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Should You Invest With Friends?

Investing with friends might seem like an intriguing concept. Instead of being the sole decision maker, you can share financial and knowledge-based resources to come up with a compelling investment strategy that serves your collective goals.

Investing with friends may also be a way to make a substantial impact in a cause you believe in, such as raising funds to invest in a friend’s startup or business venture. And investing is something you’re likely already using as a way to connect—according to SoFi’s research, 70% of SoFi Invest members talk about investing with friends, family, or colleagues at least once a week. So it might make sense to some people to pool that passion and capital and begin investing together.

Of course, investing with friends also comes with some particular concerns you’ll want to consider in advance:

•  Who controls the investment account and how are investment decisions made?
•  What is the process if one person wants to remove their portion of the investment?
•  How will any returns be distributed?
•  Does the investment have a set length of time or will it continue in perpetuity, or until all parties have decided to withdraw or buy out their investment?

Talking through scenarios like this can be helpful. It can also be helpful to come up with some sort of contract that outlines contingencies, so you know everyone is on the same page.

What To Talk About Before You Invest With Friends

Before pooling resources, it may be a good time to talk a little about how you each approach the market.

Maybe one friend is a Warren Buffett aficionado, while another is eager to invest in crypto. Maybe one friend is eager to hit a specific financial goal while another is looking at the investment as a way to diversify their portfolio.

It can also be a good time to talk through all the what-ifs you can think of, including:

•  What if this investment loses money?
•  What if one of us needs the money for an emergency?
•  What if more people want to invest in the future?

And finally, make sure your goals are aligned. Are you looking for specific investment opportunities? Some friend groups get together for what is called impact investing, or socially conscious investing —investing in companies that have positive social, environmental, and environmental impact on the world. Other friends may pool their money to gain access to investment opportunities that may have a minimum investment threshold, such as private investments and alternative investments like venture capital.

Once you’re all on the same page, you can then assess different methods of investing as a group of friends.

How Do You Invest With Friends

There are a few different ways to invest with friends.

Set Up a Brokerage Account

The low-touch way to invest with friends is to designate someone as account holder and have them open a brokerage account with the pooled resources. But that method may not allow for safeguards to protect your capital or empower each individual investor with decision-making power.

Start an Investment Club

Another option is to start what’s called an investment club. Depending on the circumstances, the club may have registration requirements so the SEC can regulate the club. Circumstances can vary by state. Some circumstances include having passive members who do not decide how the money is invested (ie, if partners or spouses input money but are not involved in investment decisions) or if there is a member providing investment advice or making investment decisions on behalf of the group. Because securities laws operate on both the state and federal level, it may be a good idea to make sure everyone fully understands state and federal regulations.

In some cases, an investment club may have to register with the SEC as an investment company. And someone who takes the lead on investment decisions without input from all members may also need to register with the SEC as an investment advisor. Your club also may need to write bylaws, create a legal partnership, and set up any necessary software.

Better Investing , a national nonprofit, has resources and sample club materials you can peruse to see if an investment club may be right for your friends.

Start a Casual Investing Club With Friends

Some people find investing with friends easier when they’re not actually poolings funds. There are investment clubs where members share experiences, invite financial advisors to speak, and otherwise talk portfolios—without sharing money and making joint investment decisions. This can be a way to dip your toe into the world of investing with friends, or help expand your knowledge on popular investment trends, like cryptocurrency or impact investing, that you’ve been curious about but have not yet had a chance to explore.

An investment club that does not have financial commitment can also be a way to assess whether your group of friends is ready to take the next step and explore investing as a group. While some people hold their financial moves close to their chest, others find freedom in talking through what does and does not work for them.

People who find value in talking through financial moves may find this sort of investment group a valuable resource that still allows them to keep control of their money and have the ultimate say in any financial moves they may make.

Create an LLC

You may also choose to invest with friends as a show of faith for a mutual friend or family member’s startup or business venture. In this case, it can be helpful to create a limited liability company (LLC) for the purpose of raising and investing cash, as well as to make sure there is an agreement laid out as to potential returns on the investment and whether investors will have any power in the direction and decisions the company makes.

In creating an LLC, it may be helpful to seek legal advice to help create a contract so that everyone is on the same page and there is no confusion as to how money is used and what the return on investment will look like for investors.

The Takeaway

Some people see the benefits in investing with friends: the shared wisdom and experience, the mutual financial goals, and in some cases the pooled funds that may result in profitable returns.

There are many things to consider before investing with friends, and many different ways to go about it. In some cases, you might want to create an LLC with friends, to safeguard your own interests and make sure everyone is in agreement on the details of the arrangement.

If you’re not quite ready to invest your money directly with other people, there are other ways to enjoy that group dynamic while retaining full control of your money and your financial decisions.

SoFi’s investing platform has a feature available for Active Investing members that allows them to opt-in to share their investment portfolios, so you can see how your friends are doing and the market moves they’re making.

Dollar amounts are hidden, but you can follow the holdings of friends who also have opted-into this feature, look at watchlists, and comment on trades. You can also see you and your friends on a dynamic leaderboard with other members. This is a seamless way to see your friends investing behaviors, ask questions, and connect on investment decisions—while still keeping your finances separate.

Find out how you can follow your friends’ investments with SoFi Invest®.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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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Can You Open a Roth IRA For Your Child?

A Roth IRA can be a great retirement investment tool for adults and children. Funded with after-tax dollars, a Roth IRA grows tax-free, so account holders won’t need to pay taxes when they withdraw money in retirement.

Like other individual retirement accounts, a Roth IRA has an early distribution penalty, but that penalty is waived for certain expenses, such as first-time home buying and paying for college. In this way, funding a Roth IRA can allow for more flexibility than a 529 college savings plan or other plan specifically earmarked for education.

That flexibility can make a Roth IRA appealing—especially if you’re a parent who wants to open a Roth IRA for your child. A Roth IRA for minors, called a Custodial Roth IRA, can be opened by any adult—whether a grandparent, parent, or family friend—for a minor who earns income (more on that later).

Here’s everything you need to know about making this investment.

Advantages of Opening a Roth IRA for Your Child

Flexibility in how to use the funds can be one benefit to opening a Custodial Roth IRA as part of an investment plan for your child. A Roth IRA can provide flexibility not only for potential expenses in early adulthood—such as going to college or buying a home—but can be an investment vehicle throughout your child’s lifetime.

Control Over Investments

Another benefit is that a Roth IRA gives you more control over investments than an education-focused 529 college savings plan, and can allow you to create a diversified portfolio made of bonds, stocks, ETFs, or whatever else you may want to add.

Compound Interest

A Roth IRA is a gift that can keep growing, since investors can maximize compound interest to get the most out of their investment.

Here’s how a Roth IRA unlocks the power of compounding: As an example, let’s say you open a Custodial Roth IRA when the child is 10 years old, and contribute $2,000 annually. At a certain point, your child might take over contributing $2,000 annually.

Assuming a 7% rate of return, the account will be worth $928,000 by the time your child is 60 years old—even though the total amount you and your child contributed would be $100,000 total. In comparison, if that same money was put in a taxable savings account over the same time period, the total of the account would be $515,764.

No Required Minimum Distribution (RMD)

Unlike a traditional IRA, there is no required minimum distribution (RMD) on a Roth IRA once the account owner reaches retirement age. A Roth IRA also allows people to continue contributing throughout their lifetime, as long as they’re earning income (with a traditional IRA, you can no longer contribute once you reach 70 ½).

Income Requirements for a Custodial Roth IRA

One reason it may not be immediately intuitive to open a Roth IRA for your child is that a Roth IRA account holder must earn income—but not too much income.

In order to qualify for a Roth IRA, an account holder (in this instance, the child) must make less than $140,000 annually. Individuals who make under $125,000 (filing as single taxpayers) can contribute up to $6,000 per year to a Roth IRA. Those who make between $125,000 and $140,000 are eligible to contribute a reduced amount.

Teens who have jobs “on the books”—lifeguarding, camp counselor—can contribute to a Roth IRA. But they can’t contribute more than their earned income for the year. For example, a teen who makes $2,000 per summer at their lifeguarding job can contribute no more than $2,000 to a Roth IRA.

Of course, this doesn’t mean that a teen has to invest all of their wages. In some cases, parents or grandparents might decide to contribute all or some of the maximum amount the teen is eligible for, and allow the account to grow this way.

Another way that parents can create a Custodial Roth IRA for their child is to hire their child on the books for household tasks that may include shoveling snow, babysitting, housework, or paperwork. Any earned income can then be put into the IRA. If the income comes from self-employment, it makes sense to discuss details with a tax professional, in case any Medicare or Social Security taxes need to be paid.

If you have a business and are hiring your child to do work for your business, make sure their work is business-related (for example, cleaning the office or stuffing envelopes is likely fine; raking leaves may not be unless it is a legitimate business expense).

The IRS also pays attention to the age of your child. Tweens and teens can perform work, but infants and toddlers are likely not doing any work for your business unless there is a legitimate business need for them (such as a clothing designer using an infant to model clothing as marketing material).

How to Open a Roth IRA For Your Child

A Custodial Roth IRA for a minor can be opened by any adult—whether grandparent, parent, or family friend. While the child is a minor, the adult will have sole access to the account; once the child comes of age (the timing of which varies by state), the account will transfer over to the child.

As with any Roth IRA, investment options within the account can include stocks, bonds, ETFs, and mutual funds.

A Roth IRA can be opened with an investment broker or brokerage firm. Some brokerages may have an automated method that can allow the account owner to be relatively hands off with the account once they input goals and risk tolerance, others may require the account owner to direct the account, choosing investments. Choosing the right brokerage and account depends on the investor and their preferences.

Who Can Contribute to a Custodial Roth IRA for Your Child?

Unlike a 529, which anyone can contribute to, only the custodian of the Roth IRA account can contribute funds into the account. But it’s important to be mindful of how much your child has earned during the year and only contribute up to that limit.

For example, if a child has a lifeguarding job that earns her $2,000 a year, only $2000 may be contributed to the Custodial Roth IRA that year—regardless of whether the child contributes the money themselves, or whether the parents contribute their own money to the account and allow the teen to use the money she earned as she sees fit.

Some parents create an arrangement with their child where the minor contributes a certain percentage of their income (and keeps the rest), and the parents make up the difference in contributions.

How a Roth IRA Can Help Your Child Understand Investing

Not only can a Custodial Roth IRA unlock the power of compound interest and grow contributions substantially more than a typical savings account, but they can also be a powerful tool to help a child understand investing and how compound interest works.

While some custodians may contribute the equivalent of their child’s income and let their child use their earned income for their own discretionary spending, others might encourage their child to actively earmark a certain portion of their earnings for their Roth IRA account. Either way, custodians can share the account status with their child, explaining their portfolio, showing gains, and otherwise making the investment feel more active to their child.

There’s no “wrong” way to manage a Roth IRA with your child, but letting your child peek into their account can help them ask questions about personal finance and grasp investing well before they have to make their own retirement saving decisions. This can help your child have a grasp on financial fluency that can be helpful when they reach the age where they can manage their accounts themselves.

The Takeaway

For a child with an income, Opening a Roth IRA for a child with an income can be a good way to start them on the path to investing—whether it’s saving for retirement, education, a first home, or more.

When it comes to making an investment strategy for kids, it can also be a good time for parents to audit overall retirement strategies. In some cases, it may make sense for parents to make sure their own retirement strategies are on track before opening a Roth IRA for their children.

SoFi Invest® offers both active and automated IRA options as part of their investing plans for retirement. Find out how SoFi can help you reach your retirement goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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.
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Are Fractional Shares Worth Buying?

Fractional shares are a useful way to allow new investors to get their feet wet by investing small amounts of money into parts of a share of stock. For some investors, fractional shares are worth it because it means they can own a part of a stock from a company they are interested in, without committing to buying a whole share.

While fractional shares have much in common with whole shares, they don’t trade on the open market as a standalone product. Because of that, fractional shares must be sold through a major brokerage.

What does it mean to buy fractional shares?

A fractional share is less than one whole equity share (e.g. 0.34 shares). Fractional shares appreciate or depreciate at the same rate as whole shares, and distribute dividends at the same yield proportionate to the fractional amount.

Fractional shares were previously only available to institutional investors at one-sixteenth intervals, but have recently become widely available to retail investors at exact decimals (in order to increase market pricing precision and lower trading costs).

This new capability offers another layer of financial inclusion to casual investors by lowering minimum investing requirements to thousands of stocks and assets and making them available in smaller quantities. According to Gallup, 45% of all Americans have no stock investments—but fractional shares provide an increasingly lower barrier to investing than in previous generations.

Why Fractional Shares are Worth Buying

For some investors, these positives make buying fractional shares worth it.

Access to Unaffordable Stocks

Fractional shares can help build a portfolio made of select stocks, some of which may be too expensive for some investors to afford one whole share. With fractional shares, an investor can choose stocks based on more than just price per share.

Previously, new investors would face price discrimination for not having enough funds to buy one whole share. But with fractional shares, an investor with $1,000 to spend who wants to buy a stock that costs $2,000 per share, can buy 0.5 shares of that stock.

Fractional shares make it easier to spread a modest investment amount across a variety of stocks. Over time, it may be possible to buy more of each stock to total one or more whole shares. In the meantime, buying a fractional share allows an investor to immediately benefit from a stock’s gain, begin the countdown to qualify for long-term capital gains (if applicable), and receive dividends.

A Doorway to Investing

History has shown that the stock market typically outperforms fixed-income assets and interest-bearing savings accounts by a wide margin. If equities continue to provide returns comparable to the long-term average of 7%, even a small investment can outperform money market savings accounts, which typically yield 1-2%. (Though as always, it’s important to remember that past performance does not guarantee future success.)

By utilizing fractional shares, beginners can make small investments in the stock market with significantly more growth potential even with average market returns versus savings accounts that typically don’t even match inflation.

Maximized Dollar-Cost Averaging

Fractional shares help maximize dollar-cost averaging, in which investors invest a fixed amount of money at regular intervals.

Because stock shares trade at precise amounts down to the second decimal, it’s rare for flat investment amounts to buy perfectly-even amounts of shares. With fractional shares, the full investment amount can be invested down to the last cent.

For example, if an investor contributes $500 monthly to a mutual fund with shares each worth $30, they would receive 16.66 shares. This process then repeats next month and the same investment amount is used to purchase the maximum number of shares, with both new and old fractional shares pooled together to form a whole share whenever possible.

Maximized Dividend Reinvestment Plans

This same scenario applies to dividend reinvestment plans (also known as DRIP investing). In smaller dividend investment accounts, initial dividends received may be too small to afford one whole share. With fractional shares, the marginal dividend amount can be reinvested no matter how small the amount.

Fractional shares can be an important component in a dividend reinvestment strategy because of the power of compounding interest. If an investor automatically invests $500 per month at $30 per share but can’t buy fractional shares, only $480 of $500 can be invested that month, forfeiting the opportunity to buy 0.66 shares. While this doesn’t seem like much, not investing that extra $20 every month can diminish both investment gains and dividends over time.

Stock Splits

Stock splits occur when a company reduces its stock price by proportionately issuing more shares to shareholders at a reduced price. This process doesn’t affect the total value of an investment in the stock, but rather how the value is calculated.

For some investors, a stock split may cause a split of existing shares resulting in fractional shares. For example, if an investor owns 11 shares of a company stock worth $30 and that company undergoes a two-for-three stock split, the 15 shares would increase to 22.5 but each share’s price would decrease from $30 to $20. In this scenario, the stock split results in the same total of $450 but generated a fractional share.

Mergers or Acquisitions

If two (or more) companies merge, they often combine stocks using a predetermined ratio that may produce fractional shares. This ratio can be imprecise and generate fractional shares depending on how many shares a shareholder owns. Alternatively, shareholders are sometimes given the option of receiving cash in lieu of fractional shares following an impending stock split, merger, or acquisition.

Disadvantages of Buying Fractional Shares

Fractional shares can be a useful asset if permitted, but depending on where you buy them could have major implications on their value.

Order Type Limitations

Full stock shares are typically enabled for a variety of order types to accommodate different types of trading requests. However, depending on the brokerage, fractional shares can be limited to basic order types such as market buys and sells. This prevents an investor from setting limit orders to trigger at certain price conditions and from executing trades outside of regular market hours.

Transferability

Not all brokerages allow fractional shares to be transferred in or out, making it difficult to consolidate investment accounts without losing the principal investment or market gains from fractional shares. This can also force an investor to hold a position they no longer desire, or sell at an undesirable price to consolidate funds.

Liquidity

If the selling stock doesn’t have much demand in the market, selling fractional shares might take longer than hoped or come at a less advantageous price due to a wider spread. It may also be possible to come across a stock with full shares that are liquid but fractional shares that are not, providing difficulty in executing trades let alone at close to market price.

Commissions

Brokerages that charge trading commissions may charge a flat fee per trade, regardless of share price or quantity of shares traded. This can be disadvantageous for someone who can only afford to buy fractional shares, as they’re being charged the same fee as someone who can buy whole or even multiple shares. Over time, these trading fees can add up and siphon limited capital that could otherwise be used to buy additional fractional shares.

Higher transaction fees

Worse yet, some brokerages may even charge higher transaction fees for processing fractional shares, further increasing investor overhead despite investing smaller amounts.

What Happens to Fractional Shares When You Sell?

As with most brokerages that allow fractional shares, fractional shares can either be sold individually or with other shares of the same asset. Capital gains or losses are then calculated based on the buy and sell prices proportionate to the fractional share.

The Takeaway

Fractional shares are an innovative market concept recently made available to investors. They allow investors of all experience and income levels access to the broader stock market—making it worth buying fractional shares for many investors.

Fractional shares have many other benefits as well—including the potential to maximize both DRIP and dollar-cost averaging. Still, as always, it makes sense to pay attention to downsides as well, such as fees disproportionate to the investment, and order limitations.

For investors who are curious about fractional shares, SoFi Invest® makes it easy to start investing in Stock Bits with as little as $1.

Find out how to invest in fractional shares with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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.
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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Understanding Cash in Lieu of Fractional Shares

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

If such a corporate action generates fractional shares, the company’s leadership has a few options for how to proceed: They could distribute the fractional shares, round up to the nearest whole share, or pay cash in lieu of fractional shares.

What is Cash In Lieu?

With cash in lieu, one party elects an exchange of value to be settled in cash as opposed to the underlying asset or services rendered. In investing, cash in lieu refers to funds received by investors following structural company changes that unevenly disrupts existing stock prices and quantities.

Following a corporate action, the newly-adjusted stock supply can be uneven and often results in fractional shares. When the stock’s exchange ratio does not equal a whole number of new shares, rather than holding or converting fractional shares to whole shares, some companies opt to aggregate and sell all of the fractional shares in the open market.

After the sale, the funds are paid to investors in cash in the form of a check or account deposit. The company’s board ultimately determines how the company will maintain or return value to investors and how that value will be distributed. Opting to distribute cash in lieu is a company’s method of disposing of fractional shares and returning the cash balance to investors, proportionate to prior holdings.

Why Investors Receive Cash in Lieu

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

There are several company events that can lead to investors receiving cash in lieu of fractional shares.

Stock Split

A stock split occurs when a company’s board of directors determines that their company’s strongly performing stock price may be too high for new investors. To make the stock price look more attractive to more investors and gain more liquidity and marketability, a stock split is executed to artificially lower the stock’s price by issuing more shares at a fixed ratio while maintaining the company’s unchanged value.

Depending on the predetermined ratio, a stock split could cause fractional shares to be generated. For example, a three-for-two stock split of a stock worth $111 would create three shares for every two shares each investor holds. Thus, a stock split would cause any investor with an odd number of shares to receive a fractional share.

However, if the company’s board isn’t keen to hold or deal with fractional shares, they will distribute investors’ whole shares and liquidate the uneven remainders, thus paying investors cash in lieu of fractional shares. The ratio or cash rate as set by the company performing the stock split can be located on the company’s corresponding SEC 8-K document.

Conversely, a company may execute a reverse stock split because a stock’s prices are too low and they want to artificially raise them. If stock prices get too low, investors may become fearful to buy and the stock risks being delisted from exchanges.

When a stock undergoes a reverse stock split, each share is converted into a fraction of a share but higher-priced shares are issued to investors according to the reverse split ratio . For example, a stock valued at $3.50 may undergo a reverse one-for-10 stock split. Every 10 shares is converted into one new share valued at $35.00. Investors who own 33 shares or any number indivisible by 10 would receive fractional shares unless the company decides to issue cash in lieu of fractional shares.

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

Merger or Acquisition

Company mergers and acquisitions (M&As) can also create fractional shares. When companies combine or are absorbed, they combine new common stock using a predetermined ratio, which often results in fractional shares for investors in all involved companies.

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

Spinoff

If an investor owns shares of a company that spins off part of the business as a new entity with a separately-traded stock, shareholders of the original company may receive a fixed amount of shares of the new company for every share of the existing company held.

How Is Cash in Lieu of Fractional Shares Taxed?

Just like many other forms of investment profits, cash in lieu of fractional shares is taxable , even though it was acquired without the investor’s endorsement or action. The stock’s company may send investors a check followed by an IRS Form 1099-B at year-end with a “cash in lieu” or “CIL” notation.

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

Looking to Trade Fractional Shares?
SoFi Invest Can Help with That.


How to Report Cash in Lieu of Fractional Shares

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

•  An investor owns 15 shares of Company X worth $10.00 per share ($150 value).
•  Investor’s 15 shares have a $7.00 per share cost basis ($105 total cost basis).
•  Company X declares a 1.5 stock split.

The investor is entitled to 22.5 shares valued at $6.67 each but the company states they will only issue whole shares. Therefore, the investor receives 22 shares plus a $2.73 cash in lieu payment for the half share.

The investor’s total cost basis remains the same, less the cash in lieu of the fractional shares. However, the adjusted cost basis now factors in 22 shares instead of 15, equaling a $4.66 per share cost basis and a $2.33 fractional share cost basis. Finally, the taxable “net gain” for the cash payment received in lieu of fractional shares equates to $2.725 – $2.33 = $0.39.

The Takeaway

It’s not always possible to anticipate a company being restructured and how it will affect shareholders’ stock. In the event the company doesn’t wish to deal with fractional shares, it’s important for shareholders to understand the alternatives such as cash in lieu of fractional shares, and how it affects them. While cash in lieu can be burdensome, investors can be made whole and can then proceed on their own accord.

There are many reasons investors consider fractional shares worth buying to add to their investment portfolio. For individuals looking to invest in fractional shares with the help of a simple account setup and no fees, SoFi Invest® can help.

Find out how SoFi Invest can help you reach your financial goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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.
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.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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How to Plan the Ultimate Debt Payoff Strategy

Debt often has a negative connotation, but there are plenty of good reasons to have it—for example, using student loans to increase your earning potential, funding an entrepreneurial venture with a small-business loan, or going to the “Bank of Mom & Dad” to pay for a move across the country for a great job.

But even when you have debt for good reasons, actually being in debt doesn’t feel great—especially if high-interest rate credit cards are monopolizing your monthly paycheck.

So how do you use debt to your advantage without letting it get you down? The key is to be proactive about paying it off. Luckily, there are plenty of great resources and techniques to help you create your debt payoff plan—but only you will know what’s best for your unique financial situation.

While none of this is meant to be financial advice, which you should always seek out from a professional, here are a few tips to consider:

Customizing Your Debt Payoff Plan Approach

The words “snowflake,” “snowball” and “avalanche” might sound like an increasingly alarming day on the mountain, but they also apply to three popular debt payoff methods, one of which may be just right for you.

As Melissa Batai from Money Crashers explains, “Snowflaking is the process of using extra money gained here and there to pay down your debt above and beyond your planned monthly payment.” You can acquire this extra cash through things like side gigs, selling the stuff you no longer need, and renting out a room in your house.

The Snowball Method entails paying off your debts in order from smallest to largest–regardless of their respective interest rates. “The benefit … comes from seeing one of your debts paid off sooner,” says Darren Wu from Wisebread. “This, in turn, can provide an emotional boost.”

It is important to remember with this method that you shouldn’t ignore your other debt while you focus on your smallest one. And, of course, it’s crucial to continue making at least the minimum payment on all of the debt you owe.

But people using the debt snowball method, beware: Ignoring interest rates usually means paying more money in the long run. If savings is your main priority, you’ll probably want to look at the Avalanche Method, which has you putting more money toward your higher-interest rate debt first. Not only does this approach save you money, it can also help you get debt-free sooner.

Trying a Debt Detox

People often compare getting fiscally fit with getting physically fit, and with good reason. Whether you’re trying to achieve financial goals or health and fitness goals, you’re more likely to succeed if you have a good plan in place, a fair amount of willpower, and a desire to change your habits.

That was the approach Anna Newell Jones of And Then We Saved took when she decided to embark on a Spending Fast®. It entailed “spending money on necessities only to see what happens, how much debt I can get out of, and how much I can get into savings.”

Fifteen months later, she’d eliminated nearly $24,000 in debt and inspired her readers to save over $320,000 by doing the Spending Fast® (and its less austere cousin, the Spending Diet) right along with her.

Upping the Minimum

Another approach for a debt payoff plan is to pay more than the minimum balance each month. Whether you have student loans or credit card debt, paying more than the minimum can help accelerate your debt payoff journey.
It can be tempting to just stick with paying the minimum balance due rather than adding to it. But paying as much as you can each month (without stretching yourself too thin) can add up. In order to make this happen, however, you may have to make a few sacrifices.

Making coffee at home, cooking for yourself, or exercising outside instead of paying for a pricey gym membership are all small changes that can help save extra money each month to put toward your debt.

By increasing how much is allocated toward monthly payments, you could pay off your debt faster and therefore save on interest. And who wouldn’t want to be out of debt sooner?

See if a personal loan should be
part of your debt payoff strategy.


Trying a Balance Transfer

Balance transfer credit cards sometimes offer low or even 0% introductory annual percentage rate, or APR, periods for high-interest credit card debt transfers. Some credit cards offer up to 21 months of 0% interest, which can help keep you from accumulating even more debt via interest.

Reasons people apply for a balance transfer credit card include:

•  Having high-interest credit card debt
•  A desire to simplify payments on one card, rather than managing payments on multiple credit cards
•  Wanting to take advantage of a good promotional deal (for example, 21 months of 0% interest)

But it is important to remember that this debt payoff strategy is optimal if you know you can pay off your entire debt by the time the low- or no-interest period ends. Otherwise, you will go back to accruing interest on your debt after the introductory period ends.

Our Credit Card Interest Calculator can help you discover how much you are paying in interest alone on your credit card debt.

Recalibrating Your Rate

High-interest rate debt is not only expensive, it can also take forever to pay off. But just because your loan or credit card came with a high rate doesn’t necessarily mean you’re stuck with it forever.

For one thing, if you have student loans, new options for student loan refinancing have become available in the past few years. When you refinance your student loans with a private lender, you are taking out a completely new loan with a new interest rate.

You can refinance both private and federal student loans with a private lender, but understand that if you refinance federal loans you will lose access to all federal benefits like deferment, income-driven repayment plans, and public service loan forgiveness programs.

If you have an improved financial profile from when you took out your original loan, however, you may be able to qualify for a lower interest rate. By obtaining a lower interest rate, you could save money over the life of the loan. Or you may be able to select a shorter term with higher payments but a quicker payoff—and save money on interest payments.

And if you have high-interest rate credit cards, you can look into consolidating them with a low-interest rate unsecured personal loan. One plus of taking out a personal loan to consolidate your debt is that personal loans are typically installment loans, which means they have a fixed repayment period. That means you’ll know exactly when your loan will be paid off.

In contrast, credit card debt is “revolving debt,” which means you can continuously add to the debt even while paying it off. That’s not an option with a personal loan. By consolidating your credit card debt with a personal loan, you could also potentially qualify for a lower interest rate, which can make your debt easier to manage.

On the flip side, a personal loan may not be right for everyone. Some personal loans come with origination fees, late fees, or prepayment penalties, which could potentially drive up the cost of your loan. When shopping around for debt payoff solutions, you may want to consider any hidden fees that could come with a personal loan.

No matter what debt payoff plan you choose, the key is to take control of your debt rather than letting it control you. Ultimately, executing a successful debt payoff strategy might help you focus on the positive outcomes that happened as a result of your debt, rather than the frustration of having to pay it back.

Need help consolidating your debt? See how a SoFi personal loan can help get you on the right track to becoming debt free.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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