. If banks can borrow money at a lower rate, they in turn can lend money to their customers at a lower rate.

Central Banks have long preferred to lower short-term interest rates to expand the economy and encourage more spending.

Similarly, the Federal Reserve raises interest rates to slow inflation. But when interest rate cuts aren’t enough to stimulate the economy, as is now the case, quantitative easing is sometimes used as a last resort.

One limitation on interest rates is that they can’t practically be lowered to less than zero. Technically, negative interest rates are possible, but this would mean that banks would actually be paying people to borrow money, rather than the other way around.

On March 15, 2020, the Federal Reserve lowered interest rates nearly to zero, with a target between 0% and 0.25%. This is down from a previous rate of 1% to 1.25%.

When interest rates fall to near zero, and banks, corporations, and individuals hoard money, this results in a lack of liquidity in the market. Quantitative easing can help release money from this type of liquidity trap back into the market.

Following the recent interest rate slash, the Federal Reserve also announced the launch of a $700 billion quantitative easing program in the United States. The Fed is buying $500 billion in Treasuries and $200 billion in agency-backed mortgage securities.

These purchases will take place over the course of several months. The goal is to make sure that businesses have sufficient funds to lend to other businesses throughout the ongoing coronavirus pandemic. The current QE program may total $1.5 trillion in asset purchases over time.

Despite these attempts, the market’s initial response to the Federal Reserve’s actions were negative, as the stock market continued to fall after the announcement.

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Past Examples of Quantitative Easing

A relatively new strategy, quantitative easing has been used a number of times over the past 20 years, with varying degrees of success.

Japan

The first example of an advanced first-world country implementing a quantitative easing program was Japan in 2000-2006. Japan entered into a recession following the Asian Financial Crisis of 1997.

The Bank of Japan bought private debt and stocks through the QE program, but the program didn’t result in the stimulus they had hoped for. Japan’s GDP fell from $5.45 trillion to $4.52 trillion between 1995 and 2007.

Japan also used QE in 2012 when Prime Minister Shinzo Abe was elected and sought to stimulate the economy.

United States

A few rounds of quantitative easing took place throughout the financial crisis from 2008 to 2011, both in the U.S. and in the U.K.

The most successful example of QE was the $2 trillion stimulus enacted by the U.S. in 2008, despite that fact that it doubled the Federal debt from $2.1 trillion to $4.4 trillion in just a few years.

Although many feel that the QE program helped get the U.S. and global economy through the 2009 recession, this topic has been debated and is hard to quantify.

Banks actually held on to much of the excess money they received through the QE program rather than lending it out, so the program didn’t exactly have the desired effect.

However, QE helped to remove subprime mortgages from bank balance sheets, and helped to bring the housing market back.

Switzerland

During the 2008 financial crisis, the Swiss National Bank also implemented a QE program. In terms of its ratio to GDP, the Swiss program was the largest ever enacted in the world.

Despite this overwhelming effort that resulted in some economic growth, Switzerland didn’t reach its inflation targets after the use of QE.

United Kingdom

More recently, in 2016, the Bank of England launched a QE program worth 70 billion pounds to help alleviate economic concerns about Brexit.

Between 2016 and 2018, business investment grew in the U.K., but it was still growing at a slower rate than it had been in previous years. Economists have not been able to confirm whether growth would have been even slower without the QE program.

The Pros and Cons of Quantitative Easing

While QE programs can help stimulate a struggling economy, they have some downsides, and there are reasons they are used as a last resort.

Pros:

•   QE programs make it easier for businesses to take out loans.

•   The influx of money into the market can help keep the economy flowing and release liquidity traps.

•   Low interest rates make it easier for consumers to take out loans for cars, homes, and other borrowing needs.

Cons:

•   Increasing the supply of money can lead to inflation.

•   Stagflation can occur if the QE money leads to inflation but doesn’t help with economic growth. The Fed can’t force banks to lend money out and it can’t force businesses and consumers to take out loans.

•   QE can devalue the domestic currency, which makes production and consumer costs higher.

•   As a relatively new economic concept, there isn’t data and consensus about whether QE is effective.

What If QE Doesn’t Work?

Previous QE programs implemented by Japan, Switzerland, and the U.K. have not managed to reach the stimulus goals they set out to achieve.

However, the QE program enacted in the U.S. during the 2009 recession helped to revive the housing market, stimulate the economy, and restore trust in banks. It didn’t cause rampant inflation as many feared it would.

As a relatively new strategy, there isn’t enough data to confirm whether QE is effective. In fact, there isn’t even agreement about how exactly it’s supposed to work.

Economists have a theory that quantitative easing will work by flattening the yield curve , which is a graph curve that displays the variation of interest rates according to their term of maturity.

When the Fed purchases long-term Treasuries, their yield goes down and their prices go up.

This results in the yields of corporate bonds and long-term mortgages going down as well. Lower rates encourage home construction, corporate investment, and other activities that stimulate the economy.

Although this sounds good in theory, the issue in the current economy is that the yield curve is already pretty flat.

A QE program might stimulate the economy for a short amount of time, but it could also lose its effectiveness. If this happens, the government can also turn to fiscal policy, or government spending, to further put money into the economy.

Sometimes QE and government spending can blur together, if the Fed purchases government bonds that are issued to fund government spending.

Some economists also believe that by signaling to the world that the Fed is serious about stimulating the economy, this will help create economic growth and spending and make consumers confident about making purchases. Whether this is true is yet to be seen in the current global situation.

Staying Up to Date on the Economy

These are unprecedented times for the entire world. Every country, business, and individual is taking things day by day, and the news can change rapidly.

It’s important to keep track of what’s going on in the economy, as it can affect jobs, investments, loans, and so much more.

A great tool for staying up to date on market news is by downloading the SoFi app. Download it to read all the latest headlines and follow familiar (and not-so-familiar) stocks and companies.

The SoFi app allows users to organize investments with SoFi Invest® and financial information in one easy-to-access app.

If users want to talk to an expert about their financial situation, SoFi has a team of financial planners available to answer questions and help with financial goals.

Stay up to date with the markets by downloading the SoFi app.


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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 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 . The umbrella term “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.

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