Stock vs. Share: What’s the Difference?

Essentially, a stock is the actual asset you are investing in. An asset is something that has “economic value and can act as a store of wealth.” A share is the unit of measurement for that asset. So, a stock tells you what you are investing in, and a share tells you how much of that stock you own.

Terminology Archives

Q: What Are Shares?

A share is the smallest whole piece of the company an individual investor can own. A share is a unit of ownership (e.g. you own 10 shares), whereas stock is a measurement of equity (e.g. you own 10% of the company).

Q: What Are Stocks?

Stocks, which are also referred to as equities, are a type of security that give investors a stake in a publicly traded company. A publicly traded company is one that trades on stock exchanges. Privately owned companies are not traded on the stock exchange.

Feb

2025

Shares vs Stocks: What’s the Difference?

By Inyoung Hwang | Growing Wealth, Investing, Terminology | No Comments

The difference between the terms stock and shares is a simple one. An investor buys shares of stock in a company. The stock represents the company, and is sold in units called shares.

Thus, an investor can own a certain number of shares of a company’s stock: e.g., they might own 100 shares of Company A. But it’s incorrect to say an investor owns 100 stocks in Company A. If an investor owns 100 stocks, that would mean they own shares of stock in 100 different companies.

Key Points

• The terms “shares” and “stock” are often used in tandem, but they refer to different aspects of an equity investment.

• A stock is a broad term for the asset, while a share is the unit of ownership.

• Owning 100 shares implies you have 100 units of one company’s stock, while owning 100 stocks means you have stakes in 100 different companies.

• Ordinary shares are the same as common stock, and preference shares are the same as preferred stock.

• Common stockholders have voting rights and may receive dividends; preferred stockholders usually don’t have voting rights, but they often receive dividends before common stockholders.

Stock vs Share: Comparison

A stock is the actual asset you purchase, while a share is the unit of measurement for that asset.

So, investing in a certain stock means you’re investing in that company. A share tells you how much of that stock you own.

Differences Between Stocks and Shares

Stocks	Shares
A stock refers to the publicly-traded company that issues shares	A share is the unit of measurement of ownership in a company
Stocks can refer to the ownership of many different companies	Shares usually refer to the specific ownership stake in a company
Stock is a more general term	Share is a more precise term

For example, if you are interested in investing in Company A, you will buy 100 shares of Company A stock. Owning 100 shares of Company A would give you a specific ownership stake in the company.

In contrast, if you said you wanted to buy 100 stocks, that would generally mean you wanted to buy shares of 100 different companies.

You could buy 10 shares of one company’s stock, 50 shares of another, 1,000 shares of another, and so on. Shares represent the percentage of ownership you have in that company.

What Are Stocks?

Stocks, also called equities, are a type of security that gives investors a stake in a publicly traded company. A publicly traded company trades on a stock exchange, like the New York Stock Exchange or Nasdaq.

When you buy stock, you buy a share or fractional shares of a publicly traded company. You essentially own a small piece of the company, hoping to get a return on your investment.

Companies typically issue stock to raise capital. Usually, the goal is to grow the business or launch a new product, but the company could also use the money to pay off debts or for another purpose.

Why Should I Buy Stocks?

Generally, people buy stocks with the hope that the company they invest in will earn money, and as a result, the investor will see a return or growth. There are two ways to earn money through stock ownership: dividends and capital appreciation.

Dividends are payouts a company makes to its shareholders. When a company is profitable, it can choose to share some of its profits with its shareholders through dividend payments. Typically, companies pay dividends on a specified schedule, often quarterly, although they can pay them at any time.

The second way to earn money is through capital appreciation, which is when a stock’s price increases above the purchase price. However, capital appreciation doesn’t lock in your gains; you don’t realize your profits until you sell your stock. And there is no guarantee that a stock will appreciate. Sometimes, owing to a range of factors, a stock’s price may drop, and investors may incur a loss.

If you sell stock and realize a profit, you must pay capital gains taxes on the earnings. The amount of tax you owe on your earnings depends on the type of asset, and how long you held it before selling.

Types of Stocks

There are two main types of stocks that investors can buy and sell.

• Common stock: The type of stock most people invest in, common stockholders have voting rights and may receive dividends.

• Preferred stock: Investors of this type of stock usually don’t have voting rights, but they often receive dividends before common stockholders. Preferred stock also gives investors a higher claim to assets than common stockholders if the company is liquidated.

Recommended: Preferred Stock vs. Common Stock

How Are Stocks Categorized?

Beyond common and preferred stocks, investors can buy and sell many different types of stocks. Usually, investors break down the various categories of stocks based on investing styles and company size, among other factors.

By Different Styles of Investing

Investors may divide up stocks of different companies into value and growth stocks.

Growth stocks have the potential for high earnings that may outpace the market. Growth stocks don’t usually pay dividends, so investors looking at these stocks hope to make money through capital gains when they sell their shares after the price increases.

Growth stocks are often tech, biotech, and some consumer discretionary companies. As the name suggests, consumer discretionary companies sell goods or services that consumers don’t consider essential.

Value stocks, in contrast, are stocks that investors consider to be trading below a price that accurately reflects the company’s strength. Value stocks usually have a lower price-to-earnings ratio.

Value investors are hoping to buy a stock when its price is low relative to its earnings, holding it until the market corrects and the stock price goes up to the point that better reflects the company’s underlying value.

Recommended: Value vs. Growth Stocks

By Market Cap

Market capitalization, often referred to as market cap, is a common way to categorize stocks. Market cap is a measure of a company’s value. Below is a breakdown of market cap categories:

• Micro-Cap: $50 million to $300 million

• Small-Cap: $300 million to $2 billion

• Mid-Cap: $2 billion to $10 billion

• Large-Cap: $10 billion or higher

• Mega-Cap: $200 billion or higher

Generally speaking, companies with larger market capitalizations are older, more established, and have greater international exposure. Meanwhile, smaller-cap stocks tend to be newer, less established, and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.

What Are Shares?

A share is a piece of the company an investor can own. A share is a unit of ownership (e.g., you own 10 shares), whereas stock is a measurement of equity (e.g., you own 10% of the company).

Think of shares as a small portion of a company. So, if a company were a pie, a share would be a slice of said pie: the more slices, the more shares.

Shares play a role when calculating a company’s market cap. To find the market cap of a publicly traded company, you multiply the stock’s price by the number of outstanding shares, which is the number of shares currently owned by shareholders. This can also be referred to as shares outstanding, and the exact number can fluctuate over time.

Changes in the number of shares available can occur for various reasons. For example, if a company decides to release more shares to the public, the number of shares would increase.

Additionally you can own shares in a variety of assets other than stocks, like mutual funds, exchange-traded funds (ETFs), limited partnerships (LPs), and real estate investment trusts (REIT).

Types of Shares

Like with stock, investors may own different types of shares.

• Ordinary shares are the same as common stock. Holders of ordinary shares are entitled to vote on corporate matters and may receive dividends.

• Preference shares are the same as preferred shares. Holders of preferred shares usually receive dividends before common stock dividends are issued. If the company enters bankruptcy, shareholders of preference shares may be paid from company assets before common stockholders.

• Deferred shares are shares usually issued to company founders and executives where they are the last in line to be paid in bankruptcy proceedings, following preferred and common stockholders.

• Non-voting shares, as the name suggests, do not confer voting rights to the shareholder. Non-voting shares may have different dividend rights and rights to company assets in the event of liquidation compared to holders of voting shares.

Stock Splits Definition

A stock split is a decision made by the board of directors of a company to adjust the price of their stock without changing the company’s overall value. It is one of the ways how the number of a company’s outstanding shares can change.

A company usually initiates a stock split when its stock price gets too high. For example, if a company’s stock is trading at over $1,000, it can be difficult for some investors to purchase and limits the availability of buyers.

To remedy this problem, a company will issue new shares through a stock split, lowering the price of each share but maintaining its market cap. A 10-for-1 stock split, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100. Your total investment value remains the same, but the number of shares you own increases.

Other Ways to Own Stock

Trading company stocks or shares isn’t the only way to own equities. One alternative is to invest in shares of a mutual fund, a managed investment fund that pools money from several different investors. The money is then invested in various securities, including stocks and bonds.

Another option for investors is exchange-traded funds (ETFs). Like mutual funds, ETFs are baskets of securities packaged into a single investment vehicle. But unlike mutual funds, investors can trade shares of ETFs all day in the stock market.

One significant benefit that mutual funds and ETFs offer is portfolio diversification. A mutual fund and ETF can either be actively managed by a financial professional or passively managed, which means the fund tracks an index like the S&P 500.

Another way besides stocks or shares to get exposure in the market is through options trading. Options are contracts giving the purchaser the right — but not always the obligation — to buy or sell a security, like stock or (ETF), at a fixed price within a specific period of time.

Test your understanding of what you just read.

The Takeaway

The difference between stocks and shares is that a share represents a unit of ownership in a company, while stocks refer to the ownership of one or more companies. It’s common to use both terms when discussing equity investments. But knowing the distinction between the two terms can help you better understand the stock market and investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

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

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

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

SOIN-Q324-004

Feb

2025

What Is Spoofing in Trading?

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

In the financial space, the term “spoofing” refers to an illegal form of stock market and exchange trickery that is often used to change asset prices. Given that the stock markets are a wild place, and everyone is trying to gain an advantage, spoofing is one way in which some traders bend the rules to try and gain an advantage.

Spoofing is also something that traders and investors should be aware of. This tactic is sometimes used to change asset prices — whether stocks, bonds, or cryptocurrencies.

Key Points

• Spoofing is an illegal trading tactic where traders place and cancel orders to manipulate asset prices, influencing market supply and demand dynamics.

• Traders often use algorithms to execute high volumes of fake orders, creating a false perception of demand that can inflate or deflate security prices.

• The practice of spoofing is a criminal offense in the U.S., established under the Dodd-Frank Act, with serious penalties for those caught engaging in it.

• Significant fines have been imposed on both institutions and individual traders for spoofing, highlighting the risks of detection and legal consequences.

• Investors should remain vigilant against spoofing, as it can distort market activity and impact trading strategies, particularly for active traders and day traders.

What Is Spoofing?

Spoofing is when traders place market orders — either buying or selling securities — and then cancel them before the order is ever fulfilled. In a sense, it’s the practice of initiating fake orders, with no intention of ever seeing them executed.

Spoofing means that someone or something is effectively spamming the markets with orders, in an attempt to move security prices.

What’s the Point of Spoofing?

Because stock market prices are determined by supply and demand — for instance, the more demand there is for Stock A, the higher Stock A’s price is likely to go, and vice versa — they can be manipulated to gain an advantage. That’s where spoofing comes in.

By using bots or an algorithm to make a high number of trades and then cancel them before they go through, it’s possible for spoofers to manipulate security prices. For a trader looking to buy or sell a certain security, those valuations may be moved enough to increase the profitability of a trade.

Spamming the markets with orders creates the illusion that demand for a security is either up or down, which is then reflected in the security’s price. Because it would require an awful lot of “spoofed” orders to move valuations, spoofers might rely on an algorithm to place and cancel orders for them, rather than handle it manually. For that reason, spoofing is typically associated with high-frequency trading (HFT).

Is Spoofing Illegal?

If it sounds like spoofing is essentially cheating the system, that’s because it is. In the United States, spoofing is illegal, and is a criminal offense. Spoofing was made illegal as a part of the Dodd-Frank Act, which was signed into law in 2010. Specifically, spoofing is described as a “disruptive practice” in the legislation, straight from the U.S. Commodity Futures Trading Commission (CFTC), which is the independent agency responsible for overseeing and policing spoofing on the markets:

Dodd-Frank section 747 amends section 4c(a) of the CEA to make it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that —

(A) violates bids or offers;

(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or

(C) is, is of the character of, or is commonly known to the trade as ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).

Additionally, there are laws and rules related to spoofing under rules from the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA), too.

Example of Spoofing

A hypothetical spoofing scenario isn’t too difficult to dream up. For instance, let’s say Mike, a trader, has 100,000 shares of Firm Y stock, and he wants to sell it. Mike uses an algorithm to place hundreds of “buy” orders for Firm Y shares — an algorithm that will also cancel those orders before they’re executed, so that no money is actually spent.

The influx of orders is read by the market as an increase in demand for Firm Y stock, and the price starts to increase. Mike then sells his 100,000 shares at an inflated price — an artificially inflated price, since Mike effectively manipulated the market to increase his profits.

Consequences of Spoofing

Because spoofing is a relatively easy way to manipulate markets and potentially increase profits, it’s also a fairly common practice for some traders and firms, despite being against the law. That transgression can cost spoofers if and when they’re caught.

For example, one financial institution was fined nearly $1 billion by the SEC during the fall of 2020 after the company was caught conducting spoofing activity in the precious metals market.

But it’s not just the big players that can be on the receiving end of a smack down by the authorities. During August of 2020, an individual day trader was caught manipulating the markets through spoofing activity — actions that netted the trader roughly $140,000 in profits. The trader was ultimately ordered by the CFTC to pay a fine of more than $200,000.

Despite the cases that make headlines, it’s generally hard to identify and catch spoofers. With so many orders being placed and executed at once (especially with algorithmic or computer aid) it’s difficult to identify fake market orders in real time.

How to Protect Against Spoofing

There are a number of parties that are constantly and consistently trying to gain an edge in the markets, be it through spoofing or other means. For investors, it’s worth keeping that in mind while sticking to an investing strategy that works for you, rather than investing with your emotions or getting caught up in the news cycle.

In a time when a single social media post or errant comment on TV can send stock prices soaring or into the gutter, it’s critical for investors to understand what’s driving market activity.

Test your understanding of what you just read.

The Takeaway

Spoofing is meant to gain advantage in the markets, but as such it’s illegal and penalties can be steep. Beyond the spoofers trying to manipulate the market, spoofing has the potential to affect all investors.

If spoofers are manipulating prices for their own gain, that can cause traders and investors to react, not realizing what is going on behind the scenes. While this is more of an issue for active investors or day traders, it’s something to be aware of.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

You may also be interested in:

Market Manipulation: An Overview for Retail Investors

Wash Trading: What Is It and How Does It Work?

What Is a Dark Pool in Trading?

Photo credit: iStock/visualspace

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

Feb

2025

SPAN Margin: How It Works, Pros & Cons

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Terminology | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Many brokerage accounts require traders to maintain a margin account when trading options, which involves depositing funds or securities as collateral to reduce the risk of potential losses.

The SPAN system determines margin requirements on options and futures trading accounts by considering key factors, such as volatility, price changes, and portfolio composition to conduct a one-day risk global assessment.

In this sense, options margin is quite different from the margin accounts used for trading stocks and other securities, where margin refers to the use of debt to increase a position.

Key Points

• SPAN stands for Standardized Portfolio Analysis of Risk, and is used by brokerages, investment banks, and exchanges to estimate a portfolio’s worst-case risk scenario for options and futures trading.

• The SPAN system incorporates factors like market volatility, price changes, time decay, and portfolio composition to ensure margin requirements align with a trader’s risk exposure, so there is enough collateral to cover potential losses.

• The SPAN margin calculation evaluates risk scenarios using sophisticated algorithms that automate the margin-setting process.

• Advantages of using SPAN include a holistic portfolio approach and potentially lower margin requirements; disadvantages involve fluctuations in daily margin requirements due to changing market conditions.

• Though the SPAN risk assessment and modeling method was developed for the derivatives markets, it is now employed as a risk-management tool for other financial instruments as well.

What Does SPAN Stand For?

SPAN stands for standardized portfolio analysis of risk, and is a framework used by exchanges and financial institutions to ensure that options and futures traders have enough collateral to cover potential losses.

Today, many derivative exchanges use the SPAN system for risk analysis.

What Is SPAN Margin?

The SPAN margin calculation helps options traders understand risk in their portfolios, and assists brokers in managing risk by ensuring that options and futures margin traders have enough collateral in their accounts to cover potential losses.

The SPAN system relies on algorithmic calculations to estimate a portfolio’s one-day worst-case risk scenario.
SPAN margin is calculated using key inputs such as the strike price, time decay, market volatility, price changes, and position offsets, among other factors.

What Is a Stock Margin Account?

The margin in an options or futures account is different from how a stock margin account functions when making stock trades on margin. When trading stocks and other securities, margin allows traders to use leverage (i.e., borrow funds) to increase their position. The risk of using a margin account is the potential for steep losses, possibly exceeding the initial investment.

By contrast, SPAN is used by options and futures exchanges around the world to determine a trader’s one-day worst-case scenario based on their portfolio positions. This risk modeling ensures the correct amount of collateral is deposited.

Margin requirements can be determined in an automated way from the calculation’s output.

How Does SPAN Margin Work?

The SPAN margin calculation uses modeled risk scenarios to determine margin requirements on options and futures. Some key variables included in the algorithm are strike prices, risk-free interest rates, price changes in the underlying assets, volatility shifts, and the effect of time decay on options.

Not all options positions have margin requirements. Buying options, for example, typically does not require margin, while selling (or writing) options requires a deposit to mitigate potential risks.

In essence, the options seller exposes the broker to risk when they trade. To reduce the risk that the trader won’t be able to pay back the lender, margin requirements establish minimum deposits that must be kept with the broker. (This is different from the margin requirements needed in a stock trading account.)

Instead of relying on fixed or static figures, the SPAN system automates the margin-setting process, relying on sophisticated algorithms and a range of inputs. SPAN margin looks at the worst-case scenario in terms of one-day risk, so the margin requirement output will change each day.

The analysis is done from a total-portfolio perspective since all assets are considered. For example, the SPAN margin calculation can take excess margin from one position and apply it to another.

Pros and Cons of SPAN Margin

There are upsides and downsides to SPAN margin in options and futures trading.

The Advantages

The key advantage of SPAN margins is that it is intended to cover potential losses.

Net option sellers benefit from SPAN’s holistic portfolio approach. SPAN combines options positions when assessing risk. If you have an options position with a substantial risk in isolation, but another options position that offsets that risk, SPAN considers both. The effect is a potentially lower margin requirement.

On top of that, futures options exchanges that use the SPAN margin calculation allow Treasury bills to be margined.

The Downsides

Changing market conditions can result in significant fluctuations in daily margin requirements.SPAN margin isn’t without its challenges. One big drawback is how much margin requirements can shift from day to day. If the market gets volatile or prices move suddenly, you might find yourself scrambling to meet a higher margin call to keep your positions open.

Another issue is the complexity. SPAN’s calculations aren’t always easy to follow, especially for newer traders. Unlike simpler, fixed-margin systems, SPAN relies on a lot of variables, so you might not always know what to expect with your margin needs.

Although SPAN’s portfolio-wide approach is helpful, it can sometimes create confusion. Margin offsets across different positions might be hard to follow unless you’re closely tracking how everything is allocated. This makes it important to stay on top of your portfolio and understand how SPAN applies to your trades.

The Takeaway

SPAN margin is a helpful risk-management tool for options trading. Algorithms determine margin requirements based on a one-day risk analysis of a trader’s account, taking into consideration factors such as market volatility and position size.

By considering the entire portfolio, SPAN helps ensure that margin requirements are in line with a trader’s risk exposure. This provides a more dynamic, accurate approach to managing risk.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

🛈 SoFi does not offer futures trading at this time.

FAQ

What does SPAN stand for in margin trading?

SPAN margin stands for “standardized portfolio analysis of risk.” It is a system used by many options and futures exchanges worldwide to gauge a portfolio’s risk level, and ensure that the trader has enough collateral to cover potential losses.

How is SPAN margin used?

SPAN margin is used to manage risk. It calculates the amount of good-faith deposit a trader must add to their account in order to engage in options or futures trading. To help ensure that traders maintain adequate collateral for their positions, mitigating risks to the broker, exchanges use the SPAN system to calculate a worst possible one-day outcome and set a margin requirement accordingly.

What is a SPAN calculation?

SPAN is calculated using risk assessments. That means an array of possible outcomes is analyzed based on different market conditions using the assets in a portfolio. These risk scenarios specify certain changes in variables such as price changes, volatility shifts, and decreasing time to expiration in options trading.

Photo credit: iStock/NakoPhotography

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

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

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

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

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

SOIN-Q125-097

Feb

2025

Businesswoman Using Her Phone Standing At Office

How Do You Cash Out Stocks? Guide to Selling Stocks

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

Table of Contents

Can You Cash Out Stocks?
What Happens When You Sell a Stock?
How to Cash Out Your Stocks: 5 Steps
Motivations for Selling Stocks
Understanding Types of Sell Orders
Factors to Assess When Cashing Out Stocks
Pros and Cons of Reinvesting Profits
Platforms for Buying and Selling Stocks
FAQ

Cashing out stocks essentially means selling them, and most investors should be able to sell their stocks without too much trouble. Buying stocks can be fairly straightforward, whether online or through a financial advisor. But, when it’s time to sell shares, some beginning investors struggle with how to turn their stocks back into cash. After all, money invested in stocks is not immediately cash.

Investors may want to sell stocks for a wide variety of reasons. They might wish to reinvest the cash into another asset with an eye toward long-term gains. Or they could choose to withdraw funds from the stock market to cover short-term, daily expenses with cash earned from the sale. So, how might investors go about cashing out stocks? And, what factors might individuals curious about how to cash out stocks bear in mind? Here’s an overview of the how and when of selling stocks.

Key Points

Stocks can be cashed out by selling them through a broker on a stock exchange.
Selling stocks can provide cash for major expenses or to reinvest in other assets.
Steps to cash out stocks include determining investment goals, accessing a brokerage account, placing a sell order, waiting for the sale to be completed, and receiving the proceeds.
Motivations for selling stocks include accessing cash for expenses, cashing out profits, preventing significant losses, day trading, and offloading low-performing stocks.
Types of sell orders include market orders, limit orders, stop orders, and trailing sell stop orders.

Can You Cash Out Stocks?

Investors can cash out stocks by selling them on a stock exchange through a broker. Stocks are relatively liquid assets, meaning they can be converted into cash quickly, especially compared to investments like real estate or jewelry. However, until an investor sells a stock, their money stays tied up in the market.

What Happens When You Sell a Stock?

When you sell a stock for a higher price than you paid, the proceeds from the sale will include your original investment plus your gains and minus any fees. If you sold your stock at a lower price than you paid, your total return will be less than your original investment (depending on how much of an overall loss you’re taking), minus any fees. So, you can have either a positive or negative return.

How to Sell Stocks: 5 Steps

There are several steps involved in selling stocks, including the following:

1. Determine Your Investment Goals

Consider why you want to sell your stocks and whether it aligns with your overall investment goals.

2. Access Your Brokerage Account

You need to access or log in to your brokerage account to sell your stocks.

3. Place an Order to Sell your Stocks

Once you’re logged into your brokerage account, you can place a sell order (like the orders outlined below) to sell your stocks. You can choose to sell at a specific price or through a market order, which will sell the stocks at the current market price.

4. Wait for the Sale to be Completed

After placing an order to sell your stocks, you will need to wait for the sale to be completed. This can take anywhere from a few seconds to several days, depending on market conditions and the type of order you have placed.

5. Receive the Proceeds From the Sale

After the sale is completed, the proceeds from the sale will be deposited into your brokerage account or sent to you in the form of a check.

Motivations for Selling Stocks

Some investors watch their portfolios closely, selling stocks regularly to cash out profits or avoid significant losses.

However, one common reason investors decide to sell stocks is that they need the cash from the investments to pay for living expenses. While different investors might sell for various reasons, it can be helpful to understand the motivation that drives the desire to sell.

So, why might investors want to cash out stocks? Some common reasons could include the following:

Motivation for Selling Stocks

Accessing Cash for Life Expenses

If investors know they’ll need cash for a major life expense, such as buying a car or home, they may choose to cash out some stocks. Selling shares might ensure there’s enough cash around to cover big expenses.

One benefit to having cash on hand instead of having money invested in stocks is that cash is not subject to the ups and downs of the stock market. However, the value of cash is impacted over time by inflation.

Some investors might also opt to move money out of stocks into potentially more secure investments, such as bonds or a money market account, until they’re ready to pay for that large expense.

Cashing Out Profits

If it appears as though a recession is coming or investors have seen significant gains in their portfolio, they might choose to cash out to lock in the profits. It’s important to understand, however, that attempting to time the stock market to avoid losses during unstable economic conditions is risky. What seems to be a trend in the market one day may or may not indicate how the markets may perform in the future.

Investors may want to ask themselves whether they’re interested in cashing out based on an emotional reaction (fear of recent market ups and downs, for instance) or a need for profits.

Preventing Significant Losses

The goal of investing in stocks is to earn profits or generate a positive return – online investing, or otherwise – is to not take losses. Still, there are some instances in which it could make sense to sell at a loss.

For example, an investor may sell specific stock holdings to prevent the likelihood of deeper losses in the future. Another scenario that might drive an investor to want to sell stocks is an industry-wide hardship, where numerous companies in one sector of the economy experience financial calamity at the same time. Industry-wide hardships may negatively impact the value of specific stock holdings.

In other instances, a company might reduce or eliminate shareholder dividends. Earning dividends may be a prime reason an investor bought the stock in the first place, so they decide to sell the stock because it’s no longer part of their investment strategy.

Day Trading

Day trading is one way of selling stocks, but it can involve significant risks. Day trades are the purchasing and selling (or vice versa) of the same stock on the same day. Here, traders are attempting to gain profit through short-term trades — typically through the use of technical or market analyses, which can require an in-depth knowledge of the intricacies of trading.

If it were possible to clearly predict future stock movements, everyone might want in on the stock market. But, stocks are volatile. Rather than guessing based on company news and technical indicators, traders who wish to make shorter term trades might choose to set a price goal. For instance, if they buy shares at $10 each, they could set a goal to sell them when they reach $18 per share.

Offloading Low Performing Stocks

Even if investors conduct thorough research on a company before buying a stock, they may later realize it wasn’t a boon for their portfolio. If a purchased stock continues to decline in value over time, investors may opt to offload the low-performing stock.

Also, some investors sell low-performing stocks at the end of the year for tax-loss harvesting, where investors sell investments at a loss to reduce their overall tax burden.

What Are the Different Types of Sell Orders?

Once an investor has decided to cash out a stock, there are several options for how to sell. Each comes with different amounts of control over the sale. Here’s an overview of the most common types of sell orders:

Types of Sell Orders

Market Orders

When placing a market order, an investor agrees to sell their shares at the current market price per share. The sell order will be placed immediately or when the market reopens if the order is placed after hours.

One upside of market orders is that the trade can usually be executed quickly. A downside is that the investor has no control over the selling price.

Limit Orders

With a limit order, however, an investor can set the minimum price they are willing to sell their shares for. The sell order only gets executed if and when the stock reaches that price or higher.

For example, if you want to sell a stock currently trading at $50 per share and place a sell limit order at $55, the order will only be filled if the stock price rises to $55 or above.

The upside of limit orders is that investors can control the selling price (and potentially get a higher price than the current market rate). But, one possible downside is that their order won’t go through instantly and, potentially, might never go through (if the stock doesn’t reach the selected price).

Stop Orders or Stop-Loss Orders

A stop-loss order is placed with a brokerage to automatically sell a security when it reaches a specific price, known as the stop price. The reason investors set stop orders is to prevent incurring significant losses if a stock plummets in value.

For example, if you own a stock currently trading at $50 per share and place a stop-loss order at $40, the order will be triggered, and the stock will be sold if the price falls to $40 or below.

The upside of stop orders is that they can help protect against significant losses if the stock price drops unexpectedly (but not guarantee that you’ll avoid them). However, stop-loss orders do not guarantee a specific price, and the actual sale price may differ from the stop price due to market fluctuations.

Trailing Sell Stop Orders

Investors may also choose to place a trailing sell stop order, which allows you to set a stop price for a security that adjusts automatically as the price of the security moves in your favor.

With a trailing sell stop order, you can set the initial stop price at a certain percentage or dollar amount below the market price. The stop price will then adjust automatically as the market price of the security increases so that the stop price remains a fixed percentage or dollar amount below the market price. If the market price of the security then falls and reaches the stop price, the order will be triggered, and the security will be sold.

Trailing sell stop orders may allow traders to benefit from gains when a stock’s price rises while still protecting themselves from potential losses.

Factors to Assess When Selling and Cashing Out Stocks

There are several factors that you should consider when cashing out stocks:

Capital gains taxes: Cashing out stocks may result in capital gains, which are subject to taxes. It is important to consider the tax implications of cashing out stocks. Not all stock holdings are taxed similarly, which could impact an investor’s decision to sell or not to sell.
Investment goals: Consider why you are cashing out stocks and whether it aligns with your overall investment goals. If you are cashing out stocks to meet a short-term financial need, selling may be necessary even if the stock price is not optimal. However, if you are cashing out stocks as part of a long-term investment strategy, it may be worth holding onto the stocks, even if they’ve declined in price, because they may still appreciate over time.
Fees and commissions: Brokerage firms generally charge investment fees and commissions for executing trades, which can impact the overall profit or loss on the sale of your stocks. Considering these fees and commissions is important when deciding whether to cash out stocks.

Pros and Cons of Reinvesting Profits

Investors may choose to sell stocks to gain or spend cash. But, individuals may want to reinvest earnings from the stocks sold into other assets. If investors decide to reinvest their profits, they need to consider the advantages and disadvantages of doing so.

Pros

Compound growth: Reinvesting stock profits allows you to compound your returns on your investments, which may significantly increase your overall returns over time.
Diversification: Reinvesting stock profits can help you diversify your portfolio and reduce risk by investing in various stocks rather than holding a lot of cash.
Hedge against inflation: Cash is subject to inflation, which makes cash savings lose value over time. Over a long-term period, cash tends to lose value, whereas the stock market tends to grow. By reinvesting rather than holding on to cash, investors may be less likely to lose money due to inflation.

Recommended: 5 Tips to Hedge Against Inflation

Cons

Opportunity cost: Reinvesting stock profits means that you are not using the proceeds from the sale of your stocks to meet other financial goals or needs, such as paying off debt or saving for a down payment on a house.
Taxes: Reinvesting stock profits may result in capital gains tax, which can reduce the overall returns on your investments.
Market risk: The value of your investments can fluctuate due to market conditions, and reinvesting stock profits means you are exposed to the risks of the stock market.

Platforms for Buying and Selling Stocks

People just getting started with building a portfolio of stocks have several options. Options might include online platforms or traditional phone-in and in-person traders, including:

Online Brokerage Accounts

There are numerous online brokerage accounts and digital apps where investors can buy and sell stocks to build a portfolio. Online brokerage accounts and apps can be a convenient investment method, allowing users to sell from anywhere. Unlike many traditional brokerage firms, many trading apps don’t charge a commission on trades.

Opening a brokerage account will require identity verification and connection with a bank account for deposits and withdrawals.

Financial Advisors

Investors can also make stock trades over the phone or in person by working with a financial advisor. Sell orders placed through these individuals generally get executed within 24 hours, so it can be a slower method to cash out stocks. Before the arrival of web-driven trading, most stocks were bought and sold through traditional investment brokers or financial advisors.

Test your understanding of what you just read.

The Takeaway

Before selling any stocks, investors might opt to evaluate their short- and long-term financial goals. Then, they could devise a plan to pursue those objectives, which may lead to cashing out stock holdings. However, knowing when to sell a stock can take time and effort. Rather than trying to time the market and sell stocks to lock in immediate profits and avoid future losses, individuals may want to invest for the long term.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

How long does it take to cash out stocks?

The time it takes to cash out stocks can vary depending on the type of order you place and market conditions. Generally, it can take anywhere from a few seconds to several days for a sale of stocks to be completed.

Do you get money when you sell stock?

Yes, you will receive money when you sell stock, as long as its value is more than $0. The proceeds from the stock sale will be deposited into your brokerage account or sent to you in the form of a check. The amount of money you receive will depend on the price you sell the stock and any fees or commissions charged by the brokerage firm.

Can I withdraw money from stocks?

To access cash from stocks, you need to sell your holdings and use the proceeds from the sale to withdraw cash from your brokerage account.

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

SOIN-Q424-031

Feb

2025

401(a) vs 401(k) Compared

By MP Dunleavey | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement, Terminology | No Comments

Table of Contents

What Is a 401(a) Plan?
What is a 401(k) Plan?
401(a) vs. 401(k) Contribution Limits
401(a) vs. 401(k) Investment Options
401(a) vs. 401(k) Tax Rules
401(a) vs. 401(k) Rollover Rules
What is a 401(a) Profit Sharing Plan?
Summarizing the Differences Between 401(k) and 401(a) Plans
Summarizing the Similarities Between 401(a) vs 401(k) Plans
Pros and Cons of 401(k) vs 401(a) Plans

A 401(k) plan and a 401(a) plan may sound confusingly similar, but there are some differences between the two retirement accounts.

The biggest differences between 401(k) vs 401(a) plans are in the types of companies that offer them and their contribution requirements. While most private sector companies are eligible to offer 401(k) plans, only certain government and public organizations can offer their employees a 401(a) plan. Employers must contribute to 401(a) plans and can make it mandatory for employees to contribute a pre-set amount as well. By contrast, employers do not have to contribute to 401(k) plans and employees are free to choose whether they want to contribute.

Key Points

• A 401(a) plan is an employer-sponsored retirement account typically available to government workers and employees at educational institutions and nonprofits. Employer contributions are mandatory, while employee contributions may be voluntary.

• A 401(k) plan is offered by for-profit employers as part of the employee’s compensation package. Employers are permitted but not required to contribute to a 401(k) plan.

• For 2024, the annual contribution limit for employer and employee combined is $69,000, $70,000 in 2025, with an additional $7,500 catchup contribution allowed for employees 50 or older. And in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

• Employee contributions to 401(a) or 401(k) plans in 2024 are $23,000 per year. For those 50 and older it’s $30,500 with the catch-up contribution of $7,500. The limits for 2025 are $23,500 per year, and $31,000 for those 50-plus.

• You can borrow from either a 401(a) or a 401(k) plan with restrictions. Withdrawals before age 59 1⁄2 may incur penalties. Employees can begin to withdraw money without penalty when they turn 59 1⁄2.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored type of retirement account that typically covers government workers and employees from specific education institutions and nonprofits. It is different from an IRA in that the employer sponsors the plan, determines the investment options that the employees can choose from, and sets the vesting schedule (the amount of time an employee will have had to have worked with the organization before all employer contributions become fully theirs, even if they leave the company).

With IRAs, the individual investor decides how much to contribute and if/when they want to make withdrawals from the account. With a 401(a) plan, employer contributions are mandatory; employee contributions are not. All contributions made to the plan accrue on a tax-deferred basis.

Recommended: IRAs vs 401(k) plans

However, withdrawing from either type of plan may incur penalties for withdrawing money before age 59 ½.

What Is a 401(k) Plan?

A 401(k) plan is a benefit offered by for-profit employers as part of the employee’s compensation package. The employer establishes the plan, along with the investment options the employee can choose from and the vesting schedule. As with 401(a) plans, funds contributed are tax-deferred and help employees save for retirement.

Some employers choose to offer a match program in which the company matches employee contributions up to a specific limit.

401(k) plans are also accessible to entrepreneurs and self-employed business owners.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Who Contributes to Each Plan?

Under a 401(a) plan, employer contributions are mandatory, though the employer can decide whether they’ll contribute a percentage of the employees’ income or a specific dollar amount. Employers can establish multiple 401(a) accounts for their employees with different eligibility requirements, vesting schedules, and contribution amounts.

Employee participation is voluntary, with contributions capped at 25% of their pre-tax income.

Under a 401(k) plan, employees can voluntarily choose to contribute a percentage of their pre-tax salary. Employees are not required to participate in a 401(k) plan.

Employers are permitted but not required to contribute to a 401(k) plan, and many will match up to a certain amount — say, 3% — of employees’s salaries.

401(a) vs 401(k) Contribution Limits

For 2024, the total annual 401(a) contribution limit — from both employer and employee — is $69,000; for 2025 it’s $70,00. However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section).

Employee contributions to 401(k) plans have a $23,000 limit in 2024 and a $23,500 limit in 2025. Employees who are 50 or older may contribute up to an additional $7,500 for a total of $30,500 in 2024 and a total of $31,000 in 2025.

An employee with a 401(k) plan may also fund a Roth or traditional IRA. However, restrictions apply.

401(a) vs 401(k) Investment Options

401(a) vs 401(k) plans often offer various investment options, which may include more conservative investments such as stable value funds to more aggressive investments such as stock funds. Some 401(a) plans may allow employees to simplify diversified portfolios or seek investment advice through the plan’s advisor.

Most 401(k) plans also offer various investment choices ranging from low-risk investments like annuities and municipal bonds to equity funds that invest in stocks and reap higher returns.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

401(a) vs 401(k) Tax Rules

The tax rules in a 401(a) plan may be one difference between a 401(k) and 401(a).

With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. Pre-tax means contributions are not taxed at the time of investment, but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account

A 401(k), on the other hand, is a tax-deferred retirement plan, meaning all contributions are pre-tax. The wages employees choose to contribute to their plan are untaxed upon initial investment. Income taxes only kick in when the employee decides to withdraw funds from their account.

Can You Borrow from Each Plan?

You can borrow from either a 401(a) or a 401(k) plan if you have an immediate financial need, but there are some restrictions and it is possible to incur early withdrawal penalties.

An employer can limit the amount borrowed from a 401(a) plan — and may choose not to allow employees to borrow funds. If the employer does allow loans, the maximum amount an employee can borrow is the lesser of:

• $10,000 or half of the vested account balance, whichever is greater OR

• $50,000

Because the employee is borrowing money from their account, when the employee pays back the loan’s interest, they are paying it to themselves. However, the IRS requires employees to pay back the entire loan within five years . If they don’t pay the loan back, the IRS will consider the loan balance to be a withdrawal and will require taxation on the remaining loan amount as well as a 10% penalty if the employee is under age 59 ½.

Borrowing from a 401(k) plan is similar. Employees are limited to borrowing $50,000 or half of the vested balance — whichever is less. One big difference between borrowing from a 401(a) vs. a 401(k) plan is employees lose out on a tax break if they borrow from their 401(k) because they are repaying it with after-tax dollars. Because the money is taxed again when withdrawn during retirement, an investor is essentially being taxed twice on that money.

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

You may be able to use the funds from a 401(a) or 401(k) account to purchase a home. Remember, with 401(a) plans, the employer ultimately decides if loans are permitted from the 401(k).

If you borrow money from your 401(a) or 401(k) to fund the purchase of a home, you have at least five years to repay what you’ve taken out.

The maximum amount you’re allowed to borrow follows the rules stated above:

• $50,000 OR

• The greater between $10,000 or half of what’s vested in your account,

Whichever is less.

When Can You Withdraw From Your Retirement Plan?

Employees can begin to withdraw money from their 401(a) plan without penalty when they turn 59 ½. If they make any withdrawals before 59 ½, they will need to pay a 10% early withdrawal penalty. Once they reach 73, they’re required to make withdrawals if they haven’t already started to. [link to article about RMDs]

With a 401(k) plan, if an employee retires at age 55, they can start withdrawing money without penalty. However, to take advantage of this early-access provision, they need to have kept the money in the 401(k) plan and not have rolled it into a Roth IRA.

Employees also need to have ended their employment no earlier than the year in which they turn 55.

Otherwise, the restrictions are the same as with a 401(a) plan, and they can begin to withdraw money penalty-free once they turn 59 ½.

401(a) vs 401(k) Rollover Rules

Generally, 401(a) and 401(k) accounts have similar rollover rules. When an employee chooses to leave their job, they have the option to roll over funds. The employee can choose to roll the account into another retirement plan or take a lump-sum distribution. Generally, if the employee decides to roll over their plan to another plan, they have to do so within 60 days of moving the funds.

The rules for a 401(a) rollover dictate that funds can be transferred to another qualified plan like a 401(k) or an individual retirement account (IRA). The rules for 401(k)s are the same.

If the employee decides to take a lump-sum distribution from the account, they will have to pay income taxes on the full amount. If they are under 59 ½, they will also have to pay the 10% penalty.

Recommended: How To Roll Over a 401(k)

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

If you quit your job, you can leave the money in your former employer’s plan, roll it into the plan of your new employer, transfer it to a Rollover IRA, or cash it out. If you are under age 59 ½ and cash out the plan, you will likely need to pay taxes and a 10% penalty.

However, if you quit your job before you are fully invested in the plan, you will not get your employer’s contributions. You will only get what you contributed to the plan.

A 401(a) profit sharing plan is a tax-advantaged account used to save for retirement. Employees and employers contribute to the account based on a set formula determined by the employer. Unlike 401(a) plans, the employer’s contributions are discretionary, and they may not contribute to the plan every year.

All contributions from employees are fully vested. The ownership of the employer contributions may vary depending on the vesting schedule they create.

Like 401(a) plans, 401(a) profit sharing plans allow employees to select their investments and roll over the account to a new plan if the employee leaves the company. If an employee wants to take a distribution before reaching age 59 ½, they are subject to income taxation and a 10% penalty.

Summarizing the Differences Between 401(k) and 401(a) Plans

The main differences between a 401(k) and 401(a) are:

• 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers.

• Employees don’t have to participate in a 401(K), but they often must participate in a 401(a).

• An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like.

• With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. With a 401(k), all contributions are pre-tax.

Summarizing the Similarities Between 401(a) vs 401(k) Plans

A 401(k) vs. a 401(a) has similarities as well. These include:

• Both types of plans are employer-sponsored retirement accounts.

• Employees can borrow money from each plan, though certain restrictions apply.

• There may be a 10% penalty for withdrawing funds before age 59 ½ for both plans.

401(a) vs Other Retirement Plan Options

401(a) vs 403(b)

A 403b is a tax-advantaged retirement plan offered by specific schools and nonprofits. Like 401(a) and 401(k) plans, employees can contribute with pre-tax dollars. Employers can choose to match contributions up to a certain amount. Unlike the 401(a) plan, employers don’t have mandatory contributions.

For 2024, the employee contributions limit is $23,000. For 2025, the employee contributions limit is $23,500. If the plan allows, employees who are 50 or older may contribute a catch-up amount of $7,500. And in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Generally, 403b plans are either invested in annuities through an insurance company, a custodian account invested in mutual funds, or a retirement income account for church employees.

Additionally, 403b plans allow for rollovers and distributions without a 10% penalty after age 59 ½. Like similar plans, employees may have to pay a 10% penalty if they take a distribution before reaching age 59 ½ unless the distribution meets other qualifying criteria.

401(a) vs 457

457 plans are retirement plans offered by certain employers such as public education institutions, colleges, universities, and some nonprofit organizations. 457 plans share similar features with 401(a) plans, including pre-tax contributions, tax-deferred investment growth, and a choice of investments that employees can select.

Employees can also roll over funds to a new plan or take a lump-sum distribution if they leave their job. However, unlike a 401(a) or 401(k) plan, the withdrawal is not subject to a 10% IRS penalty.

Another option offered through 457 plans is for employees to contribute to their account on either a pre-tax or post-tax basis.

401(a) vs Pension

A 401(a) is a defined contribution plan, where a pension is a defined benefit plan. With a pension, employees receive the benefit of a fixed monthly income in retirement; their employer pays them a fixed amount each month for the rest of their life. The monthly payment can be based on factors like salary and years of employment.

With a 401(a), employees have access to what they and their employer contributed to their 401(a) account. In contrast to a pension plan, retirees aren’t guaranteed a fixed amount and their contributions may not last through the end of their life.

Pros and Cons of 401(k) vs 401(a) Plans

Both 401(k) and 401(a) plans have pros and cons.

Pros of a 401(k):

• Employers may match a portion of the employee’s contributions.

• The plan is fairly easy to set up.

• Employees generally have a wide range of investment options.

Pros of a 401(a):

• Lower fees

• Contributions are tax-deferred.

• Both the employer and employee make monthly contributions.

Cons of a 401(k):

• Fees may be high.

• Need to wait until fully vested to keep employer matching contributions.

• Penalty for withdrawing funds early.

Cons of a 401(a):

• Investment choices may be limited.

• Participation may be mandatory.

• Penalty for withdrawing funds early.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Other Retirement Account Options

Roth IRAs

Roth IRAs are funded with after-tax contributions, which means they aren’t tax deductible. However, the withdrawals you take in retirement are tax-free.

You can withdraw the amount you contributed to an IRA at any time, without penalty.

The Roth IRA annual contribution limit for 2024 and 2025 is $7,000 ($8,000 if you’re 50 or older).

Traditional IRAs

A traditional IRA is similar to a 401(k): both plans offer tax-deferred contributions that may lower your taxable income. However, in retirement, you will owe taxes on the money you withdraw from both accounts.

Unlike a 401(k), a traditional IRA is not an employer-sponsored plan. Anyone can set up an IRA to save money for retirement. And if you have a 401 k), you can also have a traditional IRA.

The traditional IRA contribution limit for 2024 and 2025 is $7,000 ($8,000 if you’re 50 or older).

HSAs

An HSA, or Health Savings Account, allows you to cover healthcare costs using pre-tax dollars. But you can also use an HSA as a retirement account. At age 65, you can withdraw the money in your HSA and use it for any purpose. However, you will pay taxes on anything you withdraw that’s not used for medical expenses.

In 2024, you can contribute up to $4,150 in an HSA as an individual, or $8,300 for a family. In 2025, you can contribute up to $4,300 as an individual, or $8,550 for a family.

Test your understanding of what you just read.

Investing In Your Retirement

The largest difference between 401(a) and 401(k) plans is the type of employers offering the plans. Whereas 401(a) plans typically cover government workers and employees from specific education institutions and nonprofits, 401(k) plans are offered by for-profit organizations. Thus, a typical employee won’t get to choose which plan to invest in — the decision will be made based on what organization they work for.

Both 401(a) plans and 401(k) plans do have restrictions that might bother some investors. For example, an employee will be at the mercy of their employer’s choice when it comes to investing options.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is a 401(a) better than a 401(k)?

It’s not necessarily a matter of which plan is “better.” 401(k) plans are offered by private employers, while the government and nonprofits offer 401(a) plans. Both plans allow you to save for retirement in a tax-deferred way.

How are 401(a)s different from 401(k)s?

There are some differences between 401(k) and 401(a) plans. For instance, 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers. In addition, employees don’t have to participate in a 401(k), but they often must participate in a 401(a). An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like. And finally, those who have a 401(k) may have more investment options than those who have a 401(a).

Can you roll a 401(a) into a 401(k)?

Yes, you can roll a 401(a) into a 401(k) if you leave your job and then get a new job with a private company that offers a 401(k). You can also roll over a 401(a) into a traditional IRA.

Photo credit: iStock/solidcolours

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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

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

Stock vs Share: Comparison

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What Are Stocks?

Why Should I Buy Stocks?

Types of Stocks

How Are Stocks Categorized?

By Different Styles of Investing

By Market Cap

What Are Shares?

Types of Shares

Stock Splits Definition

Other Ways to Own Stock

The Takeaway

What Is Spoofing?

What’s the Point of Spoofing?

Is Spoofing Illegal?

Example of Spoofing

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Consequences of Spoofing

How to Protect Against Spoofing

The Takeaway

You may also be interested in:

What Does SPAN Stand For?

What Is SPAN Margin?

What Is a Stock Margin Account?

How Does SPAN Margin Work?

Pros and Cons of SPAN Margin

The Advantages

The Downsides

The Takeaway

FAQ

What does SPAN stand for in margin trading?

How is SPAN margin used?

What is a SPAN calculation?

Can You Cash Out Stocks?

What Happens When You Sell a Stock?

How to Sell Stocks: 5 Steps

1. Determine Your Investment Goals

2. Access Your Brokerage Account

3. Place an Order to Sell your Stocks

4. Wait for the Sale to be Completed

5. Receive the Proceeds From the Sale

Motivations for Selling Stocks

Accessing Cash for Life Expenses

Cashing Out Profits

Preventing Significant Losses

Day Trading

Offloading Low Performing Stocks

What Are the Different Types of Sell Orders?

Market Orders

Limit Orders

Stop Orders or Stop-Loss Orders

Trailing Sell Stop Orders

Factors to Assess When Selling and Cashing Out Stocks

Pros and Cons of Reinvesting Profits

Pros

Cons

Platforms for Buying and Selling Stocks

Online Brokerage Accounts

Financial Advisors

The Takeaway

FAQ

How long does it take to cash out stocks?

Do you get money when you sell stock?

Can I withdraw money from stocks?

What Is a 401(a) Plan?

What Is a 401(k) Plan?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Who Contributes to Each Plan?

401(a) vs 401(k) Contribution Limits

401(a) vs 401(k) Investment Options

401(a) vs 401(k) Tax Rules

Can You Borrow from Each Plan?

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

When Can You Withdraw From Your Retirement Plan?

401(a) vs 401(k) Rollover Rules

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

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